You have to give American Eagle (NYSE:AEO) props for one thing: At least it didn't bury the lead.

Management ripped off the bandage by opening its first-quarter report with the announcement of a 40% drop in earnings to $0.21 per share. Immediately following that disappointing figure, CEO Jim O'Donnell touched on the current economic challenges and briefly offered investors his long-term optimism on the company.

Fortunately, the Eagle lost very few feathers in the process. Instead, investors rewarded AE with an 8% stock-price bump for its news. So how does a 40% profits plummet translate into $375 million in additional market cap? Let's pull out the Eagle's entrails and see whether we can divine some meaning therein.

You know that power of diminished expectations?
Don't underestimate it. Analysts had pegged AE to report $0.19 per share in profits. The company's 10% outperformance tracks pretty neatly with the 8% rise in share price. The improved profits also bolster O'Donnell's argument that he's hip-deep in shoring up AE's defenses against the downturn by "reducing inventory and expenses."

Sales for the quarter increased 4.5% in comparison with last year's first quarter. However, true to his word, O'Donnell managed to trim nearly 5% from his stores' inventories. That looks good, and it's even better when you run an avians-to-avians comparison. On a same-store basis, comps dropped 6%. We should have already been expecting that. But inventories "on a per square foot basis" dropped nearly three times as quickly -- down 17%.

This all tells me that AE has made dramatic progress in paring down the piles of clothing stacked up in company warehouses. Granted, such progress does not come cheap. O'Donnell specifically noted that the company had to increase markdowns on its clothing to move the inventories out the door. That move caused margins to fall drastically. At 10.1%, AE's operating margin was a full 880 basis points lower than one year ago. Still, that beats the bottom-line margins that Aeropostale (NYSE:ARO), Citi Trends (NASDAQ:CTRN), Hot Topic (NASDAQ:HOTT), and even Abercrombie & Fitch (NYSE:ANF) pulled off this past quarter.

What's more, if AE had to take a big hit to margins, the first quarter was the time to do it. In no other quarter of the year does AE sell so few garments. As this quarter fades in memory, by the time AE's full-year numbers roll around next March, this company may yet fly back into investors' fancy.

Seems AE is making a lot of investors' shopping lists lately. It's recently made appearances on: