Rising 9% This Year, What Lies Ahead For American Eagle Stock Following Q1 Earnings?

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 29. We expect the stock to likely trade higher with both revenues and earnings beating market expectations in the upcoming first quarter results. AEO stock has increased 9% from around $21 to $23 since the beginning of this year, outperforming the broader indices, with the S&P growing 11% over the same period. In sharp contrast, AEO’s peer Abercrombie & Fitch’s stock (NYSE: ANF) has seen its stock rise 70% over the same period.

American Eagle’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 11% year-over-year (y-o-y) in the fourth quarter. American Eagle brand’s growth figure was still lower than what the company achieved in Q4 2019, but it had many more stores (940 stores) at that point than it does today (851). We expect the company’s social media activities, e-commerce growth, lack of debt, and focus on Aerie to likely give the business greater flexibility. Due to easier comparisons with the first half of last year and one less selling week in the fourth quarter, AEO expects revenue and profit growth to be skewed to the first half of this year.

AEO stock has shown strong gains of 25% from levels of $20 in early January 2021 to around $23 now, vs. an increase of about 40% 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 $26 per share, which is 12% 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 above consensus estimates

Trefis estimates AEO’s FQ1 2024 revenues to be $1.6 Bil, slightly below the consensus estimate. In Q4, the apparel retailer’s revenue grew 13% y-o-y to $1.7 billion. Aerie brand rose 16% y-o-y (with same-store sales up by 13%) to $538 million and the American Eagle core brand grew 11% y-o-y (6% for comp store sales) to $1.1 billion in Q4. In addition, AEO’s store revenue was 10% higher, and digital revenue was up 19%. The retailer’s gross margin increased to 37.3% in Q4 2023, up 340 basis points y-o-y. 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.

AEO unveiled its new Powering Profitable Growth. This plan is structured to deliver mid-to-high teens annual operating income expansion on 3% to 5% annual revenue growth over the next three years, and an approximate 10% operating margin. A few strategies mentioned were growing American Eagle and powering market leadership in denim. AEO will also look to fuel Aerie’s expansion and accelerate the activewear opportunity.

(2) EPS likely to beat consensus estimates 

AEO’s FQ1 2024 earnings per share (EPS) is expected to be 31 cents per Trefis analysis, beating the consensus estimate. In Q4, AEO’s adjusted earnings came in at $0.61 per share, up 65% 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 $1.75 and a P/E multiple of 14.7x in fiscal 2024, this translates into a price of around $26, which is almost 12% higher than the current market price.