Can American Eagle Keep Flying Higher?

Clothing retailer American Eagle Outfitters (NYSE:AEO) has had a pretty good story to tell over the past couple of years. Heading into its fourth-quarter earnings release on Thursday, the retailer’s stock price was up 11% year to date (YTD) at $23.45 per share, and that is coming off a 55% return in 2023. In fact, American Eagle’s stock has bounced back after a devastating 43% drop in 2022 that saw its share price sink below $10 per share.

On Thursday morning, American Eagle flew even higher, rising about 13% in early trading to over $26 per share after it posted strong fiscal fourth-quarter earnings and shared a three-year plan to boost profits.

Record fourth-quarter revenue

The numbers were pretty impressive for American Eagle in its fiscal fourth quarter , which ended Feb. 3. The retailer posted record revenue of $1.7 billion. This is a 12% year-over-year increase with store revenue jumping 10% and online revenue climbing 19%.

The American Eagle brand did $1.1 billion in sales, up 11% overall with comparable or same-store sales rising 6% from the same quarter a year ago. The Aerie women’s brand did $538 million in revenue, up 16% overall with comparable sales up 13%. These numbers beat analysts’ estimates, as did American Eagle’s earnings results.

However, the retailer saw net income of only $6.3 million or 3 cents per share, down from $55 million or 28 cents per share in Q4 2022. On an adjusted basis, American Eagle’s net income came in at $121.4 million or 61 cents per share, up from $72.3 million or 37 cents per share and topping estimates.

The low GAAP net income number of $6.3 million included $131 million in impairment and restructuring charges, with the bulk of that coming from the restructuring of American Eagle’s Quiet Platforms internal shipping and logistics brand. The restructuring was done to improve alignment with American Eagle’s strategy of a regionalized fulfillment center network. These actions are expected to result in $20 million in annualized savings starting this year.

“We are entering 2024 with momentum and from a position of strength with an exciting line-up of innovation and customer engagement initiatives,” said Jay Schottenstein, executive board chairman and CEO of American Eagle Outfitters. “Our balance sheet is healthy, and we are seeing early proof points of our new long-term strategy to deliver industry-leading earnings growth and shareholder returns.”

Three-year plan to boost profits

American Eagle also laid out its expectations, not only for Q1 or even fiscal 2024 but for the next three years.

In Q1, the company expects its revenue to be up in the mid-single digits percentage-wise, with operating income in the range of $65 million to $70 million. For the full fiscal year, American Eagle anticipates revenue climbing 2% to 4%, with operating income between $445 million and $465 million.

The bigger picture looks even better if the company can execute. Its Powering Profitable Growth plan calls for mid-to-high teens annual operating-income growth with annual revenue growth of 3% to 5% over the next three years. That would bring American Eagle’s revenue to potentially $6 billion in 2026, up from $5.26 billion at the end of 2023.

The goal is to have a 10% operating margin by the end of 2026, up from the current 7%. The plan to get there involves three pillars: amplifying its brands; executing financial discipline; and optimizing its operations.

“Amplifying American Eagle and Aerie’s stronghold in casual apparel is at the very center of our strategic plan,” Schottenstein explained. “We see incredible growth opportunities as we elevate key businesses and expand into category adjacencies at American Eagle, fuel the #AerieReal movement in underpenetrated markets, and accelerate OFFLINE’s significant potential in activewear. These efforts will be supported by a sharp focus on profit expansion.”

Can American Eagle keep flying?

This seems like a pretty realistic plan and achievable goal for American Eagle, as it already took key steps in the fourth quarter to restructure and become more efficient in the future.

The company’s price-to-earnings ratio of 21 is a little skewed after the fourth quarter, but the forward P/E is a reasonable 13, and the price-to-sales ratio is a cheap 0.91.

Analysts are generally pretty lukewarm on the stock, and there were no price target increases, at least initially, after the earnings came out. We might see some boosts at some point, but more than likely they will wait for continued execution by American Eagle.

The company’s stock price could flatten out a bit after today’s big jump, but at this relatively cheap valuation, it might be one to put on your radar as the long-term prospects look decent.