What American Eagle’s Management Wants Investors to Know

Investors weren’t thrilled with American Eagle‘s (NYSE: AEO) second-quarter earnings report, sending the stock lower immediately following the results. Yet that dip likely had more to do with the dramatic run-up that shares have had so far this year, and not with any looming issues with the company.

In fact, the retailer’s recent growth was broad-based and included healthy earnings gains despite increased investments in the business.

In a conference call with Wall Street analysts, CEO Jay Schottenstein and his team provided details about that spending while explaining why they remain so bullish about American Eagle’s growth prospects.

Here are a few highlights from that discussion.

Image source: Getty Images.

Hitting the target

In fact, on a consolidated basis, stores [sales] increased in the high single-digits and our digital business, again, grew at an impressive pace, marking the 14th straight quarter of double-digit sales growth [and] representing approximately 24% of total revenue.
— CFO Robert Madore

American Eagle enjoyed broadly positive results last quarter across its two main sales channels of brick-and-mortar stores and e-commerce. Management said the gains were driven by increasing traffic, higher spending per visit, and better conversion rates for online shoppers.

With comps up 9% in each of the last two quarters, the retailer’s sales growth is strong enough that executives are now referring to the company’s multichannel transformation in the past tense. “Our teams have successfully transitioned [American Eagle] during a period of real disruption in the retail sector,” Schottenstein said.

Brand by brand

In addition to strong digital sales, each brand delivered positive store comps for the third quarter in a row and demonstrated incredible consistency. This was the 14th consecutive quarter of positive comps for [the company].
— CEO Jay Schottenstein

The core American Eagle brand accelerated to a 7% comp increase from 4% in the prior quarter while boosting its profitability. The newer Aerie franchise, meanwhile, posted 27% comp sales growth — down from 38% growth in the first quarter — following a 26% spike in the prior-year period.

For the American Eagle brand, management highlighted strength in both the men’s and women’s offerings, with the jeans business performing particularly well. Standout areas for Aerie included apparel, bras, and swimwear. Its e-commerce segment also grew 30%, which management called a “spectacular” result.

Allocating resources

Our healthy cash flow and this year’s additional financial flexibility from tax reform has enabled us to continue to invest in our people, our brands, and in the customer experience.
— Schottenstein

American Eagle spent more on wages last quarter and made significant investments in store remodels and in support of the digital sales channel. These expenses didn’t hurt profitability, though.

Instead, gross margin improved by almost 2 full percentage points to 36.6% of sales and adjusted operating income jumped to $76 million, or 7.9% of sales, from $50 million, or 6% of sales, a year ago. Executives believe they’re getting plenty of bang for their buck from this spending, as store cleanliness, better in-stock levels, and employee training are all helping improve the customer shopping experience.

Looking ahead

… [L]ooking ahead to the third quarter — we continue to be pleased with the performance of our business. We expect third quarter earnings per share of $0.45 to $0.47 based on comparable sales in the high single-digits and total revenue growth in the mid-single-digits.
— Madore

Judging by the stock’s decline in the immediate wake of the earnings report, investors were hoping for a brighter outlook from the management team. But American Eagle’s forecast is still aggressively optimistic.

American Eagle is predicting continued robust market share gains, with sales rising in the high single-digit range. Management is especially bullish about the Aerie brand, given the demand spike both in stores and online. To support that attractive growth engine, American Eagle plans to accelerate its footprint expansion by opening between 50 and 80 new Aerie stores in fiscal 2019, including in several new markets.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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