American Eagle says digital and full-price sales offset lower mall traffic

Mall staple American Eagle Outfitters Inc. said traffic was a challenge during the third quarter, but digital sales and full-price purchases drove better-than-expected results.

American Eagle Outfitters
  on Wednesday reported net income of $58.1 million, or 32 cents per share, down from $80.8 million, or 48 cents per share, last year. Adjusted EPS of 35 cents beat the FactSet consensus for 34 cents per share.

Revenue of $1.032 billion was down from $1.066 billion in the same period a year ago, but just ahead of the FactSet consensus for $1.029 billion.

Digital sales rose 29%, with online sales at the Aerie brand of underwear and lounge apparel up 83%.

Shares rose 4% in Wednesday trading.

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“Despite numerous headwinds related to COVID, we saw stronger full-price selling and had limited promotional activity, leading to a meaningful increase in merchandise margin,” said Chief Executive Jay Schottenstein, on the earnings call, according to FactSet.

“Although stores were impacted by negative mall traffic, we continued to outpace the mall with very strong conversion.”

American Eagle executives reminded analysts that the company is taking a closer look at its store fleet, with plans to close 50 stores this year and others over the next several years.

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“These stores have been selected based on their lease tenure, mall profile, proximity to other stores and customer engagement levels,” said Michael Mathias, American Eagle’s chief financial officer, on the call.

The Aerie brand, which saw revenue increase 34% during the quarter, opened a new store in October for its Offline brand of activewear. Offline now has four stores.

And early in the fourth quarter, the American Eagle brand launched a collaboration with Walt Disney Co.

“The capsule is selling quickly and we are seeing significant engagement on TikTok,” said Jennifer Foyle, global brand president for Aerie, according to FactSet.

Even the good news wasn’t enough for cautious analysts, who raised target prices but not stock ratings.

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“All things considered, this felt like a pre-pandemic report, and that’s a good thing,” wrote BMO Capital Markets analysts led by Simeon Siegel. “We expect ongoing Aerie strength to drive the show, but believe this is understood.”

BMO rates American Eagle stock market perform with a $17 price target, up from $15.

Cowen also raised its price target, to $21 from $13, while maintaining its market perform stock rating.

Analysts there think announcements of more store closures will come in January, when American Eagle hosts its investor day event.

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“Sixty percent of existing stores have leases expiring in the next 12-to-24 months, and Cowen continues to expect 200-to-300 stores to come into focus as closure candidates given accelerating e-commerce penetration,” analysts led by Oliver Chen wrote. “We also estimate that 300-plus of American Eagle’s 931 stores could be in C- and D-tier malls.”

Malls at this lower level have generally experienced greater declines than those in higher-level A and B-tier malls.

Raymond James analysts are more upbeat, largely because of the company’s investments in doing business across stores and digital.

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“We believe American Eagle will prove to be a market-share consolidator in an industry that is ripe for the taking in a post COVID-19 world,” wrote analysts led by Matthew McClintock.

“Further, American Eagle’s e-commerce penetration is elite and the company’s digital leadership should enable American Eagle to close underperforming stores and negotiate more favorable lease terms going forward.”

Raymond James rates American Eagle shares outperform with a $20 price target, up from $15.

American Eagle shares have gained 25.8% for the year to date, while the S&P 500 index
  is up 12.4% in 2020.

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