American Eagle Outfitters (AEO), the teen fashion retailer, offers signs of both hope and dread in its most recent earnings report. Profit almost tripled in the first fiscal quarter ended April 30, to $28.3 million from $10.9 million in the first quarter a year earlier. But revenue at American Eagle Outfitters dropped by 6 percent to $609.6 million. Cost cuts offset the sales decline.
So is the glass half empty or half full? The bulls point out that American Eagle is more profitable than competitors Aeropostale (ARO) and Gap (GPS) as a result of superior inventory and cost controls. They expect profit margins to rise and say the company is a strong candidate for a leveraged buyout, thanks to its strong free cash flow and light debt load.
The company itself, of course, likes its prospects. "While sales for the quarter came in lower than anticipated, we achieved EPS (earnings per share) within our expected range,” American Eagle CEO Jim O’Donnell said in a statement.
“A higher merchandise margin and the positive impact of our expense control initiatives contributed to the bottom line. During the quarter, we continued to implement strategic initiatives . . . that will position the business for improved performance in the second half of the year and fuel longer-term growth."
For the bears, things are less clear cut. “We believe that American Eagle continues to lose market share, inventory discipline is once again becoming an issue, and we have no faith the company will be able to drive higher pricing to restore margin integrity in the second half of 2012," Eric Beder of Brean Murray Carret & Co. wrote in a note to clients.
The company will have a tough time turning around and is unlikely to see a leveraged buyout, he says.
Nevertheless, Beder upgraded his rating of the stock to hold from sell, but that was largely because the stock price already has been beaten down.
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