This Retailer Could Raise Guidance This Week

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Shares of American Eagle Outfitters (NYSE: AEO  ) have been nothing short of a roller-coaster ride over the past couple of years. It held the distinction of being one of the last few retailers to suffer from the economic downturn, a testament to the quality of its management team, but eventually succumbed to the economic maelstrom.

Currently, it sits more than 50% off its all-time high set in early 2007 but appears to be regaining the swagger that made it one of the retailers to own just a few years ago. American Eagle is set to issue fourth-quarter guidance and November sales figures on Thursday, and I wouldn't be surprised if they trumped analysts' forecasts.

Here's why ...

Everything in the retail world revolves around inventory! It's what you sell, how much you sell, and how well-stocked you are in the things you sell. Last year, American Eagle was an inventory nightmare. Inventory levels were through the roof, and the shoppers were simply not there. We had a more recent example of inventory woes at competitor Abercrombie & Fitch (NYSE: ANF  ) in August. Its larger-than-expected rise in inventory levels took a 150-basis-point bite out of its gross margins.

This year, inventory figures at American Eagle look much better. Its latest quarterly filing showed a 4% decline in inventory, resulting in lower expenses and higher gross margins. Having the right assortment can make or break a retailer's holiday season, and American Eagle looks to be on track.

Black Friday
Thus far, national retail sales figures from Black Friday look promising, and I fully expect American Eagle to have outperformed the majority of its competition. It's not uncommon for the fourth quarter to account for one-third of total yearly revenues, so it's crucial that the company gets a solid start.

Internet shoppers were truly out in force, with nearly 16% growth seen in online retailers. Although sales at AE Direct's Internet business decreased by 2% last quarter, I think this could be where the bulk of growth could come from. Shoppers are increasingly moving toward shop-at-home convenience. Despite a lower promotional budget for its Internet business, margins should be significantly higher as a result, which should translate into solid profits.

Don't forget the intangibles
Although insider action has no bearing on a company's results, let's not overlook the fact that, as Tim Beyers points out, insiders are buying into American Eagle's results. Insider purchases are never a guarantee that a company is headed in the right direction, but I do admit to feeling more comfortable when management will put its money where its job is. Compare this to Gap (NYSE: GPS  ) , which has had considerable insider selling over the past two months.

Only time will tell if American Eagle will raise guidance, but the signs right now point to continued success.

Related Foolishness:

Fool contributor Sean Williams does not own shares in any companies mentioned in this article. Under normal circumstances, you would have to drag him kicking and screaming to the mall. You can follow him on CAPS under the screen name TMFUltraLong. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 01, 2010, at 5:55 PM, dylanreese wrote:

    "Compare this to Gap, which has had considerable insider selling over the past two months."

    Your lack of knowing what you're writing about is seriously undermining your credibility ! Doris Fisher, who accounted for over 90% of the insider sales the past 2 months at Gap, is on a regular, monthly sale schedule. As one of the original founders she owns millions of shares and sells the same amount each month. NOTHING ABNORMAL about this. This is easily available data, but not only did you miss it, you in fact used a wrong "fact" to support your overall point. Makes me doubt any of your points.

  • Report this Comment On December 02, 2010, at 12:39 AM, TMFUltraLong wrote:


    Precisely why this is an intangible argument. Regular sale or not, insider selling places downward pressure on the stock price and that's the point being conveyed here.


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