Will American Eagle Outfitters Smash Earnings or Be Left in the Dust?

On Friday, American Eagle Outfitters (NYSE: AEO  ) is due to report earnings for its third fiscal quarter. This year, a number of retailers have posted bad results, while only a few have seen attractive growth. Looking at American Eagle's competitors Abercrombie & Fitch (NYSE: ANF  ) and Gap (NYSE: GPS  ) , we can put the expectations into perspective and determine whether an earnings beat is possible or unlikely.

Expectations are low for American Eagle
For the quarter, analysts expect American Eagle to perform relatively poorly. If earnings expectations turn out to be accurate, then the company will report earnings per share of $0.19. This would be far less than the $0.41 in EPS the company reported during the same quarter a year earlier.

The primary driver behind the earnings shortfall is expected to be revenue, which is forecast to come in at $844.36 million. This would mean a 7.3% drop from the $910.37 million in revenue the company reported for the same quarter a year ago. The disparity between the earnings and revenue expectations would be made up by an increase in American Eagle's costs relative to its revenue, and partially offset by fewer common shares outstanding if management continues to buy back stock.

How does American Eagle stack up against Abercrombie and Gap?
Though these results are anything but ideal, some perspective is needed. Abercrombie & Fitch, one of American Eagle's competitors, has also seen its earnings drop over the past year. The company reported earnings per share of $0.52 in the past quarter while it reported EPS of $0.87 for the quarter last year. However, it should be noted that the company did beat analyst expectations of $0.45.

Gap, on the other hand, is another creature entirely. For the quarter, the company reported EPS of $0.72, beating analyst estimates by $0.01. This is a 14.3% increase over the company's EPS of $0.63 during the same quarter last year.

On a revenue basis, Abercrombie & Fitch dropped significantly, falling by 11.7% from $1.17 billion to $1.03 billion. Meanwhile, Gap saw a modest 2.9% increase in revenue, which rose from $3.86 billion to $3.98 billion.

Based on these observations, it shouldn't be too surprising to see American Eagle posting a positive surprise, but these are just two competitors in a very large economic ecosystem. In an effort to gain a better understanding of the situation, we should look back at how American Eagle has performed over the past few years.

A blast from the past

Looking at the revenue of each company over the past four years, we can see that Abercrombie & Fitch experienced the greatest growth. From 2010 through 2013, revenue rose by 54%. In comparison, American Eagle achieved 18.2% growth, while Gap brought up the rear with an aggregate growth rate of 10.2%.

Similarly, Abercrombie & Fitch experienced the highest growth in net income over the past four years, with its net income growing by 789%. Meanwhile, American Eagle came in second place with net income growth of 37.3%, while Gap came in dead last with a growth rate of 3%.

To further illustrate American Eagle's growth over time, I analyzed the company's improved revenue to see how revenue grew.

In the event that the company's sales rose as a result of a greater number of locations in operation, while comparable store sales fell, then this would be a negative sign. This simply isn't the case with American Eagle. Over the past four years, comparable store sales improved considerably, going from a 3% contraction to a positive 9% growth spurt from its 2012 to its 2013 fiscal years. By comparing this growth to the growth in total sales each year, we can see that the improvement in comparable store sales is largely responsible for the company's total growth for the years ending in 2012 and 2013.

We can also analyze the situation from the perspective of sales per average square foot. Though sales stayed constant between 2010 and 2011 on a square foot basis, the company experienced 4% jump in sales per square foot in 2012 and a 10.1% jump in 2013. This data further supports the argument that American Eagle has not only grown over time, but has done so at an increasing rate. As such, I would be surprised to see a substantial decline in revenue and, in turn, net income to the extent that analysts expect.

Foolish takeaway
Based on the data above, it appears that the market has fairly low expectations for American Eagle this quarter. This is especially true when you look at how the company has performed over the past four years. Abercrombie & Fitch saw the best four-year growth on both the top and bottom lines. It has seen declining performance year-to-date, but it still managed to beat analyst estimates. Likewise, Gap also beat the estimates but it appears to be experiencing a bit of a growth spurt compared to where it stood last year.

As a company that has stood somewhere in between these two peers in the recent past, American Eagle appears to face a good degree of pessimism. It is possible that the company could be facing hard times ahead. However, with American Eagle's history of attractive growth, it's also possible that the market is being too hard on the company, which could allow the Foolish investor a chance to take a bite at a cheap price.

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