Joe Johnson Period 1
American Eagle's Stock Is Poised To Soar
You might think there was trouble brewing for American Eagle Outfitters as the share price tumbled 4% on heavy volume today. But the only trouble I can see is in the minds of traders who dump a stock merely at the possibility of slightly lower earnings in the current quarter.
American Eagle earned $150.2 million, or 66 cents per share, in its fourth quarter -- a year-over-year improvement of 50%. Total sales jumped 27%, with same-store sales increasing by an impressive 14%. There isn't an apparel retailer around that wouldn't kill for numbers like those.
Yet given difficult industry conditions and uncertainty over consumer spending amid the meltdown in the housing market and turbulence in stocks, management actually deserves credit for adopting a cautious stand.
The company is also spot on with current fashion trends. Colors are bright, pricing is affordable, and the brand still resonates with its teen-to-early-30s market. American Eagle, alongside Abercrombie & Fitch, is a brand of choice among the younger set.
More importantly, American Eagle has identified a key growth driver for revenue with its new intimates chain called aerie. The original test sites have done very well, easily surpassing company targets, and plans call for 15 new stores in the current fiscal year. If sales remain brisk -- and there's no reason to expect otherwise given the tremendous business done by Victoria's Secret and the lack of any other meaningful competition -- American Eagle hopes to open more than 300 stores within the next five years. That will help drive top- and bottom-line results for many quarters to come.
Capital expenditures are up due to the aggressive expansion efforts, but American Eagle continues to do an excellent job of managing its growth, with gross and operating margins higher again in the most recent quarter.
American Eagle is one of the top plays in the specialty apparel sector, and with today's decline investors can buy the stock at the bargain price of 15 times forward earnings. That equates to one times estimated long-term growth of 15%, well below the industry average of 1.25 times, despite the fact that American Eagle routinely reports superior growth. The valuation gets even more attractive when you consider that the company is sitting on nearly $3 per share in cash and short-term investments.
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