American Eagle’s Ugly Holiday Results Doom AEO Stock

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American Eagle Outfitters (AEO) stock fell sharply Friday, a day after taking an axe to its holiday selling season earnings forecast amid weak mall traffic and tougher competition. AEO stock plunged by more than 10% as soon as the market opened.

American Eagle AEO stockSpecialty teen retailers such as AEO, Abercrombie & Fitch Co. (ANF) and Aeropostale Inc (ARO) are stuck in a multiyear funk and it’s not clear what will bring them back to life. Part of the problem is that shoppers are still being cautious with their discretionary dollars even five years into the recovery, and are making fewer trips to malls.

At the same time, so-called fast fashion chains like H&M — owned by Sweden’s Hennes & Mauritz AB (HMRZF) — has been stealing market share by updating fashions more frequently and offering more compelling prices. Privately held Forever 21, Inc. has also been taking share for teen retailers like American Eagle.

The bottom line is that AEO is in trouble and the best idea it can come up with is to shrink its way to growth. Indeed, a cost-cutting program calls for the retailer to close 150 stores in North America over the next three years. (Needless to say, that’s not going to do much for American Eagle’s top line.)

AEO is also trying to take a page or two from the fast-fashion playbook, speeding up sourcing so it can respond to changes in taste on the fly.

The market usually loves a good cost-cutting program and there’s no harm in giving AEO a chance to rework its strategy, but it’s hard to expect investors to have much patience when the all-important holiday selling season is already looking like a dud.

AEO Stock Sinks on Outlook

As part of its third-quarter earnings report, AEO said fourth-quarter earnings would come in at 30 cents to 33 cents a share. Wall Street analysts, on average, were looking for earnings to hit 35 cents a share in the current quarter. That comes on top of a quarterly earnings report that managed to meet Street expectations, but was ugly nonetheless.

For the three months ended Nov. 1, AEO said profit tumbled to $9 million, or 5 cents a share, from $24.9 million, or 13 cents a share, in last year’s third quarter. On an adjusted basis — which is what analysts typically look at — earnings came to 22 cents a share. That was in line with Street estimates, according to a survey by Thomson Reuters.

So where does AEO go from here? As tough a year as American Eagle has had, AEO stock was off only 4% for the year-to-date before Friday’s selloff. More promising, it’s even bounced back over the last couple of months. AEO stock had been flirting with $14 recently after bottoming out below $11 in the summer.

Troubled retailer stocks often make good candidates for rebound trades, but now that it’s had to punt on the holidays, AEO stock doesn’t look good even for that. And as for value buyers coming in to snag shares on the cheap, well … AEO stock ain’t cheap. It trades at more than 17 times forward earnings when the long-term growth forecast is less than 7%.

Bottom Line

AEO is out of favor with its core customers and is finding it hard to regain whatever cache it once had. It’s not cheap enough to take a chance on deep value, and it’s not priced for death like Best Buy Co Inc (BBY) was before it went on its own 2013 rally.

Apart from perhaps being useful for harvesting tax losses, AEO stock doesn’t have much going for it. Teens don’t need this chain. It’s hard to say who could need this stock.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/american-eagle-aeo-stock/.

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