Despite beating second quarter earnings and sales
expectations, shares of specialty retailer American Eagle (AEO 24.74, -2.54, -9.31%)
fall to six-week lows due in part to comparable store sales at the Aerie brand,
which didn’t live up to expectations, and to underwhelming third quarter
Jumping right into it, American Eagle reported second quarter earnings per share (EPS) of $0.34 on revenue growth of 14.2% to $964.85 mln, both of which handily beat market expectations. Gross profit increased 20% to $353 mln from adjusted gross profit of $294 mln last year. The gross margin rate increased 170 basis points to 36.6% of revenue compared to adjusted 34.9% last year, primarily reflecting rent leverage.
Further, total ending inventories at cost increased 8% to $466 mln in the quarter, in line with the company’s expectations. Looking forward, American Eagle expects third quarter ending inventory to be up in the high-single digits.
Overall, consolidated comparable sales increased 9% versus the comparable period ending August 5, 2017, following a 2% increase last year. By brand, the flagship American Eagle business saw comparable sales increase 7% while Aerie’s comparable sales increased 27%, compared to flat and +26% comparable sales last year, respectively. This result for Aerie, while up 100 basis points year/year, wasn’t enough to pacify investors and the Street as expectations were high heading into the quarter.
In the second quarter, capital expenditures totaled $54 mln, with more than half related to store remodeling projects and new openings, and the balance of the expenditures were directed toward supporting the digital business, omni-channel tools, and general corporate maintenance. The company continues to expect capital expenditures to be in the range of $180-190 mln this year.
In terms of guidance, based on an anticipated comparable sales increase in the high-single digits and total revenue growth in the mid-single digits, reflecting the approximate $40 mln revenue shift into the second quarter due to the shifted retail calendar, management expects third quarter 2018 EPS to be approximately $0.45-0.47, slightly worse than the Street had expected. Management highlighted that last year’s third quarter reported EPS of $0.36 included approximately $0.01 per share of restructuring and related charges.
Following this morning’s print, shares of AEO opened below its 50-day simple moving average (25.38) and continued to push lower as the morning session progressed, trading down by 13.3% at their lowest. After topping +11-year highs a week ago (8/22), the stock has lost about 20%, trimming its YTD gains to about 27.5% -- for context, the S&P Retail SPDR (XRT 51.48, -0.32, -0.62%) has added about 13.5% YTD.
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