[Updated: 01/20/22] AEO Stock Update
American Eagle Outfitters (NYSE: AEO) reported its Q3 report, wherein revenues were slightly higher and earnings were 17% above the Trefis estimates. The company surpassed market expectations on the top and bottom lines in its Q3 earnings with reported revenues of $1.27 billion, up 23.3% year-over-year (y-o-y), and earnings per share of $0.74 compared to $0.32 a year ago and $0.48 in 2019. In addition, the company’s gross margin of 44.3% expanded 410 basis points from 40.2% in the third quarter of 2020 and reflected the highest rate since 2007. Notably, sales at the retailer’s Aerie division, which it is counting on to drive growth, rose 28% y-o-y in 2021 after posting 34% growth the prior year. Meanwhile, sales at its namesake brand (American Eagle) bounced back, up 21% following an 11% decline y-o-y in the prior year.
American Eagle Outfitters also issued a strong update on holiday sales, including that it is on track to achieve $600 million in operating income for fiscal 2021. AEO expects Q4 revenue growth to be in the mid-to-high teens compared to a year ago, and up in the mid-teens from Q4 of 2019. Operating income is expected to be in the range of $90 million to $100 million including approximately $80 million in higher freight costs, due to supply chain disruptions. For fiscal 2023, AEO targets revenue of approximately $5.8 billion vs. $5.4 billion consensus and operating income of $800 billion, with the operating margin expanding to 13.5%.
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To add to this, American Eagle Outfitters also acquired Quiet Logistics for $360 million in cash recently. Quiet Logistics is a supply chain partner that utilizes state-of-the-art technology and robotics and has provided cost-effective in-market fulfillment services for AEO, as well as for numerous other leading consumer brands. This tie-up is anticipated to support AEO’s continued growth, while also driving economies of scale as AEO looks to expand its customer base to other brands and retailers.
We have updated our model following the Q3 release. We now forecast AEO Revenues to be $5.1 billion for the full year 2021, up 35% y-o-y. Looking at the bottom line, we now forecast EPS to come in at $2.33. Given the changes to our revenues and earnings forecast, we have revised our AEO Valuation at $29 per share, based on $2.33 expected EPS and a 12.6x P/E multiple for fiscal 2021 – almost 24% higher than the current market price. We believe that the company’s stock appears very cheap at the current levels.
[Updated: 11/22/21] AEO Q3 Pre-Earnings
American Eagle Outfitters (NYSE: AEO), which sells men’s and women’s apparel and accessories under the American Eagle, Tailgate, Todd Snyder, and Aerie brands, is scheduled to report its fiscal third-quarter results on Tuesday, November 23. In the upcoming Q3, we expect the company’s stock to likely trade higher with revenues and earnings beating consensus. In 2020, the pandemic accelerated Aerie’s sales as the brand stood out for AEO, amid declining sales of its namesake brand. That said, the American Eagle brand has been performing quite well so far with Q2 2021 revenues growing 35% y-o-y to $846 million. Aerie’s revenue grew by 34% y-o-y to $336 million after lapping extremely difficult comps of 32% growth in Q2 2020, assisted by strength in core intimates, swimwear, and apparel. Going forward, we expect Aerie to continue its growth trajectory, with revenues likely increasing to $1.5 billion in FY 2021. As such, the women’s intimate wear market of $16 billion is a huge opportunity for Aerie to expand further.
Our forecast indicates that American Eagle Outfitters’ valuation is around $30 a share, which is almost 11% higher than the current market price of $27. Look at our interactive dashboard analysis of American Eagle Outfitters Pre-Earnings: What To Expect in Q3? for more details.
1) Revenues expected to be slightly above consensus estimates
Trefis estimates AEO’s FQ3 2021 revenues to be $1.25 Bil, slightly above the consensus estimate of $1.23 Bil. In the recent Q2, the company’s revenues grew a strong 35% year-over-year (y-o-y) to $1.2 billion, driven by increased traffic as economies re-opened. While the retailer’s revenue was the highest it has been in the second quarter, it still missed the analyst consensus slightly by $30 million. To break down the revenue growth, AEO’s store revenue grew by 73% y-o-y but digital revenue fell 5% during the same period. It looks like some investors might have liked to see the company perform a little better on the digital front, but it should also be noted that the company was up against a tough comparison when digital demand surged 48% y-o-y in fiscal Q2 last year. Compared to the pre-Covid quarter, the company’s store revenue increased 4% and digital revenue grew 66%.
(2) EPS likely to beat consensus estimates marginally
AEO’s FQ3 2021 earnings per share (EPS) is expected to be $0.63 per Trefis analysis, marginally beating the consensus estimate of $0.61. AEO posted second-quarter earnings per share of $0.60, up more than 50% from $0.39 in Q2 2019. One of the major contributors to profitability was again Aerie, which saw its Q2 operating profit increase 7 times from the pre-pandemic quarter. This is despite the ongoing higher labor shortages and supply chain disruptions.
(3) Stock price estimate higher than the current market price
Going by our American Eagle Outfitters’ Valuation, with an EPS estimate of around $2.17 and a P/E multiple of 13.8x in fiscal 2021, this translates into a price of around $30, which is 11% higher than the current market price.
For further comparison among peer groups, it is helpful to see how they stack up. AEO Stock Comparison With Peers shows how American Eagle Outfitters compares against peers on metrics that matter.
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|S&P 500 Return||-4%||-4%||104%|
|Trefis MS Portfolio Return||-9%||-9%||256%|
 Month-to-date and year-to-date as of 1/20/2022
 Cumulative total returns since the end of 2016