'Tis the season for first-quarter 2007 earnings releases on Wall Street. Next up, that most red-white-and-blue of avian appareliers: American Eagle Outfitters (NYSE:AEO).

What analysts say:

  • Buy, sell, or waffle? Twenty-nine analysts bird-dog American Eagle, giving it 10 buy ratings, 17 holds, and a pair of sells.
  • Revenues. On average, they expect to see 19% sales growth to $620.7 million.
  • Earnings. Profits are predicted to rise 25% to $0.35 per share.

What management says:
It's beginning to sound like a broken record. Retailer after retailer in recent weeks has stepped up to the mic to report a sudden downturn in consumer spending in April. Whether they sell out of big boxes like Target (NYSR: TGT) or Wal-Mart (NYSE:WMT), or smaller boxes like Limited (NYSE:LTD) or Gap (NYSE; GPS), the song remains the same. American Eagle harmonized: "In contrast to a very strong performance in March, April sales were below our expectations."

Numerically speaking, AE's month broke down like this: Same-store sales declined 10%, which when paired with an expanding store base, worked out to about a 4% decline in total sales for April. The good news is that as the month progressed, business improved. A month that began with a "mid thirties" decline in comps evolved into a "mid single-digits" decline in week two, and then yielded "mid single-digits" increases in weeks three and four. Also good news: Sales for the quarter increased 17% year over year (still shy of analyst predictions), quarterly comps were up 6%, and AE reiterated its earnings guidance of $0.34 to $0.35 per share for the quarter.

What management does:
How does AE intend to turn 17% sales growth into 21% or better profits growth? By continuing to improve its profit margins. Rolling gross and operating margins have been rising for three quarters straight, and the net already has four quarters of successive improvement under its belt.

Margins

10/05

1/06

4/06

7/06

10/06

2/07

Gross

47.4%

46.6%

46.6%

46.9%

47.6%

48.2%

Operating

21.3%

20.9%

20.2%

20.5%

21.2%

22.5%

Net

12.9%

12.7%

12.8%

12.9%

13.4%

13.9%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
July's six-month review of Motley Fool Stock Advisor recommendations made by David Gardner is just around the corner. (Tom's update came out just days ago, by the way. Claim a free 30-day subscription and get the lowdown on his picks before the news filters out to the Street.) While we're waiting to get David's latest thoughts on AE, I thought I'd contribute one -- disturbing -- thought of my own.

It's on inventories. At AE, they're, shall we say, soaring. Although it's great to see that the firm grew its sales 24% year over year in the last half of last year, I can't help but notice the tower of inventory looming in the background. On average, we've seen inventories exceed their H2 2005 levels by 32% over the last two quarters. That's not good, and it poses a threat to the strong margin growth you see reflected in the table above. If sales don't pick back up, and if inventories continue to squat around the stockroom, becoming staler by the day, AE will eventually decide it has to move product, and slash prices to do so. If that day comes, profits will surely take a hit.

American Eagle Outfitters and Wal-Mart are Motley Fool Stock Advisor selections. Wal-Mart and Gap are Motley Fool Inside Value recommendations. Limited is a Motley Fool Income Investor pick.

Fool contributor Rich Smith owns shares of American Eagle Outfitters. The Fool has a disclosure policy.