What happened

Shares of American Eagle Outfitters (NYSE:AEO) were moving higher today after investors overlooked an ugly first-quarter earnings report and focused instead on signs of a recovery and strong online demand.

The stock was up 15.7% as of 10:32 a.m. EDT on Wednesday.

So what

Like other brick-and-mortar apparel retailers , the teen-focused brand saw sales plunge during the quarter with its stores closed for roughly half the period. Revenue in the quarter fell 38% to $552 million, well below estimates at $634.3 million.  By segment, sales at American Eagle fell 45%, but declined just 2% at Aerie, its fast-growing brand of intimate apparel for women.

An American Eagle Outfitters storefront

Image source: American Eagle.

Digital demand, which is a reflection of ordered sales, was encouraging, rising 33% in the quarter, up 75% at Aerie and 15% at American Eagle. But due to supply chain constraints, digital revenue was up just 9% overall in the quarter, though management said it has reduced backlogs since the mid-April peak. Nonetheless, it shows customers have remained loyal to the company during the crisis.  

On the bottom line, the retailer reported an adjusted loss of $0.84 per share compared with a $0.24 per-share profit a year ago, and worse than estimates of a $0.29 per-share loss.

Looking ahead to the recovery, CEO Jay Schottenstein said, "I'm very pleased to see stores reopening strong, supported by industry-leading health and sanitization measures to ensure safe and secure stores for our associates and customers. American Eagle and Aerie will be well positioned for the back-to-school and fall seasons."

Now what

As a teen retailer, American Eagle makes most of its profit during the second half of the year from the back-to-school and holiday shopping seasons, so it's key that the company is ready for them. The retailer successfully reduced its inventory by 8% to adapt to the changing climate, which management said positions it well for the back-to-school season.

With stores now reopening, the worst of the crisis has likely passed for American Eagle. The company has a solid balance sheet with $856 million in cash after raising debt and tapping a line of credit. And with fast growth at Aerie, it should be able to outperform its peers during the recovery.

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