A deeper dive into why we bought more of this retailer before the holidays

A shopper sporting a protecting masks walks previous a sale signal at an American Eagle Outfitters Inc. clothes retailer at Westfield San Francisco Centre in San Francisco, California, U.S., on Thursday, June 18, 2020.

Michael Short | Bloomberg | Getty Images

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Charitable Trust holding American Eagle Outfitters (AEO) reported stronger than anticipated third quarter outcomes Tuesday morning and the shares have been on the transfer greater Tuesday.

Breaking down the numbers:

Total internet income elevated 24% YoY to $1.27 billion, topping estimates of $1.23 billion (FactSet).  Adjusted earnings per share of $0.76 crushed the consensus of $0.61, in response to FactSet.

Looking at gross sales, consolidated retailer income elevated 29% due to double-digit progress in site visitors, whereas digital revenues grew 10% and lapped a tough 29% comp from the prior yr. Both retailer and digital revenues and income in the quarter exceeded ranges achieved in the third quarter of 2019, an indication that the firm has emerged from the pandemic in a robust place.

The rise of informal put on, a pattern we consider can be a multi-year story, continues to be an enormous driver of gross sales progress at the firm’s two main manufacturers.

Strongest margins in years:

Company third-quarter gross margins have been the strongest since 2007, increasing 410 foundation factors YoY to 44.3% (1 foundation level equals 0.01%). This was a beat in opposition to estimates of about 42%. The improve was largely because of leverage on lease and supply in addition to sturdy product demand, greater full-priced gross sales, much less promotional exercise, and stock optimization initiatives, although greater freight prices have been a drag.

Operating margins at 16.5% have been additionally the strongest since 2007 and exceeded estimates of about 13.8%. Total working earnings in the quarter was $210 million, representing an enormous beat in comparison with estimates of $170 million. Management stated on the name that they anticipate working earnings to “nicely exceed” $600 million this yr. 

Breaking down the manufacturers:

  • By model, Aerie’s income elevated 28% YoY to $315 million. The momentum right here is solely unstoppable with the quarterly outcomes representing the twenty eighth consecutive quarter of double-digit progress. The firm cited sturdy demand throughout the whole Aerie portfolio, with notable power in intimates and off-line activewear. It seems that Aerie is taking market share too, as administration stated they’re seeing prospects transacting more continuously and throughout more classes. The AUR, or common unit retail (common promoting value), elevated in the excessive teenagers due to greater full-price promoting and strategic decision-making round promotions. Aerie’s working margin of 16.5% expanded 200 bps from 2020 and hit a brand new third-quarter excessive for the model. Aerie overcame challenges associated to some unevenness of stock circulation associated to issue shutdowns in South Vietnam. These shutdowns primarily impacted Aerie’s high-demand legging enterprise, which can be a high-margin class. So Aerie’s margins would have been even greater in the event that they did not miss out on some enterprise.
  • At American Eagle, income elevated 21% YoY to $941 million. Driving gross sales in the quarter was progress throughout all classes in males’s whereas ladies’s delivered sturdy outcomes thanks partially their signature denim class. American Eagle additionally had a really sturdy back-to-school season due to the model’s management in denims together with new product type choices. When you hear about beneficiaries of a denim cycle, it’s important to embrace American Eagle as a result of the firm is number one in denim in ladies’s for all ages and number one in males’s for its age demographic.

We additionally see indicators that American Eagle just isn’t the market share donor that some consider it to be. The firm stated on the name that its buyer file is up and prospects are additionally shopping for more continuously and spending more. And due to stock optimization and promotional self-discipline, AUR grew, and merchandise margin expanded. Operating margin in the quarter was 27.8%, representing a brand new excessive for the model.

Key subjects — stock and provide chain:

American Eagle Outfitters ending stock at price elevated 32% to $740 million. The firm stated the improve was partially pushed by greater air freight because of international provide chain disruptions, which resulted in uneven stock flows associated to manufacturing facility closures in Vietnam. To make sure that their shops can have lots of inventory in time for the holidays, the firm selected to air the product. All issues thought of, administration is happy with their stock place forward of what ought to be a really sturdy vacation season.

Updating on everybody’s favourite matter of provide chain and logistics, the firm continued to successfully handle by what has been a difficult atmosphere with little disruption outdoors the manufacturing facility closures in Vietnam. AEO’s supply price {dollars} have been really down YoY, due to efficiencies created in digital supply. That being stated, the firm expects to incur between $70 million to $80 million of freight prices in the fourth quarter.

Management additionally spent a while on the name discussing its latest acquisition of Quiet Logistics. During the convention name, COO Michael Rempell stated the deal offers AEO “the ability to drive substantially greater sales and margin on far less inventory, create more precision in our inventory allocation decisions and deliver products to customers both faster and at a lower cost.”

This deal adopted the acquisition of AirTerra. On the convention name, CEO Jay Schottenstein stated, “we expect the combination of Quiet Logistics and the recent acquisition of AirTerra to create a unique platform that revolutionizes logistics within our business in retail.”

Plenty of firepower:

Regarding money, the firm ended the quarter with $741 million in money on the steadiness sheet. Thanks to a robust steadiness sheet, American Eagle Outfitters has lots of firepower to assist funding in progress initiatives and shareholder returns. At present ranges, we discover the 2.5% dividend yield engaging. Given money circulation, we wouldn’t rule out the chance of share repurchase exercise in the future. 

Bottom line:

Overall, a terrific quarter for American Eagle Outfitters as the firm proved to be one of the huge back-to-school buying season winners we initially thought it will be. With momentum in informal put on and activewear on its model’s aspect and margins operating at the strongest ranges in over a decade, we assume the stage is about for American Eagle Outfitters to ship this vacation season.

We have been puzzled earlier by how the inventory was not getting any credit score in the marketplace for this sturdy report, explaining why we decided to add to our position this morning.

What is obvious from the quarter is that American Eagle Outfitters has emerged from the pandemic as a greater firm with the proper product assortment and an thrilling new logistics initiative. We assume this low-cost inventory buying and selling at a low teenagers price-to-earnings a number of and a 2.5% dividend yield goes greater.

The CNBC Investing Club is now the official house to my Charitable Trust. It’s the place the place you may see each transfer we make for the portfolio and get my market perception before anybody else. The Charitable Trust and my writings are not affiliated with Action Alerts Plus in any means.

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 (Jim Cramer’s Charitable Trust is lengthy AEO.)

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