The long-term growth drivers for American Eagle stock haven't disappeared.
Christopher Lee/BloombergAmerican Eagle delivered another disappointing quarter. But the pain was expected, and there are still reasons to be optimistic about the stock.
Deep discounts on apparel and higher freight costs weighed down margins in the company’s second-quarter report, released late Wednesday.
The gross margin rate was 30.9%, versus 42.1% last year. Earnings took a hit: Adjusted profit of 4 cents a share was much lower than the 13 cents estimated by analysts, according to FactSet. Revenue of $1.2 billion was in line with estimates.
For now, to mitigate the current headwinds and bolster its cash position, the company is pausing its quarterly cash dividend, cutting expenses, and freezing hiring.
Shares of Am erican Eagle (ticker: AEO) were down 8.6%, at $10.59, at midday Thursday, 18% lower from when Barron’s recommended the stock in August.
No one should expect a quick rebound.
The denim retailer had previously cited excess inventory, high freight costs, and sagging consumer demand. It lowered its operating income estimates for fiscal 2022 to $314 million in May as a result, pointed to heavy discounting of its products this yea, r and stopped providing long-term guidance months ago.
The company said it expects more pressure on its margins as it continues to mark down its products, given weak demand trends. Management estimates gross margins to be in the mid-30s in the third quarter and low 30s in the fourth quarter. Analysts predict 38.1 % for the third quarter and 33.3% for the fourth.
American Eagle didn’t immediately respond to a request for comment.
While things are admittedly painful for the retailer, the long-term growth drivers for the stock haven’t disappeared. Aerie, an American Eagle division specializing in leggings, lingerie for women of all-sizes, posted an 11% increase in revenue in the latest quarter, primarily due to new-store openings. That compared with an 8% decline in the core American Eagle brand.
Aerie, launched in mid-2006, is a share gainer and has posted several years of consistent double-digit growth. The brand does face near-term headwinds as customers feel the pinch of inflation and shift dollars to going-out apparel at more , but underwear, which saw strong demand in the latest quarter, remains an indispensable product.
Some analysts agree. CFRA Research’s Zachary Warring upgraded his rating on the stock to Buy from Hold as shares trade at levels not seen since March 2020 while “AEO’s Aerie brand continues to see momentum and is proving to be resilient in a tough economic backdrop.”
Jefferies’ Corey Tarlowe maintained his Buy rating on the stock. He sees Aerie as a growth vehicle “that we think can generate meaningful revenue growth over the medium term and improve margins,” he wrote. Tarlowe lowered his price target on the stock to $13 from $17.
Besides Aerie, the company’s bet on logistics through Quiet Platform, a supply-chain platform that ships merchandise for both American Eagle and some 60 other retailers, should pay off. The platform is doing what it’s supposed to do—the cost of fulfilling orders is down this year versus last year and 2019, the company said in its earnings call. For the near term, though, management expects weaker than initially planned revenue from Quiet Platform, as partners have cut second-half spending plans.
While many retailers seem to be headed for a demand-led recession, investors should have a little patience for American Eagle.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com
