May 21, 2012
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of teen-oriented apparel retailer American Eagle Outfitters (NYSE: AEO ) soared 11% in intraday trading today on news that it is exiting from its children's business, 77kids, and that CFO Joan Hilson is stepping down.
So what: Lackluster sales have hurt American Eagle over the past several years, but this news suggests that new CEO Robert Hanson is pretty serious about his turnaround plans. Exiting 77kids helps the company focus on its core brands -- 77kids lost $24 million last year -- while management changes allow for fresh leadership, giving analysts plenty of good vibes about American Eagle's profitability going forward.
Now what: Management is considering options for 77kids -- including a full or partial sale to a third party -- and expects the charges to be taken largely in the second and third quarters. "Although making this decision is disappointing," CEO Robert Hanson said of the exit from 77kids, "it is in the best interest of the company and our shareholders to prioritize and focus our efforts on businesses with the highest return potential." With the stock now up more than 100% from its 52-week lows, however, I'd wait for a considerable pullback before buying in.
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