American Eagle Outfitters (AEO) Management Optimistic, but CEO Search and Turnaround Remain Challenges - Stifel
Stifel comments on American Eagle Outfitters (NYSE: AEO) following the company's Q2 report and outlook, which was issued early Wednesday morning.
Analyst Richard Jaffe noted the following key points following AEO's quarterly call:
- Management is Optimistic - Management is encouraged by selling trends thus far in the 3Q, especially in the previously underperforming women’s category. Women’s tops and soft bottoms are performing well. Given the trend towards soft bottoms and away from denim, management correctly decreased its denim inventory investment for the 2H and denim sales are in-line with management’s plan. Given the company’s consistently poor merchandise offerings over the past year, it will take time for AEO to win back its customers, despite an improved fashion assortment. We therefore believe the company’s new national marketing campaign (launched last week) is critical to increase the customer’s awareness of the AEO brand and its improved merchandise.
- Ability To Chase Into Strong Selling Categories – Management expects that trends should continue to improve throughout the 2H driven by easy comparisons and a more nimble design and production process. Shortened lead times and a greater open to buy allows the company to operate with a lean inventory position and chase strong selling merchandise (approximately 20% of inventory is chased). This should drive sales and limit markdowns, in our opinion. Management expects gross margin to improve approximately 400 bps in the 2H versus very easy comparisons LY. This is partially offset by a mid to low single digit increase in SG&A spending vs. LY.
- Reiterate Hold – Despite a recent uptick in sales and margin trends at AEO, we believe it is too soon to declare victory and we lack visibility that these positive trends will continue. We believe there is uncertainty surrounding both the merchandise turnaround and the CEO search. Finding a qualified CEO replacement will take time (the search for ex-CEO Hanson took nearly a year) and once a replacement is found, impact by the new CEO will take time to materialize.
American Eagle Outfitters closed at $11.59 yesterday.