American Eagle Soaring Into Busy Holiday Season (Breakfast News) November 17, 1999


Wednesday, November 17, 1999

"My greatest strength as a consultant is to be ignorant and ask a few questions."
-- Peter Drucker

American Eagle Soaring Into Busy Holiday Season

By Richard McCaffery (TMF Gibson)

What a run the leading casual clothing retailers have had in the last three years.

Apparel, footwear, and accessories maker American Eagle Outfitters (Nasdaq: AEOS) is riding a swift updraft. The company, whose stock is up 68% this year, reported third quarter net income of $24.3 million, or $0.50 per diluted share. This is a 75% increase from net income of $13.9 million, or $0.29 per diluted share, a year ago.

Results blew away analyst estimates of $0.43 per share, according to First Call/Thomson. Same-store sales jumped an amazing 26.4%. Retail investors pay close attention to this measure because it separates growth at existing stores from growth at new stores, which can skew the actual strength of a company's business because new stores are typically fast out of the gate.

What makes the company's Q3 results even more impressive is the strength of last year's third quarter. A 75% growth in net income wouldn't be such a big deal if the company reported negative growth last year. But that's not what happened. Net income jumped 121% last year, and same-store sales increased 29.4%.

The company sells its own line of jeans, khakis, and T-shirts, as well as shoes and accessories like sunglasses, hats, and coats. It targets the fashion-conscious consumers ages 16 to 34, a strategy that's served competitors the Gap (NYSE: GPS) and Abercrombie & Fitch (NYSE: ANF) well over the years.

American Eagle should have an easier time than the Gap growing earnings and sales at a double-digit pace over the long term, however, simply because it's a much smaller company. American Eagle operates 460 stores in 43 states, compared to more than 1,800 Gap stores in the U.S., Canada, and overseas.

After more than doubling this year, shares of American Eagle slid after talk that it boosted same-store sales by counting merchandise it sold to discount retailers, as well as scuttlebutt about the company not building up enough inventory for its busy fourth quarter. Rubbish, said analysts at Robertson Stephens in a recent report, which recommended buying on the weakness.

What can the Fool add to this? Investors with questions about how a company stocks inventory, counts same-store sales, handles accounts receivable, etc. -- all good questions -- should pick up the phone and call the company's investor relations department. Go right to the source. It doesn't take long and that's what investor relations people are there for. More often than not you'll get your answer in two shakes.

News to Go

Name-your-own price online vendor (Nasdaq: PCLN) will now sell tickets from three more airlines, company officials said. It's reached agreements with US Airways (NYSE: U), United Airlines, owned by UAL Corp. (NYSE: UAL), and American Airlines, owned by AMR Corp. (NYSE: AMR), which means all the major carriers are onboard. The company will take a $1.1 billion charge related to the deal, which allows its major airline vendors to take equity positions in Priceline. Adding these carriers just about doubles the number of seats Priceline has to offer.

Local telephone and communications services company SBC Communications (NYSE: SBC) and computer hardware, software, and services giant IBM (NYSE: IBM) have formed a partnership to sell PCs with high-speed Internet hookups to telecommuting consumers in California and the Midwest, Bloomberg reported.

Microprocessor computer chip company Intel (Nasdaq: INTC) is struggling to meet demand for its Pentium III computer chips, according to The Wall Street Journal. A company spokesman said Intel is experiencing a shortage of products across its supply chain, though it's unrelated to the earthquake in Taiwan.

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