Why American Eagle Outfitters Shares Flew Today

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 American Eagle Outfitters (NYSE: AEO  ) closed up nearly 12% Wednesday after the teen-oriented apparel company posted better-than-expected results for the second quarter.

So what: American Eagle shares have been battered over the past year on slumping sales, but today's Q2 beat -- EPS of $0.03 on revenue of $711 million versus the consensus of breakeven and $689 million, respectively -- suggests the worst may be behind it. And although same-store sales slumped 7%, they were also ahead of Wall Street's forecast for an 8% decline.

Perhaps the most positive news today, however, is regarding the company's current inventory position: Excluding the change in ownership terms, inventory at cost per foot declined in the mid single digits. More important, clearance units were well below last year, indicating that the pressure on its gross margins is starting to let up.

So, while American Eagle didn't deliver a blowout quarter by any means, there are definitely signs that management's merchandising initiatives are gaining a bit of traction. Of course, the company is still in the process of trying to find a permanent CEO while trying to negotiate this significant turnaround, so its longer-term competitive position remains highly uncertain.   

Now what: Based on a mid-single-digit decrease in same-store sales, management now sees EPS of $0.17 to $0.19 in the third quarter, bracketing the average analyst estimate of $0.18. "We successfully cleared through spring and summer merchandise and entered the second half of the year in a good inventory position. We made progress on merchandise improvements, which will ramp up through the holiday season," said Interim CEO Jay Schottenstein. "We remain vigilant on expense management, while pursuing strategic initiatives crucial to our future success. We are confident that these efforts will position AEO to achieve stronger operating results and deliver increasing shareholder value."

Of course, given the uncertainty still surrounding American Eagle's merchandise turnaround and its ongoing search for a CEO, I'd be apprehensive about chasing today's big run-up.

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