Were American Eagle Outfitters (AEO) fourth quarter results really that bad?
I've heard some chatter about American Eagle's lower than expected 2019 first quarter guidance. I think the concern might be a bit oversold. The company just reported a record year. Their brands are experiencing nice sales growth. If the stock falls, I think it might be an opportunity. The company reported comparable sales growth of 6% in the fourth quarter. Overall, I think the strength of their Aerie brand seems to be resonating with a large consumer base. This part of the business might have more upside than some expect. Overall, this has been a very stable business through time, and I don't think there's a ton of cause for concern over the first quarter guidance.
AEO reported revenue growth of 1% in the fourth quarter to $1.24 billion. That included a $60 million difference related to the one extra week in fiscal Q417. The American Eagle brand had sales gains of 3% while Aerie produced a 23% increase. Obviously this area of the business is creating big gains thanks to continued weakness in competitors like LB Brands (LB) Victoria's Secret. Operating income also suffered from the one week difference year over year. The one week difference adversely hit operating income by $18 million. That hit meant operating income fell to $101 million versus $116 million. As you can see, it's tough to compare the year over year numbers here thanks to an uneven schedule. In regards to earnings, American Eagle reported earnings per share of $0.43 compared to $0.52 last year. The figure beat Wall Street's expectations, and solidified the year as a strong one for the company.
Total full year revenue increased 6% to $4 billion. This sales revenue beat last year despite the week's difference. Consolidated comp sales are gaining traction as they came in at 8% vs. 4% in 2017. Operating income through the year as a whole was much better than the fourth quarter. 2018 operating income increased 11.22% to $337 million compared to $303 million the year prior. Full year earnings per share came in at $1.47 vs. $1.13 in 2017. What I really like about American Eagle's full year results is it didn't rely on lower tax provisions or big share buybacks. That the company successfully increased operating incomes helped to drive pretax income. This is something that a lot of companies failed to do this year. It's a problem that isn't getting discussed enough. Both Pretax and net incomes were a larger portion of revenues for 2018.
Based on historical trends, I think this company is consistent over the long term. They're developing a track record of sales growth, and have maintained strong (if not a little stagnant at times) net income. Looking into the current year, the company provided us with underwhelming guidance for Q1. The company anticipates earnings per share of $0.19 to $0.21 in the first quarter. That would mark a decline from last year's $0.22. There are two ways to look at this. The company is either being cautious in the aim to possibly provide an earnings beat, or they foresee a genuine slowdown. The guidance comes in below what analysts had hoped for.
I think I still like the stock over the long term. Going off of trailing full year earnings, the company's pre-market price of $20.65 (at the time of writing) offers a trailing P/E ratio of 14. With 2019 first quarter guidance relatively close to last year, we should start out the year on a similar trajectory if not slightly lower. The stock took dipped in after hours trading yesterday. I think the fall was premature.
UBS's take on the strength of Aerie in regards to taking business from competitors like Victoria's Secret makes me think there's more momentum left here. Conservative first quarter guidance does not mean that the year, or Q1 for that matter, will be a total bust. I like the trends that American Eagle has been putting together. They grow sales, and have been improving earnings, even if the short term trajectories have been up and down. Indeed I think selling now would be a little premature. One quarter's guidance (that isn't even that bad) doesn't mean the party is over. It simply didn't live up to analyst's hopes. I view American Eagle as a "hold". There just isn't enough here for me to think it is a sell. If the bearish sentiment pre-market turns into something more, I think there could be opportunities for long term gains.