Is This Silver Lining a Reason To Buy American Eagle Outfitters?

With sales cratering at the store level and poor visibility going forward, this teen retailer is among the worst. As the stock continues its downward slide, though, its dividend becomes more attractive.

May 23, 2014 at 12:38PM

American Eagle Outfitters (NYSE:AEO) resides firmly in one of the least appealing, riskiest segments of specialty retailing—teen apparel. The company trades around its lowest levels since 2011, and recently reported earnings that showed year-over-year profits down nearly  90%. American Eagle is shuttering stores to save on costs and is in the depths of a turnaround effort, but what can it do? Outlook remains lackluster at best, and the business needs a way to address the shifts in the industry. The best thing about American Eagle's stock today is the rather chunky dividend yield as a result of its falling price. Is there any reason investors should give American Eagle a chance?

Bad news brigade
Sales are down only 5% on the top line, but same-store sales cratered 10% on top of a 5% decrease in 2013's first quarter. Since retailers such as H&M and Forever 21 came on the scene, the more traditional teen retailers were put to the fire. Flash fashion can bring products to market faster and cheaper than its counterpart, and it's exactly what an image-seeking, price-conscious teen wants out of a clothing store.

American Eagle's store presence is shifting quickly as the company announced further plans to reduce locations by 150 over the next three years. Starting a year from now, the company expects the store closures  to yield $10 million to $15 million in annualized savings.

Looking ahead, the company is set to achieve break-even earnings and same-store sales declines in the high single digits. Management mentions the usual strategy of developing an omni-channel retailing plan, but the problem here seems more with its core merchandising efforts than anything else.

The one reason
At its current price, investors are getting a great deal on the company's dividend of $0.50 per share, per annum. At today's price, that's a yield of 4.6%-- extremely high for a retailer of any kind, let alone a struggling teen retailer. In isolation, this is nearly enough to justify a buy on the stock, regardless of the near-term guidance and underlying issues. Realistically, though, it's hard to see the dividend continuing, at least at its current rate.

Responsibly, management should slash or nix the dividend altogether and reinvest in making the company a better business. Either way, the dividend is easily at-risk and should not be the lynchpin of an investment thesis behind American Eagle at this time.

American Eagle could turn around with a substantial shift in its merchandising efforts and a quicker build out of its e-commerce channel. Management is working on both, and there is still chance for a recovery. At this point, though, investors should give American Eagle a wide berth until management can prove the business has stabilized and can begin to grow once more.

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Michael Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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