Teen Clothing Retailers Are Getting Smacked By Inflation, And This Analyst Has A Dire Prediction For One

Zinger Key Points
  • "This is an unprecedented time in retail," says Jay Schottenstein, executive chairman and CEO of American Eagle.
  • Promotional activity across the entire retail space is expected to continue to weigh on margins, Telsey Advisory Group says.

American Eagle Outfitters Inc AEO shares are under pressure Thursday as analysts slash price targets on the stock following the company's weak earnings results and forecast for continued margin pressures.

What Happened: American Eagle said second-quarter revenue was flat year-over-year. The company reported quarterly revenue of $1.2 billion, which was in line with average analyst estimates, according to Benzinga Pro.

American Eagle reported second-quarter earnings of 4 cents per share Wednesday, which missed average analyst estimates of 14 cents per share.

"This is an unprecedented time in retail. As we cycle exceptional demand from last year, a tougher macro environment is impacting consumer spending behavior. Second quarter performance reflected these challenges, constraining revenue and amplifying margin pressure as we fully cleared through excess spring and summer goods," said Jay Schottenstein, executive chairman and CEO of American Eagle.

Assuming current trends continue, American Eagle sees third quarter gross-margin rates in the mid 30s and fourth-quarter gross margin rates in the low 30s. 

Analyst Assessment: Citigroup lowered its price target on American Eagle to $10 and Cowen & Co cut its price target to $11 following the company's results. Telsey Advisory Group trimmed its price target the least, cutting its 12-month forecast from $15 to $13.

In a note to clients Thursday, Telsey said American Eagle's second-quarter results are reflective of ongoing macro and inflationary pressures that continue to negatively impact both the company and its customers.

The analyst firm's main concerns are centered around margin pressure going forward. 

"While sales were in-line with expectations, margins came under pressure as the company aggressively took actions to clear through excess spring and summer goods in order to better position the business for the back half and all-important holiday season," according to Telsey. 

See Also: Analyst Adjustments For September 8

Although the company said it took swift actions to clear inventory in the second quarter, American Eagle anticipates continued pressure in the back half of the year. Still, Telsey analysts focused on the broader retail environment.

Telsey noted that promotional activity across the entire retail space is expected to continue to weigh on margins in both the third and fourth quarters. As a result, the analyst firm maintained its Market Perform rating on American Eagle. 

"Given our moderated estimates, we are lowering our price target to $13 from $15, which assumes a 14x multiple on our two-year forward EPS estimate of $0.90, consistent with the historical average NTM multiple," Telsey said.

AEO Price Action: American Eagle is making new 52-week lows on Thursday.

The stock was down 8.71% at $10.58 Thursday afternoon. 

Photo: Mike Mozart from Flickr.

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Posted In: Analyst ColorEarningsNewsPrice TargetReiterationSmall CapTop StoriesAnalyst RatingsMoversTrading IdeasJay SchottensteinretailTelsey Advisory Group
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