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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

American Eagle

April 16th 2010 American Eagle
NYSE Symbol: AEO
Industry: Retail
Price as of 4/16: $17.83

Goldilocks is back. Everything was working until Friday. A major headline like the SEC charging Goldman Sachs with fraud gave short term investors a perfect opportunity to take profits and long term investors an opportunity to get in. This is a good time of the year to be bullish particularly with the retailers. Last year about this time we featured retailers Lowes and Home Depot anticipating a pick up in housing sales and the economy. Well, the economy did pick up helping Lowes and Home Depot's stocks rally exactly 44%. This week we'll feature second consecutive retailer. This featured stock of the week is American Eagle. The company offers denim wear, sweaters, graphic t-shirts, fleece, outerwear, and accessories targeting 15 to 25 year old girls and guys under the American Eagle brand name. They also provide clothing and accessories for kids through the brand name 77kids and dormwear, intimates, and personal care products for girls under the brand name, aerie. Thanks to an improvement in the economy, retail sales have perked up. American Eagle reported same store sales growth last week of 15% verse 10.8% consensus. The stock has performed well, but remains cheap and attractive for long term investors.
Back in March, American Eagle reported in-line earnings and in-line revenue. Guidance for the first quarter was also in-line. Earnings came in at 33 cents, excluding non-recurring items, in-line with the First Call consensus of 33 cents. Revenue rose 7.3% to $972 million. Fourth quarter comparable store sales increased 5% vs the +2.7% consensus, compared to a 16% decline last year. Gross profit for the fourth quarter were $388.2 million, or 39.9% as a rate to sales, compared to $311.6 million, or 34.4% as a rate to sales last year. The merchandise margin increased by 600 basis points, primarily due to lower markdowns. As a rate to sales, buying, occupancy and warehousing costs increased by 50 basis points. Looking forward, American Eagle said they will build upon their progress and momentum that began during the second half of 2009. Their goal is to achieve on-going margin improvement each quarter, returning to a minimum of mid-teen operating margins by 2011 thanks to top line sales growth, on-going margin recovery, and focusing on new concepts which have demonstrated the highest potential. American Eagle ended the year in strong financial position with total cash and investments of $896 million with only $30 million in long term debt.
Even though the stock has performed well, American Eagle still looks attractive. Currently the stock trades for 14.8 times earnings, 12.8 times next years earnings, 1.2 times sales, and 2.3 times book of $7.63 a share. In recent weeks FBR Capital reiterated an outperform on American Eagle. MKM Partners raised their target to $24 a share thanks to accelerating recovery in women's apparels and a leveraging in the recovery of their core business, while ensuring its ancillary opportunities like aerie, 77kids and the international business.