American Eagle: Teen Turnaround

04/17/2015 8:00 am EST


Harry Domash

Publisher, DividendDetective and Winning Investing

Our latest recommended turnaround play is a teen retailer that operates more than 1,000 stores in the US, Canada, Mexico, China, Hong Kong, and the United Kingdom, notes income expert Harry Domash, editor of Dividend Detective.

We’re adding American Eagle Outfitters (AEO) to the Dividend Detective Speculators portfolio. American Eagle was blindsided when new competitors such as Forever 21 and H&M entered the market a few years ago.

These new fast fashion players offered stylish, but low cost merchandise that was frequently updated.

As a result, the established players that focused on higher-end assortments that changed only seasonally saw market share, revenues, and profits slide relentlessly, quarter after quarter.

However, in January 2014, American Eagle’s CEO stepped-down and AEO temporarily replaced him with Jay Schottenstein, who had run the company from 1992 to 2002.

Schottenstein, who is still interim CEO, quickly began instituting changes aimed at making AEO competitive with the fast fashion players.

Based on January 2015 quarter numbers—when year-over-year revenues and earnings rose for the first time in a year—the remake appears to be working. But, there’s much more to come, and while you wait, American Eagle pays a 3% dividend yield.

American Eagle reported December quarter earnings (continuing) of $0.36 per share, $0.02 above analyst forecasts and up 33% vs. year-ago. Revenues rose 3% to $1.072 billion.

Gross margin was 35.1% of sales vs. year-ago 31.9% (higher is better). Reduced markdowns drove the gross margin increase.

During the quarter, Eagle opened three new stores in the UK, two in Mexico, and one in Asia, but also closed 39 existing stores.

American Eagle announced plans to open licensed stores in Chile and Peru. It expects the first stores to open in Chile in the third quarter of 2015 and in Peru in early 2016. American Eagle already has stores in Colombia, Panama, and Mexico.

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