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What Has Been The Cause For American Eagle's Stock Price Decline?

American Eagle Outfitters ' ( AEO ) stock price has been on a steady downtrend since the release of its second and third quarter results (ended July and October 2016). From a closing high of $19.37 on August 15, the share price has spiraled down to $15.46 on January 3. The share price fell further after the release of the company's comparable store sales for the fourth quarter to date on January 5, which mainly comprises the holiday season. Notably, the comps remained flat year-on-year, as a result of a "choppy" holiday sales season and a highly promotional environment. In an earlier guidance provided by the company, it had predicted a flat to low single digit comps growth. Below we underline the main factors that have pulled down the stock price for the company in recent months.

AEO Stock Price

See our complete analysis for American Eagle Outfitters

1. Weak Guidance

American Eagle reaffirmed its fourth quarter guidance for its EPS to be in the range of $0.37 to $0.39 per diluted share. This, when compared with the EPS in the corresponding quarter of last year, of $0.42, seemed to be poorly received by the investors, given the fact that the fourth quarter is the most important quarter for a retail company. This coupled with the flat comps growth resulted in a fall in the stock price of the company. During the Holiday season, retailers tend to offer various discounts and promotions in order to encourage buying. Since this season accounts for a major chunk of a retailer's earnings, a dismal performance in the quarter will hamper growth. However, the EPS of $0.42 in the corresponding quarter of last year included $0.07 of non-recurring items, including a gain on the sale of a distribution center of $9.4 million, and a lower tax rate of 27.9%, against an anticipated rate of 35% in the quarter this year. This means that the retailer's fourth quarter earnings would actually represent a 6%-11% growth from the adjusted EPS of $0.35 last year.

2. Poor Mall Traffic

American Eagle has blamed traffic weakness in the malls leading into Christmas for a poor comps growth. This has been a result of the rise in e-commerce, prompting a shift from brick and mortar stores to the online channel. This trend has also forced hundreds of collective store closures, including those of Macy's and Walmart. According to Prodco Retail Traffic Index, brick and mortar traffic fell about 7% at stores through December, as compared to the year-earlier period. This shift is expected to continue in 2017, with a rise in online and mobile spending. While the clothing and accessories sales in the industry are increasing year-on-year, the non-store retail sales are the driving force behind it, creeping to over 30% of all retail sales (excluding autos, gas stations, food, and grocery). However, as noted by Jay Schottenstein, CEO of American Eagle, online sales for both American Eagle and Aerie were strong throughout the Holiday season. The company's digital sales represent a huge portion of their sales, accounting for approximately 30% of the revenue. This lends credence to its decision to develop its omni-channel presence by investing in digital marketing, and improve its website and mobile app. During FY 2015, the company invested $29.1 million in developing its e-commerce capabilities, with a further spend in FY 2016. The growth in digital sales has been a major driver for the sales growth of the company in recent quarters as a result of the poor mall traffic.

3. Soft Industry Outlook

The weak fourth quarter announcement by American Eagle was no exception to the prevailing trend in the industry. It came in the wake of warnings from Macy's and Kohl's, with both companies reporting weak holiday sales. The SPDR S&P Retail ETF, which replicates the performance of an index derived from the retail segment of a US total market composite index, dropped more than 3% when the sharp losses of Macy's and Kohl's were disclosed. This again has been a result of a shift of purchases to alternative channels such as online and the off-price channel, which is expected to continue in 2017. Consumer appetite for clothing is also dwindling as people prefer to spend more on experiences. A study by Harris Group found that 72% of millennials prefer to spend their money on experiences, rather than material things. As a result of this, American Eagle is gradually cutting down its store count, and putting a greater focus on its omnichannel presence. This will bode well for the future, as with a growing internet penetration and a greater proliferation of smartphones, the online channel will be the main driver for retail growth in the years to come.

SPDR S&P Retail ETF

Have more questions about American Eagle Outfitters? See the links below:

  • Investors Overlooking American Eagle's Growth Potential
  • How Has American Eagle Performed In 2016?
  • Why Has American Eagle's Stock Price Fallen Despite Meeting Consensus Estimates?
  • Growth Momentum To Continue For American Eagle In The Third Quarter
  • What Is American Eagle Doing To Bolster Its Direct Business?
  • How Is American Eagle Expected To Perform In 2016?
  • How Has the Digital Age Affected Apparel Retailers?
  • How Did American Eagle Manage To Improve Its Gross Margins In The Second Quarter?
  • Growth In Aerie Helps American Eagle Beat Estimates
  • How Will American Eagle Perform In The Second Quarter Of Its FY 2016?
  • How Has The Merchandise Mix Of American Eagle Changed Over The Last Three Years?
  • Why Will American Eagle's Aerie Brand Be A Key Growth Driver In The Future?
  • Why Are We Bullish On American Eagle?
  • What Can Move American Eagle's Stock Down In The Next Couple Of Years?
  • What Is American Eagle Outfitters' Revenue & Net Income Breakdown In Terms Of Different Operating Segments?
  • How Has American Eagle Outfitters' Revenue Composition Changed In The Last Five Years?
  • What's American Eagle Outfitters' Fundamental Value Based On Expected 2016 Results?
  • Where Will American Eagle Outfitters' Revenues Come From In The Next Five Years?

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for American Eagle Outfitters

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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