American Eagle (AEO) Rallies 53.5% In Six Months: Here's Why

American Eagle Outfitters, Inc. (NYSE:AEO) has been riding on solid omni-channel capabilities, robust brand strength, sturdy e-commerce business and healthy financial status. However, the company reported lower-than-expected results in the third quarter of fiscal 2017. Yet, the quarter was characterized by record sales, sequential improvement in margins and continued comparable store sales (comps) growth, marking the company’s 11th straight quarter of positive comps.

Shares of this specialty retailer of casual apparel, accessories and footwear were up 6.8% since the company reported its quarterly numbers on Dec 6. In the last six months, this Zacks Rank #2 (Buy) stock has surged 53.5%, substantially outperforming the industry’s gain of 12.8%. Additionally, the company’s Zacks Consensus Estimate witnessed an uptrend, reflecting analysts’ confidence in the stock. Also, the company has a long-term earnings growth rate of 8.7% with a VGM Score of A, which highlight its growth potentials.

Robust Outlook & Favorable Estimate Revisions

Management remains impressed with the quarterly performance, particularly sequential improvements in sales and profit margins. Though gross margin in the quarter fell 120 basis points (bps) year over year due to greater promotions and increased shipping costs, it witnessed sequential improvements from gross margin declines of 270 bps and 240 bps in the first and second quarters of fiscal 2017, respectively.

Moreover, the company expects these trends to continue in the fourth quarter. American Eagle anticipates a successful holiday season ahead and expects to close the year on a solid note. For the fiscal fourth quarter, comps are envisioned to increase in mid single-digits. This is likely to result in earnings per share of 42-44 cents compared with 39 cents earned in the prior-year quarter.

Consequently, the consensus estimates for the fourth quarter and fiscal 2017 have moved up by 5 cents and 3 cents, respectively, to 44 cents and $1.16 in the past 30 days.

Solid Comps Trend a Growth Driver

Notably, American Eagle boasts a solid comps growth trend, which improved 3% in the fiscal third quarter. Comps growth was backed by strong online sales at both the brands, which in turn were driven by efficient use of omni-channel capabilities to enhance customer experience.

Further, trends improved in the brick and mortar stores, where traffic and transactions improved and store traffic surpassed mall traffic for both brands. In fact, the aerie brand marked 14th straight quarter of positive comps.

Strategic Initiatives Bode Well

American Eagle remains focused on strengthening its product assortments by adding more compelling brands, managing inventory levels diligently and improving e-commerce business. Moreover, it remains committed toward enhancing store sales by rationalizing its brick and mortar store fleet that include closing underperforming stores and expanding the profitable ones.

Furthermore, the company is on track to convert more than 15 million current metrics and attract new customers through its revamped loyalty program, which provides a seamless overall experience.

In order to boost its bottom line, management is continuously undertaking initiatives to reduce costs through supply chain efficiencies and its updated product allocation system. We believe that these strategic initiatives will drive the company’s top line and overall profitability. Also, the company’s shareholder-friendly moves are noteworthy.

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Other favorably-ranked stocks in the same industry include Zumiez Inc. (NASDAQ:ZUMZ) , Urban Outfitters, Inc. (NASDAQ:URBN) and The Children's Place, Inc. (NASDAQ:PLCE) .

Zumiez, with a long-term earnings growth rate of 18% has delivered an average positive earnings surprise of 22.2% in the last four quarters. Also, the stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Urban Outfitters, a Zacks Rank #1 stock has a long-term earnings growth rate of 12%. Also, the company has come up with an average positive earnings surprise of 5.7% in the trailing four quarters.

Children's Place has pulled off an average positive earnings surprise of 14% in the last four quarters and carries a Zacks Rank #2. Also, it has a long-term earnings growth rate of 9%.

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