American Eagle Stock Up 32% Over Last Twelve Months, What’s Next?

After a 32% increase in the last twelve months (LTM), at the current price of around $20 per share, we believe 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 fairly priced in the near term with upside potential in the longer term. AEO stock has increased from around $15 to $20 over the LTM, outperforming the broader indices, with the S&P growing 22% over the same period. The retailer’s gross margin has increased to 39.4% in the first nine months of 2023 compared to 35% in FY’22. This margin expansion was driven by strong demand, lower product, and freight costs, and continued benefits from the lower markdowns and leverage on distribution, rent, and delivery. The company’s Aerie brand has shown impressive growth despite the macroeconomic environment. While its namesake brand has struggled with tough comparisons to its post-pandemic recovery, its revenues grew 2% year-over-year (y-o-y) in the recent third quarter. American Eagle brand’s growth figure was still lower than what the company achieved in Q3 2019, but it had many more stores (940 stores) at that point than it does today (873). That said, a y-o-y upturn in the American Eagle brand could be a noteworthy inflection point for the company. We expect the company’s social media activities, e-commerce growth, lack of debt, and a larger focus on Aerie to likely give the business greater flexibility in the long run.

AEO stock has seen little change, moving slightly from levels of $20 in early January 2021 to around $20 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. Overall, the performance of AEO stock with respect to the index has been quite volatile. Returns for the stock were 26% in 2021, -45% in 2022, 52% in 2023, and -5% in 2024 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, 24% in 2023, and -1% in 2024 (YTD) – indicating that AEO underperformed the S&P in 2021, 2022 and 2024. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AEO face a similar situation as it did in 2021, 2022 and 2024 and underperform the S&P over the next 12 months – or will it see a strong jump?

In Q3, the apparel retailer’s revenue grew 5% y-o-y to $1.3 billion and adjusted earnings came in at $0.49 per share, up 16.7% y-o-y. Aerie brand rose 12% y-o-y (with same-store sales up the same amount) to $393 million and the American Eagle core brand grew 2% y-o-y (same growth here as well for comp store sales) to $857 million in Q3. In addition, AEO’s store revenue was 3% higher, and digital revenue was up 10%. For fiscal 2023, the retailer’s management expects revenue to be up mid-single-digits y-o-y, compared to prior guidance for revenue up low single-digits. Operating income is expected to be between $340 to $350 million, at the high end of prior guidance of $325 to $350 million.

We forecast AEO’s Revenues to be $5.2 billion for the fiscal year 2023, up 4.4% y-o-y. Looking at the bottom line, we now forecast the earnings per share to come in at $1.34. Given the changes to our revenues and EPS forecast, we have revised our AEO’s Valuation to $20 per share, based on a $1.34 expected EPS and a 14.6x P/E multiple for the fiscal year 2023 – almost 6% lower than the current market price.

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