When a retail company runs double-digit comp sales, everything is easy. Expenses leverage, inventory flies off the shelf, and picking new store locations is a target-rich environment.
But when sales momentum slows to a crawl, the party hats come off and making the numbers work becomes the typical retail grind.
After a long run of exceptional sales, American Eagle Outfitters
This sales slowdown is not uncommon, either. Other top-notch rag sellers like J.C. Penney
How well will American Eagle manage through this sales slowdown? So far, so good.
Earnings per share of $0.45 were a penny more than last year and met Street expectations. Gross margin was down 210 basis points versus last year, driven by higher markdowns to clear seasonal inventory and rent; the company opened 60 stores in the second half of the year compared to 32 last year.
SG&A expense was actually lower as a percentage of sales than last year, revealing that the company is battening down the hatches. Inventories grew 13%, but 3% lower on a per-square-foot basis. This shows me the company is watching customer demand carefully, buying merchandise conservatively, and taking markdowns quickly ... all good signs.
American Eagle issued Q4 guidance that looks a lot like this quarter -- EPS of $0.67 to $0.70 compared to $0.66 last year.
The Street was not impressed, but it looks to me that this company has its ducks in the right order. With consumer confidence at its current low, soft retail sales are expected.
Foolish investors should watch for companies that can manage through adversity and position themselves to soar when consumer spending comes back. I'd say American Eagle fits that description.
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Motley Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, but doesn't own shares of any companies mentioned in this article. The Motley Fool owns stock in American Eagle. The Fool has a disclosure policy.