Global specialty retailer American Eagle Outfitters (AEO, Financial) logged strong third-quarter results, a quarter that was marked by record sales and EPS growth.
During the quarter the core denim business witnessed increased demand and a good start to the holiday season. The Aerie brand increased its sales during the quarter and has a lot of opportunities. Aerie's performance could push the stock higher.
Operations in this industry are generally seasonal and depend to a greater extent on discretionary consumer spending. The year-end holiday selling seasons generally contribute higher and increased demand.
It brings stylish and trendy yet affordable clothing and personal care products to its customers. The current quarter dividend marked the company’s 50th consecutive quarterly dividend. Through its Web sites, the company delivers to 81 countries worldwide.
Third-quarter performance
Total net revenues during the quarter increased by 2% and were $941 million ($919 million during the prior-year quarter).
Consolidated comparable sales increased by 2% following a 9% increase last year.
Total gross profit during the quarter increased by 3% and was $378 million ($368 million in the prior-year quarter).
The gross margin increased by 20 basis points to a rate of 40.2%.
Income from continuing operations was $75 million ($69 million in the prior-year quarter).
Net income per diluted share during the quarter was 41 cents (38 cents in the prior-year quarter).
Selling, general and administrative dollars decreased to $220 million.
Operating income during the quarter increased by 8% and was $118 million ($109 million in the prior-year quarter).
The operating margin expanded by 70 basis points.
EPS during the quarter was 41 cents (an increase of 17% from EPS from continuing operations of 35 cents during the prior-year quarter).
Total merchandise inventories at the end of the third quarter increased by 3% and were $493 million.
Capex during the quarter totaled at $47 million. Capex for the year-to-date period was $108 million.
Cash and cash equivalents during the quarter was $292 million.
Dividend
The company declared a quarterly cash dividend of 12.5 cents per share which is payable on Dec. 30.
Expectations for the fourth quarter and fiscal 2016
| Â | Fourth Quarter | Fiscal 2016 |
| EPS | To be between 37 cents and 39 cents | Â |
| Capex | Â | To be around $160 million |
| Inventory | Fourth quarter 2016 ending inventory at cost is expected to be up in the high-single digit range. | Â |
Focus
- Best innovation.
- Consistent quality.
- Delivering outstanding value to customers day in and day out.
- Tapping the market opportunities.
- New technologies and capabilities to gain further market share.
- Deliver earnings growth.
Conclusion
The third quarter marked the ninth consecutive quarter of profit improvement. With more than 1,000 stores in the U.S., Canada, Mexico, China, Hong Kong and the United Kingdom, the company continues to leverage its ability to build on the momentum required to improve its position. This brand is surely a hit with teens since it commands a strong position in denims. With positive cash flows and no big debt, it is on a spree to create shareholder returns.
The retail apparel industry is fiercely competitive and through continued product innovation and product-focused marketing, the company is capitalizing on brands to sustain its growth. It is growing the digital experience. To expand its international reach, the company is advancing its digital capabilities and digital marketing. During the quarter, it increased its investments in advertising which were offset by well-controlled expenses.
The American brand is performing well as of now and is showing bullish behavior. Over the past year, it returned $92 million in cash dividends and the capex totaled $152 million. The company is known for regular dividends; adding it will reap shareholder returns.
Disclosure: I do not hold any position in the company.
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