Why American Eagle Outfitters Could Be Hoping for a Breakout

American Eagle Outfitters Inc. (NYSE: AEO) is trading up well enough after its first-quarter earnings report that some investors are likely to be wondering if the stock is ready for that big giant breakout again. Its chart has a lot of resistance right now, despite better than a 4% gain after the report. Still, at $16.50 there is a lot of room to run before the $20 to $23 highs come into play from back in 2012 and 2013.

A fresh report from Janney Capital Markets was reiterating a Buy rating, but the firm raised its fair value target to $20 from $19. The firm said that American Eagle’s products are shining, and it even suggests that further upside in earnings per share could be coming as the company regains some market share.

Wednesday’s note is after strong sales and earnings were up more than 7% on a comparable basis, versus an expectation of 5%. It was also shown to be driven by full price selling. Here are the simple reasons why Janney would chase shares of American Eagle Outfitters:

• Sustainable, full price driven comps
• Inventory and SG&A discipline
• Strong merchandise assortment
• Upside EPS revisions

The report said:

Consistent with our proprietary checks, lower markdowns, as well as expense control drive earnings. The company continues to make steady progress on merchandise improvements, and the reduced promotional activity, together with lower expenses from ongoing cost and operating efficiencies. The company achieved a 260 basis point improvement in the gross margin rate for 1Q15 primarily driven by reduced markdowns. The company expects margin improvement in 2Q15 driven by reduced markdowns and higher full price selling. In addition, the company expects SG&A leverage as management drives lower fixed SG&A expense dollars.

Inventory discipline is expected to keep providing margin support. The inventory was up by 1% when total revenue was up 8%. Janney further said that American Eagle Outfitters continues to focus on delivering a compelling merchandise assortment, growing its online sales and improving the profitability of stores.

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Janney now sees a period of “beat-and-raise” to continue through 2015. The firm raised earnings estimates for 2015 to $0.98 per share from $0.89. Even the 2016 estimate was raised to $1.08 from $0.99 per share.

American Eagle Outfitters shares were last seen up 4.8% at $16.50 on more than 13 million shares. That is about three times normal volume with two hours to go. AEO has a 52-week range of $10.12 to $18.12, and the consensus price target from analysts is $18.23.