On Thursday, BMO Capital Markets adjusted its outlook on American Eagle Outfitters (NYSE:AEO), reducing the price target to $20.00 from the previous $22.00. The firm maintained its Market Perform rating for the apparel retailer. According to InvestingPro data, three analysts have recently revised their earnings estimates downward, while the company maintains a P/E ratio of 14x.
The decision comes in the wake of American Eagle's recent financial report, which revealed a miss on both top-line revenue and gross margin (39.2%), with inventory growth outpacing sales. Despite these challenges, the company managed to preserve its earnings before interest and taxes (EBIT) through reductions in selling, general, and administrative expenses (SG&A), depreciation and amortization (D&A), and a lower tax rate.
The analysis by BMO Capital highlights that while American Eagle experienced a strong customer response during key selling periods, such as the Thanksgiving and Black Friday weekend, with notably double-digit percentage increases in traffic and positive in-store comparable sales, digital sales have shown inconsistency.
Management at American Eagle has expressed concerns about potential variability in sales during non-peak periods. InvestingPro's comprehensive analysis reveals the company maintains strong financial health with liquid assets exceeding short-term obligations and a healthy current ratio of 1.57x. This inconsistency raises questions about the company's ability to execute effectively in the future.
Reflecting on the company's forward-looking statements, BMO Capital notes that management has set the fourth-quarter revenue and EBIT projections significantly below the market consensus. Furthermore, American Eagle has revised its full-year revenue and EBIT guidance downward.
The revised price target of $20.00 is based on approximately 12 times the firm's estimated earnings for the fiscal year 2025. Notably, InvestingPro analysis indicates the stock is currently undervalued, with additional insights available in the comprehensive Pro Research Report, which covers over 1,400 US stocks.
American Eagle's recent performance and the subsequent adjustment by BMO Capital suggest caution from the investment firm regarding the retailer's near-term prospects. The company's ability to navigate the challenges of inconsistent digital sales and the potential for sales volatility outside of peak periods will be critical in meeting the revised financial expectations.
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