American Eagle's Brands & Growth Efforts Seem Good: Apt to Hold Stock

American Eagle Outfitters, Inc. AEO remains well-poised to tap the positive trends in the fashion arena, thanks to its digital endeavors and other robust strategies, including the Powering Profitable Growth plan. The company is gaining from immense brand strength and sturdy demand for its products that resonate well with the customers.

American Eagle's brand strength and gains from progress on its Powering Profitable Growth strategy have been bolstering its performance for a while. Its earnings beat the Zacks Consensus Estimate for the fifth consecutive time in second-quarter fiscal 2024. This was the company's sixth straight quarter of record revenues. The bottom and top lines also increased year over year. Let's delve deeper.

AEO's Powering Profitable Growth & Other Efforts

American Eagle is on track with its Powering Profitable Growth plan. The plan looks to deliver annual operating income growth in the mid-to-high teens to more than $570 million by the end of fiscal 2026. This translates to an operating margin of about 10%, implying an expansion of 300 basis points over the next few years.

The plan also targets annual revenue growth in the band of 3-5% through the end of fiscal 2026. This indicates revenues in the range of $5.7-$6 billion. The company remains committed to amplifying brands, optimizing operations and executing financial discipline.

In addition, its Real Power Real Growth value creation plan is focused on driving profitability through real estate and inventory-optimization efforts, omnichannel and customer focus and investments to improve the supply chain. As part of the Real Power Real Growth plan, American Eagle has been pursuing opportunities to grow the Aerie brand through expansion into newer markets, innovation and a growing customer base.

American Eagle's Brand Strength Holds Promise

We note that American Eagle has been witnessing spectacular response for its Aerie brand for quite some time now. Sales rose 9% and comps jumped 4% for Aerie in the fiscal second quarter. Strength in apparel and the offline active sub-brand aided growth. The company is focused on building brand awareness and expanding into new categories. New Aerie and offline stores are doing well, thereby expanding the reach and enlarging the customer base.

The company's soft dressing categories and the expansion into activewear are key drivers. Soft Apparel was driven by tees, shorts, tanks and pants. Major categories remained mostly positive in the quarter. The company is seeing a positive response from consumers to its innovations and categories like sleepwear, and fleece and leggings. Management sees potential in Soft Apparel and activewear categories going forward.

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In addition, the company's flagship brand is also doing well. Revenues for the American Eagle ("AE") brand increased 8% year over year and comps rose 5%. This marked the fourth straight quarter of revenue and profit growth for AE. Operating profit has also been going up each quarter. The top category registered six straight quarters of growth. Skirts, dresses and shorts also remained sturdy. The company has been targeting social casual occasions and is strengthening age demo, both are key growth opportunities.

Headwinds Faced by American Eagle

American Eagle has been witnessing increased selling, general and administrative (SG&A) expenses for a while now. SG&A expenses grew 4% year over year in the fiscal second quarter. In addition, the ongoing uncertain macro landscape and consumer spending pattern are headwinds. Apart from this, stiff competition in the industry remains a concern.

AEO's Performance & Upbeat View

Buoyed by gains from growth initiatives and efficient cost-control efforts, American Eagle now expects operating income to be in the high end of the $455-$465 million range for fiscal 2024. This indicates income growth in the band of 21-24% to adjusted operating income of $375 million. The company expects comparable sales to be up around 4%, with total revenues increasing in the band of 2-3%, including the impact of one less selling week.

For the fiscal third quarter, AEO anticipates operating income to be in the range of $120-$125 million. American Eagle expects comparable sales to grow in the band of 3-4%, with total revenues estimated to remain flat to rise slightly due to the impact of the retail calendar. SG&A is likely to leverage, with dollars down slightly, owing to the efficiencies in key focus areas.

Analysts also seem optimistic about AEO stock. The Zacks Consensus Estimate for fiscal 2024 sales and earnings per share is currently pegged at $5.4 billion and $1.79, respectively. This indicates growth of 3.3% and 17.8%, respectively, year over year.

Buoyed by such strengths, shares of this apparel and footwear dealer have gained 21.3% compared with the industry's 22.9% growth in a year. All the aforementioned strengths will continue aiding this Zacks Rank #3 (Hold) company's performance on the bourses moving forward.

Key Picks

We have highlighted three better-ranked stocks, namely Boot Barn, Abercombie and Deckers.

Boot Barn, a lifestyle retail chain devoted to western and work-related footwear, apparel and accessories, currently sports a Zacks Rank #1 (Strong Buy).

The company has a trailing four-quarter earnings surprise of 7.1%, on average.

The Zacks Consensus Estimate for Boot Barn's current financial-year sales indicates growth of 10.7% from the year-ago figure.

Abercrombie, a leading casual apparel retailer, currently sports a Zacks Rank of 1. ANF delivered an earnings surprise of 16.8% in the last reported quarter.

The Zacks Consensus Estimate for Abercrombie's current financial-year sales indicates growth of 12.5% from the year-ago figure.

Deckers, a footwear and accessories dealer, currently carries a Zacks Rank #2 (Buy). DECK delivered an average earnings surprise of 47.2% in the trailing four quarters.

The Zacks Consensus Estimate for Deckers' current financial-year sales indicates growth of 11.5% from the year-ago figure.

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