American Eagle Outfitters Gaps Up 4% On Better Sales Outlook

American Eagle Outfitters NYSE: AEO gapped up Thursday following the company’s announcement that first-quarter revenue would reach $1 billion. That would be a year-over-year increase of at least 81%. 

Shares climbed 4.09% mid-session, to $34.33, in triple average trading volume. The stock is trading at all-time highs. 

In its Wednesday press release, the company noted that the quarterly revenue would also represent a mid-teens increase over 2020’s first quarter, a somewhat “normal” quarter before retail was disrupted due to Covid-19 closures. 

Revenue that quarter was $1.31 billion, a 6% year-over-year increase. 

The company’s brands include American Eagle and Aerie. It said Wednesday that demand has increased for both, “resulting in higher full-priced sales, lower discounts, and higher margins.”

American Eagle reports first-quarter results on May 1 after the market close. Analysts expect earnings per share of $0.23 on revenue of $902.58 million. Expectations may be adjusted higher after the company’s announcement. 

Stimulus checks may be helping the company’s results, as part of a broad uptick in retail spending last month. 

According to preliminary Commerce Department data released Thursday, retail spending rose 9.8% from February. 

Shift To Online Sales

As with just about every retailer on the planet, American Eagle has been investing in technologies to shift more sales online, rather than stores. In fact, that initiative began before the pandemic closures, and and analysts credit recent sales performance to this new focus. 

Sequential revenue accelerated over the past three quarters, but still marked year-over-year declines. 

In January, the company rolled out an internal initiative called Real Power, Real Growth. The company has been spotlighting its Aerie brand, saying it wants to grow that business unit to $2 billion in revenue. 

In the announcement of that initiative, the company said, “Aerie revenue is expected to grow at a mid-20%’s compound annual growth rate to approximately $2 billion, providing significant profit flow through.”

American Eagle revenue is expected to remain roughly flat, relative to fiscal 2019, at approximately $3.5 billion. The company did say it expects greater profitability from that level of revenue.

Notably, in January the company filed a Form 8-K with the Securities and Exchange Commission to break out performance of the American Eagle and Aerie operating segments. 

It projected its expectations out more than two years, saying, “AEO targets revenue of approximately $5.5 billion and operating income of $550 million in fiscal 2023, with the operating margin expanding to 10%.” 

Those targets exclude asset impairment and restructuring charges. In the case of American Eagle, as with many brick-and-mortar retailers, those impaired assets could well be related to store presence, as malls see less foot traffic or shut down altogether. This trend was under way before the pandemic, which only accelerated the situation. 

Store Closures Ahead

In January, the company said it expects to shutter 200 to 250 locations, mostly in shopping malls, over the coming three years. Earlier this year, the company operated 880 stores. 

American Eagle is a mid-cap stock, with a market capitalization of $5.77 billion. 

Despite challenges in the retail environment, the stock notched a total return of 249.32% over the past year, and 65.01% year-to-date. Its dividend yield is 1.59%, with an annual dividend of $0.55 per share. Dividends are an attraction to investors who want to get at least some return from a stock, even during a downturn. In some cases, that can mitigate selloffs when company news is bad, or when market conditions deteriorate. 

Since breaking out of a cup-with-handle base in September, the stock has traveled higher near or above its 50-day moving average. Its up/down volume ratio is 1.9, indicating heavier upside volume over the past 50 days, an excellent sign of institutional support. 

At this point, the stock is extended beyond a reasonable buy point, although a heavy-volume gap higher shows you that the big investors, whose buying and selling moves markets, are behind the stock. It’s best to wait for a pullback to a key average, such as the 50-day or 10-day line, to initiate a position.