American Eagle has gotten torched over the last six months - since July 2024, its stock price has dropped 23.5% to $15.68 per share. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in American Eagle, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Even though the stock has become cheaper, we're swiping left on American Eagle for now. Here are three reasons why we avoid AEO and a stock we'd rather own.

Why Is American Eagle Not Exciting?

With a heavy focus on denim, American Eagle Outfitters (NYSE:AEO) is a specialty retailer offering an assortment of apparel and accessories to young adults.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, American Eagle’s 5% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark for the consumer retail sector.

2. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, American Eagle’s margin dropped by 7.9 percentage points over the last year. This decrease came from the higher costs associated with opening more stores.

3. Previous Growth Initiatives Haven’t Paid Off Yet

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

American Eagle historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.2%, lower than the typical cost of capital (how much it costs to raise money) for consumer retail companies.

Final Judgment

American Eagle isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 8.4× forward price-to-earnings (or $15.68 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at Wabtec, a leading provider of locomotive services benefiting from an upgrade cycle.

Stocks We Would Buy Instead of American Eagle

With rates dropping, inflation stabilizing, and the elections in the rearview mirror, all signs point to the start of a new bull run - and we’re laser-focused on finding the best stocks for this upcoming cycle.

Put yourself in the driver’s seat by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Sterling Infrastructure (+1,096% five-year return). Find your next big winner with StockStory today for free.