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American Eagle Outfitters (AEO) Focuses On Consistent Profitability: Analyst

 January 18, 2013 03:17 PM

(By Balaseshan) Brean Capital analyst Eric Beder believes American Eagle Outfitters (NYSE: AEO) has set realistic goals and will drive consistent profitability, while remaining shareholder friendly throughout the process.

The brokerage maintained its "Buy" rating on shares of AEO with $25.50 price target.

The analyst said American Eagle is the best positioned player in universe focused on driving consistent profitability for 2014 and beyond. The company is pleased with comp performance of 5% over a 13% increase last year driven by initiatives focused on improving margins by selectively reducing promotional activity and maintaining well controlled inventories.

[Related -American Eagle Outfitters (NYSE:AEO) Q3 Earnings Preview: What To Watch?]

In addition, the direct to consumer division grew 24% year-over-year, the analyst noted. As such, sales are expected to reach about $350 million, SG&A at 23.7% and EBIT of 12.6% all leading to reiterated EPS guidance of $0.54 to $0.56 for 4Q.

Beder said the management laid out 4 pillars of growth in which will be the main focus in order to reach the 5-year compound annual growth rate (CAGR) targets set for sales, EBIT and ROIC which include: fortify assets; grow North America; transform; and return.

The analyst said the CAGR target is based on expanding e-commerce from 14% of sales to 20% by driving conversion through conserved customization capabilities; connecting with the consumer on all platforms including mobile apps; and growing its international presence by opening six stores in Mexico planned for fiscal 2014.

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Beder said EBITDA five-year CAGR of 12% to 15% reflects a: targeted gross margin rate of 42% to 44% by lowering the markdown rate from 37% to 30% through selectively reducing promotional activity and remaining disciplined with inventory levels; continued benefit from cotton in first half of 2014 in addition to creating more efficiencies on the sourcing and buying and occupancy front; and maintaining a 23% range SG&A margin while growing the business.

In addition, the change in channel mix will also positively impact margins, the analyst noted. ROIC targeted five year CAGR of 14% to 17% is expected to be achieved through constant dividends, share repurchasing and continued investment to support growth.

AEO is trading down 0.43% at $21 on Friday.



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