Before the open, apparel and accessory retailer American Eagle (AEO) issued solid Q1 results, posting EPS of $0.23, edging consensus by a penny, with revenue climbing by 8% year/year to $823 million, also handily beating the $811.5 million expectation. In many regards, this was actually one of AEO's strongest quarters over the past few years.
On top of that, it issued upside guidance for Q2, seeing EPS of $0.27-$29 vs. the $0.25 consensus, driven by comparable sales growth in the mid-single digit range.
Drilling down further on the Q1 results, comparable sales were up an impressive 9% with its Aerie's brand leading the way, increasing by a robust 38%. Commenting on Aerie's impressive performance, AEO's CEO stated, "After starting a body positivity movement, Aerie is posting record growth rates and striking a real emotional connection with its expanding customer base. We are highly focused on our strategic plan, centered on expanding American Eagle, accelerating Aerie's growth..."
What also stands out about AEO's report is that gross margin improved by 50 basis points to 37%, due to rent leverage and a favorable markdown rate. This indicates that AEO has significant brand equity and that consumers are willing to pay higher prices for its products, relative to some of its peers. As noted above, rising costs have been an issue for many retailers, cutting into margins, so AEO is a bit of an outlier in this regard.
The strong comp growth and increase in margins led to a 44% spike in Adj EPS growth and a 23% bump in operating income to $51 million. Furthermore, the company repurchased 2.3 million shares during Q1, providing another catalyst for earnings growth.
To conclude, AEO's quarterly report is a notable bright spot in the retail sector as management appears to be executing well, and, as the strong brand name helps to offset the rising cost pressures. So far today, the stock performance isn't reflecting the news, which is somewhat surprising. But, the general trend for the stock is still upward, so, as long as the broader markets hold up, the outlook still looks pretty good for AEO.