Learn more about why we bought more of this retailer before the holidays

Read Time:7 Minute, 9 Second


On Thursday, June 18, 2020, a shopper wearing a protective mask walked past the sales sign of the American Eagle Outfitters Inc. clothing store in the San Francisco Center in Westfield, San Francisco, California.

Michael Short | Bloomberg | Getty Images

(This article was first sent to members of the CNBC Investment Club with Jim Cramer. To get real-time updates in your inbox, Subscribe here.)

The charitable trust fund holding American Eagle Outfitters (AEO) announced stronger-than-expected third-quarter results on Tuesday morning, and its stock price rose on Tuesday.

Break down the numbers:

Total net income increased by 24% year-on-year to US$1.27 billion, higher than the expected US$1.23 billion (FactSet). According to FactSet’s data, adjusted earnings per share were US$0.76, which was lower than the consensus estimate of US$0.61.

In terms of sales, due to double-digit growth in passenger traffic, general store revenue increased by 29%, while digital revenue increased by 10%, an increase of 29% over the same period last year. Both store and digital revenue and profits in the quarter exceeded the level of the third quarter of 2019, which shows that the company has emerged from the pandemic and is in a strong position.

The rise of casual wear, we believe that this trend will continue for many years and continue to be a huge driving force for the sales growth of the company’s two leading brands.

Highest profit rate in years:

The company’s gross profit margin in the third quarter was the highest since 2007, an increase of 410 basis points year-on-year to 44.3% (1 basis point equals 0.01%). This exceeds the estimate of approximately 42%. This increase is mainly due to the leverage of rents and delivery as well as strong product demand, higher full-price sales, fewer promotions and inventory optimization measures, although higher freight costs are a drag.

The 16.5% operating profit margin is also the highest level since 2007, exceeding expectations of approximately 13.8%. Total operating income for the quarter was 210 million U.S. dollars, a substantial increase from the expected 170 million U.S. dollars. The management stated on the conference call that they expect this year’s operating income to “significantly exceed” $600 million.

Brand breakdown:

  • By brand, Aerie’s revenue increased by 28% year-on-year to US$315 million. The momentum here is unstoppable, and the quarterly performance represents the 28th consecutive quarter of double-digit growth. The company cited the strong demand for the entire Aerie product portfolio, among which the strength of underwear and offline sportswear is significant. Aerie also seems to be grabbing market share because management stated that they see customers have higher transaction frequency and involve more categories. Due to higher full-price sales and strategic decisions around promotion, AUR or average unit retail (average selling price) increases in the teens. Aerie’s operating profit margin was 16.5%, an increase of 200 basis points from 2020, setting a new high for the brand in the third quarter. Aerie overcomes the challenges associated with the imbalance of inventory flows associated with the shutdown of the southern Vietnam factory. These shutdowns mainly affected Aerie’s high-demand leggings business, which is also a high-margin category. Therefore, if Aerie does not miss certain businesses, their profit margins will be higher.
  • American Eagle’s revenue increased 21% year-on-year to US$941 million. The growth in sales this quarter was driven by growth in all categories of menswear, while womenswear achieved strong results, partly because of its iconic denim category. Thanks to the brand’s leading position in the jeans field and new product styles, American Eagle also ushered in a very strong back-to-school season. When you hear about the beneficiaries of the denim cycle, you must include American Eagle because the company ranks number one among women’s denim of all ages and number one among men’s denim of its age.

We have also seen signs that the American Eagle is not a market share donor as some people think. The company said on the conference call that its customer profile has been established and that customers’ purchase frequency and expenditures are also higher. Due to inventory optimization and promotional discipline, AUR increased and product profit margins expanded. The operating profit margin for the quarter was 27.8%, setting a brand new high.

Key theme-inventory and supply chain:

American Eagle Outfitters’ ending inventory costs increased by 32% to US$740 million. The company said that this increase was partly due to an increase in air freight due to disruptions in the global supply chain, resulting in an uneven flow of inventory related to the closure of the Vietnamese factory. In order to ensure that their store has sufficient inventory during the holidays, the company chose to ship the product by air. Taking all factors into consideration, management is satisfied with their inventory before the supposedly strong holiday.

Renewing everyone’s favorite supply chain and logistics topics, the company continues to effectively manage this challenging environment with almost no interruption beyond the closure of the Vietnamese factory. Due to the increased efficiency of digital delivery, the delivery cost of AEO actually decreased year-on-year. That being said, the company expects to incur between 70 million and 80 million U.S. dollars in freight costs in the fourth quarter.

The management also spent some time on the conference call to discuss its recent acquisition of Quiet Logistics. During the conference call, Chief Operating Officer Michael Rempell stated that this transaction allows AEO to “significantly increase sales and profit margins with less inventory, make our inventory allocation decisions more precise, and Deliver products to customers at a faster speed and lower cost.”

This transaction was carried out after the acquisition of AirTerra. During the conference call, CEO Jay Schottenstein said: “We hope that Quiet Logistics, combined with the recent acquisition of AirTerra, will create a unique platform that will revolutionize logistics in our retail business.”

Sufficient firepower:

Regarding cash, the company had $741 million in cash on its balance sheet at the end of the quarter. Thanks to a strong balance sheet, American Eagle Outfitters has sufficient firepower to support investments in growth plans and shareholder returns. At current levels, we find a 2.5% dividend yield attractive. In view of cash flow, we do not rule out the possibility of future share repurchase activities.

Bottom line:

Overall, it was an amazing quarter for American Eagle Outfitters because the company proved to be one of the big winners of the back-to-school shopping season we initially thought. With its brand’s momentum in the development of casual wear and sportswear and the highest level of profitability in more than a decade, we believe that American Eagle Outfitters is ready to launch this holiday season.

Earlier, we were confused about how the stock did not receive any praise in the market due to this strong report, which explains why we decided to increase our holdings this morning.

It is clear from this quarter that American Eagle Outfitters has emerged from the pandemic to become a better company with the correct product classification and exciting new logistics plans. We believe that this cheap stock that trades at a low teenage P/E ratio and a 2.5% dividend yield is going higher.

The CNBC Investment Club is now the official location of my charitable trust. Here, you can see every move we do for the portfolio and gain my market insight before anyone else. The Charitable Trust and my work are no longer affiliated with Action Alerts Plus in any way.

As a subscriber to the CNBC Investment Club with Jim Cramer, you will receive transaction reminders before Jim makes a transaction. Normally, Jim waits 45 minutes after sending a transaction alert before buying or selling the stocks in his charitable trust portfolio. If the trade alert is sent before the market opens, Jim will wait 5 minutes after the market opens before executing the trade. If the trading alarm is issued for less than 45 minutes during the trading day, Jim will execute the trade 5 minutes before the market closes. If Jim talked about a stock on CNBC TV, he would wait 72 hours after issuing a trade alert before executing the trade. Please see here for the investment disclaimer.

(Jim Kramer’s charitable trust is a long-term AEO.)


If you want to know more about business please go to https://updatednews24.com/category/business/

Happy
Happy
0 %
Sad
Sad
0 %
Excited
Excited
0 %
Sleepy
Sleepy
0 %
Angry
Angry
0 %
Surprise
Surprise
0 %
We use cookies to personalise content and ads, to provide social media features and to analyse our traffic. We also share information about your use of our site with our social media, advertising and analytics partners. View more
Cookies settings
Accept
Decline
Privacy & Cookie policy
Privacy & Cookies policy
Cookie name Active

Who we are

Suggested text: Our website address is: https://updatednews24.com.

Comments

Suggested text: When visitors leave comments on the site we collect the data shown in the comments form, and also the visitor’s IP address and browser user agent string to help spam detection. An anonymized string created from your email address (also called a hash) may be provided to the Gravatar service to see if you are using it. The Gravatar service privacy policy is available here: https://automattic.com/privacy/. After approval of your comment, your profile picture is visible to the public in the context of your comment.

Media

Suggested text: If you upload images to the website, you should avoid uploading images with embedded location data (EXIF GPS) included. Visitors to the website can download and extract any location data from images on the website.

Cookies

Suggested text: If you leave a comment on our site you may opt-in to saving your name, email address and website in cookies. These are for your convenience so that you do not have to fill in your details again when you leave another comment. These cookies will last for one year. If you visit our login page, we will set a temporary cookie to determine if your browser accepts cookies. This cookie contains no personal data and is discarded when you close your browser. When you log in, we will also set up several cookies to save your login information and your screen display choices. Login cookies last for two days, and screen options cookies last for a year. If you select "Remember Me", your login will persist for two weeks. If you log out of your account, the login cookies will be removed. If you edit or publish an article, an additional cookie will be saved in your browser. This cookie includes no personal data and simply indicates the post ID of the article you just edited. It expires after 1 day.

Embedded content from other websites

Suggested text: Articles on this site may include embedded content (e.g. videos, images, articles, etc.). Embedded content from other websites behaves in the exact same way as if the visitor has visited the other website. These websites may collect data about you, use cookies, embed additional third-party tracking, and monitor your interaction with that embedded content, including tracking your interaction with the embedded content if you have an account and are logged in to that website.

Who we share your data with

Suggested text: If you request a password reset, your IP address will be included in the reset email.

How long we retain your data

Suggested text: If you leave a comment, the comment and its metadata are retained indefinitely. This is so we can recognize and approve any follow-up comments automatically instead of holding them in a moderation queue. For users that register on our website (if any), we also store the personal information they provide in their user profile. All users can see, edit, or delete their personal information at any time (except they cannot change their username). Website administrators can also see and edit that information.

What rights you have over your data

Suggested text: If you have an account on this site, or have left comments, you can request to receive an exported file of the personal data we hold about you, including any data you have provided to us. You can also request that we erase any personal data we hold about you. This does not include any data we are obliged to keep for administrative, legal, or security purposes.

Where we send your data

Suggested text: Visitor comments may be checked through an automated spam detection service.
Save settings
Cookies settings