American Eagle (NYSE:AEO) Beats Q3 Sales Targets But Stock Drops 12.8%

Full Report / November 21, 2023

Young adult apparel retailer American Eagle Outfitters (NYSE:AEO) reported Q3 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 4.9% year on year to $1.30 billion. Turning to EPS, American Eagle made a GAAP profit of $0.49 per share, improving from its profit of $0.42 per share in the same quarter last year.

American Eagle (AEO) Q3 FY2023 Highlights:

  • Revenue: $1.30 billion vs analyst estimates of $1.28 billion (1.6% beat)
  • EPS: $0.49 vs analyst estimates of $0.49 (small beat)
  • Gross Margin (GAAP): 41.8%, up from 38.7% in the same quarter last year
  • Store Locations: 1,199 at quarter end, increasing by 20 over the last 12 months

With a heavy focus on denim, American Eagle Outfitters (NYSE:AEO) is a specialty retailer offering an assortment of apparel and accessories to young adults.

In addition to denim in various styles and washes, shoppers can find other casual clothing such as t-shirts, sweatshirts, and dresses. The American Eagle aesthetic is youthful, with a colorful palette. The core customer is the 15 to 25 set (male and female) who favors a relaxed, Americana look. American Eagle’s prices are mid-tier, neither approaching the stratosphere of luxury brands but also not as affordable as fast fashion.

Stores are roughly 6,000 square feet and located in malls or shopping centers along with other retailers. There is usually a male side of the store and a female one, with the center featuring displays of new releases or promoted items. In addition to physical stores, American Eagle has an ecommerce presence that gives customers options such as pure online shopping or buying online and picking up in store.

In addition to the core American Eagle brand, the company also operates Aerie, which offers lingerie, loungewear, and swimwear for women. The company acquired Todd Snyder, a men's fashion brand, in 2021.

Apparel Retailer

Apparel sales are not driven so much by personal needs but by seasons, trends, and innovation, and over the last few decades, the category has shifted meaningfully online. Retailers that once only had brick-and-mortar stores are responding with omnichannel presences. The online shopping experience continues to improve and retail foot traffic in places like shopping malls continues to stall, so the evolution of clothing sellers marches on.

Retailers offering youth-focused apparel and accessories include Abercrombie & Fitch (NYSE:ANF), Urban Outfitters (NASDAQ:URBN), and The Gap (NYSE:GPS).

Sales Growth

American Eagle is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the other hand, it has an edge over smaller competitors with fewer resources and can still flex high growth rates because it's growing off a smaller base than its larger counterparts.

As you can see below, the company's annualized revenue growth rate of 4.6% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre , but to its credit, it opened new stores and expanded its reach.

American Eagle Total Revenue

This quarter, American Eagle reported decent year-on-year revenue growth of 4.9%, and its $1.30 billion in revenue topped Wall Street's estimates by 1.6%. Looking ahead, analysts expect sales to grow 2.8% over the next 12 months.

Number of Stores

When a retailer like American Eagle is opening new stores, it usually means it's investing for growth because demand is greater than supply. Since last year, American Eagle's store count increased by 20 locations, or 1.7%, to 1,199 total retail locations in the most recently reported quarter.

American Eagle Operating Retail Locations

Taking a step back, the company has generally opened new stores over the last eight quarters, averaging 4.1% annual growth in its physical footprint. This is decent store growth and in line with other retailers. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.

Gross Margin & Pricing Power

Gross profit margins tell us how much money a retailer gets to keep after paying for the goods it sells.

American Eagle's unit economics are higher than the typical retailer, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it's averaged a decent 36.3% gross margin over the last eight quarters. This means the company makes $0.36 for every $1 in revenue before accounting for its operating expenses. American Eagle Gross Margin (GAAP)

American Eagle produced a 41.8% gross profit margin in Q3, marking a 3.1 percentage point increase from 38.7% in the same quarter last year. This margin expansion is a good sign in the near term. It shows the company increased its pricing power, and if this trend continues, it could signal a less competitive environment where it has more negotiating leverage and stable input costs (such as distribution expenses to move goods).

Operating Margin

Operating margin is an important measure of profitability for retailers as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

This quarter, American Eagle generated an operating profit margin of 9.6%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.

American Eagle Operating Margin (GAAP)

Zooming out, American Eagle was profitable over the last eight quarters but held back by its large expense base. It's demonstrated subpar profitability for a consumer retail business, producing an average operating margin of 5.9%. However, American Eagle's margin has improved, on average, by 1.2 percentage points year on year, an encouraging sign for shareholders. The tide could be turning.


Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.

In Q3, American Eagle reported EPS at $0.49, up from $0.42 in the same quarter a year ago. This print was close to Wall Street's estimates, meaning the result was likely already priced into the stock because investors were aware of expectations and traded accordingly.

American Eagle EPS (GAAP)

Between FY2019 and FY2023, American Eagle's adjusted diluted EPS dropped 30.2%, translating into 7.5% average annual declines. In a mature sector such as consumer retail, we tend to steer our readers away from companies with multiple years of falling EPS. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).

On the bright side, Wall Street expects the company's earnings to grow over the next 12 months, with analysts projecting an average 57.3% year-on-year increase in EPS.

Return on Invested Capital (ROIC)

We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.

American Eagle's subpar returns on capital may signal a need for future capital raising or borrowing to fund growth. Its five-year average ROIC is 10.9%, somewhat low compared to the best retail companies that consistently pump out 25%+ returns.

Key Takeaways from American Eagle's Q3 Results

With a market capitalization of $3.9 billion and more than $240.9 million in cash on hand, American Eagle can continue prioritizing growth.

It was good to see American Eagle beat analysts' revenue estimates this quarter, driven by better-than-expected same-store store sales growth at both American Eagle and Aerie. That stood out as a positive in these results. On the other hand, its gross margin and operating income guidance for the full year, despite being raised, missed analysts' expectations. Overall, the results could have been better. The company is down 12.8% and currently trades at $17.22 per share.

Is Now The Time?

When considering an investment in American Eagle, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We cheer for all companies serving consumers, but in the case of American Eagle, we'll be cheering from the sidelines. Its revenue growth has been mediocre over the last four years, and analysts expect growth to deteriorate from here. And while its stable growth in physical locations shows it has steady demand, the downside is that its relatively low ROIC suggests it has struggled to grow profits historically. On top of that, its operating margins are below average compared to other retailers.

American Eagle's price-to-earnings ratio based on the next 12 months is 13.7x. While we think the price is reasonable and there are some things to like about American Eagle, we think there are better opportunities elsewhere in the market right now.

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