The Zacks Analyst Blog Highlights: American Eagle Outfitters, Abercrombie & Fitch, Gap, Big Lots and Target

CHICAGO, Aug. 24, 2012 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include American Eagle Outfitters Inc. (NYSE:AEO), Abercrombie & Fitch Co. (NYSE:ANF), Gap Inc. (NYSE:GPS), Big Lots Inc. (NYSE:BIG) and Target Corporation (NYSE:TGT).

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Here are highlights from Thursday's Analyst Blog:

AEO's Profits Jump, Guides Higher

American Eagle Outfitters Inc.'s (NYSE:AEO) adjusted earnings of 21 cents per share for the second quarter of fiscal 2012 climbed nearly 62% from the prior-year quarter's adjusted earnings of 13 cents. The year-over-year growth in earnings were driven by a double-digit growth in top line, coupled with lower input and operating expenses. Moreover, quarterly adjusted earnings were in line with the Zacks Consensus Estimate.

Adjusted figures do not include income generated from 77Kids business, since the company announced its plan to exit from children's business in May 2012. On a reported basis, including loss from discontinued business, the company earned 9 cents per share compared with 10 cents in the year-ago period.

Quarter in detail

During the quarter, American Eagle's adjusted net sales went up 11% year over year to $739.7 million, while beating the Zacks Consensus Estimate of $738 million. Growth in revenue was driven by a 9% increase in comparable store sales compared with a rise of 1% registered in the year-ago quarter.

The company's AE Brand, aerie and AEO Direct segments reported a growth of 7%, 13% and 28%, respectively, in comparable store sales.

Adjusted gross profit increased 17% to $276.6 million, while gross margin improved 210 basis points (bps) to 37.4%. The year-over-year increase in gross profit and margin was primarily driven by strong top-line performance along with lower cost of goods sold and a benefit of 90 bps rising from leveraged buying, occupancy and warehousing expenses.

Adjusted selling, general and administrative (SG&A) expense increased 9.1% to $178 million. However, as a percentage of sales, it improved 40 bps to 24% compared with 24.4% in the prior-year quarter. Adjusted figure excludes the $4 million expense incurred during the quarter towards restructuring purpose.

Consequently, adjusted operating income surged 76% to $67 million. Moreover, adjusted operating margin expanded 340 bps to 9.1%, primarily due to increased sales, lower input costs and leveraged SG&A expenses.

Financial Position

American Eagle ended the quarter with cash and short term investments of $702 million compared with $514 million in the year-ago period. During the first six months of fiscal 2012, the company generated $47.7 million cash from operating activities while it deployed $48.2 million toward capital expenditure.

The company's total inventory was $462 million at the end of second quarter compared with $457 million in the prior-year period. Cost per square foot was up 3% from the previous-year quarter.

Guidance

Looking ahead into fiscal 2012, the company raised its earnings guidance range to $1.33 - $1.36 per share from $1.16 - $1.22 forecasted earlier. The improved guidance range is based on the company's expectation of mid-single-digit and low-sing-digit growth in comparable store sales for third and fourth quarters of fiscal 2012. Moreover, the company still anticipates incurring a capital expenditure of $100 million in fiscal 2012.

For the third quarter of fiscal 2012, American Eagle expects to earn in the range of 37 - 38 cents per share compared with 30 cents in the prior-year period. In addition, the company is anticipating a decline in the range of mid-single-digit in inventory per square foot.

Our Recommendation

American Eagle now plans to focus more on merchandise assortments, adding more compelling brands, managing inventory level much diligently and augmenting e-commerce business. Further, in order to emphasize more on the core business while generating the best possible return for shareholders, the company has decided to exit its children's brand, 77Kids.

We remain impressed with the company's continued momentum in denim along with improved merchandise assortments in the women's business segment, which will likely augment its top-line performance as well as enhance the gross margin.

Moreover, we believe that American Eagle's cost-saving initiatives and long-term growth strategy will not only provide financial flexibility, but will also help to drive value proposition. In an effort to boost its bottom line, the company is relentlessly focusing on initiatives to cut down costs through supply chain efficiencies and updated product allocation system.

American Eagle, which competes with Abercrombie & Fitch Co. (NYSE:ANF) and Gap Inc. (NYSE:GPS), carries a Zacks #2 Rank, translating into short-term Buy rating for the next 1-3 months. Moreover, we maintain our long-term 'Outperform' recommendation on the stock.

Big Lots Misses, Lowers Outlook

Big Lots Inc. (NYSE:BIG) reported second-quarter 2012 earnings of 36 cents a share that missed the Zacks Consensus Estimate of 42 cents and plunged 28% from 50 cents earned in the year-ago quarter. Excluding the Canadian operations, earnings came in at 42 cents.

Quarter Details

Total revenue came in at $1,218 million, up 4.4% from the prior-year period. However, the reported revenue also missed the Zacks Consensus Estimate of $1,240 million.

Net sales for U.S. operations inched up 1.7% year over year to $1,183 million during the quarter. However, comparable store sales for the U.S. stores decreased 1.9%.

During the quarter under review, Canadian operations net sales came in at $35 million. Big Lots commenced its Canadian operations with 89 stores and 1000 committed associates, after the company completed the acquisition of Liquidation World Inc.

The company has been exploring numerous options for over two years in order to foray into the Canadian market. Big Lots expects the acquisition to be accretive to its top line in the coming years, while generating long-term growth for the company.

Gross profit for the quarter increased 3.8% year over year to $477.8 million, whereas gross margin declined 30 basis points to 39.2%. Operating profit marked a significant decline of 34.2% year over year to $39.3 million, whereas operating margin decreased 190 basis points to 3.2%, reflecting a rise in SG&A expenses as a percentage of sales.

Guidance Lowered

Sluggish results forced management to lower its guidance for the second time during the current fiscal. The company now expects earnings in the range of $2.80 to $2.95 a share on a consolidated basis for fiscal 2012, down from its prior guidance range of $3.25 to 3.40.

For U.S. operations, adjusted earnings are forecasted to be in the range of $3.05 to $3.15 a share, down from its earlier guidance range of $3.50 to $3.60.

For fiscal 2012, the company expects U.S. comparable store sales to decline in the low single digit range, while total U.S. sales are expected to ascend by 3% to 4%. The company earlier forecasted comparable store sales to remain flat or increase by 1%, while total U.S. sales were expected to augment by 5.5% to 6.5%.

Moreover, for fiscal 2012, Canadian sales are forecasted to be in the range of $152 to $158 million with operating loss of $13 to $15 million.

Share Buybacks

Big Lots is returning much of its free cash to shareholders via share repurchases. Besides, it authorized a $200 million share repurchase program in May 2012. During the quarter under review, Big Lots spent $149 million to repurchase 4 million shares. Year-to-date, the company repurchased shares worth $254 million and has $45 million remaining under its current share repurchase program.

Other Financial Details

Based in Columbus, Ohio, Big Lots ended the quarter with cash and cash equivalents of $61.7 million and shareholders' equity of $690 million. The company, at the end of the quarter, had $242.8 in its long-term obligations under bank credit facility.

At the end of the quarter, net cash provided by operating activities was $88.7 million. Management projects cash flow of $125 million for fiscal 2012.

Big Lots, which operates as a broad-line closeout retailer in the United States, offers food, health, beauty, plastic, paper, chemical and pet products as well as home decorative products, besides other product lines.

Currently, we have a long-term 'Underperform' rating on the stock. However, Big Lots, which competes with retailers like Target Corporation (NYSE:TGT), holds a Zacks #3 Rank, translating into a short-term 'Hold' rating.

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