American Eagle (AEO)

Young adult apparel retailer American Eagle Outfitters (NYSE:AEO) met Wall Street’s revenue expectations in Q4 CY2024, but sales fell by 4.4% year on year to $1.6 billion. On the other hand, next quarter’s revenue guidance of $1.09 billion was less impressive, coming in 6.7% below analysts’ estimates. Its non-GAAP profit of $0.54 per share was 6.3% above analysts’ consensus estimates.

Company Overview

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.

Apparel sales are not driven so much by personal needs but by seasons, trends, and innovation, and over the last few decades, the category has shifted meaningfully online. Retailers that once only had brick-and-mortar stores are responding with omnichannel presences. The online shopping experience continues to improve and retail foot traffic in places like shopping malls continues to stall, so the evolution of clothing sellers marches on.

Retailers offering youth-focused apparel and accessories include Abercrombie & Fitch (NYSE:ANF), Urban Outfitters (NASDAQ:URBN), and The Gap (NYSE:GPS).

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $5.33 billion in revenue over the past 12 months, American Eagle is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale.

As you can see below, American Eagle’s 4.3% annualized revenue growth over the last five years (we compare to 2019 to normalize for COVID-19 impacts) was sluggish as its store footprint remained unchanged.

This quarter, American Eagle reported a rather uninspiring 4.4% year-on-year revenue decline to $1.6 billion of revenue, in line with Wall Street’s estimates. Company management is currently guiding for a 5% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 3% over the next 12 months, similar to its five-year rate. This projection doesn't excite us and implies its products will see some demand headwinds.

Number of Stores

A retailer’s store count influences how much it can sell and how quickly revenue can grow.

American Eagle operated 1,172 locations in the latest quarter, and over the last two years, has kept its store count flat while other consumer retail businesses have opted for growth.

When a retailer keeps its store footprint steady, it usually means demand is stable and it’s focusing on operational efficiency to increase profitability.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales gives us insight into this topic because it measures organic growth for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year.

American Eagle’s demand has been spectacular for a retailer over the last two years. On average, the company has increased its same-store sales by an impressive 3.6% per year. Given its flat store base over the same period, this performance stems from not only increased foot traffic at existing locations but also higher e-commerce sales as demand shifts from in-store to online.

In the latest quarter, American Eagle’s same-store sales rose 3% year on year. This performance was more or less in line with its historical levels.

We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate product differentiation, negotiating leverage, and pricing power.

American Eagle has good unit economics for a retailer, giving it the opportunity to invest in areas such as marketing and talent to stay competitive. As you can see below, it averaged an impressive 38.9% gross margin over the last two years. That means for every $100 in revenue, $61.05 went towards paying for inventory, transportation, and distribution.

American Eagle’s gross profit margin came in at 37.3% this quarter, in line with the same quarter last year and exceeding analysts’ estimates by 1.7%. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

American Eagle was profitable over the last two years but held back by its large cost base. Its average operating margin of 6.1% was weak for a consumer retail business. This result is surprising given its high gross margin as a starting point.

On the plus side, American Eagle’s operating margin rose by 3.8 percentage points over the last year, as its sales growth gave it operating leverage.

In Q4, American Eagle generated an operating profit margin of 8.9%, up 8.3 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, and administrative overhead.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

American Eagle’s EPS grew at an unimpressive 3.3% compounded annual growth rate over the last five years, lower than its 4.3% annualized revenue growth. However, its operating margin actually expanded during this time, telling us that non-fundamental factors such as interest expenses and taxes affected its ultimate earnings.

In Q4, American Eagle reported EPS at $0.54, down from $0.61 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 6.3%. Over the next 12 months, Wall Street expects American Eagle’s full-year EPS of $1.74 to grow 1.3%.

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.

American Eagle has shown impressive cash profitability, driven by its attractive business model that gives it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 3.8% over the last two years, better than the broader consumer retail sector. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? 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 2.6%, lower than the typical cost of capital (how much it costs to raise money) for consumer retail companies.

American Eagle reported $359 million of cash and $1.45 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $657.1 million of EBITDA over the last 12 months, we view American Eagle’s 1.7× net-debt-to-EBITDA ratio as safe. We also see its $7.77 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see American Eagle beat analysts’ gross margin expectations this quarter. We were also happy its EPS outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter missed significantly, making this a weaker quarter. The stock traded down 5.6% to $10.85 immediately after reporting.

Updated: May 22, 2025 at 10:34 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in American Eagle.

American Eagle’s business quality ultimately falls short of our standards. First off, its revenue growth was a little slower over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its wonderful same-store sales growth is among the best in the consumer retail sector, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its operating margins are low compared to other retailers.

American Eagle’s P/E ratio based on the next 12 months is 6.1x. While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $12 on the company (compared to the current share price of $10.85).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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