American Eagle Outfitters (NYSE:AEO) announced its third-quarter earnings November 28. They were a home run, sending its stock up 8% in early morning trading. American Eagle's been in a bit of a funk in recent years, so the continuing earnings improvement is definitely welcome by shareholders. Its stock is up 39% year to date as of November 27; it hasn't had a double-digit total return since 2009. Can it keep up the pace? I believe it can. Here's why.

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Same-Store Sales
Its third-quarter same-store sales growth was 10%, 300 basis points higher year over year. Year to date same-store sales growth was 12%, significantly better than the 1% achieved for the first nine months of 2011. In Q4 it expects same-store sales growth around 5%, which including American Eagle direct, is much lower than the 11% recorded in last year's final quarter. Given Thanksgiving/Black Friday delivered record results, combined with online same-store sales growth of 26% year to date, I have to think American Eagle management is being extremely conservative in its guidance. I'd expect the number to be closer to double digits, but time will tell.

Thanksgiving Weekend
Analysts at Janney Capital Markets replaced American Eagle November 26 with Abercrombie & Fitch (NYSE:ANF) on its "Best Ideas" list. Interestingly, Janney still rates American Eagle a "buy" with a $26 price target. If December is as strong as the end of November, its stock should easily hit that price target by early in the New Year. American Eagle is one of the few specialty stores with lineups over the holiday weekend. Its 40% off sale through November 25 for in-store purchases, as well as those online, seemed to encourage customers to shop more in its stores.

RBC Capital Markets analyst Howard Toobin believes its fashion-forward apparel items helped bring in the teen fashionistas while not scaring away the more traditional shopper. It also helped that it priced its product below Abercrombie and above Aeropostale (NYSE:ARO). Most importantly, it's done all of this while reducing its inventories 11% on a cost-per-foot basis. Anytime you see rising comps and lower inventories, you know the buyers are doing something right, and that usually leads to higher corporate margins.

Robert Hanson has been on the job for 10 months; it appears that he has the business firing on all cylinders. Brought in from Levi's after 23 years with the San Francisco jean maker, Hanson replaced retiring CEO Jim O'Donnell, who was chief executive for almost a decade. Although I have nothing against older CEOs, O'Donnell is 30 years Hanson's senior. While it's unlikely that Hanson would stick around for 30 years, certainly the board hired someone who isn't ready to retire anytime soon. Hopefully it will give Hanson time to groom someone younger than himself to step up when he's ready to move on. As is often the case when a new CEO arrives, Hanson brought in Mary Boland as chief financial officer. Boland spent the past six years at Levi's, most recently as vice president of finance for global business. Given American Eagle wasn't performing up to its potential, the insertion of new blood appears to have done the trick. Now it's simply a matter of continuing to execute properly.

The Bottom Line
American Eagle raised its 2012 guidance for earnings per share for continuing operations by 5 cents to $1.38 on the low end and $1.40 at the high end. Its diluted earnings per share for fiscal 2011 was 77 cents. Its loss from discontinued operations for the first three quarters of 2012 was 16 cents. It will likely increase its year-over-year earnings per share by more than 40%. The $1.50 special dividend it paid October 10 took the wind out of its sales as investors moved on. While concerns such as rising cotton prices loom, American Eagle seems to have found its sweet spot in retail. Historically, American Eagle has a tough time staying above $20, so be prepared to add to your position if it drops below that number for more than a few trading days at a time. Otherwise, American Eagle is ready to soar.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.

Tickers in this Article: AEO, ANF, ARO

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