American Eagle Outfitters Inc. (AEO - Analyst Report) came out with splendid second-quarter fiscal 2016 results, wherein both sales and earnings increased year over year and outdid estimates. This marked the company’s seventh consecutive positive earnings surprise. However, with American Eagle being an investors’ favorite, it seems that the solid quarterly results were not enough to please them, as its stock price declined 3.3% following the earnings release.  

Quarterly earnings of 23 cents per share surged 35.3% from 17 cents recorded in the prior-year quarter and beat the Zacks Consensus Estimate of 21 cents.
 American Eagle Outfitters Inc. (AEO - Analyst Report) Street Actual & Estimate EPS - Last 5 Quarters | FindTheCompany

Results gained from the company’s constant efforts toward enhancing brands via innovations; making technological advancements and commitment toward enriching consumer experience. Further, the company’s quarterly results benefited from continued strength noted in its American Eagle (“AE”) and aerie brands.

Total revenue of this Zacks Rank #3 (Hold) company advanced 3.2% year over year to $822.6 million, which surpassed the Zacks Consensus Estimate of $818.7 million. Comparable-store sales (comps) improved 3%, compared with an 11% jump recorded last year. Brand-wise, comps increased 24% at the company's aerie stores and 1% at AE Total Brand outlets. Notably, this marked the aerie brand’s fifth straight quarter of over 20% comps growth.

Quarter in Detail

Gross profit in the quarter rose 8% to $307 million, with the gross margin expanding 160 basis points (bps) to 37.3%. The gross margin expansion was driven by better merchandise margins, which in turn stemmed from lower costs and higher selling prices, somewhat offset by greater delivery costs associated with digital sales growth.

Selling, general and administrative (SG&A) expenses increased 2% year over year to $200 million, reflecting higher investments in brand advertising and variable selling costs, somewhat compensated by strong cost management efforts. However, as a percentage of sales, SG&A expenses declined 20 bps to 24.3%.

The company’s operating income came in at $69 million, marking a 29% rise from $53 million recorded in the prior-year quarter. At the same time, operating margin expanded 160 bps to 8.3%.

Financial Position

American Eagle ended the fiscal second quarter with cash and cash equivalents of nearly $247.9 million compared with $327.3 million in the prior-year quarter. The low cash balance is attributed to $227 million spends related to share buybacks, $94 million of dividends and $135 million in capital expenditure in the past one-year period.

In second-quarter fiscal 2016, the company incurred $36 million of capital expenditure. For fiscal 2016, management now targets nearly $160 million as capital expenditure, which marks the lower end of its previously targeted range of $160–$170 million.

As of Jul 30, 2016, American Eagle’s total inventory was $422.2 million, up 3% from the comparable year-ago period. The company expects inventory at cost to increase in the low-single digits at the end of third-quarter fiscal 2016.

Store Update

During the second quarter, American Eagle inaugurated four new AE Brand stores and one Tailgate Clothing Co. store (which was acquired at 2015 end), while it closed three AE stores and four aerie stores. Alongside, on the global platform, the company opened 13 international licensed stores.

As of Jul 30, 2016, American Eagle operated 1,044 company stores and 158 international licensed outlets.

By the end of fiscal 2016, the company expects to operate 181 international licensed stores. Its total store count at the end of fiscal 2016 is expected in the range of 1,045−1,050.

AMER EAGLE OUTF Price, Consensus and EPS Surprise

AMER EAGLE OUTF Price, Consensus and EPS Surprise | AMER EAGLE OUTF Quote

Guidance

Management remains confident of its near-term prospects, as it entered the fall season with solid expectations with regard to market opportunities as well as the company’s robust execution. Also, management remains focused on enhancing consumer experience by providing top-quality products, in an attempt to place American Eagle’s brands well in the evolving retail space.

Consequently, the company offered its view for third-quarter fiscal 2016, wherein it anticipates comps growth at a low single-digit rate. Further, the company projects earnings per share in the band of 40–41 cents compared with 35 cents earned in the prior-year quarter. The current Zacks Consensus Estimate for the third quarter is pegged at 40 cents, in line with the company’s outlook.

Stocks to Consider

Better-ranked stocks in the same industry include Nordstrom Inc. (JWN - Analyst Report) , with a Zacks Rank #1 (Strong Buy), The Children's Place, Inc. (PLCE -Snapshot Report) and DSW Inc. (DSW - Snapshot Report) , each carrying a Zacks Rank #2 (Buy).