'Underlying Trends Remain Robust' Says Wunderlich On American Eagle

Wunderlich reiterated its Buy rating on American Eagle Outfitters (NYSE: AEO) despite the fact that American Eagle reported an in-line third-quarter results, which according to Wunderlich, shows the company’s revenue expansion and operating leverage capabilities.

Quarterly Review

• American Eagle Outfitters reported Q3 EPS of $0.41 versus the estimate of $0.41.
• Revenue came in at $941 million versus the estimated $940 million.
• For Q4 EPS, the company sees $0.37–$0.39 versus the estimate of $0.45.
• American Eagle sees comp sales as flat or low-single-digit increase.

Analyst Take

“We not only consider the company to have achieved a shareholder return structure, and long-run growth position that leads the retail industry as a whole, but one that has also been irrationally discounted by the marketplace, in our view,” analyst Eric Beder wrote in a note.

During the quarter, American Eagle's core denim business saw strong demand trends and women’s tops also strengthened. Further, Beder said the company's intimates-driven Aerie concept is “an overlooked jewel in the retail marketplace.”

Commenting on the lower-than-expected fourth-quarter outlook, Beder noted that the company was exercising unnecessary caution, as it commented on far better holiday season trends in its conference call.

American Eagle said its fourth-quarter-to-date traffic trends were ahead of the mid-single-digit declines that had dragged the results of the previous two quarters.

Beder highlighted that that current analyst forecasts likely do not accurately model the normalized operational performance of the company in the year-ago period and the guidance implies tangible net-income growth that has not been present in rivals Abercrombie & Fitch Co. (NYSE: ANF) and Urban Outfitters, Inc. (NASDAQ: URBN).

Wunderlich's Bottom Line

However, based on management's guidance, Beder cut his fourth-quarter earnings estimate by $0.06 to $0.40, indicating definitive upside to management's $0.37–$0.39 guidance range.

Shares of American Eagle closed Wednesday’s trading at $16.56. Beder has a price target of $22.