Apparel retailer American Eagle Outfitters, Inc. (AEO) offers clothing, accessories, and personal care products under the American Eagle and Aerie brand names. The company’s portfolio includes specialty apparel for men and women, activewear and swim collections, accessories, and personal care products for women.

The retailer recently experienced a drop in its stock price after it missed the consensus estimate for its second-quarter earnings. The company reported $0.04 per share earnings, missing Street estimates by 70.4%. However, its revenue was almost in line with what analysts expected.

The stock has declined 58.7% over the past year and 57.4% year-to-date to close its last trading session at $10.79. It has declined 16% over the past month.

Here are the factors that could affect AEO’s performance in the near term:

Bleak Bottom-line Growth

For the fiscal second quarter that ended July 30, AEO’s total net revenue increased 0.3% year-over-year to $1.20 billion. However, its non-GAAP net income decreased 94.7% from the prior-year quarter to $6.66 million. Non-GAAP earnings per common share declined 93.3% from the same period the prior year to $0.04.

Unfavorable Analysts’ Expectations

The consensus EPS estimates of $0.23 and $0.25 for the quarters ending October 2022 and January 2023 indicate 69.7% and 28.6% year-over-year decreases. Analysts expect EPS for the current year (ending in 2023) to decline 69.4% from the prior year to $0.67.

Likewise, the consensus revenue estimate for the quarter ending January of $1.47 billion reflects a decline of 2.8% year-over-year, while Street expects revenue for the current year to come in at $4.93 billion, down 1.7% from the prior year.

Narrow Profit Margins

AEO’s trailing-12-month EBIT margin, EBITDA margin, and net income margin of 7.19%, 10.84%, and 3.81% are 12.4%, 3.7%, and 35% lower than their respective industry averages of 8.21%, 11.25%, and 5.86%.

The stock’s trailing-12-month levered FCF margin of a negative 4.65% is significantly lower than the industry average of 1.69%. Its trailing-12-month ROE of 14.49% is 5.2% lower than the industry average of 15.28%.

POWR Ratings Reflect Bleak Prospects

AEO’s POWR Ratings reflect this bleak outlook. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

AEO has a Sentiment grade of F in sync with its bleak analyst expectations. The stock has a D grade for Growth, consistent with its bleak bottom-line growth in the last reported quarter. It has a D grade for Stability, which is justified by its five-year monthly beta of 1.29.

In the 67-stock Fashion & Luxury industry, AEO is ranked #66. The industry is rated C.

Click here to see the additional POWR Ratings for AEO (Value, Momentum, and Quality). To see the top stocks in the Fashion & Luxury industry, click here.

Bottom Line

AEO shares plunged on its earnings miss in the most recent quarter. Moreover, the stock seems to be on a downtrend as it is trading below its 50-day and 200-day Moving Averages of $11.92 and $17.02. And given its lean profit margins, I think the stock might be best avoided now.

How Does American Eagle Outfitters, Inc. (AEO) Stack Up Against its Peers?

While AEO has an overall POWR Rating of D, one might consider looking at its industry peers, Hugo Boss AG (BOSSY) and J.Jill, Inc. (JILL), which have an overall A (Strong Buy) rating, and Chico’s FAS, Inc. (CHS) and H & M Hennes & Mauritz AB (HNNMY), which have an overall B (Buy) rating.

AEO shares fell $0.01 (-0.09%) in after-hours trading Thursday. Year-to-date, AEO has declined -56.36%, versus a -17.25% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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