On Thursday, CFRA made a bearish move on American Eagle Outfitters (NYSE:AEO), downgrading the stock from Hold to Sell and lowering the price target to $20 from the previous $22. The revised price target is based on a 12.5x multiple applied to the updated fiscal year 2025 earnings per share (EPS) estimate, which aligns with the retailer's historical forward price-to-earnings ratio.
The downgrade follows American Eagle's release of its fourth-quarter earnings, which outperformed consensus estimates with normalized EPS of $0.61 compared to $0.37, and revenue totaling $1.68 billion, slightly above the anticipated $1.50 billion. The company experienced growth in comparable store sales for both its Aerie and American Eagle brands, by 13% and 6% year-over-year respectively.
CFRA also noted improvements in the company's adjusted gross margin, which expanded by 340 basis points year-over-year to 37.3%, driven by lower input and freight costs, as well as reduced markdowns. Despite a 9% year-over-year increase in inventory, with units up by 11%, the company considers this to be a healthy level that will support its growth goals.
American Eagle has announced a three-year strategic plan aiming for a 10% operating margin and revenues between $5.7 billion and $6.0 billion. CFRA believes these targets are within reach, assuming economic stability.
However, the firm has expressed concerns about the stock's valuation, indicating that at 16 times the company's fiscal year 2025 earnings guidance, shares are trading above both three- and five-year average multiples, suggesting an overvalued status.
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