American Eagle Outfitters (AEO) Will Feel Top-Line Pressure

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Janney Capital Markets analysts Adrienne Tennant and Gabriella Carbone rate American Eagle Outfitters (NYSE:AEO) as a Buy, as the retailer announced the departure of CEO Robert Hanson, effective immediately.

On January 22, 2014, after the market closed, American Eagle Outfitters (NYSE:AEO) announced the departure of CEO Robert Hanson, effective immediately. Jay L. Schottenstein, Executive Chairman of the Board, has been appointed as the company’s Interim Chief Executive Officer. Additionally, Roger S. Markfield has agreed to postpone his retirement and will continue in his current role as Vice Chairman and Executive Creative Director.

American Eagle Outfitters (AEO) Ex-CEO appraisal

We commend Robert Hanson for managing the business through a tough macro environment and for his focus and expertise on international/global growth for the AE brand. We further believe the pillars of the longer-term strategy, namely 1) global growth, 2) higher-margin DTC and Outlet expansion, 3) speed to market, and 4) inventory and SG&A control, all remain intact. In our opinion, we believe the Board is seeking greater execution in the company’s progress. We would expect a one-time severance charge in 4Q13. The Board will initiate a search for a permanent Chief Executive Officer.

American Eagle Outfitters 4Q13 EPS guidance

In addition, American Eagle Outfitters (NYSE:AEO) reiterated 4Q13 EPS guidance that was updated on January 9, 2014. The company expects 4Q13 non-GAAP EPS to be approximately $0.26 – at the low-end of prior range of $0.26 to $0.30 (the Street is currently at $0.26). The guidance excludes potential asset impairment and restructuring charges. We expect 1Q14 EPS numbers to come down closer to our estimate of $0.07 (the Street is currently at $0.14), considering pressures from carryover inventory and the continuation of an expected highly promotional mall environment. We believe the top line will continue to be pressured throughout the remainder of the year and into early next year as the macro-backdrop continues to weigh on consumer spending, and retailers are forced to resort to promotions as a way to move through inventories; however, we believe the back half of 2H14 presents the company with opportunities for margin recapture should inventory become more in line with sales.

We believe, after the sector wide excess dollar inventory of 2H13, we could see a reversal of this trend for 2H14 and we are looking for ways to play this reversal with a name that has come under margin pressure in 2013, yet still has strong brand equity and limited downside due to valuation support. We believe the remainder of FY13 and first half of 2014 will continue to see gross margin (and merchandise margin) pressure; however, we look for sequential improvement in both comp and margin pressure performance in 2014, particularly in 2H. Given that we believe the sector needs an EPS haircut for comp and EPS for 1Q14 and our belief this is a 2H14 story, we would recommend patience in continuing to accumulate positions and believe it’s advisable to wait until after 1Q14 and FY14 guidance is lowered below the current consensus expectations.

American Eagle Outfitters valuation

We are maintaining our FY13, FY14, and FY15 EPS estimates of $0.73 (versus consensus of $0.73), $0.84 (versus consensus of $0.90), and $1.04 (versus consensus of $1.10), respectively for American Eagle Outfitters (NYSE:AEO). We remain conservative given the tough and highly promotional environment. Our 12-month fair value remains $19, which is based on 23.0x (23% EPS growth rate) our FY14 EPS estimate of $0.84.

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