For two quarters straight, American Eagle Outfitters (NYSE:AEO) has turned the neat trick of producing earnings numbers precisely where Wall Street wanted to see them. Will tomorrow morning's Q2 2007 results make it three in a row?

What analysts say:

  • Buy, sell, or waffle? Twenty-nine analysts bird-dog American Eagle, giving it 11 buy ratings, 16 holds, and a pair of sells.
  • Revenues. On average, they expect to see 16% sales growth to $697.3 million.
  • Earnings. Profits are predicted to rise in tandem to $0.36 per share.

What management says:
If you're a clothing retailer, and your name isn't Wal-Mart (NYSE:WMT) or Target (NYSE:TGT), chances are you had a pretty miserable July. Aeropostale (NYSE:ARO), Abercrombie & Fitch (NYSE:ANF), PacSun (NASDAQ:PSUN), and Gap (NYSE:GPS) all reported slumping sales last month.

Likewise with American Eagle. Although firmwide sales grew 19% for the month, all of that growth came from new store openings. Meanwhile, same-store sales slid 6%. Management encourages that: "This was largely due to later back-to-school starts ... as well as ... tax free events" being postponed from July to August in many states, but that "customers are responding well to the back-to-school collection." But even with the delayed school starts and tax-free buying sprees, it looks like American Eagle managed to eke out a "revenue beat." According to the July sales release, sales for the second quarter surpassed analyst expectations, rising 17% to $703.2 million. Earnings, however, could still "miss" -- the company promised $0.35 or $0.36 per share.

What management does:
For a stock that's down 22% in the last three months, I must say that the company behind the stock is performing remarkably well. Gross, operating, and net margins were all on the rise until last quarter, and they've held steady since. Perhaps importantly, management advised on its July sales conference call that online sales through have significantly outpaced overall sales -- up 39% year over year. These higher-margin online sales just might result in more margin improvement than expected tomorrow.





























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:
In his most recent six-month review of companies on his side of the Motley Fool Stock Advisor portfolio, Fool co-founder David Gardner reiterated his confidence in this company (read David's investment thesis when you try out the service for free for 30 days.) While acknowledging that the company has suffered, David finds himself more bullish despite (or perhaps because of) the falling stock price. "Teens still love the brand," he says, "and this company's new retail concepts should accelerate growth in the months ahead."

Let's hope so. Personally, as much as I like American Eagle (both the stores and the stock), I admit to being a bit worried about one statistic in particular. Over the last six months, the firm's sales have grown an impressive 23% -- but its inventories are up an even more sizeable 33%. In tomorrow's news, I'm going to be very interested in seeing whether American Eagle has been able to reduce inventories while maintaining margins. The longer we see inventories build up faster than sales, the greater the pain will be when this Eagle finally lends an eye to fixing this problem.

Pacific Sunwear and Gap are both Stock Advisor selections. Wal-Mart and Gap are both Inside Value recommendations. Both market-beating newsletters are available for a free 30-day trial.

Fool contributor Rich Smith owns shares of American Eagle Outfitters. Full disclosure is always in style at The Motley Fool.