American Eagle Outfitters Likely To Trade Sideways Due To Mixed Q4

American Eagle Outfitters’ (NYSE: AEO), which sells men’s and women’s apparel and accessories under the American Eagle, Tailgate, Todd Snyder, and Aerie brands is scheduled to report its fiscal fourth-quarter results on Wednesday, March 3. In the upcoming Q4, we expect the company’s stock to likely trade sideways with earnings beating consensus but revenues falling short. The company expects fourth-quarter revenue to decrease in the low single-digits due to store revenue declines from weak mall traffic, store closures, and reduced hours related to the pandemic. 

Our forecast indicates that American Eagle Outfitters’ valuation is under $26 a share, which is marginally lower than the current market price of over $26. Look at our interactive dashboard analysis of American Eagle Outfitters Pre-Earnings: What To Expect in Q4? for more details.

1) Revenues expected to be slightly below consensus estimates

Trefis estimates AEO’s FQ4 2021 (year ended February 1) revenues to be $1.27 Bil, slightly below the consensus estimate of $1.28 Bil. In the first nine months of FY2021, the company’s revenues declined 18% year-over-year (y-o-y). American Eagle is the stable part of the business whereas Aerie has been a high-growth brand so far, which has been crushing the competition. In the upcoming quarter, the retailer expects its namesake American Eagle stores’ sales to decline in the low double-digit percentage range, as a result of higher store penetration. But the highlight of the quarter will be Aerie sales, which are expected to grow in the high-20% range, and its e-commerce channels, which should show double-digit percentage growth across both of the company’s nameplates.

We are expecting AEO’s revenues to decline 13% y-o-y for full-year fiscal 2021. Looking further ahead, American Eagle Outfitters is targeting $5.5 Bil in total revenue and $2 Bil in Aerie revenue for the fiscal year 2023. That said, Aerie’s contribution is expected to grow from around 18% of the business (in FY 2020) to more than 36% by 2023. On the other hand, the American Eagle brand, however, is expected to see its sales remain more or less flat to fiscal 2019, at around $3.5 billion, though with improved profitability. The company, which currently runs around 880 physical retail locations, is planning to permanently close between 200 and 250 stores in the next three years, mostly in malls.

(2) EPS likely to beat consensus estimates

AEO’s FQ4 2021 earnings per share (EPS) is expected to be $0.39 per Trefis analysis, marginally beating the consensus estimate of $0.36. In Q4, American Eagle expects Q4 adjusted operating income to be around $95 million, up from just $77 million in the prior-year quarter, driven by lower advertising costs and higher selling prices. While we expect the company earnings per share to come at a loss in fiscal 2020 (due to a weak fiscal first half), the reorganization of its brick-and-mortar network and ambitious growth strategy for the Aerie brand should help the company optimize its profitability going forward.

(3) Stock price estimate higher than the current market price

Going by our AEO’s valuation, with a revenue per share (RPS) estimate of around $21.98 and a P/S multiple of 1.2x in fiscal 2021, this translates into a price of under $26, which is 2% lower than the current market price of over $26.

While AEO stock could trade sideways post Q4 release, 2020 has created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for TJX vs Abiomed. 

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