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Why American Eagle Outfitters Stock Dropped on Thursday

By John Ballard – Sep 2, 2021 at 11:33AM

Key Points

  • Second-quarter revenue came in at $1.19 billion, which fell shy of expectations for $1.23 billion.
  • Lower digital sales might be to blame for the shortfall on the top line.
  • Management expects operating income to reach $600 million in fiscal 2021.

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The reopening boosted store revenue, but it wasn't enough to meet analysts' expectations.

What happened

American Eagle Outfitters (AEO -0.70%) reported strong growth in the fiscal second quarter, with revenue increasing 35% year over year and operating income reaching a Q2 record of $168 million. But revenue of $1.19 billion fell short of analyst estimates that called for $1.23 billion. 

Shares were trading down 7.1% as of 10:10 a.m. EDT on Thursday. This brings the stock's year-to-date gains to 35%, which is still ahead of other apparel stocks.

AEO Chart

AEO data by YCharts.

So what

American Eagle stock has risen sharply over the last year, as investors anticipated a strong recovery in the business. Going into the quarter, the shares traded at 13.5 times forward earnings estimates for fiscal 2021. That doesn't look expensive even by apparel stock standards, but investors have been very quick to punish companies that are not beating estimates this year.

Regardless of the market's reaction to the report, management appeared upbeat about current business trends. In a statement, CEO Jay Schottenstein said, "It's extremely gratifying to see significant growth across our business, as we delivered another quarter of record revenue and profitability." 

Schottenstein cited efforts to improve profits with a "laser focus" on inventory, real-estate optimization initiatives, and supply chain investments.

A customer checks out at an apparel store.

Image source: Getty Images.

Now what

While store revenue increased 73% year over year due to higher traffic, digital revenue declined 5%. Some investors might have liked to see American Eagle perform a little better on the digital front, but the company was up against a tough year-over-year comparison when digital sales surged 66% in fiscal Q2 2020.

However, the Aerie brand, which has the highest digital reach, reported revenue growth of 34% year over year, which came on top of 32% gains in the year-ago period. Management credited a growing customer file for that increase. 

Schottenstein sees the company achieving $600 million in operating income this year, which would be more than double the adjusted total of $314 million in fiscal 2019. Analysts currently expect American Eagle Outfitters to report earnings per share of $2.17 for fiscal 2021. That puts the stock's forward price-to-earnings multiple at an even cheaper 12.7.

John Ballard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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