Retail clothier American Eagle Outfitters
It's true, of course, that a one-time charge taken by the company in Q3 2003 played a large part in making this quarter's and this year's results look especially good in comparison to the year-ago periods -- and the company admitted this right up front. But that fact should not detract from the remarkable and real gains in efficiency of operations that American Eagle has achieved over the past year.
Let's look at two oft-used metrics for measuring a retailer's financial health to see just how well American Eagle is really doing. The first is days sales outstanding (DSO), which depicts how much time elapses between when a company sells its goods, and when it gets paid. To calculate this accurately, you need one piece of information that is not broken out in American Eagle's press release (and not available from the company's 10-Q either, as it has not yet been filed with the SEC): accounts receivable. Lacking this number, I'm going to substitute the company's line item for "other current assets" for accounts receivable. (Warning: Accounts receivable historically make up only about a third of American Eagle's "other current assets," so this result can be charitably described as "rough.") Dividing other current assets by sales by 270 (for the number of days in the first three quarters of 2004), American Eagle scored an 18.6 for hypothetical DSO this quarter, vs. a 22.8 last year. So the company appears to be collecting payment more quickly this year than last.
The company's results on inventory turns support this supposition that American Eagle is operating more efficiently this year than last. What's more, we can calculate inventory turns more exactly, as all the necessary data is in the press release. Inventory turns is the number of times a company can sell everything in its stores and warehouses down to bare shelving, then restock and do it all over again (hypothetically, of course), within a given period. In the first nine months of 2004, that number nearly doubled from last year's 3.3 times, to 5.9. American Eagle has made some remarkable strides in selling efficiency.
American Eagle looks to be quite healthy this year -- not just at first glance, but at second glance, as well. Not a bad way for a retailer to head into the critical fourth (Christmas) quarter. Not bad at all.
Fool contributor Rich Smith owns no shares in American Eagle.
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