Life ain't easy in the Eagle's nest.
Today, American Eagle Outfitters (NASDAQ:AEOS) shed a few percent after turning in some very good Q4 and full-year numbers.
The tale of the tape is impressive. The $1.70 per share was a record, and represented 35% growth over the prior year's tally. For the last quarter of 2006, the $0.66 per share was a 40% gain. Revenue gains were robust for both periods, but not nearly as high, which tells you how much of the earnings growth for 2006 has been dependent on expanding margins.
And that, ladies and germs, is the secret word for today. While everyone else out there seems to attribute the stock's action today to a lukewarm outlook, I think that is -- to choose a gentle term -- horse hockey. I think the real issue for American Eagle is margins. I don't think they've got much room for improvement, at least not for a while. And that means profitability probably isn't going to run ahead of revenue growth the way it has for the past couple of years.
To management's credit, it's been prepping us for operating margin contraction for a while now. Much of that is owed to the startup and expansion of new lines, like the high-priced Martin + Osa, and the new undies division, Aerie. While I like what's selling at Martin + Osa (and I've dropped a few bills there myself) I don't believe the chain has nearly the same potential as the flagship American Eagle.
The duds are just too expensive right now, and while the shopping experience there is pleasant to me, I can't help but wonder if it's too different. Abercrombie & Fitch's (NYSE:ANF) goofy Reuhl concept features pretty much the same clothes as the regular store, but in smaller, darker rooms, at higher price points. That vestige of product familiarity seems to work. At my local mall, the place is always packed -- unlike Martin + Osa, which my friends call "the gerbil cage" because of the cedar theme and smell.
For these reasons, I have higher hopes for Aerie, but any leverage from the success of either of these brands is at least a couple of years away.
So, turning back to sales, comps for February were 6% (not the 16% reported by our friends at Reuters), which isn't dazzling, and only reinforces my belief that, for the short term, the Eagle isn't going to be ratcheting margins up the way it has in the past.
Decent earnings and cash flow, alas, don't mean much when a stock is already priced for that, or better. That's why I lightened the load on my American Eagle shares a few weeks back, about the time I noticed that Chair Jay Schottenstein was also throwing back shares. Having made better than a double in just about a year, I had nothing to complain about, and today's action only reminds me that retail isn't a place where we should buy and expect to hold forever. American Eagle is still a fine company and I expect it to do well in the future, but I believe there will be better buying opportunities once investor sentiment swings back to "show me" mode.
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At the time of publication, Seth Jayson had shares of American Eagle, but no positions in any other company mentioned here. See his latest blog commentary here. View his stock holdings and Fool profile here. Fool rules are here.
