This is exactly why investors shouldn't put too much credence in just one month of data.
Only one month after reporting soaring sales and increasing its guidance, teen retailer American Eagle (NYSE:AEO) posted a drop in July comps below even the lowest estimates. That's why Foolish investors understand the importance of conducting due diligence rather than dumping the stock based on the headlines. It's much more beneficial for investors to look at what's happened before this and what is expected in the coming months.
First, however, is to look at American Eagle's most recent sales report. The retailer reported an impressive increase in total sales of 19% to $233.9 million. However, comps took a nosedive, falling 6% for the month. Competitors, including Aeropostale (NYSE:ARO) and Abercrombie & Fitch (NYSE:ANF), reported similar declines. American Eagle's management said shoppers were getting a later start on their back-to-school shopping, and said that Florida and Texas moved their-tax free shopping days from July to August this year.
This is similar to what happened to American Eagle back in April when comps fell 10% because shoppers allegedly finished their Easter shopping in March. However, the company bounced right back in May with a 5% gain in comps and reported first-quarter earnings at the upper end of its guidance.
Whether it will be able to bounce back so quickly this time around isn't known. However, if you believe what the retailers are telling you, sales should be strong in August. I could easily see that leading to another overreaction, only this time on the buy side. Of course, we still haven't felt the full impact of the spiraling mortgage market, which could limit consumer spending for some time.
I realize I haven't been very helpful when it comes to American Eagle's near-term prospects. However, I will tell you that from a long-term perspective, American Eagle looks attractive. Its stock price has reached lows not seen in a year, giving it a good valuation, and it remains a well-managed company with a great following.
Also, I can say with a fair amount of certainty to expect several more instances of what has happened after the company's latest two sales reports. Whether American Eagle exceeds expectations or disappoints, investors will almost always overreact to the news. It's your job as a Foolish investor to take advantage and scoop up shares when the price is pushed excessively low.
For more on the up-and-down world of retail stocks, check out:
American Eagle is a Motley Fool Stock Advisor selection. David and Tom Gardner's picks are beating the market. To see how they're doing it, take a free 30-day trial to the newsletter service. Fool contributor Mike Cianciolo welcomes feedback and doesn't own any of the companies in this article. The Fool has a disclosure policy.
