American Eagle Will be 'Unable To Stem Traffic Bleed,' Says Morgan Stanley

In a report published Wednesday, Morgan Stanley analyst Kimberly Greenberger argued that

demonstrated a "solid" second half 2014 improvement, but the second half of 2015 will prove to be a "true test." "After American Eagle laps first half 2015's easy average unit revenue (AUR) compares (negative mid single digit) and must anniversary the third quarter's positive AUR increase, the key question becomes whether American Eagle can deliver positive traffic in the second half 2015," Greenberger questioned in the note. Greenberger answered her own question and stated that the company's third quarter guidance and results will be the "true test." The analyst added that the apparel industry continues to experience structural apparel price deflation and therefore the company will be unable to drive traffic without the competitive prices offered by "fast-fashion" players. Under a "base case" scenario, Greenberger estimated a three percent first half 2015 blended comp, but a negative 1.5 percent comp in the second half 2015. Additionally, the analyst assumed the company delivers 250 basis points first half 2015 gross margin expansion versus just 50 basis points in the second half, as the company benefits from lower average units cost but comes against tough compares. Greenberger did note that a "bull case" scenario calls for four percent comp gains in fiscal 2015 as second half 2015 traffic remains consistent in the mid-single digit comps. Bottom line, Greenberger "remains skeptical" over a bull case scenario and believes the company "will be unable to stem its traffic bleed." Shares remain Underweight rated with a $12 price target.