By  on March 8, 2007

While some of its competitors continue to struggle, American Eagle Outfitters has been gaining market share at record high gross margins.

Reporting fourth-quarter financial results, American Eagle said Wednesday net profits rose 15.4 percent to $150.2 million from $107.5 million in the year-ago quarter. Net gross margins increased 160 basis points due to higher merchandise margins and leveraging of markdowns and rent.

Earnings per share increased 40 percent to 66 cents, despite rather modest square-footage growth, indicating consumers are willing to pay higher prices for American Eagle merchandise.

American Eagle, which has logged 12 consecutive quarters of record earnings, said total sales for the fourth quarter rose 27 percent to $973.4 million, compared with $769.1 million last year. Comp-store sales increased 14 percent versus an 8 percent increase in last year's same period. The company gave guidance for the first quarter of 31 cents to 33 cents a share, compared with 28 cents a share for the first quarter of last year.

Sales for the four weeks ending March 3 rose 16 percent to $166.3 million, from $143.1 million for the four-week period ended Feb. 25, 2006. Due to the 53rd week in fiscal 2006, last month's comps were compared with the four-week period ended March 4, 2006. On this basis, the company delivered a same-store sales increase of 6 percent, versus 8 percent for the same period last year.

For the year, net income rose 13.9 percent to $387.4 million, from $294.2 million, on sales of $2.79 billion, versus $2.32 billion in the previous 12 months.

Today, American Eagle is moving from the Nasdaq to the New York Stock Exchange, where its common stock is trading under symbol AEO. "We're proud to join the NYSE and view it as a reflection of both our brand and our consistent financial performance," said chief executive officer Jim O'Donnell.

In the company's recent performance, O'Donnell also found validation for American Eagle's strategy of launching the aerie subbrand and Martin + Osa and the continued investment to aggressively expand both businesses.

In a conference call, O'Donnell said underdeveloped categories in the core American Eagle business, such as knitwear and accessories, are being targeted for growth. "We're exploring other new concepts that complement our lifestyle brand to drive incremental growth and sales productivity."Aerie is in line for fast-track growth. "If the new stores continue to perform like the test stores, we believe aerie could be a 350-plus store concept," O'Donnell said. "We're looking forward to accelerating aerie's growth plans. Our new aerie stand-alone stores achieved profitability consistent with the American Eagle chain."

Aerie in the fall will launch personal care and a new line within the existing dormwear category.

American Eagle plans to open at least 15 freestanding aerie units this year, but, O'Donnell said, "it's feasible to do 70 a year in the U.S. and Canada, primarily due to the store size of 3,000 to 3,500 square feet," compared with 6,000 to 8,000 square feet for American Eagle stores. "We're letting the subbrand become a masterbrand of its own. Our real goal is to have it be a self-contained brand unto itself."

The Martin + Osa start-up chain needs some tweaking, O'Donnell acknowledged. "We know there's an unmet demand for this demographic," he said, referring to the 25- to 40-year-old women and men it targets. "We've made substantial changes to the assortment. The women's collection will be more feminine and less outdoorsy and the fits will be more flattering and fashion-right for the M+O customer. We're also working to improve the customer's perception of overall value in terms of price and quality."

Joan Hoxen, chief financial officer, noted that Martin + Osa will lose 15 cents to 17 cents this year, compared with 12 cents last year. That's about $35 million to $40 million, higher losses than the company previously forecast. Martin + Osa had some major setbacks in sourcing and manufacturing, Hoxen said, but early signs bode well for fall.

For the first time, American Eagle offered a timetable for the introduction of its yet-to-be-named third concept. "We've just about completed our market research, brand positioning, name [selection] and a number of other preludes to preparing the business plan," said O'Donnell. "As far as when it will launch, it really hinges on M+O. If we do the types of things our customers told us through our research and M+O moves in a direction that meets [our goals] in 2007, then we will very diligently start on concept three in 2008 for a potential launch in spring or summer of 2009," he said. "The only reason I mentioned M+O in conjunction with concept three is that I don't want to have our eye on two balls at the same time. I want to have M+O in a steady growth cycle as we take on our next opportunity. We're still very excited about concept three."Hoxen said there's still opportunity to improve American Eagle's top line. "We didn't do everything right in 2006," she said. "We have the opportunity to make fashion-right investments. We have opportunities in supply procurement and the store payroll model. We're committed to a minimum of 15 percent EPS growth."

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