AEOS ( $32 -$23) PE 20 falls 28%, hits target, but warns third quarter to miss
By Jennifer Waters, CBS.MarketWatch.com
Last Update: 5:58 PM ET Aug. 21, 2001
WARRENDALE, Pa. (CBS.MW) -- Many analysts were taken aback by Tuesday's broad sell-off of American Eagle Outfitters, which screamed 28 percent lower after the fashion-oriented youth-apparel retailer warned that its third-quarter profit would miss projections.
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American Eagle (AEOS: news, chart, profile) landed at $23.21 to finish the session off $9.06 with a stunning 21.7 million shares changing hands -- over 20 times its three-month average daily volume.
The retrenchment is a 46 percent nose-dive from American Eagle's 52-week high of $43, reached only in May, and wiped out an entire year's worth of market capitalization gains.
To some analysts, such a retreat -- sparked by American Eagle's lowering earnings expectations to a range of 45 to 47 cents a share vs. the Wall Street average estimate of 49 cents for the third quarter -- represents a chance to get in on the cheap.
"We would use the weakness as a buying opportunity as we believe that American Eagle is fashion-right with great value price points," said Janney Montgomery Scott analyst Holly Guthrie in a note to clients.
At the same time, fashion is at the heart of the inventory issues that could plague American Eagle. In particular, it's denim -- this fall's fashion statement that could leave a great many apparel retailers singing the blue-jean blues.
American Eagle executives told analysts and investors on the company's second-quarter conference call late Monday that its supplies were up 14.5 percent -- significantly higher than most analysts had thought.
That gave many the shivers because virtually every major and minor retailer has stocked up on denim. With so much of it out there and so many choices for fickle teenagers, it's likely some retailers will ultimately be forced to take deep discounts to clear the shelves.
Matching up against the competition
Most analysts agree that American Eagle's selection of the so-called "trend-right" look is among the best in the business. Ditto for rival Abercrombie & Fitch (ANF: news, chart, profile).
Gap Inc. (GPS: news, chart, profile), on the other hand, is said to have fallen horribly out of step with the latest fashions.
To be sure, there are some fashion misses and some price issues prompting American Eagle to take discounts on certain jeans and rugby shirts. Some jeans will be repriced -- different from discounting -- to better match what its competitors are doing. Others will be slashed to move and drive traffic.
The fear, however, is that the competition will be so promotion-driven that it will put pressure on American Eagle to trim prices on even its best-selling items.
"With the entire arena of apparel retailing plagued this selling season by a surfeit of denim, it's going to be difficult for anyone to make a decent margin," A.G. Edwards' Robert Buchanan said.
During Gap's earnings call last week, Chief Executive Millard Drexler cautioned investors that deep discounting was on the way, particularly for its basics.
So here's the scenario that some investors would dread coming to pass: Gap has fire sales on jeans and basics, a move that sucks traffic out of American Eagle and Abercrombie & Fitch stores, both of which watch their margins erode as they are forced to cut prices to stay competitive.
That could prove particularly damaging for American Eagle because -- unlike most of its direct competitors -- the Warrendale, Pa.-based company faces difficult year-over-year comparisons for its third-quarter sales and earnings.
But to knock out 25 percent of the value in American Eagle shares is going a bit overboard, said Jefferies & Co. analyst Eliot Laurence. Abercrombie & Fitch also got hit, retreating $1.48 to trade at $29.60.
"That's just conservative on their part," Laurence said about American Eagle's lowered expectations, with investors reacting in what he called a "classic half-empty/half-full" analysis. "Many will interpret this as confirmation that sluggish consumer demand is finally catching up with American Eagle," he said.
Darkest before the dawn?
But there's "tangible evidence" that American Eagle will manage its way out of a difficult environment. For starters, it just did.
The retailer's profit grew five-fold to $15.3 million, or 21 cents a share, in the second quarter ended Aug. 4, up from last year's $2.8 million, or 4 cents a share. Sales increased 40 percent, to $209 million.
But more importantly, he said, the company's revised financial outlook is based on the results of one-third of the back-to-school season for American Eagle. Two-thirds of its markets -- in the Midwest and Northeast -- haven't even returned to the classrooms yet.
What's more, though the inventories seem excessive, they're not if you consider that there's enough to carry American Eagle into the holiday season. And, Laurence noted, retailers can sell jeans through April.
Finally, consider too that American Eagle also said that it expected third-quarter comparable-store sales -- receipts run up at stores open more than a year -- to be flat to up in a low-digit range. That's based on back-to-school sales in the first two weeks of August. But it comes barely two weeks after the company said it expected same-store sales to be down to flat.
"In that short time, American Eagle saw enough sell-through to have confidence to change its guidance," said Laurence, who reiterated his "accumulate" rating.
Janney Montgomery's Guthrie did the same with her "buy" rating. "The slightly less optimistic forecast has to do with a slower-growing economy, the response of other competitors to their respective fashion misses, and American Eagle's slightly conservative nature," she said.
Of course, not all analysts were in the same camp. Buchanan, for one, doesn't think American Eagle can overcome the "novel blasts and weights and fabrications and other elements of detail" that Abercrombie & Fitch is selling.
"The overall inventory levels are too high for our comfort level," he said in urging investors to "maintain" their holdings, which he considers "speculative."
Jennifer Waters is the Chicago bureau chief for CBS.MarketWatch.com. |
