American Eagle: Retail Turnaround?

03/31/2014 7:00 am EST

Focus: STOCKS

Jason Clark

Contributing Editor, The Prudent Speculator

Our experience has been that a near-term goat can turn into a long-term hero, says Jason Clark, referring to a retailing stock whose turnaround is trying the patience of investors. Here’s his update from The Prudent Speculator.

After all, take a look at our best and worst performers in 2011, 2012, 2013, and, thus far, in 2014, to see how the tide can quickly turn. Incredibly, three of last year's worst performers are in the top five for performance this year!

Investors were very much displeased with the latest earnings announcement from American Eagle Outfitters (AEO), whose shares were down some 10% on the news.

As many retailers have been reporting, worse than expected winter weather around the country has had a material negative impact on results.

Although AEO reported revenue and adjusted earnings that slightly beat analyst expectations for fiscal Q4, the company’s outlook for Q1 2015 came in well below forecasts, and the shares were then hammered.

Wall Street had been looking for Q1 guidance to show that the company would deliver approximately $0.13 per share of net income. Instead, management anticipates that per-share earnings will be about breakeven.

AEO continues to battle through operational headwinds, as the company saw same-store (locations open at least one year) sales fall some 7%, while the search for a permanent CEO continues.

Interim CEO Jay Schottenstein commented, “The company’s results in 2013 were highly disappointing. We’re taking steps to bring greater focus and excitement to our product offering. Our brands remain incredibly strong and I’m confident in our ability to execute the strategic plan and resume long-term profitable growth.”

There is little doubt in our minds that American Eagle is a turnaround story that will take some patience.

That said, we are quite attracted to the balance sheet, which we feel gives leadership the flexibility needed to succeed. Currently, the company has more than $2.20 per share of net cash (with no long-term debt).

With a 3.9% dividend yield and the recent sell off in the stock, we think that AEO remains a good addition to well-diversified stock portfolios looking for additional consumer discretionary exposure.

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