It seems like American Eagle Outfitters (Nasdaq: AEOS ) can do no right these days.
After getting cut back mercilessly following a very small third-quarter earnings warning, the retailer's stock didn't even rebound when it posted strong comps growth, or when it re-upped guidance to the original range. We might attribute some of that slide to the general retail pessimism that has afflicted companies across the space, from competitor Abercrombie & Fitch (NYSE: ANF ) to big-box discounters such as Wal-Mart (NYSE: WMT ) and Target (NYSE: TGT ) . And unlike competitor Aeropostale (NYSE: ARO ) , American Eagle's operational performance has remained quite strong.
Today, the Eagle actually "beat" its yo-yoing guidance number, but the stock still dropped as much as 7% in morning trading. The problem? A "cautious" view, according to the headline-writing sort. We'll get to what that means in a second. For now, let's look at the results.
Earnings of $0.47 per share represent a 23.7% bump over the prior-year quarter's $0.38, though that included a $0.01 charge for a loss on discontinued operations. The earnings growth outpaced the 20.5% top-line increase, with this quarter's $577.7 million in sales also handily beating analyst's estimates.
Now the bad news: Gross margins were 2% lower in this year's quarter. This is something I never like to see, but this time around, I'm willing to accept management's excuse -- namely, that year's margins were abnormally strong due to an incredible sales environment. A quick double-check against the firm's historical margins shows that this quarter's 46.6% is indeed in line with more normalized gross margins over the past year, and that last year's 48.8% was an anomaly. If you're a real margin stickler, you might share my point of view here. These margins are still OK, and they do offer room for improvement.
Whether that happens will depend, of course, on discounting. The year-over-year inventory increase of 23.7% outpaced the sales growth, which is rarely a good sign. It didn't bloat to a level where I'd begin to head for the lifeboat, but it does bear watching.
As for today's share-price slide, I'm tempted to blame the ol' forward guidance thing. While the data I've got suggest a per-share average estimate of $0.75 or $0.756 for the quarter -- it all depends on which aggregator is compiling the estimates -- others are saying analysts were looking for $0.76. What's in a penny? In a day's trading, plenty maybe, but in the long run, I expect that penny's difference to be close to zero. American Eagle's free cash flow remains strong. Capital expenditures are well covered by cash flow, and better yet, they seem to be providing solid returns, as remodeled stores show significant boosts in sales performance. Finally, the Eagle's future growth opportunities look good.
The firm plans to leverage existing stores by selling more accessories and intimate apparel. It's also slated to open the first five stores in its 20-something concept, Martin + Osa, next August. It also announced a partnership to expand into Japan, a region that has exhibited strong demand for the firm's direct-order business.
I've run literally dozens of thumbnail discounted cash flow valuations on American Eagle -- you can try it yourself with a free trial of our nifty tool at Motley Fool Inside Value -- and even with conservative growth estimates, I have a very hard time coming up with a value for these shares that's not a good deal higher than today's price. The shares have looked cheap to key insiders lately, and they look cheap to me, too.
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At the time of publication, Seth Jayson had shares of American Eagle and Aeropostale but no position in any other company mentioned. View his stock holdings and Fool profile here. Fool rules are here.
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