Soaring sales at American Eagle Outfitters ( AEOS) are getting a second look from investors. The Warrendale, Pa., clothing retailer is known as the poor man's Abercrombie & Fitch ( ANF) for its cut-rate preppy clothes. The company's sales growth has continued to sparkle even as many rivals' sales growth has tanked. But reports from the Center for Financial Research and Analysis, a research outfit that focuses on accounting issues at public companies, question the quality of a recent same-store sales gain. Specifically, CFRA suggests a recent upside surprise stems in part from the omission of recently acquired Canadian stores from the headline number -- an omission the firm says could be giving investors an unrealistic picture of the company's growth. American Eagle denied those allegations in a separate story Tuesday. As a result, short-sellers are jumping into the stock in record numbers. Short interest jumped 33% last month to its highest level in almost a year, according to figures from Nasdaq. Shorts, who bet on a stock's decline, now account for about 9.2% of shares outstanding. "There's a growing concern that this doesn't make sense," says a hedge fund analyst, whose firm is short the stock, of American Eagle's sales numbers. American Eagle stock is down more than 40% from its peak last May. CFRA calls the omission of Canadian sales numbers from recent same-store sales numbers, which measure activity in shops open at least a year and which are closely watched by investors, "misleading." In January, CFRA notes, American Eagle reported a 6.2% same-store sales rise, but those figures didn't include sales from the company's Bluenotes/Thriftys stores. Critics, noting the Canadian chain was acquired by American Eagle in December 2000, say the numbers should have been included with January data. Moreover, the company's policy in the past has been to include new stores in same-store sales after 12 months, says the hedge fund analyst. To be sure, the same-store sales figures in the text of American Eagle press releases are clearly labeled as applying to only U.S. stores. And it's impossible to determine from publicly available documents exactly what January's same-store sales figures would have been had the Canadian numbers been included. But many analysts, including some who are bullish on the stock, acknowledge it wouldn't have been as big a jump. Indeed, January sales at Bluenotes/Thriftys declined about 36% from a year ago, although last year was a five-week period, while it was four weeks this year. Analysts had forecast a 1.5% gain. One analyst who follows the company says the Canadian numbers likely will be included in the first month of its coming fiscal year. "My guess is they'll start throwing them in in February," says Eliot Laurence, an analyst at Jefferies who rates American Eagle accumulate. His firm doesn't have a banking relationship with the company.
A second point of contention has been American Eagle's dealings with discounter Value City ( VCD). Jay Schottenstein, American Eagle's chairman and chief executive, is also the chairman of Value City and a large shareholder in both companies. American Eagle typically offloads markdown inventory to Value City; in the third quarter it sold almost $2 million of inventory to Value City. That amounts to almost three times the year-ago level, according to regulatory filings. American Eagle's "revenues and earnings may have benefited based on the related-party nature of certain transactions," says one CFRA report. While nothing is necessarily untoward about this arrangement -- apparel retailers often sell inventory to discounters such as Value City, TJ Maxx (run by TJX ( TJX) and Ross Stores ( ROST)) -- related-party transactions are being scrutinized by Wall Street after the Enron scandal. By the same token, the report concedes that "the company indicated all transactions are at arm's-length and that Value City must outbid other discount retailers to acquire the overstocked merchandise." Yet even American Eagle's defenders acknowledge the arrangement can raise suspicions, even if it is perfectly legitimate. "If it looks bad, it's probably something you should do less of for appearance's sake," says Jefferies' Laurence. And appearances matter a lot these days on Wall Street.