On Thursday, Morgan Stanley maintained its Underweight rating on shares of American Eagle Outfitters (NYSE:AEO) but reduced the price target to $17 from the previous $18. The firm expressed concerns about the company's long-term profit margin targets, potential gross margin reversion, and continued volatility in selling, general, and administrative expenses (SG&A).
The analyst highlighted several risks that could affect American Eagle's earnings per share (EPS) in the future. These risks include the possibility of a gross margin reversion, ongoing volatility in SG&A, and what the firm considers to be ambitious long-term operating margin (OM) targets.
According to Morgan Stanley, these factors contribute to the potential for significant negative revisions to American Eagle's out-year EPS projections. The firm's stance is influenced by these concerns, coupled with what it perceives as limited potential for an increase in the company's stock valuation.
American Eagle Outfitters, a retailer known for its apparel and accessories, is facing scrutiny from analysts as it navigates the competitive and ever-changing retail landscape. The adjusted price target reflects the challenges that the company may encounter as it strives to meet its financial objectives in the coming years.
The revised price target of $17 suggests that Morgan Stanley sees limited room for the stock's valuation to rise from its current level. The firm's analysis indicates caution regarding American Eagle's future earnings potential, guiding investors to temper their expectations for the stock's performance.
In other recent news, American Eagle Outfitters reported a record revenue of $1.3 billion in its second quarter of 2024, marking a 4% increase in comparable sales. The firm's operating income and earnings per share also saw substantial growth, with a 55% rise in the former and a 56% surge in the latter to $0.39. Both American Eagle and Aerie brands contributed to this success, with respective growth rates of 5% and 4%.
TD Cowen, Telsey Advisory Group, and Citi have all adjusted their outlook on American Eagle Outfitters, reducing their stock price targets while maintaining a neutral stance. These revisions followed the company's second-quarter earnings report, which showed mixed results, with some segments underperforming expectations.
In terms of recent developments, American Eagle Outfitters ended the quarter with $192 million in cash and no debt, returning $120 million to its shareholders. The company revised its full-year operating income outlook to range between $455 million and $465 million. Lastly, the firm's gross margin rose by 10%, indicating a positive performance across both physical stores and digital channels.
InvestingPro Insights
While Morgan Stanley maintains a cautious stance on American Eagle Outfitters, InvestingPro data paints a nuanced picture. With a market capitalization of $3.87 billion and a P/E ratio of 15.83, American Eagle is trading at a low P/E ratio relative to near-term earnings growth, as per InvestingPro Tips. This suggests that the stock may be undervalued considering its growth prospects. Additionally, American Eagle has maintained dividend payments for 21 consecutive years, which could appeal to income-focused investors. The company's record of profitability over the last twelve months, coupled with analysts' predictions of continued profitability this year, provides a counterbalance to the concerns raised by Morgan Stanley.
InvestingPro data shows that American Eagle has a PEG ratio of 0.5 based on data from the last twelve months as of Q2 2025, indicating potential undervaluation relative to earnings growth expectations. The company also boasts a solid gross profit margin of 39.38% and a return on assets of 7.11%, highlighting efficient operations and asset utilization. For those interested in dividend investing, the dividend yield stood at 2.48%, with a notable dividend growth of 25.0% in the same period.
For investors seeking a deeper analysis, there are additional InvestingPro Tips available on https://www.investing.com/pro/AEO, which could provide further insights into American Eagle's financial health and future prospects.
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