American Eagle Outfitters (AEO) is trading -6% lower today after reporting disappointing Q1 (Apr) earnings/guidance this morning. In case you're not familiar, American Eagle Outfitters is an apparel retailer that also sells accessories and personal care products.
AEO focuses on the affordable segment of the market. AEO operates under two brand names: American Eagle Outfitters (AE) and aerie. The American Eagle Outfitters brand targets 15 to 25 year old men and women. The company operates more than 1,000 stores in the US, Canada, Mexico, China, Hong Kong and the United Kingdom. Its merchandise also is available at more than 170 international locations operated by licensees.
Denim is the cornerstone of the American Eagle Outfitters product assortment, which is complemented by other key categories including pants, shorts, sweaters, fleece, outerwear, graphic t-shirts, footwear and accessories. The aerie brand is a collection of intimates and personal care products for women.
Turning to the AprQ results, non-GAAP EPS fell 27% YoY to $0.16, which was right at the mid-point of prior guidance of $0.15-0.17. Revenue rose 1.7% year/year to $761.8 mln, which was above market expectations. While the AprQ results were pretty good, the guidance for Q2 (Jul) was disappointing. Management said it expects JulQ non-GAAP EPS of $0.15-0.17, which is a good bit below market expectations.
Turning to same store comps, which is always a critical operating metric for retailers, it came in at +2%, roughly in-line with prior guidance for a flat to low single digit decline. Breaking it down by brand, American Eagle came in at -1% while aerie was +25%. Of note, AEO was lapping a difficult +6% same store comp last year, so that likely muted this year's +2% result. But a two-year stack of +8% is pretty good in this difficult retail environment. In terms of guidance, AEO expects JulQ comps of flat to a low single digit decline.
AEO says AprQ results reflected mall traffic headwinds, especially early in the quarter, with improved trends over Easter and a strong digital business throughout. Looking ahead, in order to adjust its business for today's rapidly evolving retail environment, AEO is undergoing a previously-announced restructuring to improve efficiencies across the company. This includes layoffs, a home office restructuring and the possible closure or conversion of company owned stores in Hong Kong, China, and the UK to licensed partnerships.
The balance sheet remains in good shape with $225.2 million in cash/inv, or $1.24/sh, with no LT debt. And AEO is good about returning cash to shareholders. It pays a healthy dividend yield of 4.1% and it is good about repurchasing shares. In AprQ, AEO repurchased six million shares for $88 mln.
In sum, while the AprQ results were pretty good, investors seem to be disappointed with that JulQ guidance, both for EPS and comps. This stock has been in a steady decline since August 2016 when it was trading above $19, it's now in the $12 area. AEO is being hurt by weaker mall traffic. Also, consumers' buying habits are changing as more people are increasingly buying merchandise online. AEO's solid balance sheet and dividend yield are attractive, but investors want to start seeing some results from AEO's restructuring activities.