Oh Was I Wrong On American Eagle (AEO)
March 6th, 2008 by 
James Cullen
Sometimes you just mess up. Better to come out and say it - thanks Uncle John - so, I was wrong.
Same-store sales and new guidance is out from American Eagle (AEO), and it looks ugly. Comps were down again at 4%, something I more-or-less expected. What I wasn’t ready for was some bad guidance - Q1 EPS at 25-27 cents. The stock is down over 11% in early trading, bucking the retail group as a whole.
A couple thoughts:
-Q4 looked solid performance-wise.
-Company pointed to continued weakness in women’s clothes. As I mentioned a few days back, this is a bothersome and recurring theme - so what are they going to do to turn that around?
-Aeropostale (ARO) continues to shoot the lights out, could they be taking share with younger customers?
-The thesis that weak same-store sales numbers now will create an easy-to-beat situation is still certainly intact. I’m less than happy about that at the moment, though.
I really don’t understand why guidance was so weak. Part of me wants to say this is a situation where the worst-case scenario was put out there. A 30% decline in EPS year-over-year, and that’s after store base expansion? Something there doesn’t sit well. In my valuation modeling, I’ve run scenarios and estimate that the market is looking for gross margins to contract long-term by about 10 full percentage points down to the low 50s. While it was almost a foregone conclusion that margins were going to come down near-term, I don’t see such a scenario holding. All of my reads say that this company is immensely popular and earns huge returns on capital, so I still believe this is a near-term blip.
So what to do? I still own AEO and anticipate I will continue to do so for some time. I can now see that this wasn’t the once-a-year circumstance where I catch the local bottom in a stock, something I was hoping might be the case up until an hour ago.
As for other retailers, Wal-Mart (WMT) again topped expectations with a pretty good showing and is moving up about 1%. Abercrombie & Fitch (ANF) saw negative comps like American Eagle, and they are down about 3% to start the day.
I’ll reiterate retail to outperform. An ETF is RTH.
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Disclosure: I own AEO.
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March 7th, 2008 at 10:47 am
I think if you’re looking to play an economic recovery, a better place is a transport/logistics stock like HUBG, because these stocks recover earlier in the cycle.
Another thing to keep in mind for anyone who hasn’t previously traded a bear market is that bear markets exist to make small investors go broke so they don’t have the money to buy when things get really cheap. Always respect the bear by keeping in mind that by buying stocks you’re going against the trend.
March 7th, 2008 at 6:45 pm
Rob,
As usual, good advice. I still have enough cash to add a few blocks to my existing holdings, or to create two-three new positions. I do realize buying is counter to the trend, which is why I’m trying to stagger buys every month or two.
HUBG sounds a bit like PACR, a company I’m fairly familiar with. I’ll have to look into those more. Any other areas you like on the early-cycle basis?