American Eagle Outfitters (AEO): 5 Reasons This Retailer Is Priced To Outperform

Speaking of cash flow, this leads me to the fourth reason to consider American Eagle.  The company generates more free cash flow per dollar of sales than most of its competition. Since retailers are seasonal in nature, I make two adjustments to their cash flow. First, I take the average of the last four quarters. Second, I use what I call core free cash flow, which is just net income plus depreciation, minus capital expenditures. In the last four quarters, Buckle led the way with almost $0.16 of free cash flow per dollar of sales. American Eagle came in second at almost $0.08, Gap generated about $0.06, and Abercrombie actually showed negative average core free cash flow.

Last but not least, American Eagle Outfitters (NYSE:AEO) offers the best yield of the group, and better growth than most. At current prices, the stock pays a yield of better than 2.25%. Relatively speaking, this beats out Abercrombie at 1.6%, Buckle at 1.7%, and Gap at 1.6%. I know that Buckle has a history of special dividends, but American Eagle paid its own special dividend last year. Since by definition these dividends are not guaranteed, investors should compare the annualized dividends and not assume special dividends will be declared every year.

The only competitor that is expected to show better EPS growth is Abercrombie. However, the company has struggled with inconsistent comps. and is the only one of the four to show negative free cash flow. With analysts calling for 7.77% earnings growth at Buckle, and 9.4% at Gap, American Eagle’s 11.75% expected growth rate soundly beats most of its competition.

In the end, American Eagle Outfitters (NYSE:AEO) offers investors a good mix of current income, earnings growth, and good free cash flow. The company’s international expansion plans should drive earnings for years to come. The additional cash flow from this expansion should help fund share repurchases and higher dividends in the future. If growth and income sounds like a fashionable choice to you, consider adding AEO to your personalized Watchlist today.

The article 5 Reasons This Retailer Is Priced To Outperform originally appeared on Fool.com and is written by Chad Henage.

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