Shares of American Eagle Outfitters, Inc. AEO experienced a notable decline of 17.4% yesterday after the announcement of major new tariffs designed to overhaul global trade and support U.S. manufacturing.

The sharp decline was due to the U.S. government's decision to implement a flat 10% tariff on imports from nearly all countries, along with additional reciprocal tariffs on around 60 nations that the United States claims to impose higher duties on American goods. Among these is Vietnam, which now faces a 46% tariff effective April 9.

With effective tariff rates now standing at 54% for China and 46% for Vietnam, retailers like AEO that rely heavily on cost-efficient sourcing from these regions face a sudden spike in input costs. These elevated duties are expected to significantly pressure margins and may force brands to raise prices for consumers or absorb higher expenses, impacting profitability.

The market decline reflects investor concerns about AEO’s reliance on imported products, especially amid stricter trade regulations in key supply regions. As Wall Street assesses the long-term impact of new tariffs, apparel companies that manufacture primarily in Asia rather than the United States may continue to face challenges.

Factors Weighing on AEO Stock

AEO’s sharp stock decline also highlights broader worries about the apparel retail sector, which is closely tied to consumer spending and overall economic health. Purchases of apparel and accessories are heavily influenced by changes in disposable income, making the industry especially vulnerable during periods of financial stress or inflation.

Tariffs typically add to the costs of doing business. Although they are paid by the importing company, not the country where the goods originate, they still represent a significant financial burden. These costs are often passed on to consumers through price increases.

As margins tighten, companies may be forced to cut back on discretionary spending like advertising and promotions in an effort to balance budgets. However, pulling back on marketing efforts can hurt brand visibility and slow sales growth, creating a tough cycle for retailers like AEO already navigating a challenging retail environment.

In addition to tariff concerns, American Eagle reported a 4% year-over-year decline in net revenues in the fourth quarter due to an $85 million impact from a change in the retail calendar. Breaking it down by brand, American Eagle brand’s revenues dropped 9.1% compared to the prior year.

AEO’s Bleak Outlook Remains a Concern

Following the softer-than-expected fourth-quarter fiscal 2024 results, AEO's management issued a cautious outlook for fiscal 2025, pointing to continued near-term headwinds from consumer spending trends and broader macroeconomic uncertainty.

For fiscal 2025, the company is guiding for a low-single-digit decline in revenues and a reduction in gross margin compared to the prior year. Operating income is expected to be between $360 million and $375 million, factoring in a $20 million currency headwind from a stronger U.S. dollar and a $5-$10 million negative impact from U.S. tariffs.

For the first half of fiscal 2025, management anticipates a mid-single-digit revenue decline alongside falling profits, as cost pressures and soft consumer demand continue to weigh on performance.

AEO’s Estimates Reflect a Downtrend

Led by the cautious outlook, American Eagle estimates have shown a declining trend in the past 30 days. The Zacks Consensus Estimate for AEO’s fiscal 2025 and 2026 earnings per share have declined 16.7% and 16.3%, respectively, in the last 30 days. The downward revision in earnings estimates indicates that analysts are less confident about the company’s growth potential.

For fiscal 2025, the Zacks Consensus Estimate for AEO’s sales implies a 5.3% year-over-year dip, whereas the EPS estimate indicates a 13.8% year-over-year decline.

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Do AEO’s Strategies Promise Growth?

American Eagle is actively executing its strategic initiatives, aimed at driving long-term growth, enhancing operational efficiency and improving agility. The company has been investing in its digital platform to grow its e-commerce business and enrich customer experience. It is also investing in automation in the DC to boost cost efficiencies. These efforts are focused on strengthening profitability and delivering consistent performance over time. 

American Eagle is on track with its Powering Profitable Growth Plan, which is built upon the strength displayed in fiscal 2023. The plan is designed to deliver annual operating income growth in the mid-to-high teens to more than $570 million by the end of fiscal 2026. 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 financial discipline.

Investment Choice for AEO Stock

American Eagle faces a critical moment as it navigates the challenges of rising tariffs, soft consumer demand and a weakening macroeconomic backdrop. While the company’s growth story remains compelling, the sharp decline in its share price reflects diminished investor confidence. However, the company remains committed to its long-term strategy of driving profitable growth through digital investments, operational efficiency and brand amplification. Investors should approach with caution, as the company’s near-term outlook remains uncertain. Currently, AEO has a Zacks Rank #4 (Sell).

Key Picks

We have highlighted three better-ranked stocks in the broader sector, namely Nordstrom, Inc. JWN, Urban Outfitters Inc. URBN and Boot Barn BOOT.

Nordstrom, a fashion retailer that provides apparel, shoes, beauty, accessories and home goods for women, men, young adults and children, currently flaunts a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Nordstrom’s current financial-year sales indicates growth of 2.02% from the year-ago period’s reported figures. JWN delivered an earnings surprise of 30.3% in the last reported quarter.

Urban Outfitters is a lifestyle specialty retailer that offers fashion apparel and accessories, footwear, home décor and gift products. It sports a Zacks Rank #1 at present. 

The Zacks Consensus Estimate for Urban Outfitters’ fiscal 2025 earnings and sales indicates growth of 20.6% and 7.5%, respectively, from the fiscal 2024 reported levels. URBN delivered a trailing four-quarter average earnings surprise of 22.8%.

Boot Barn, a lifestyle retail chain devoted to western and work-related footwear, apparel and accessories, currently has a Zacks Rank #2 (Buy).

The Zacks Consensus Estimate for Boot Barn’s current financial-year sales indicates growth of 14.9% from the year-ago figure. BOOT delivered a trailing four-quarter earnings surprise of 7.2%, on average.

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American Eagle Outfitters, Inc. (AEO) : Free Stock Analysis Report

Nordstrom, Inc. (JWN) : Free Stock Analysis Report

Urban Outfitters, Inc. (URBN) : Free Stock Analysis Report

Boot Barn Holdings, Inc. (BOOT) : Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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