What happened
Shares of teen-focused basics retailer American Eagle Outfitters (AEO -0.04%) fell a quick 13% at the open on March 3. The news that drove the decline was the company's earnings update, which hit the newswires after the close on March 2. The quarterly report was actually pretty solid in many ways, but there were enough negatives to put investors in a bad mood today.
So what
American Eagle Outfitters CEO Jay Schottenstein started the company's fourth-quarter news release by explaining that fiscal 2021 was "a milestone year," with revenue surpassing $5 billion for the first time ever. Specific to the fourth quarter, the company's top line chimed in at $1.51 billion, up 17% compared to the same quarter of 2020. American Eagle's fast-growing Aerie brand was the driving force, with sales up 27% year over year while the retailer's namesake brand saw sales increase a solid, but more modest, 11%. Although the company's adjusted earnings of $0.35 per share in the fourth quarter were down from $0.39 per share in the fourth quarter of 2020, they met analyst expectations. For the full year American Eagle earned $2.19 per share on an adjusted basis. All in, the top- and bottom-line stories here were fairly good.
Image source: Getty Images.
The problem for investors today appears to be a combination of the business's fundamentals and its outlook. Specifically, American Eagle faced elevated freight costs in the fourth quarter of 2021 partly because it chose to fly goods in from manufacturers to ensure it had inventory. And while it brought in extra product so that it would have enough to sell in the first quarter, that also means it is tying up capital in that extra inventory right now. Meanwhile, given the geopolitical backdrop, still constrained logistics networks, and the lack of economic stimulus this year compared to 2021, management is taking a cautious outlook. In fact, management is calling for American Eagle's full-year operating profit to decline in 2022, with a weak first half expected to only be partly offset by a stronger second half. That's not so great, and investors reacted accordingly.
Now what
Since hitting a peak in mid 2021, the price of American Eagle Outfitters' stock has been cut in half. That said, the company has made material progress on the business front since the recession began, including making some distribution-related acquisitions to bolster its ability to better serve customers. While it is disheartening to hear that the first half of 2022 could be tough, that's actually not too shocking given both the business backdrop and the solid performance the company put up in 2021. Investors probably shouldn't get too caught up in the short term with a company that's making strong moves to ensure its long-term growth.
