American Eagle Outfitters Stock To Likely Trade Higher Post Q1

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 first-quarter results on Wednesday, May 24. AEO’s gross margins sharply declined to 35% in FY’22 from 39.8% in FY’21, driven by inflationary pressures impacting the industry. There is a link between these problems and inflation, which has curbed consumer spending and pushed up freight costs for the company, as well as supply chain challenges. Although the Aerie brand has grown despite the macroeconomic environment, its namesake brand has struggled with tough comparisons to its post-pandemic recovery. However, that pressure seems to have eased a little in the fourth quarter as its inventories rose at a slower pace and its gross margin expanded 150 basis points year-over-year (y-o-y). It was encouraging to see AEO’s gross margin hold steady in Q4 since it is still heavily reliant on markdowns to boost sales and reduce inventories. We expect the company stock to be pressured in the short term but the company’s social media activities, e-commerce growth, lack of debt, and focus on Aerie will likely give the business greater flexibility.

For the year 2023, AEO expects flat to low single-digit percentage revenue growth from 2022. Given the company notched $5.01 billion in revenue in 2022, even mild growth suggests an upside to the $5.1 billion consensus. It also forecasts its 2023 operating income to land in the $270 million to $310 million range, better than the $269 million in 2022. That said, lower cotton prices and freight costs compared to the beginning of 2022 should likely help AEO stabilize expenses in FY 2023. Overall, AEO’s success hinges on revitalizing its namesake brand with fresh products and aggressively expanding Aerie’s banner.

Our forecast indicates that American Eagle Outfitters’ valuation is around $15 a share, which is 20% higher than the current market price. Look at our interactive dashboard analysis of American Eagle Outfitters Earnings Preview: What To Expect in Q1? for more details.

1) Revenues expected to be slightly above consensus estimates

Trefis estimates AEO’s FQ1 2023 revenues to be $1.09 Bil, slightly above the consensus estimate. In Q4, the apparel retailer’s revenue declined 1% y-o-y to $1.5 billion. Aerie brand rose 8% to $464 million and the American Eagle core brand fell a similar 8% y-o-y in Q4. Additionally, inventory levels were trimmed to $585 million, down from $798 million at the close of Q3 and up only 6% from Q4 2021. For the full year 2023, we expect American Eagle Outfitters’ revenues to grow 2.3% y-o-y to $5.1 billion.

(2) EPS likely to beat consensus estimates comfortably

AEO’s FQ1 2023 earnings per share (EPS) is expected to be 18 cents per Trefis analysis, comfortably beating the consensus estimate. AEO’s adjusted fourth-quarter earnings per share came in at 37 cents, up 6% y-o-y.

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

Going by our American Eagle Outfitters’ Valuation, with an EPS estimate of around $1.14 and a P/E multiple of 13.4x in fiscal 2023, this translates into a price of around $15, which is almost 20% higher than the current market price.