Wall Street Is Divided On American Eagle

American Eagle Outfitters

reported Q4 earnings Thursday and beat analyst estimates. http://www.benzinga.com/news/earnings/15/03/5296933/update-american-eagle-beats-q4-estimates-shares-surge The stock spiked upwards nearly 10 percent following the earnings announcement and recently traded at $16.22. Analysts weighed in on the results and while some found the company's performance highly compelling, others saw downside. Below are highlights along with current ratings and price targets. UBS - Neutral, $16 price target "We are encouraged by the progress AEO is making in its turnaround, but with the recent run in the stock (up 30 percent since December), we believe this is already largely reflected in the shares. AEO is benefiting from improved response to product, better customer experience, successful pullback on promo levels, and the aerie repositioning. Within the 3As, we continue to believe that AEO has deviated the least from its roots, and therefore see the most opportunity for a long-term turnaround. To get more constructive from here, we'll look for continued improvement in women's knit tops and improved traffic trends, which will be critical as compares toughen in 2H." BMO Capital Markets - Outperform, $20 price target "Several key points give us confidence in the momentum continuing into 2015 and beyond: 1) Despite the significant decrease in promotions (35 days fewer store-wide promotions in 4Q), the company is still outpacing its teen peers and capturing market share; 2) Holiday was the first reflection of the product vision of chief merchant (and now Global Brand President) Chad Kessler, boding well for future trends as his team can further affect the assortment; 3) Knit tops, a high-margin, yet long-underperforming category is seeing a resurgence; 4) aerie is inflecting, thanks to a revamped product, marketing, and real estate strategy; 5) Margins still have plenty of room for recovery, with 2014 operating margins coming in just over 6 percent, compared to the historical average of about 13 percent. We believe at least low-double-digit operating margins should be achievable." Morgan Stanley - Underweight, $12 price target "The competitive environment has changed and the apparel industry is experiencing structural apparel price deflation, in our view. Therefore we think AEO will be unable to drive traffic without the competitive prices offered by fast-fashion players. In our base case, we forecast a +3 percent 1H blended comp, but -1.5 percent in 2H. This assumes a similar 2-year stack comp in 1H/2H. Additionally, we assume AEO delivers 250 bps 1H gross margin expansion versus just 50 bps in 2H, as AEO benefits from lower average units cost but comes against tough compares. AEO achieves ~7.5 percent EBIT margin in FY16 and 85c in EPS. At 4x $430M EBITDA this yields a $12 stock, -25 percent downside." Susquehanna - Positive, $20 price target "With an improving merchandise position, stringent control of inventories, greater rigor related to expense management, fleet rationalization, leveraging omni-channel capabilities, coupled with strong cash flow dynamics and an effective dividend yield of ~3 percent, in our view, AEO continues to offer a compelling risk/reward investment profile." Stifel - Buy, $20 price target "Our outlook regarding AEO shares has grown more favorable. Thus far in 1Q, sales trends have accelerated as customers are responding favorably to the company's spring floorset. We believe the momentum of AEO's merchandise turnaround is strong and sustainable. Going forward, merchandise improvement, combined with easy comparisons, should drive EPS growth. Given our more favorable outlook, we are upgrading AEO to Buy from Hold. As visibility for a sustained merchandise turnaround and a return to improved levels of profitability become more evident, we believe the stock will trade up to our new target price of $20 (19x our 2016 EPS of $1.05). A 19x multiple is at a slight premium to the current out year multiple, which we view as appropriate given our improved outlook for the company."