The recent good results for AEO showing higher sales and margins were also indicative of the overall strong results recently. The question is, are its Q4 earnings strong enough to boost AEO to $18 a share?
The revenue increase of 3% in the quarter was not brilliant, and according to many, it is not going up anytime soon. Nevertheless, AEO’s merchandising strategy and pricing are solid and the company continues to increase its volume of sales.
Variable costs increased in Q3 and Q4 which can significantly affect margin growth. However, AEO’s increases in delivery and incentive costs are mostly caused by its higher revenues. Increasing incentive costs usually means that a business is exceeding its objectives and is usually accompanied by overall growth. With the current high demand for AEO products, higher margins should also follow. While SG&A costs are also increasing, their level is still only 21.1 percent of sales, meaning that there is still room for a strong operating profit.
Profit and Growth
The operating profit of 9.1% in 2015 was higher than 2014, and AEO’s operating margins improved in the last six months of 2015 indicating the possibility for expansion. According to the guidance for Q1 of 2016, AEO management is confident and feels that the performance in 2015 was well earned.
Q1 earnings per share are predicted to be a few cents higher than last year and margins are expected to remain stable or grow slightly. Comp increases could be a huge factor in maintaining AEO’s solid Q1 guidance, since significant revenue growth is not expected. However, operating margin expansion could prove to be the way to further profit growth. Since SG&A is just 21% of revenue and comps continue to rise, there is space for SG&A to decrease further.
By the end of the year, AEO has room to grow further with the potential for higher operating margins. The talented AEO management will take its well deserved credit for the good results, and with this year looking strong, achieving $20 a share seems more and more realistic at the moment.