American Eagle's Fall Lineup Gets Favorable Reaction, Analyst Eyes Back-To-School Season

Telsey Advisory Group analyst Dana Telsey reiterated a Market Perform rating on American Eagle Outfitters, Inc. AEO, with a price target of $15.

According to the analyst, the favorable reaction to its initial Fall products will likely position the company well for the back-to-school season.

AEO will report Q2 earnings results on Wednesday, September 6, after the market close.

With the preannounced second quarter results (ahead of expectations) in early August, the analyst is encouraged by the sequential improvement in topline trends in June and July, particularly as other retailers noted further deceleration in June. 

The analyst continues to expect Q2 EPS of $0.14, vs. $0.04 last year, a penny below the market's expectation of $0.15.

On the top line, Telsey estimates sales of $1.20 billion, flat Y/Y, in line with company guidance, and compared to the consensus of $1.19 billion (down 0.5%).

Within the top line, the analyst forecasts comps to come in flat Y/Y (vs. the consensus forecast of down 2.2%). 

Overall, due to the lack of visibility, Telsey believes AEO will continue to focus on finding efficiencies and cost savings across the organization (i.e., the restructuring of the Quiet business in Q1). 

Below the top line, Telsey estimates 370 bps of gross margin expansion Y/Y to 34.6%, which compares to the consensus estimate for 350 bps of leverage to 34.4%. 

In addition, the analyst projects 120 bps of operating expense deleverage to 26.8% percent of sales, vs. the consensus forecast of 26.6%. Taken together, the analyst continues to look for an operating income of $36 million, in line with consensus, representing an operating margin forecast of 3% (in line with the consensus).

Management noted that the business' exposure to the mid- to lower-income consumer could be an issue given the macro landscape, the analyst adds.

While the Q2 preliminary results came in better than anticipated, Telsey notes there is still limited clarity into the back half.

Price Action: AEO shares are trading higher by 0.12% to $16.59 on the last check Wednesday.