Zacks_Analysts' Blog : American Eagle Meets Estimate - Analyst Blog

American Eagle Outfitters Inc.(AEO) recently reported first-quarter 2011 results. Earnings in the first quarter decreased to 14 cents per share from the year-ago earnings of 17 cents per share, however, in line with the Zacks Consensus Estimate.

Quarterly Review

During the quarter, American Eagle’s net sales went down 6.0% year over year to $610.0 million, below the Zacks Consensus Estimate of $642 million. Same-store sales reported a decrease of 8.0%. In the relevant quarter, the company opened three American Eagle (AE) stores, two aerie and six 77kids stores, and remodeled 32 stores. The company closed 1 AE store in the quarter.

American Eagle’s gross profit plummeted 10.1% to $232 million, while gross margin contracted 170 basis points (bps) to 38.0%. Merchandise margins recorded an increase of 70 basis points.

Selling, general and administrative expenses fell 6% to $158 million due to the company’s continuous effort to reduce expenses and lower incentive compensation. Despite a fall in selling, general and administrative expenses, operating income plunged 29.6% year over year to $38 million, while operating margin contracted 190 bps to 6.3%.

Financial Position

American Eagle ended the year with cash and cash equivalents of $474.7 million, compared with $535.2 million in the year-ago period. In first quarter of 2011, cash used for operating activities came in at $39.2 million. The company also deployed $38 million toward capital expenditures including $28 million on opening of new stores and remodeling old stores.

The company expects to incur capital expenditures in the range of $90 million to $100 million in fiscal 2011.

Guidance

In the second quarter of fiscal 2011, the company expects to earn in the range of 10 cents to 13 cents per share.

For fiscal year 2011, the company expects earnings to be at par with $1.02 per share reported in fiscal 2010.

Conclusion

We remain impressed with the company’s continued momentum in denim along with improved merchandise assortments in the women’s business segment, which will likely lead to a turnaround in top-line momentum as well as a rebound in gross margin.

The company operates in a highly fragmented specialty retail sector and faces intense competition from other teenage-focused retailers, such as Abercrombie & Fitch Co. (ANF) and Gap Inc. (GPS).

We currently have a short-term Zacks #3 Rank ('Hold') rating and a long-term Neutral recommendation on the company.