Teenagers are notoriously fickle when it comes to fashion. But American Eagle Outfitters (AEO - Analyst Report) has been executing well to the current fashion trends. Its "trend-right product" has allowed the company to avoid heavy discounting despite the highly promotional retail environment and is helping to take market share from competitors like Abercrombie & Fitch (ANF) and Aeropostale (ARO).

Following strong first quarter results, management provided bullish guidance for Q2. This prompted analysts to revise their estimates significantly higher for both this year and next, sending the stock to a Zacks Rank #1 (Strong Buy). While the stock popped on the Q1 report, shares still look attractively priced with a Zacks Value Style Score of 'A'.

American Eagle Outfitters is a clothing retailer that operates more than 1,000 stores in the United States, Canada, Mexico, China, Hong Kong and the United Kingdom under the 'American Eagle Outfitters' and 'Aerie' brands.

First Quarter Results

American Eagle delivered strong first quarter results before the bell on May 20. Earnings per share came in at $0.15, well above the Zacks Consensus Estimate of $0.11. It was also significantly higher than EPS of $0.02 in the same quarter last year.

Total net revenue rose 8% to $700 million, beating the consensus of $689 million. This was driven by a 7% increase in same-store sales.

Also note that American Eagle didn't just succeed in boosting sales, it boosted its profit margins too. The gross profit margin expanded 260 basis points to 37.5% of net revenue. This tells me that they're not discounting heavily despite the heavily promotional retail environment because demand for their product is that strong.

Estimates Soared

Management also provided bullish guidance for Q2. The company expects EPS between $0.11-$0.14 compared to the Zacks Consensus Estimate of $0.11 (and note that their guidance for Q1 EPS was conservative at $0.09-$0.12 versus a print of $0.15). This prompted analysts to revise their estimates significantly higher, sending the stock to a Zacks Rank #1 (Strong Buy).

The 2015 Zacks Consensus Estimate has jumped from $0.86 to $0.95 over the last 30 days while the 2016 consensus has climbed from $0.95 to $1.05 over the same period.

Several analysts noted that the company beat Q1 expectations on all metrics - sales, comps, gross margin, SG&A, and EPS were all better than consensus. That is a home run.

Reasonable Valuation

Shares of American Eagle popped on the Q1 report, but the valuation picture still looks reasonable. The stock trades at 16.8 x 12-month forward earnings and sport an enterprise value to cash flow ratio of 11.6.

The Zacks Value Style Score for AEO is an 'A'.

The Bottom Line

With its "trend-right product", American Eagle has been taking market share from competitors and avoiding heavy discounting, which has boosted profit margins as well as earnings estimates. Given these factors and its reasonable valuation, American Eagle looks well-positioned to soar.