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Investing.com -- Bank of America Securities lowered its rating on American Eagle Outfitters Inc (NYSE:AEO) to Underperform from Neutral, warning of a longer road to recovery for the retailer amid tariff headwinds and weakening sales momentum.
The bank also trimmed its price objective to $10 from $11.
Shares in the clothing retailer slid over 3% in premarket trading.
BofA slashed its fiscal 2026 earnings per share (EPS) estimate by 30% to $0.95, down from $1.35 previously, and now sees fiscal 2025 and 2026 earnings at $0.65 and $0.95, respectively, both well below consensus.
“We see a longer path to a more normalized earnings profile in this environment,” analyst Christopher Nardone wrote.
“With the stock trading at 5x EV/EBITDA (F26E) or 13.5x P/E, we see downside risk to estimates and the multiple given a worsening fundamental backdrop,” he added.
Tariffs are expected to be a key drag on profitability. Management previously disclosed that tariff rates would reduce fiscal 2025 gross profit by $40 million, or about 150 basis points, even after mitigation.
BofA estimates that an incremental 20% rest-of-world tariff could add another 70 basis points of gross margin pressure by 2026.
“AE and Aerie are in tough positions to navigate tariffs; we do not think that either brand has much pricing power,” the analysts said.
BofA flagged that American Eagle continues to struggle to build momentum outside denim, while its Aerie unit faces secular challenges in intimates and swimwear. Pulling back promotions could hurt traffic, and a softer environment may force Aerie to slow store openings.
“We think a sales recovery for both brands following the 1Q assortment issues will take time,” the team continued.
There are some potential offsets. BofA pointed to potential near-term upside risks such as stronger-than-expected performance from the Sydney Sweeney campaign or seasonal strength in denim during the back-to-school period.
Still, analysts stressed they do not assign “a high likelihood that momentum from this campaign can fully inflect the business over the long run.”