Citi cuts American Eagle Outfitters target to $12, maintains buy

On Thursday, Citi analyst Paul Lejuez adjusted the price target for American Eagle Outfitters (NYSE:AEO) shares, reducing it to $12.00 from the previous $13.00, while still holding a Buy rating on the stock. Currently trading at $11.45, the company shows a P/E ratio of 9.7x and maintains healthy profitability with a 39.2% gross margin. The revision follows American Eagle’s fourth quarter performance, which displayed solid results, with comparable store sales (comps) increasing by 3% and gross margin (GM) remaining flat, both surpassing consensus expectations. According to InvestingPro analysis, the stock appears undervalued based on its Fair Value calculations.

Despite the favorable fourth-quarter outcomes, the first quarter to date has presented significant challenges for the retailer, with weakened trends at both of its brands. The stock has declined 41.3% over the past six months and is currently trading near its 52-week low of $11.33. Influenced by adverse weather conditions, macroeconomic volatility, execution issues, and a competitive retail landscape, American Eagle provided a weaker outlook for the first quarter of fiscal year 2025. The company anticipates a mid-single-digit decline in first-quarter sales, and a planned 240 basis points decrease in gross margin due to fixed cost deleverage and the impacts of foreign exchange and freight costs, along with increased promotional activity.Discover more insights about AEO and other retail stocks with InvestingPro, which offers exclusive ProTips and comprehensive financial analysis for over 1,400 US stocks.

The implied guidance for fiscal year 2025, with earnings projected between $1.40 and $1.50, assumes an improvement in both sales and gross margin beyond the first quarter, as well as enhanced cost management in the second half of the year. The company maintains strong financial health with a current ratio of 1.57 and has demonstrated consistent profitability with a return on equity of 13%. This optimistic outlook is set against the backdrop of tough year-over-year comparisons, and according to Lejuez, the market is likely to view these expectations with a degree of skepticism given the first quarter’s weaknesses.

Lejuez highlighted the difficult position of American Eagle in the face of strong competition, notably from rivals such as Hollister, and the unpredictable nature of retail trends coupled with an uncertain macroeconomic environment. Despite these challenges, the company has maintained dividend payments for 22 consecutive years, currently offering a 4.4% dividend yield. This uncertainty casts doubt on whether American Eagle can fulfill its plans for the year. Nonetheless, the analyst believes that at the current stock price levels, the risk/reward profile for American Eagle is balanced.

In other recent news, American Eagle Outfitters reported its earnings for the first quarter of 2025, exceeding Wall Street expectations with an earnings per share (EPS) of $0.54, compared to the projected $0.51. Revenue aligned with forecasts, totaling 1.6 billion dollars. Despite these favorable results, the company anticipates a slight revenue decline for the full year of 2025. Additionally, operating income is forecasted to range between 360 and 375 million dollars for the year. Barclays (LON:BARC) analyst Adrienne Yih downgraded American Eagle’s stock rating from Equalweight to Underweight, reducing the price target from $17.00 to $10.00, citing factors like a weakening consumer base and declining mall traffic. The company’s guidance for operating income in the first quarter of fiscal 2025 was significantly reduced by 71% at the midpoint, while the full-year guidance was lowered by 20% at the midpoint compared to consensus estimates. Strategic investments in digital platforms and store remodels are planned to address these challenges. The company’s promotional strategies, including deeper discounts, were noted as efforts to drive customer conversions amid growing inventory levels.

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