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On Thursday, Barclays (LON:BARC) analyst Adrienne Yih downgraded American Eagle Outfitters (NYSE:AEO) stock rating from Equalweight to Underweight and slashed the price target to $10.00 from the previous $17.00. The stock, currently trading at $11.45, has declined over 41% in the past six months and appears undervalued according to InvestingPro analysis. With a P/E ratio of 9.7 and maintaining dividend payments for 22 consecutive years, the company presents an interesting value proposition despite recent challenges. The downgrade was motivated by several factors impacting the retailer, including a weakening consumer base, the uncertain effects of tariffs, and declining mall traffic that has led to increased promotions. These promotions are necessary to drive customer conversions but are also causing gross margin pressure. The company maintains a gross profit margin of 39.15% and a healthy current ratio of 1.57, according to InvestingPro data, suggesting some financial flexibility to weather current headwinds.
Yih pointed out that there has been a negative sales-to-inventory inflection in the third quarter of fiscal year 2024, which could indicate potential merchandise margin pressure going forward. Despite the recent drop in American Eagle’s share price, which may have already priced in some concerns, Barclays believes the stock could trade within a narrow range in the near term. There is also a potential risk to earnings estimates if consumer spending deteriorates further.
Barclays highlighted promotional strategies at American Eagle, noting deeper discounts at the front of stores to attract customers and improve conversions. This is in the context of inventory levels growing faster than sales for the second consecutive quarter, which could lead to further merchandise margin pressure.
The company’s operating income guidance for the first quarter of fiscal year 2025 was significantly reduced by 71% at the midpoint, and the full-year operating income guidance for 2025 was lowered by 20% at the midpoint compared to consensus estimates. Following the announcement, American Eagle’s stock price fell by 5% in aftermarket trading, while the S&P remained flat.
In other recent news, American Eagle Outfitters reported its first-quarter 2025 earnings, surpassing Wall Street expectations with an earnings per share (EPS) of $0.54 compared to the forecasted $0.51. The company’s revenue aligned with projections, totaling $1.6 billion. Despite these positive results, the company anticipates a slight revenue decline for the full year of 2025, with operating income expected between $360 million and $375 million. The company plans strategic investments in digital platforms and store remodels. American Eagle Outfitters also achieved record annual revenue of $5.3 billion for 2024, with a 4% increase in comparable sales. Analyst firms such as UBS and JPMorgan have been in discussions with the company regarding its strategies and market conditions. Additionally, the company is focusing on brand amplification and operational optimization to navigate the challenging consumer environment and tariff uncertainties.
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