Based on a comparison of American Eagle Outfitters (NYSE: AEO) trajectory over recent months with that around the 2008 recession, we believe that the stock can potentially gain 25%, to cross $12.50 once fears surrounding the coronavirus outbreak are put to rest. A detailed comparison of American Eagle’s performance vis-à-vis the S&P 500 is available in our interactive dashboard analysis, ‘How Did American Eagle Outfitters Stock Fare vs. The S&P 500 In 2008 And Now?’
The World Health Organization (WHO) declared a global health emergency at the end of January in light of the coronavirus spread. The rally in the equity market continued until February 19 with the S&P 500 reaching a record high, but the trend reversed sharply over the following weeks. American Eagle stock lost 45% of its value (vs. about a 34% decline in the S&P 500) between February 19 and March 23. A bulk of the decline came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Notably, though, the multi-billion dollar stimulus package announced by the U.S. government has helped the stock price recover 29% over recent weeks (vs. about 45% gain in the S&P 500) to its current level around $10. Despite these gains, the stock is still down 30% since the beginning of the year.
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The Sharp Movements In American Eagle’s Stock Were Triggered By Several Underlying Factors
The decline in American Eagle’s stock is understandable, considering the impact that the outbreak and a broader economic slowdown are having on consumer spending and on the global apparel industry in particular. The company’s first-quarter was wiped out due to the outbreak of coronavirus, which has forced people to stay indoors, resulting in a steep decline in the demand for the company’s products, as evident from American Eagle’s Q1 2020 (ending April) results which saw its revenues plunge by 38% y-o-y to $552 million. Moreover, the company’s stores remained closed during Q1 which further impacted the company’s performance. However, American Eagle’s digital channel continued to flourish as digital demand (orders) surged by 33% despite the pandemic, with digital demand for Aerie’s products swelling by more than 75%. Moreover, gradual store re-openings have provided a boost to the company’s stock movement.
But How Does The Movement This Time Around Compare With The Trend During The 2008 Downturn?
- We see American Eagle stock declined from levels of around $16 in October 2007 (the pre-crisis peak) to levels of around $6 in March 2009 (as the markets bottomed out) – implying the company’s stock lost as much as 61% from its approximate pre-crisis peak -steeper than the broader S&P, which fell by about 51%.
- However, American Eagle recovered strongly post the 2008 crisis to about $11 in early 2010 – rising by 79% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.
Will American Eagle’s Stock Recover Similarly From The Current Crisis?
Keeping in mind the fact that American Eagle stock fell 45% from the market peak on February 19 to the low on March 23 compared to the 61% decline during the 2008 recession, we believe it can potentially recover by 25% to levels of $12.50 once economic conditions begin to show signs of improvement. This marks a partial recovery to the $14-level the stock was at before the coronavirus outbreak gained global momentum.
That said, the actual recovery and its timing 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. Further, our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a more complete macro picture and complements our analyses of Coronavirus impact on a diverse set of American Eagle’s multinational peers – from Coronavirus effect on L Brands to impact on competitor Columbia Sportswear and Coronavirus effect on URBN stock. The complete set of coronavirus impact and timing analyses is available here.
While American Eagle offers a promising proposition to potential investors, could investing in debt-laden, down-but-not-out companies yield large upside post-Covid? Find out more in our analysis: The Leveraged 5: AAL, CTL, COTY, OXY, HOG.