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American Eagle Outfitters (NYSE: AEO) recently reported mixed third-quarter earnings and soft guidance for the holiday quarter. The apparel retailer's revenue rose 5% year over year to $1 billion, narrowly missing expectations by $20 million, as its comparable-store sales climbed 8% -- which also missed the consensus forecast for 8.4% growth.
AEO's earnings per share rose 33% to $0.48, beating estimates by a penny. But for the fourth quarter, it only expects to post earnings of $0.40 to $0.42 per share. That missed the consensus forecast of $0.45 and represents a 19% to 23% year-over-year decline in its reported EPS (which included a one-time tax benefit last year), or a 5% to 9% decline in its adjusted EPS (which excluded that benefit).
Image source: Aerie.
That lower forecast initially torpedoed AEO's stock, but it recovered after investors realized that the guidance was affected by an extra week in 2017. The loss of that extra week shaved $60 million in revenue and $0.07 of EPS from its forecast. Excluding the impact of losing a week, AEO's forecast would imply a 7% to 11% rise in adjusted EPS for the fourth quarter.
AEO currently trades at less than 12 times its projected earnings for next year and pays a forward dividend yield of 3%. Do those figures indicate that AEO is an undervalued dividend stock? Let's take a closer look at its business to find out.
A best-in-breed retailer with strong growth engines
AEO generates most of its revenue from its American Eagle stores, but an increasing proportion of its sales comes from Aerie, its lingerie and activewear brand for young women. Aerie has posted double-digit comps for 16 straight quarters, and that streak -- which offsets American Eagle's slower growth -- isn't likely to end anytime soon.
| Brand | Q3 2017 | Q4 2017 | Q1 2018 | Q2 2018 | Q3 2018 |
|---|---|---|---|---|---|
| American Eagle | 1% | 5% | 4% | 7% | 5% |
| Aerie | 19% | 34% | 38% | 27% | 32% |
| Total | 3% | 8% | 9% | 9% | 8% |
Comp sales growth by brand. Data source: AEO quarterly reports. Chart by author.
Aerie gained a loyal following as an "anti-Victoria's Secret" with untouched ads featuring models of all sizes in body-positive marketing campaigns. That growth has clearly hurt L Brands (NYSE: LB), which reported a 2% comp sales decline for its Victoria's Secret brand last quarter.
Image source: Aerie.
Meanwhile, American Eagle remains a beacon for younger shoppers. In Piper Jaffray's latest "Taking Stock with Teens" survey, American Eagle was ranked as the second-favorite clothing brand for U.S. teens (after Nike), and their third-favorite shopping website (after Amazon and Nike).