Shares of American Eagle Outfitters Inc. dropped 12.5 percent after investors showed their disappointment of the company’s fourth-quarter projections.
The shares closed at $16.55 in Big Board trading on Wednesday. The teen retailer earlier in the morning posted third-quarter results in which diluted earnings per share of 41 cents met Wall Street’s consensus estimate. The problem was in the fourth-quarter outlook, with the company now guiding EPS to a range of 37 cents to 39 cents, based on comparable sales in the range of flat to a low-single-digit increase. That compares with the year ago quarter’s EPS of 42 cents, which included non-recurring items, and Wall Street’s consensus for the current fourth quarter at 45 cents.
Robert L. Madore, the company’s chief financial officer, said in an interview that he thought the consensus estimate may have been “too high to begin with.” On an adjusted basis, after excluding the year-ago quarter’s non-recurring items, Madore said the current guidance of 37 cents to 39 cents is a “pretty healthy improvement year over year on an adjusted EPS basis. There is not any other specialty retailer achieving that or giving that kind of guidance.”
The cfo also said the company is happy with its inventory levels when compared with the 2015 holiday season and the clearance levels, noting that the company is being disciplined in managing the levels. When asked if guidance was somewhat conservative given what seems to be a promotional holiday season, Madore said a slight conservativeness might be in order since “traffic has been choppy at best. We are trending with the mall traffic trends.” But he also noted that the company was able to maintain promotions at its planned 40 percent off versus competitors at the mall that were discounting higher to clear out inventory.
“The guidance contemplates positive comps and gross margin improvement. If we hit the top end of our guidance range versus [adjusted EPS a year ago], it will be a healthy quarter over quarter,” Madore said.
Also impacting the fourth quarter — although a one-time issue — are the Aéropostale stores that are being liquidated. While there are at least 300 sites that will continue in operation via the Authentic Brands Group-led consortium that includes General Growth Properties and Simon Properties, there are also about 250 or so sites that are being shuttered.
Madore said that where the company has a store near an Aéropostale site being liquidated, it saw a shift in its traffic patterns that translated to a 2 percent to 4 percent comps impact at the American Eagle store. “With those stores out of the malls in the marketplace, it can be a market share capture opportunity for us,” Madore said.
For the quarter ended Oct. 29, net income rose 2.2 percent to $75.8 million, or 41 cents a diluted share, compared with net income of $74.1 million, or 38 cents, a year ago. Net revenues rose 2.3 percent to $940.6 million from $919.1 million. Consolidated comps rose 2 percent in the quarter, on top of the 9 percent comps gain in the year-ago quarter.
Wall Street was expecting EPS of 41 cents on revenues of $940.9 million.
Madore told analysts during the conference call to Wall Street that the sales increase was driven by strength in the firm’s digital business, “fueled by rapid growth in the mobile channel where traffic and conversion have been very strong.” He noted that there were transaction declines on a consolidated basis, but the average transaction size rose due to a higher average unit retail price and higher units per transaction.
Jay L. Schottenstein, executive chairman and chief executive officer, said on the call, “American Eagle and Aerie achieved positive sales and healthy margins. We maintained favorable sourcing costs, expense controls and managed inventory well. As I said a while back, consistent performance is our priority, and I’m pleased to report that this quarter marked our ninth consecutive quarter of profit improvement.”
Schottenstein also said the company has been “winning in a tough environment, and we need to keep winning. We’re working hard to propel our brands forward and deliver a differentiated experience across channels.”
Jennifer Foyle, global brand president for its intimates concept business, Aerie, said on the call that the third quarter “marked the sixth consecutive quarter with comps over 20 percent,” adding that comps were 21 percent in the quarter on top of the 21 percent gain in the year-ago quarter. “We saw strength across all channels and have continued to gain new customers, which rose 15 percent in the quarter.”
Charles Kessler, global brand president for American Eagle Outfitters, said in the telephone interview that the bottom’s business was strong in both men’s and women’s businesses. “The big difference [between the two was that the] women’s apparel business was also very strong and accelerating. We are pleased with the performance, which has been a source of strength for a few quarters,” he said.
In men’s apparel, the softness in the business has been in tops, and his team has been working on innovations on the trends and fabrications front. The women’s business has a soft shirt that the company calls “Ahh-mazingly Soft,” a super soft fabrication that Kessler said it has found in a comparable fabric for the men’s business. One difference is that the men’s softer top fabrication will have a bit more of a performance based feel to it, the brand president said.
According to Kessler, the company has also been working on speed-to-market, chasing styles and trends that do well. “As an example, we delivered a women’s top in the first week of November. We ‘chased’ it in the stores this week — that’s kind of incredibly fast since everything we do is proprietary from designing to sourcing….When we set this item [for November] we thought it would be a big item, but it did better than we thought, and in four weeks [were able to bring more inventory] to the stores,” he explained.