Has American Eagle Outfitters, Inc. Lost Its Wings?

Source: Wikimedia Commons

Despite reporting better-than-anticipated earnings for the first quarter of its 2014 fiscal year on May 21, American Eagle Outfitters (NYSE: AEO  )  saw its shares fall a whopping 6% to close at $10.60. With shares of the retailer trading at a 50% discount from their 52-week high, does now seem like a great time to jump into the fray? Or should the Foolish investor consider investments in Abercrombie & Fitch (NYSE: ANF  ) or Aeropostale (NYSE: ARO  ) instead?

American Eagle's results left investors scared
For the quarter, American Eagle reported revenue of $646.1 million. In addition to coming in below the $647.7 million Mr. Market expected, the company's sales level represents a 5% drop compared to the $679.5 million management reported for the same quarter a year earlier. The main driver behind this shortfall was a 10% decline in comparable sales, part of which was offset by non-comparable factory, international store, and licensed-store sales growth.

Source: American Eagle

Although the business saw poor revenue performance, it did manage to surprise investors for the better when it came to profitability. For the quarter, American Eagle saw earnings per share come in at $0.02, slightly better than the zero EPS analysts hoped to see but miles away from the $0.14 management reported for the first quarter of 2013. On top of being harmed by lower revenue, the company's bottom line fell sharply from an increase in its cost of goods sold, which rose from 61.2% of sales to 65.1% as a deleveraging of rent negatively affected operations.

But are its rivals any better?
Over the past few years, American Eagle has done alright for itself but has been unable to grow revenue at any meaningful rate. Between 2009 and 2013, the retailer's revenue increased a modest 12% from $2.9 billion to $3.3 billion as an aggregate 2% rise in comparable-store sales and a 1% store-count reduction left the business struggling to grow.

AEO Revenue (Annual) Chart

American Eagle revenue (annual) data by YCharts

This increase in sales stands in stark contrast to that of rival Abercrombie & Fitch, whose top line soared significantly higher than American Eagle's over a similar time frame. Even after seeing sales fall 9% between 2012 and 2013, Abercrombie & Fitch's revenue increased 41% from $2.9 billion in 2009 to $4.1 billion by year-end 2013. This tremendous growth came despite seeing its store count fall by 8% and aggregate comparable sales decline nearly 24%.

Of the three retailers profiled here, the worse performer in terms of revenue growth has been Aeropostale. Between 2009 and 2013, the company actually saw sales contract 6% from $2.2 billion to $2.1 billion. Essentially all of this decline took place between 2012 and 2013, when the retailer saw its sales plummet 12% as comparable-store sales fell 15%.

Looking at profitability, the situation was even more polarized between businesses. Over the past five years, for instance, American Eagle's net income dropped 51% from $169 million to $83 million. On top of being hit by a fall in sales, the company's bottom line was negatively affected by rising costs. Impairment charges of $44.5 million in 2013, combined with the business' cost of goods sold rising from 60.1% of sales to 66.3% over the past five years, left management struggling to please investors.

Over this time frame, Aeropostale's metrics have been even worse. Between 2009 and 2013, the company's net income fell from a gain of $229.5 million to a loss of $141.8 million. Like American Eagle, Aeropostale's bottom line was hurt by falling sales. But the biggest contributor to its woes has been its cost of goods sold, which jumped from 62% of revenue to 82.9% as store-level impairment charges and higher-cost merchandise pushed the company into the red.

AEO Net Income (Annual) Chart

American Eagle net income (annual) data by YCharts

The only winner over the past five years seems to have been Abercrombie & Fitch. Between 2009 and 2013, the retailer saw its net income jump from $300,000 to $54.6 million. At face value, this may appear like an impressive improvement. But when you consider the bits and pieces that comprised its change in earnings, the picture does not look quite as nice. Excluding a loss from discontinued operations in 2009 and impairments in both years, Abercrombie & Fitch saw its net income rise 103% from $65.5 million to $133 million.

Foolish takeaway
Based on the data provided, it's not too hard to understand why Mr. Market would punish American Eagle. Although management was capable of generating stronger-than-expected earnings, the business' lackluster revenue could serve as a warning sign that tougher times could be just around the bend.

It is for this reason as well as the company's mediocre long-term performance that the Foolish investor might want to consider a company like Abercrombie & Fitch instead. In addition to growing sales at a faster pace than both American Eagle and Aeropostale, the business' net income rose at a pretty nice pace over the past five years.

Your cable company is scared, but you can get rich
Lately, retailers like American Eagle have had a difficult time remaining relevant. One way to avoid the downside of these struggling businesses is to find an industry whose growth potential is so enormous that it's hard not to invest.

You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

 


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