Even without a new chief executive officer or relief from declining profits or net and comparable sales, investors Wednesday rushed to pick up American Eagle Outfitters Inc.’s shares.
By the end of the trading session, those shares were up $1.39, or 12 percent, to $12.98, the largest gain of the 100 fashion, luxury, retail and beauty stocks listed on the WWD Global Stock Tracker.
The lure of the troubled Pittsburgh-based teen retailer’s stock was a second-quarter performance that, while down by most measures, came in better than analysts and the company itself expected, with a sharp reduction in inventories — down 14.7 percent from year-ago levels — and a fairly positive status report on both back-to-school selling and efforts to cut expenses.
“Our performance was slightly better than we expected and we accomplished our goal of clearing through excess and spring and summer inventory,” said Roger Markfield, vice chairman and executive creative director, during a conference call. “We saw favorability in our product costs, markdowns stabilized and we delivered a higher merchandise margin in the quarter.”
While gross margin in the quarter fell to 33.4 percent of sales from 33.8 percent, markdowns were 40 basis points lower.
He added, “Although markdowns were still at unsatisfactory levels, we have reduced our reliance on broad, wide promotions. This is a significant opportunity for margin improvement as we move forward.”
That opportunity could be even greater if recent reductions in product costs are sustained and, with cleaner inventories, the pressure on margins abates.
For the three months ended Aug. 2, net income declined 70.3 percent to $5.8 million, or 3 cents a diluted share, above the zero-cent earnings per share anticipated by Wall Street. Year-ago earnings were $19.6 million, or 10 cents.
Revenues dipped less than analysts expected, too, falling 2.3 percent to $710.6 million versus the consensus estimate of $689.9 million and the year-ago top-line level of $727.3 million.
On a comparable basis, sales were off 7 percent, the same as in the second quarter of 2013, as lingerie-focused aerie’s 9 percent increase was erased by the larger American Eagle brand’s 8 percent decline. In the quarter, transactions and average transaction value declined, although less than the mid-single-digit drop in the firm’s average unit retail.
Jay Schottenstein, chairman, has served as interim ceo since the exit of Robert Hanson in January, at which time Markfield postponed his retirement. Schottenstein advised analysts that the search for a new ceo is under way while expressing confidence in the team currently in place.
The lack of progress on the succession front was among the issues cited by Eric Beder, analyst for Wunderlich Securities, as he maintained his “hold” rating and $11 price target for the stock. In a research note titled “No Disaster, No Excitement, No New CEO,” he wrote, “While not a surprise, we believe the inability to hire the company’s next leader speaks to the overall internal and external issues at American Eagle and the overall teen segment. We continue to view the American Eagle ceo position, given the debacle with the last ceo, to be one of the toughest positions to be filled in the retail space.”
Turning to AEO’s guidance for third-quarter earnings of between 17 and 19 cents a diluted share, Beder pointed out that they would be comparable to last year’s, “which were the worst 3Q results from American Eagle in the last seven years. As such, while not a disaster, the guidance…in no way reflects a material turnaround or changes in some of the structural issues we see at the company.” He described the run-up in shares Wednesday as a “relief rally.”
Conversely, Jefferies analyst Randal Konik reiterated his “buy” rating and elevated his price target to $20 from $17 based on growing top-line momentum and expense and inventory control.
AEO said it expects a midsingle-digit decline in comps during the third quarter but didn’t discuss top-line or comp results so far in August, except to note that the company was continuing to wean itself off promotions. In combination with the company’s new assortments, “focused marketing” and inventory discipline, Mary Boland, chief financial and administrative officer, said “that should result in a lower markdown rate and help drive gross margin up.”
Simon Nankervis, executive vice president of global stores, told analysts that, in addition to the 100 to 150 stores the company has identified for closure, “we have another 200 stores that have leases expiring over the next three years.”
In the first half of the year, net income contracted 79.7 percent to $9.7 million, or 5 cents a diluted share, while revenues were off 3.6 percent to $1.36 billion.
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