Urban Outfitters and American Eagle Outfitters Are Both Bleeding, But Which Stock Has The Edge?

AEO: American Eagle Outfitters logo
American Eagle Outfitters

American Eagle Outfitters (NYSE: AEO) stock has declined by close to 36% since early February after the WHO declared the Coronavirus a global health emergency, while  Urban Outfitters (NASDAQ: URBN) stock has fared slightly better and lost 27% of its value. The lockdown in various parts of the world has hurt the apparel industry worldwide, with more weakness to come over the coming months. The companies have had to shutter their stores temporarily, and it remains unclear as to when they can open them again, as the pandemic continues to spread, particularly in Europe and the U.S., which are the largest markets for apparel companies. However, we believe American Eagle will likely fare better than Urban Outfitters because of its stronger brand presence and higher growth potential of its Aerie brand.

As of 2019, American Eagle was operating close to 1,100 stores while Urban Outfitters’ store count stood at around 641. Moreover, the success of the Aerie brand separates American Eagle from its competitors, which has continued to achieve double-digit sales growth consecutively for the last 21 quarters. Aerie’s success is unparalleled to other brands in the retail business, and we believe the brand will continue to drive the company’s growth despite the coronavirus outbreak.

Nevertheless, both the companies derive a majority of their revenues from the U.S. Since the U.S. has become the new epicenter of the outbreak, we believe the performance of both companies will be adversely impacted in Q1 – with Urban Outfitters taking a bigger hit due to its limited brand appeal compared to American Eagle. URBN’s fiscal Q1 results (for the period ending April) later next month will confirm this and could come with fiscal-year 2020 revenue expectations 20% lower than 2019. As revenue and earnings expectation for fiscal-year 2020 will see a significant revision, this could potentially result in Urban Outfitters’ P/E multiple sliding to below 5, with the stock falling to around $10 for the first time in the last decade if COVID-19 spread continues accelerating. American Eagle will likely suffer, but less so – with revenue expectations for FY2020 being 10-15% less than the figure in 2019 at the time of its fiscal Q1 2020 earnings in late May. With a P/E multiple around 6, this implies that the company’s stock could remain around current levels even if the virus spread continues to accelerate.

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Our conclusion is based on our detailed dashboard analysis, ‘Is American Eagle Outfitters Expensive Or Cheap After A -35.8% Move vs. Urban Outfitters? wherein we compare trends in key metrics for the two apparel companies over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.


There Is Little To Separate The Stock Performance Of Both Companies Over Recent Weeks

American Eagle’s P/E based on 2019 earnings has declined from 10x in 2019 to 6x currently, while Urban Outfitters’ multiple has declined from 10x to about 7x. The similar decline in American Eagle’s multiple can be attributed to the overall weakness in the apparel industry. However, Urban Outfitters’ multiple still appears high, considering that the company’s revenues and margins are at a greater risk compared to American Eagle’s. Notably, though, the P/E multiple for both companies is around the lowest level in at least six years.

However, we believe Urban Outfitters’ P/E is more vulnerable to any negative news and could result in the figure shrinking 20% to around 5x. Overall, it’s likely that American Eagle stock will outperform Urban Outfitters, which will potentially result in its P/E multiple shrinking further when the ground reality is confirmed during its fiscal Q1 results.


But How Long Will The Stocks Remain Under Pressure?

  • The expected timeline for recovery in global economic conditions, and in the company’s stock, hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
  • We do believe these trends are likely to reverse in later quarters of 2020. As the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times.
  • Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of American Eagle’s multinational peers, including Guess and Urban Outfitters. The complete set of coronavirus impact and timing analyses is available here.


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