On Thursday, Citi maintained a Neutral rating on American Eagle Outfitters (NYSE:AEO) but reduced the stock's price target to $21 from the previous $22. According to InvestingPro analysis, the stock appears undervalued, with a P/E ratio of 15.9x and strong financial health metrics. The adjustment follows American Eagle's third-quarter performance, which presented a blend of strengths and weaknesses.
Comparable store sales (comps) increased by 3%, aligning with consensus driven by positive results at both of the company's brands. The company maintains strong fundamentals with a current ratio of 1.57 and has consistently paid dividends for 21 consecutive years. However, gross margins were down by 90 basis points, a steeper decline than the 50 basis points anticipated by consensus, affected by slightly higher markdowns and fixed cost deleverage.
Management at American Eagle has set the fourth-quarter comps growth expectation at 1%, which falls below the consensus estimate of 2.5% and market expectations. This conservative guidance is attributed to concerns over traffic volatility and a shortened holiday calendar. The company's shares experienced a downturn in pre-market trading due to these projections.
Despite the cautious outlook for the fourth quarter, current trends are tracking in line with management's guidance. With the most significant holiday weeks yet to come, there is potential for a rise in comps that could surpass the fourth-quarter guidance. However, management is preparing for a substantial slowdown after the holiday rush.
The report also notes that American Eagle has achieved some leverage in selling, general, and administrative (SG&A) expenses. Nonetheless, the third-quarter results underscore the company's vulnerability to broader macroeconomic and retail trends. From the pre-market level of approximately $18, the risk/reward balance for American Eagle's stock is seen as slightly favorable, according to the analyst.
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