American Eagle Outfitters (AEO)’s Plan for Success

This Wednesday before the opening bell, American Eagle Outfitters (NYSE:AEO) will report fourth-quarter earnings, and Wall Street is looking for very good things. The stock was up more than 4% yesterday on rumors and whispers — you know, the things that make Wall Street tick. The company updated its guidance in January and is forecasting earnings per share of $0.54 to $0.56 based on mid-single-digit comparable-sales growth. Through early January, comparable sales had increased 5%, when online sales were included — 1% without including online.

Analysts expectations are ostensibly in line with the company’s, with the Street predicting $0.55 per share. Yesterday’s run-up tells a slightly different story, though. That’s likely fired by a suspicion that American Eagle Outfitters (NYSE:AEO) is going to continue matching the turnaround that The Gap Inc. (NYSE:GPS) has undertaken over the past year. Like Gap, American Eagle Outfitters (NYSE:AEO) has redoubled its focus on its core brand, and started to see some success. But will the early turnaround go to its head, or is there more in store for investors?

Location, location, brand
Over the last few years, retailers have been focusing on international expansion to help increase sales and income. That expansion has largely been focused on Asia — specifically on China. The drive was the growth of the Chinese middle class. American Eagle dodged that potentially dangerous bullet and built its first international store in Dubai. Since the company waited so long to move outside of North America, it still has a relatively low international store count. Of its 1,255 stores, only 69 are international, and those are licensed locations.

In early 2012, the company realized that something had to change in the U.S. before it could make a big move internationally. That realization led to American Eagle Outfitters (NYSE:AEO) focusing on its core brand and playing to its strengths. At that point, it was operating underperforming stores and spending more cash that it should have been. To rectify that, the company went on a pruning spree, closing underperforming stores and sinking resources into its online presence to drive cheaper direct sales. Later, the whole turnaround was codified and now American Eagle has a real plan in place.

Through fiscal 2015, the focus is going to be on making the strengths that the company already has even stronger — brand, U.S. stores, and online. Starting in fiscal 2014, international growth and omnichannel will begin to play a larger role. Even though those are exciting areas, the real story has been with the company’s core turnaround, and the value that it’s bringing to investors.

The Gap model
American Eagle Outfitters (NYSE:AEO)is walking right alongside Gap in its turnaround. Over the last year, both companies have seen an increase in comparable sales and earnings. That’s helped investors’ sentiment, and share at both companies are up close to 50% over the last 12 months. The key to that success has been an unwavering focus on the clothing that made the brands what they are. Gap has increased its products’ quality and cut its shipping times, enabling it to regain its spot as a trend leader.