American Eagle Outfitters (NYSE:AEO) Q3 Earnings Preview: What To Watch?

American Eagle Outfitters, Inc. (NYSE: AEO) is expected to release its third quarter earnings on Dec. 6. The company will host a conference call and real-time webcast at 9:00 a.m. Eastern Time on that date.

American Eagle Outfitters is a leading global specialty retailer offering clothing, accessories and personal care products at affordable prices under its American Eagle Outfitters and Aerie brands. The company operates more than 1,000 stores in the United States, Canada, Mexico, China, and Hong Kong, and ships to 81 countries worldwide through its websites.

Wall Street expects AEO to earn 19 cents a share, according to analysts polled by Thomson Reuters. The consensus estimate implies a drop of 53.7 percent from last year when it earned 41 cents a share.

Early November, AEO said it now expects third quarter earnings of 19 cents a share, which excludes non-cash charges associated with closing a distribution center. The company’s previous EPS guidance was 14 to 16 cents. The revised outlook reflects slightly better than expected margin results.

AEO’s earnings have managed to beat Street view twice in the past four quarters. In the past 90 days, the consensus estimate has increased by 2 cents. Despite the tough retail environment, 24 analysts have increased their earnings forecast for the third quarter in the last month.

Quarterly revenue is estimated to drop 6.7 percent to $848.98 million from $910.37 million a year-ago. In the last two quarters, the company’s sales dropped 2 and 4 percent, respectively.

Total net revenue for the thirteen weeks ended Nov. 2, 2013 decreased 6 percent to $857 million, and consolidated comparable sales fell 5 percent, including sales from AEO direct, against a 10 percent comparable sales increase last year. AEO direct sales increased 17 percent during the period.

Robert Hanson, CEO of American Eagle, said the company’s third quarter results are clearly unsatisfactory. Yet, in an extremely challenging environment, AEO’s bottom line results are slightly ahead of its prior expectations and AEO ended the period with clean inventory.

Investors should look for the company’s commentary over strengthening of its merchandise, marketing and customer service execution, inventory and expense management.

Meanwhile, all eyes will be on the fourth quarter outlook given improved Black Friday sales. Wall Street expects fourth quarter earnings of 39 cents a share on revenue of $1.09 billion. In general, fourth quarter results should be advantageous for retailers as it includes the key holiday sales period from Thanksgiving to Christmas.

However, holiday shopping season will be record short in 2013 versus record long in 2012, leading to more deals this year versus last. Holiday shopping season 2013 will see 26 shopping days between Thanksgiving and Christmas, the fewest possible days, with Thanksgiving falling on the latest possible date of Nov. 28. This compares with a 32-day record long shopping period last year, with the most possible days between Thanksgiving and Christmas as Thanksgiving fell on its earliest possible date of November 22nd.

As a result, retailers will be churning out more promos this year, and that may have an impact on margins. The market will look for some color on the margin for the fourth quarter and the full year.

BMO Capital Markets analyst John Morris is of the view that American Eagle was one of the few retailers to show a year-over-year improvement in traffic and conversion. However, it was attributed to a deeper level of promotion.

AEO offered 50 percent off the entire store, which was only intended to run through 6 a.m., but extended well into the afternoon at most locations, before switching to 40 percent off, in line with last year.

This year, weather was cooler on Black Friday (and the coldest Thanksgiving since 1993), and remained seasonal throughout the weekend, which, coupled with deep discounts, should have spurred demand for winter apparel and accessories.

The market will focus on the company’s international expansion opportunities. The company said it further expands its global presence in the Americas and Asia Pacific markets with three exclusive multi-store licensing agreements.

AEO expects to expand its presence in Venezuela, Caribbean Islands, Central America, Columbia and Thailand. Stores will open beginning in the summer of 2014. American Eagle Outfitters currently has licensed stores in 12 countries including the United Arab Emirates, Kuwait, Russian Federation, Kingdom of Saudi Arabia, Lebanon, Jordan, Morocco, Egypt, Israel, Japan, Poland. In 2014, the company currently expects to open approximately 40 additional licensed stores.

For the second quarter ended Aug. 3, 2013, AEO’s adjusted EPS dropped 52 percent to 10 cents, and sales declined 2 percent to $727 million. Consolidated comparable sales, including AEO Direct, decreased 7 percent, compared to an 8 percent increase last year.

AEO shares, which trade 14.9 times its forward earnings, have gained 12 percent since its last quarterly report. They were down 18 percent this year and traded between $13.14 and $22.63 during the past 52-weeks.