Will Q4 Results Help Extend The 14% Gain In American Eagle Stock Since Beginning of This Year?

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 Thursday, March 7. We expect the stock to likely trade lower with both revenues and earnings missing market expectations in the upcoming fourth quarter results. 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 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, it will be a noteworthy inflection point for the company if it sees another upturn in the American Eagle brand revenues in Q4 (after Q3). 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.

AEO stock has shown strong gains of 25% from levels of $20 in early January 2021 to around $24 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. However, the increase in AEO stock has been far from consistent. Returns for the stock were 26% in 2021, -45% in 2022, and 52% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that AEO underperformed the S&P in 2021 and 2022. 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 TM, 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 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Our forecast indicates that American Eagle Outfitters’ valuation is around $20 per  share, which is 17% lower than the current market price. Look at our interactive dashboard analysis of American Eagle Outfitters Earnings Preview: What To Expect in Q4? for more details.

1) Revenues expected to be slightly below consensus estimates

Trefis estimates AEO’s FQ4 2023 revenues to be $1.6 Bil, slightly below the consensus estimate. In Q3, the apparel retailer’s revenue grew 5% y-o-y to $1.3 billion. 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%. 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.

For full-year FY 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.

(2) EPS likely to miss consensus estimates 

AEO’s FQ4 2023 earnings per share (EPS) is expected to be 46 cents per Trefis analysis, missing the consensus estimate. In Q3, AEO’s adjusted earnings came in at $0.49 per share, up 16.7% y-o-y.

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

Going by our American Eagle Outfitters’ Valuation, with an EPS estimate of around $1.34 and a P/E multiple of 14.6x in fiscal 2023, this translates into a price of around $20, which is almost 17% lower than the current market price.