American Eagle Tanks on Weak Earnings

American Eagle Outfitters is the latest of teen retailers to report earnings, which were very disappointing compared to those from rivals Gap and Abercrombie & Fitch. What should investors do now?

Mar 19, 2014 at 10:00AM

The mixed bag of earnings continues for US teen-apparel retailers with yet another weak report spooking the industry. American Eagle Outfitters (NYSE:AEO) has been struggling with store traffic for some time now, and its latest report shows even more weakness.

While extreme winter weather is partly to blame, the chain doesn't seem to be holding up as well as rivals like Gap (NYSE:GPS) and Abercrombie & Fitch (NYSE:ANF), which both delivered beats for their fourth-quarter reports. What is weighing on this struggling retailer's results?



Profit, outlook disappoint
American Eagle's adjusted fourth-quarter earnings per share slightly beat analyst expectations with earnings excluding items coming in at $0.27 versus a $0.26 consensus. However, this figure was down from $0.55 last year, operating income dropping a worrying 52%. Generally Accepted Accounting Principles, or GAAP, EPS came in at $0.05, down a massive 90% from the $0.47 the company posted last year.

This GAAP number includes a number of charges, with asset impairment shaving $0.08 per share off earnings, asset write-offs and corporate charges costing another $0.12 per share, and taxes taking off $0.02. However, even taking these charges into account, the decrease in operating income is dramatic.

Both overall sales and comp-store sales were down 7%. More worryingly, margins suffered a huge meltdown with the gross margin dropping more than 900 basis points. The markets were not at all pleased with the report, the stock down around 6% before the bell on Tuesday .

Full-year earnings didn't do much better, dropping to $0.43 per share from $1.16 per share last year. The outlook also scared investors. Analysts were hoping for first-quarter earnings of around $0.13, while the company now expects to only break even. Additionally, comp-store sales are expected to decline by a high single-digit percentage.

Interim CEO Jay Schottenstein was clearly disappointed with the company's performance, stating that the quarter fell short of expectations. While management blamed these results largely on intense promotional activity and poor weather, the numbers suggest the weakness goes far beyond these factors, and as such, investors should be cautious going forward. Generally, it seems as if competitors managed to do better under the same circumstances.

Doing it right
It is all well and good to blame American Eagle's results on macro conditions and poor weather. But the fact is some other companies managed to do fine in the period, at least compared to American Eagle. Gap has been continuing its strong performance with Q4 EPS beating by $0.02. Earnings, however, showed a year-over-year decline of around 7%. Comp-store sales held up, increasing by 1%.


For the full year, results were more inspiring. Fiscal 2013 EPS came in at $2.74, up 18% year over year for yet another year of double-digit growth. Full-year net sales increased by 5% on a currency-neutral basis, although comp-store sales were a little weak with an increase of only 2%. The company's omnichannel approach seems to be paying off with online sales up a healthy 21%.

Abercrombie & Fitch for its part delivered a solid beat, results not nearly as bad as some analysts had feared. The news indicates the embattled retailer may be turning things around finally. While Q4 earnings declined by a steep 66% year over year, EPS of $1.34 thrashed the $1.03 consensus. Investors breathed a sigh of relief and sent the stock on a bit of a rally following the news. The company seems to be regaining some of its traction with younger customers. And while sales declined, cost-cutting initiatives seem to be boosting the bottom line.

The company has taken a number of steps to improve profitability. These include a change of leadership, which separated the CEO and chairman roles following a poor performance by former head of the company Mike Jeffries. Also, the company plans to shut some 30% of its US stores in order to trim costs.

The bottom line
Fourth-quarter results were a bit of a mixed bag for many teen-fashion retailers, as cold weather and tight consumer spending seems to have weighed on results across the board. However, some companies seem to be doing worse than others. American Eagle's results were a severe disappointment to investors, with a steep double-digit decline in earnings. As such, investors may be better off looking toward companies that are performing more consistently, such as Gap.

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