Can the American Eagle continue to fly higher?

clothing retail store American Eagle Outfitters (NYSE:AEO) has had a pretty good story over the past few years. Ahead of Thursday’s fourth-quarter earnings report, the retailer’s stock price was up 11% year-to-date at $23.45 per share, setting it for a 55% return in 2023. In fact, American Eagle’s stock price has rebounded. The stock is back after a massive 43% drop in 2022 that took it below $10 per share.

On Thursday morning, American Eagle rose about 13% to more than $26 per share in early trading after reporting strong fiscal fourth-quarter results and sharing a three-year plan to grow profits.

4th quarter sales record

American Eagle’s numbers were impressive for its fiscal fourth quarter, which ended Feb. 3. The retailer reported record sales of $1.7 billion. This represents a 12% year-over-year increase, driven by a 10% increase in store revenue and a 19% increase in online revenue.

The American Eagle brand reported $1.1 billion in sales, up 11% overall, with comparable or same-store sales up 6% compared to the same quarter a year ago. Aerie women’s brands generated $538 million in total sales, up 16% overall and up 13% on comparable sales. These numbers, as well as American Eagle’s earnings results, beat analysts’ estimates.

But the retailer earned just $6.3 million, or 3 cents per share, down from $55 million, or 28 cents per share, in the fourth quarter of 2022. On an adjusted basis, American Eagle had net income of $121.4 million, or 61 cents per share. That beat expectations at $72.3 million, or 37 cents, per share.

The lower GAAP net income of $6.3 million included $131 million in impairment and restructuring charges, most of which came from the restructuring of American Eagle’s Quiet Platforms internal transportation and logistics brand. The restructuring was undertaken to improve alignment with American Eagle’s regionalized fulfillment center network strategy. These measures are expected to result in annual cost savings of $20 million starting this year.

“We enter 2024 in a strong position and with momentum, with an exciting lineup of innovations and customer engagement initiatives,” said Jay Schottenstein, Chairman of the Board and CEO of American Eagle Outfitters. “Our balance sheet is strong, and we are seeing early evidence of a new long-term strategy to deliver industry-leading revenue growth and shareholder returns.”

3-year profit increase plan

American Eagle also laid out its expectations for the next three years, as well as the first quarter or fiscal year 2024.

For the first quarter, the company expects revenue to grow in the mid-single digits and operating profit to range from $65 million to $70 million. For the full fiscal year, American Eagle expects sales to increase 2% to 4% and operating profit to be between $445 million and $465 million.

If a company can execute, the bigger picture looks even better. The Powering Profitable Growth plan calls for annual operating income growth in the mid-teens and annual sales growth of 3% to 5% over the next three years. This will likely increase American Eagle’s revenue from $5.26 billion at the end of 2023 to $6 billion in 2026.

The goal is to increase operating profit margin from the current 7% to 10% by the end of 2026. Our plan to achieve this includes three pillars: brand expansion; implementing financial discipline; Optimize your operations.

“Expanding American Eagle and Aerie’s presence in the casual apparel space is central to our strategic plan,” Schottenstein explained. “We see tremendous growth opportunities as we strengthen our core business and expand into adjacent categories at American Eagle, fueling the #AerieReal movement in underpenetrated markets, and accelerating OFFLINE’s significant potential in activewear. These efforts will be supported by our focus on growing profits.”

Can the American Eagle still fly?

This seems like a very realistic plan and achievable goal for American Eagle. That’s because we’ve already restructured in the fourth quarter and taken key steps to become more efficient in the future.

The company’s price-to-earnings ratio is 21, which is slightly distorted after the fourth quarter, but the forward PER is reasonable at 13 and the price-to-earnings ratio is cheap at 0.91.

Analysts have generally been very lukewarm on the stock, with no price target increases following earnings, at least initially. We may see some improvement at some point, but we’ll likely wait for American Eagle’s continued run.

The company’s stock price may have leveled off somewhat after today’s big rally, but its relatively cheap valuation might put it on your radar because its long-term prospects look good.