American Eagle Stock Looks Undervalued

AEO: American Eagle Outfitters logo
American Eagle Outfitters

After a 23% decline in the last twelve months (LTM), at the current price of around $14 per share, we believe 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 – could see gains in the long term. AEO stock has declined from around $18 to $14 over the  LTM, largely underperforming the broader indices, with the S&P falling about 6% over the same period. AEO’s stock decline can be attributed to its declining overall revenues, rising inventories, and shrinking gross margins. AEO’s gross margins have sharply declined to 35% in FY’22 from 39.8% in FY’21, driven by inflationary pressures impacting the industry. There is a link between these problems and inflation, which has curbed consumer spending and pushed up freight costs for the company, as well as supply chain challenges. Although the Aerie brand has grown despite the macroeconomic environment, its namesake brand has struggled with tough comparisons to its post-pandemic recovery. However, that pressure seems to have eased a little in the fourth quarter as its inventories rose at a slower pace and its gross margin expanded 150 basis points year-over-year (y-o-y). It was encouraging to see AEO’s gross margin hold steady in Q4 since it is still heavily reliant on markdowns to boost sales and reduce inventories. We expect the company stock to be pressured in the short term but the company’s social media activities, e-commerce growth, lack of debt, and focus on Aerie will likely give the business greater flexibility.

In Q4, the apparel retailer’s revenue declined 1% y-o-y to $1.5 billion and adjusted net income came in at $73.3 million, or $0.37 per share, up from the year-ago figure of $71.6 million. Aerie brand rose 8% to $464 million and the American Eagle core brand fell a similar 8% y-o-y in Q4. Additionally, inventory levels were trimmed to $585 million, down from $798 million at the close of Q3 and up only 6% from Q4 2021.

We forecast AEO’s Revenues to be $3.4 billion for the fiscal year 2023, up 2.3% y-o-y. Looking at the bottom line, we now forecast the earnings per share to come in at $1.14. Given the changes to our revenues and EPS forecast, we have revised our AEO’s Valuation to $15 per share, based on a $1.14 expected EPS and a 13.4x P/E multiple for the fiscal year 2023 – almost 14% higher than the current market price.

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For the year 2023, AEO expects flat to low single-digit percentage revenue growth from 2022. Given the company notched $5.01 billion in revenue in 2022, even mild growth suggests an upside to the $5.1 billion consensus. It also forecasts its 2023 operating income to land in the $270 million to $310 million range, better than the $269 million in 2022. That said, lower cotton prices and freight costs compared to the beginning of 2022 should likely help AEO stabilize expenses in FY 2023. Overall, AEO’s success hinges on revitalizing its namesake brand with fresh products and aggressively expanding Aerie’s banner.

It is helpful to see how its peers stack up. Check out how American Eagle Outfitters’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

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Returns Apr 2023
MTD [1]
YTD [1]
Total [2]
 AEO Return -2% -5% -13%
 S&P 500 Return 1% 8% 85%
 Trefis Multi-Strategy Portfolio 1% 9% 245%

[1] Month-to-date and year-to-date as of 4/14/2023
[2] Cumulative total returns since the end of 2016

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