Young adult apparel retailer American Eagle Outfitters (NYSE:AEO) reported Q3 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 4.9% year on year to $1.30 billion. Turning to EPS, American Eagle made a GAAP profit of $0.49 per share, improving from its profit of $0.42 per share in the same quarter last year.

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“I am pleased with our third quarter results which demonstrated the strength of our brands and reflected continued progress on our growth and profit improvement initiatives. Our strategic priorities, underpinned by our customer-first focus and commitment to operational excellence, are propelling us forward,” commented Jay Schottenstein, AEO’s Executive Chairman of the Board of Directors and Chief Executive Officer.

With a heavy focus on denim, American Eagle Outfitters (NYSE:AEO) is a specialty retailer offering an assortment of apparel and accessories to young adults.

Apparel Retailer

Apparel sales are not driven so much by personal needs but by seasons, trends, and innovation, and over the last few decades, the category has shifted meaningfully online. Retailers that once only had brick-and-mortar stores are responding with omnichannel presences. The online shopping experience continues to improve and retail foot traffic in places like shopping malls continues to stall, so the evolution of clothing sellers marches on.

Sales Growth

American Eagle is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the other hand, it has an edge over smaller competitors with fewer resources and can still flex high growth rates because it's growing off a smaller base than its larger counterparts.

As you can see below, the company's annualized revenue growth rate of 4.6% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre , but to its credit, it opened new stores and expanded its reach.

This quarter, American Eagle reported decent year-on-year revenue growth of 4.9%, and its $1.30 billion in revenue topped Wall Street's estimates by 1.6%. Looking ahead, analysts expect sales to grow 2.8% over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Number of Stores

The number of stores a retailer operates is a major determinant of how much it can sell, and its growth is a critical driver of how quickly company-level sales can grow.

When a retailer like American Eagle is opening new stores, it usually means it's investing for growth because demand is greater than supply. American Eagle's store count increased by 20 locations, or 1.7%, over the last 12 months to 1,199 total retail locations in the most recently reported quarter.

Taking a step back, the company has generally opened new stores over the last eight quarters, averaging 4.1% annual growth in its physical footprint. This is decent store growth and in line with other retailers. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.

Key Takeaways from American Eagle's Q3 Results

With a market capitalization of $3.9 billion and more than $240.9 million in cash on hand, American Eagle can continue prioritizing growth.

It was good to see American Eagle beat analysts' revenue estimates this quarter, driven by better-than-expected same-store store sales growth at both American Eagle and Aerie. That stood out as a positive in these results. On the other hand, its gross margin and operating income guidance for the full year, despite being raised, missed analysts' expectations. Overall, the results could have been better. The company is down 12.8% and currently trades at $17.22 per share.

So should you invest in American Eagle right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.