American Eagle Outfitters Inc. (AEO), the leading teen apparel retailer, remains on our Neutral list with a target price of $20.
Why the Reiteration?
American Eagle is one of the leading specialty retailers of fashionable and stylish apparels and accessories in the United States and Canada. The company has a strong portfolio of well-established brands, each of which is focused on the unique characteristics and rapidly changing preferences of the target customers.
We are impressed by American Eagle’s AE’s rewards program, strategic store expansion, and emphasis on inventory control that position the company for future growth. Further, we see continued momentum in the Denim category along with improved merchandise assortments in the women’s business segment, which will likely augment its top-line performance.
Moreover, we believe the company’s cost-saving initiatives and long-term growth strategy will not only provide financial flexibility, but will help drive value proposition.
Looking at the recent quarter, American Eagle posted a disappointing first-quarter 2013 with sales and earnings declining year over year. The decline was mainly driven by weak sales trends in seasonal merchandise due to cooler-than-usual weather conditions and higher operating expenses.
The dismal results in the recent quarter resulted in a conservative outlook for the second quarter and the full year. This triggered a negative movement in the Zacks Consensus Estimate, which marked a downward trend over the last 30 days. For fiscal 2013 and 2014, the Zacks Consensus Estimate earnings per share moved down by 3.4% to $1.44 and 1.8% to $1.63 per share in the last 30 days, respectively.
Moreover, the apparel retail industry is a consumer-driven industry and hence is very sensitive to the health of economy. We remain skeptical regarding the company’s future performance given the current macroeconomic challenges such as high household debt and unemployment levels, which may restrain consumers’ spending power and in turn affect the company’s top and bottom lines.
Other Stocks Worth Considering
American Eagle currently holds a Zacks Rank #3 (Hold). Other stocks worth considering in the apparel retail industry are Gap Inc. (GPS), Stein Mart Inc. (SMRT) and Pacific Sunwear of California Inc. (PSUN), all of which carry a Zacks Rank #2 (Buy).
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