Investing Club: American Eagle Outfitters cautious guidance is rooted in temporary headwinds

Published Wed, Mar 2 20227:48 PM EST

American Eagle Outfitters (AEO) reported fourth-quarter profit and sales that both matched estimates after the closing bell Wednesday. Revenue came in at a record $1.51 billion, up 17% year over year. Adjusted earnings came in at $0.35 per share. In addition to the headline numbers, gross margin of 32.4% was ahead of the 31.9% consensus while adjusted operating income of $92 million was short versus the $98 million consensus. Bottom line All in, while the quarter was heavily impacted by elevated freight costs, and a cautious forward guide was weighing on shares in the after-hours session, management is executing as well as anyone could ask for given the difficult operating environment. The consumer demand is clearly there, and we continue to see positive momentum at both company brands: American Eagle in causal wear and the growth engine that is Aerie, which makes women's intimates, activewear and swimwear. Strong brand recognition along with management's focus on enhancing operating efficiencies is resulting in strong growth in AUR, which stands for average unit retail, meaning average selling price, and the best profitability we've seen in over a decade, though profitability would have been at record levels if not for the aforementioned freight costs. Recent acquisitions of Quiet Logistics and AirTerra are not only helping the company offset some of these elevated costs, but we expect them to increase savings as supply chain disruptions ease and open up a new revenue stream as a "state-of-the-art supply chain platform" to a growing list of third-party retailers. We pointed out this developing logistics area in our AEO stock profile for the Club last month. Given our view that the freight cost pressures will ease and that American Eagle Outfitters is stronger than ever, and set to become an even more efficient operator as it integrates Quiet Logistics and AirTerra, we believe that as painful as this position has been at roughly 8x fiscal 2022 earnings with a dividend yield north of 3.5%, the pessimism is simply overdone. Given this view, we reiterate our 1 rating but note that our price target is under review with a downward bias to reflect the multiple compression we have seen market wide in recent weeks. Guidance Looking ahead, management guided below expectations, commenting that they are taking a "cautious view of 2022" due to a "number of macro uncertainties." For fiscal 2022, management expects adjusted operating income of $550 million to $600 million, well below the $661 million the Street was looking for. The cadence of fiscal 2022 is expected to be very back half weighed as the first half of 2021 made for a tough comp, benefiting greatly from stimulus checks that provided a tailwind into last year's Spring selling season. In the back half of this year, management expects a recovery as the team laps high air freight costs resulting from factory closures and inventory flow challenges. On a brighter note, on the call, management called out that the team has officially exceeded the 2023 targets they laid out in January 2021 — and as a result, are setting their sights on reaching $5.8 billion sales, a 13.5% operating margin and $800 million of operating income. Fourth-quarter results Aerie revenue came in at a record $428 million, representing 27% year-over-year growth, and marking the 29 th consecutive quarter of double digit growth for the brand. Aerie brand operating profits tripled versus pre-Covid pandemic levels and AUR was up in the low 20s, an acceleration from the high teens rate seen in the prior quarter and attributable to higher full-price selling, more strategic promotional activity and an improved mix toward higher ticket items. American Eagle sales advanced 11% year-over-year to $1.04 billion, while operating profits increased 50% versus 2019 levels, with the team calling out their strategic focus on profitability resulting in the highest margin since the mid-2000s. On a consolidated basis, this marked the seventh consecutive quarter of AUR growth. Touching on gross margins, management called out an $80 million freight cost headwind, roughly 75% or $60 million of which was specific to Vietnam factory closures. However, the team managed to offset some of this thanks to "customer delivery efficiencies, higher full-priced sales, lower promotions and inventory optimization initiatives," according to the earnings press release. A similar dynamic was seen in operating income. Zooming out, despite the cost headwinds experienced in fiscal 2021, this represented the company's most profitable year on an operating income basis since 2007 — and if not for the freight cost headwind, would have been the most profitable in the company's history. By channel, Q4 consolidated store revenue increased 32% year over year, driven by a double-digit improvement in store traffic. Additionally, while total digital revenue declined 3% year over year, it was up 31% versus pre-pandemic in the fourth quarter of fiscal 2019. Consolidated store revenue was up 4% versus pre-pandemic levels. Regarding digital initiatives, the team added that they continue to enhance the omnichannel experience, implementing a new mobile point-of-sale solution in stores and have seen a "significant increase" in curbside pickup orders. Another driver for the online channel is a new instant credit feature for returns. On the call, management noted that 75% of customers returning an item opted for this instant credit option and that the bulk of those who did used the credit within two weeks. The team is also leveraging after pay options and noted that the mobile app drove roughly a third of all ecommerce sales and traffic in the quarter. That's a crucial point as app-based shoppers are spending 2.5x more than web-based shoppers and transacted with the company 3x more throughout the year. Logistics While freight was clearly the major headwind in the quarter, management is not standing by idly. Improved return capabilities — doubling its processing rate per hour — led to better restocking rates, improved product availability and higher full-price selling. While fulfillment costs rose industrywide, AEO was able to realize savings due to a reduction in shipments per order, a dynamic the team was able to achieve thanks to its work with Quiet Logistics, which members will recall, American Eagle Outfitters actually acquired, along with AirTerra. The team realized a 35% improvement in delivery times. On the call the team noted that the combination of Quiet Logistics and AirTerra "creates a state-of-the-art supply chain platform" that will not only help improve efficiencies for American Eagle Outfitters but also drive a new source of revenue as the team looks to further monetize the combination by growing its third-party customer base. Management said that "since announcing the acquisition, we've received tremendous interest from retailers of all sizes. And as the business expands, we expect a material revenue and profit stream for AEO, and we're looking forward to sharing more about the long-term value creation opportunity." (Jim Cramer's Charitable Trust is long AEO . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A shopper walks past an American Eagle store in the mall.

Tim Boyle | Getty Images News | Getty Images

American Eagle Outfitters (AEO) reported fourth-quarter profit and sales that both matched estimates after the closing bell Wednesday.