American Eagle Stock Catches Another Downgrade. The Reasons Aren’t New.

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American Eagle’s stock has been trading flat around the $11 mark for the past few weeks.

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Gabby Jones/Bloomberg

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American Eagle Outfitters stock’s post-earnings plunge looks largely over. But Wall Street analysts continue to slash their ratings on the retailer, citing concerns about the near-term outlook.

Jonna Kim is at least the fifth analyst to cut her view in about two months. On Monday, she lowered her rating on the stock (ticker: AEO) to Market Perform from Outperform, reducing her target for the price to $13 from $25, citing pressure on earnings from increased promotions, higher costs, and weakening demand as the economy slows . Other analysts have noted similar concerns.

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Monday morning, American Eagle was down 3.7% to $11.60. It has fallen some 15% since May 26, when the retailer reported worrisome first-quarter earnings, but has largely been trading flat around the $11 mark in the past few weeks.

The retailer reported 16 cents in earnings, lower than the consensus call of 25 cents among analysts tracked by FactSet,
But analysts focused more on the high freight costs, excess inventory, and a shift in consumer demand that management highlighted during a call to discuss the results.

Kim finds these challenges too significant to ignore. She said she expects improvements to mall traffic to slow down, and that aggressive promotional efforts across the retail sector will make it harder for American Eagle to improve its gross margins. American Eagle’s website shows shoppers can get discounts of up to 70% on select merchandise; a $70 floral jumpsuit now retails at $21.

Kim’s concerns are nothing new. Both Morgan Stanley analyst Kimberly Greenberger and JP Morgan analyst Matthew Boss, who dropped their ratings on the stock to Underweight and Neutral, respectively, just days after the earnings report, had similar comments. Boss had rated the stock at Overweight for nearly two years, while Greenberger rated it at Equal-Weight, the equivalent of Neutral.

B. Riley analyst Susan Anderson downgraded both American Eagle and Urban Outfitters (URBN) stocks to Neutral from Buy last month, while BofA Global Research analyst Chris Nardone cut his rating on American Eagle stock to Sell from Neutral.

A silver lining is that most analysts agree on the potential of Aerie, an American Eagle subbrand selling everything from activewear to leggings to underwear. Kim wrote that a Cowen survey indicated that Aerie has advantages that it wouldn’t be easy for rivals to match—a so-called competitive moat. The subbrand has opportunities to increase awareness among customers and has a high level of satisfaction, offering the potential to “convert more customers to loyalty members,” said Kim.

And neither a potential recession nor pressure on margins resulting from promotions are risks isolated to American Eagle.

Consider Target (TGT), which warned in early June that profits for the second quarter will take a hit as it tries to reduce its inventory by increasing promotions. The retailer’s inventory as of April was 43% higher than it was last year, while Walmart‘s
is 32% higher. At American Eagle, the comparable figure is 24%, according to its earnings report from May.

Given the challenges retailers now face, investors should look beyond the current economic slowdown and focus on long-term winners. BofA’s Nardone likes Lululemon (LULU) because it has opportunities to expand into new categories of goods, while he favors Bath & Body Works (BBWI) for its agile supply chain.

Write to Karishma Vanjani at [email protected]


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