AEO: Inventory Recovery & Expense Control; Looking For Share Gains Next

Analysts at Piper Jaffray reiterate their "neutral" rating on American Eagle AEO, while raising their estimates for the company. The target price for AEO is set to $13. According to Piper Jaffray, “Management cited the use of a new inventory allocation system to better align inventory levels with sales, specifically in low volume stores. AEO has reduced inventory by up to 20% in some low volume doors which helps minimize markdowns and improve merchandise margins. AEO's allocation system holds merchandise longer at DCs, which provides for better reaction to store performance and enables faster turns along with reducing merchandise risks. With less inventory, AEO frees up more liquidity to pursue key trending styles in season.” “FQ2 inventory was down (1%) year-over-year, with inventory PSF up +1%. We view this positively in light of the recent +48% inventory gain at ANF and +7% increase at ARO, and see potential benefits in merchandise margin expansion via reduced markdowns in the back half of the year,” the analysts mention. Piper Jaffray adds, “While aerie is still a drag to the company in terms of operating contribution, the brand is making progress and is currently undergoing an intimates to lifestyle brand transformation. On the children's front, five 77kids stores were opened in FQ2, with an additional 4 planned for the 2H and initial reaction to the stores has been positive. Like PSUN, Eagle continues to skew its customer base more towards the 19-24 age range and will be making product changes to strengthen the underperforming tops and accessories businesses.” Piper Jaffray has raised its EPS estimates for FY11 and FY12 from $0.86 to $0.89 and from $1.00 to $1.03, respectively. More Analyst Ratings here