On Thursday, JPMorgan downgraded American Eagle Outfitters (NYSE:AEO), traded on the NYSE under the ticker AEO, from Overweight to Neutral. Accompanying this downgrade, the firm also reduced its price target on the stock from $27.00 to $23.00.
Currently trading at $20.54, InvestingPro analysis suggests the stock is undervalued, with analyst targets ranging from $17 to $34. The adjustment follows American Eagle's third-quarter adjusted earnings per share (EPS) report of $0.48, which was slightly ahead of the consensus estimate of $0.47. InvestingPro data reveals that 5 analysts have recently revised their earnings expectations downward for the upcoming period.
The retailer achieved a 3% increase in same-store sales, which aligned with market expectations and fell at the lower end of the company's own guidance of 3-4%. While American Eagle experienced a 0.9 percentage point year-over-year gross margin contraction to 40.9%, below the expected 41.4%, InvestingPro data shows the company maintains strong financial health with a current ratio of 1.57 and an Altman Z-Score of 4.51, indicating solid financial stability.
The company has also demonstrated consistent shareholder returns, maintaining dividend payments for 21 consecutive years. The company did manage to leverage selling, general, and administrative expenses (SG&A) by 0.5 percentage points year-over-year to 27.3%, which was better than the anticipated 27.6%, leading to EBIT margins of 9.6%, slightly higher than the 9.5% market consensus.
The company's top-line performance was impacted by approximately 100 basis points due to unfavorable weather conditions during the third quarter, including hurricane impacts. Despite this, management's guidance for the fourth quarter EPS is approximately $0.48, which is 19% lower than the consensus estimate of $0.59.
This forecast is based on an expected 4% year-over-year decline in revenues, which is more pessimistic than the -1.5% estimated by analysts. This includes an anticipated 500 basis points negative impact from the retail calendar shift, representing an $85 million headwind compared to the previous year.
American Eagle's revised fourth-quarter comparable sales growth is now expected to be 1%, down from the prior implied 3%, with a forecasted EBIT range of $125-130 million, falling short of the $158 million market expectation. This shortfall in operating profit is partly attributed to a $15 million foreign exchange headwind associated with the Mexican Peso.
As the fourth quarter has progressed, both of the company's banners have been performing at approximately 1% comparable sales growth to date, maintaining the third quarter's two-year consolidated stack despite seasonal temperature changes.
Consequently, American Eagle has provided a lower fiscal year 2024 outlook with an anticipated 1% net sales growth, which is below the previously guided range of 2-3%. Same-store sales growth is also expected to be lower at 3%, compared to the earlier forecast of 4%.
Despite near-term challenges, the company's PEG ratio of 0.51 suggests attractive valuation relative to growth prospects. For deeper insights into AEO's valuation metrics and growth potential, investors can access comprehensive analysis through the Pro Research Report, available exclusively on InvestingPro.
The company's projected FY24 EBIT is now estimated to be between $428-433 million, which is under the prior guidance of $455-465 million. This includes an additional $15 million foreign exchange headwind, accounting for half of the downward revision. The anticipated EBIT margin is now approximately 8.1%, which is below the 8.6% expected by analysts, and the adjusted EPS is estimated to be around $1.68, compared to the consensus estimate of $1.78.
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