ANF Abercrombie and Fitch Co

Recently, American Eagle Outfitters Inc. (AEO) reported its fourth-quarter 2011 earnings of 35 cents per share, beating the Zacks Consensus Estimate of 34 cents. However, it was lower than the previous-period earnings of 44 cents per share.

For the full year, the company reported earnings of 77 cents per share, missing the Zacks Consensus Estimate of 86 cents and falling below the year-ago earnings of $1.02 per share.

Sales

During the quarter, American Eagle’s net sales went up 14% year over year to $1,042.7 million, almost in line with the Zacks Consensus Estimate of $1,042.0 million. Growth in revenue was driven by a 10% increase in comparable store sales. During the period, the company’s AE Brand, aerie and AEO Direct segments reported a growth of 10%, 6% and 18%, respectively, in comparable store sales.

For fiscal 2011, net sales grew 6% to $3,159.8 million, almost meeting the Zacks Consensus Estimate of $3,160.0 million. The company’s comparable store sales for fiscal 2011 grew 3%. Full year online sales at AEO Direct were up 15% to $385 million.

Quarterly Review

Lower merchandise margins resulted in a 1.4% decline in gross profit during the quarter, while gross margin contracted 530 basis points to 34.1%. The decline in merchandise margins during the quarter was attributed to increase in unit costs, mainly due to higher product prices.

In the fourth quarter, selling, general and administrative (SG&A) expense increased 13.4% to $220 million, and included a $6 million in executive transition costs. SG&A expense, as a percentage of sales, were up 10 basis points to 21.1%, driven by higher variable expense related to the sales increase and a planned investment in advertising.

Consequently, operating income declined 40.3% to $80 million from $134 million in the prior-year period.

Financial Position

American Eagle ended the year with cash and cash equivalents of $719.5 million compared with $667.6 million in the year-ago period. For fiscal 2011, cash used for operating activities came in at $87.4 million.

During fourth-quarter 2011, the company deployed $3 million toward capital expenditure, bringing the fiscal year capital spending to $100 million.

During the year, American Eagle returned value to shareholders by buying back 1.4 million shares for $15 million. The company also paid cash dividends of $86 million.

Guidance

Looking ahead into 2012, the company sees a modest rise in sales and slight improvement in margin. The company expects margins to be pressured in the first half of fiscal 2012 due to higher product costs, while the lower product costs are expected to ease pressure on margins in the second half. The company expects to provide fiscal 2012 earnings per share guidance with its first quarter results in May.

On the other hand, the company pointed out that it began the first quarter of fiscal 2012 on a strong note with positive February comps, which are driven by well-balanced selling of spring product and clearance. The company expects first-quarter EPS to come in the range of 8 cents to 10 cents per share, driven by continued margin pressure from product costs, higher markdowns and the potential for increased promotions. The current Zacks Consensus Estimate for first-quarter 2012 is 9 cents per share.

Conclusion

We remain impressed with the company’s continued momentum in denim along with improved merchandise assortments in the women’s business segment, which will likely lead to a turnaround in its top line as well as a rebound in gross margin.

The company operates in a highly fragmented specialty retail sector and faces intense competition from other teenage-focused retailers, such as Abercrombie & Fitch Co. (ANF) and Gap Inc. (GPS).

We currently have a short-term Zacks #3 Rank (Hold) and a long-term Outperform recommendation on the stock.

 
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