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On Thursday, Citi analyst Paul Lejuez adjusted the price target on American Eagle Outfitters (NYSE:AEO) stock to $13.00, a significant reduction from the previous target of $21.00. Despite the lower price target, the analyst maintained a Neutral rating on the company’s shares. The stock, currently trading near its 52-week low of $11.64, appears undervalued according to InvestingPro analysis, which identifies several positive factors including a 4.13% dividend yield and a 22-year track record of consistent dividend payments.
Lejuez anticipates an in-line fourth quarter report, which is expected to be released after the market closes on March 13, based on management’s pre-announced holiday results shared at the ICR conference in January. The primary focus is likely to shift to the first quarter guidance, which the analyst predicts will be weaker than consensus estimates, forecasting approximately $0.20 compared to the consensus of $0.32. This expectation is due to negative comparable sales for the American Eagle brand and increased promotional activity. The company maintains strong fundamentals with a healthy current ratio of 1.57, indicating solid liquidity to manage near-term obligations.
The Citi analyst highlighted that the American Eagle brand seems to be struggling, particularly as its key competitor, Hollister, is currently reporting over 20% in comparable sales growth, indicating that American Eagle may be losing market share. While growth is expected for the company’s aerie brand, with low-single-digit increases projected for fiscal year 2025, the core American Eagle brand’s weakness is likely to have a more significant impact on the company’s shares and earnings.
Lejuez also pointed out several factors that could pressure margins, including increased promotional activities, foreign exchange rates, tariffs, and fixed cost deleveraging. These factors contribute to the expectation of a decrease in earnings per share for fiscal year 2025, with a Citi model estimating $1.40 compared to the consensus estimate of $1.83. InvestingPro analysis reveals additional insights about AEO’s financial health and market position, with 12 exclusive ProTips and comprehensive valuation metrics available to subscribers.
Despite the downward revision in earnings and price target, the recent sell-off in American Eagle Outfitters shares has brought the trading price to less than 9.0 times Citi’s below-consensus fiscal year 2025 earnings estimate. Currently trading at a P/E ratio of 10.12x, with technical indicators suggesting oversold conditions, this valuation suggests that a significant amount of negative sentiment is already reflected in the stock price, offering what the analyst sees as a more balanced risk/reward scenario at the current trading levels.
In other recent news, American Eagle Outfitters has revised its fourth-quarter financial outlook upwards, reporting a 2% increase in comparable sales, which exceeded their initial forecast of a 1% rise. The company now anticipates a fourth-quarter operating profit of approximately $135 million, up from the previous estimate range of $125 million to $130 million. This adjustment follows a strong holiday season performance, with Aerie experiencing mid-single-digit growth and the American Eagle brand showing a slight increase. Despite these positive developments, BofA Securities has maintained a Neutral rating on American Eagle, adjusting the price target from $21.00 to $18.00, reflecting a broader re-rating of sector peer multiples.
Morgan Stanley (NYSE:MS) has downgraded American Eagle from Overweight to Equalweight, citing a more competitive landscape, particularly in the intimates and apparel sectors. This decision comes as a key competitor, VSCO, shows positive comparable sales, which could challenge Aerie’s growth. Citi analyst Paul Lejuez also maintained a Neutral rating, noting the company’s steady 2% increase in fourth-quarter comparable sales. American Eagle’s management has expressed confidence in their sales growth potential and operational efficiencies, which are expected to contribute to significant operating profit growth in the coming year. Additionally, the company has been active in share repurchases, buying back 1.5 million shares in the fourth quarter to date.
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