American Eagle Outfitters, Inc. AEO has seen its shares slide 13.9% since it reported third-quarter 2024 results on Dec. 4, 2024. This performance contrasts with the broader industry’s decline of 3.5% Retail-Wholesale sector’s rise of 1.6% and the S&P 500  decrease of  0.5% in the same period. AEO’s downside was due to soft fiscal third-quarter results, where the company missed revenue and gross margin expectations.

AEO Sock Price Performance

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AEO's third-quarter fiscal 2024 results highlighted a revenue decline of 1% year over year. This was compounded by a 90-basis-point (bps) drop in gross margin to 40.9%, primarily due to a $45 million retail calendar shift and increased markdowns from heightened promotional activity. Adding to the negative sentiment, management issued a weak holiday outlook and lowered its fourth-quarter and fiscal 2024 forecast.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

AEO’s Bleak Outlook

American Eagle faces a challenging outlook for the fourth quarter of fiscal 2024, with expectations of just 1% comps growth, a notable slowdown from the 8% growth recorded last year. With the $85 million impact of the retail calendar shift and one less selling week, total revenues are expected to decline by 4% and operating income is projected at $125–$130 million, factoring in currency headwinds and a $20 million retail calendar drag.

For fiscal 2024, the company expects comps to improve by 3%, down from the previously expected 4% growth. Total revenues are expected to increase by 1% compared with the prior estimate of 2-3%, reflecting the impact of one fewer selling week. Management expects adjusted operating income of $428-$433 million in fiscal 2024, indicating mid-teens growth year over year. This reflects a decline from the prior guidance of $455–$465 million.

Reflecting the negative sentiment around American Eagle, the Zacks Consensus Estimate for earnings per share has seen downward revisions. In the past seven days, analysts have decreased their estimates for fiscal 2024 and 2025 by 4.1% to $1.70 and by 3.7% to $1.86 per share, respectively.

AEO’s Long-Term Game Plan

Despite the decline in its stock price, American Eagle’s performance continues to be supported by its strong brand and the ongoing progress of its Powering Profitable Growth strategy. This plan aims to increase operating income by mid-to-high teens percentages, reaching over $570 million by the end of fiscal 2026. This means the company expects an operating margin of about 10%, a 300-basis point increase in the next few years.

The plan also targets 3-5% annual revenue growth through the end of fiscal 2026. This indicates revenues of $5.7-$6 billion at the end of fiscal 2026. The company remains committed to amplifying brands, optimizing operations and executing the financial discipline.

In addition, its Real Power Real Growth value creation plan is focused on driving profitability through real estate and inventory-optimization efforts, omni-channel and customer focus, and investments to improve the supply chain.

As part of the Real Power Real Growth plan, American Eagle has been pursuing opportunities to grow the Aerie brand through expansion into newer markets, innovation and a growing customer base. The company has been gaining traction and market share. The company’s new lived-in-store design is rolled out to nearly 30 locations, while it is witnessing excellent results for remodeled stores.

American Eagle has been experiencing success with its Aerie brand, which reported a 4.4% increase in sales in the third quarter of fiscal 2024. The company is focused on enhancing brand awareness and expanding into new categories, with new Aerie and offline stores performing well and broadening its customer base.

What is the Best Approach for AEO?

Reflecting the near-term headwinds from softer earnings and muted guidance raises concerns about the AEO stock's near-term growth potential. While its long-term strategies provide a foundation for recovery, concerns around declining gross margins, elevated promotional activity and reduced earnings forecasts suggest caution. For now, investors may want to wait for signs of stabilization in earnings and margin trends before considering a position in AEO. American Eagle currently carries a Zacks Rank #4 (Sell).

Three Picks You Can't Miss

We have highlighted three better-ranked stocks in the broader sector, namely Deckers DECK, The Gap, Inc. GAP and Abercrombie & Fitch Co. ANF.

Deckers, a footwear and accessories dealer, currently sports a Zacks Rank #1 (Strong Buy). DECK delivered an earnings surprise of 41.1% in the trailing four quarters, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Deckers’ fiscal 2024 sales and earnings indicates growth of 13.6% and 12.8%, respectively, from the year-ago reported figures.

Gap operates as an apparel retail company, which offers apparel, accessories and personal care products for men, women and children. It currently sports a Zacks Rank #1.

The Zacks Consensus Estimate for Gap’s fiscal 2024 sales and earnings indicates growth of 0.7% and 41.3%, respectively, from the year-ago quarter’s reported numbers. GAP has a trailing four-quarter earnings surprise of 101.2%, on average.

Abercrombie, a leading casual apparel retailer, currently flaunts a Zacks Rank of 1. Abercrombie has a trailing four-quarter earnings surprise of 14.8%, on average.

The Zacks Consensus Estimate for ANF’s fiscal 2024 sales and earnings indicates growth of 14.9% and 67.5%, respectively, from the year-ago reported figures.

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