American Eagle Outfitters (AEO) Reports Solid, Underwhelming Quarter

After pulling up sharply over the last week, American Eagle Outfitters (NYSE:AEO) got knocked down 10% today after it reported earnings per share in line with the market’s expectations. As I mentioned in my preview of the company’s earnings, investors seemed to have overbuilt the success that the brand would have beyond the semi-official analyst estimations. That has lots of implications, but the most important is this: The announcement wasn’t indicative of a failure, just of overhype.

The apparel retailer is in the early middle stages of a brand turnaround, with 2012 being a rousing success. Earnings and comparable sales are increasing, and management has laid down a clear path to growth that’s not overly risky. In short, it wants to focus on the core brand in the U.S., cut back underperforming locations, open new domestic locations, and only then think about international expansion. American Eagle Outfitters (NYSE:AEO) still looks like a good play, and the pullback today puts its price back in line with realistic expectations for the coming year.

The fourth quarter at American Eagle
American Eagle Outfitters (NYSE:AEO) nailed its earnings expectation, which was in line with the market’s expectation. Earnings per share rose 41% to $0.55 for the quarter and $1.39 for the year. The first reason that American Eagle failed to hit the high bar set by investors this week came down to comparable sales. While it grew comps by 4% in the quarter, it saw a slowdown from its reporting in January. At that time, sales were up 5%, with the company coming off a good holiday season. On the conference call this morning, CEO Robert Hanson said that mall traffic had been lighter than anticipated, which affected comparable sales.

The second big reason the stock dropped was the company’s less-than-stellar first-quarter outlook. It now expects comparable sales to fall in the first quarter. The company cited macroeconomic problems and bad weather as some of the biggest issues pushing it down. That shortfall in sales is then forecast to turn into a drop in earnings per share between 14% to 27%. Ouch.

So what is there to be excited about?
It’s still not a bad time to look at American Eagle because I think management is being overly cautious. Investors have heard a lot about the economic headwinds, but most strong brands have been able to overcome those issues to keep selling. I never tire of the comparison between American Eagle Outfitters (NYSE:AEO) and The Gap Inc. (NYSE:GPS). Gap has also undergone a brand turnaround, and the company is pushing its comparable sales up despite the economy.

In its earnings statement last week, Gap said that comps rose 5% in the previous quarter and that it expects to see modest growth this year as well. I think that American Eagle has put enough into the brand over the last year that it should see similar results. While comps dropped off over the past few months, I think they’ll continue to be positive through the first quarter.