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We have downgraded our recommendation to Neutral on leading teen apparel retailer, American Eagle Outfitters Inc. (AEO - Analyst Report), on Mar 18, on account of the company’s soft outlook based on weak consumer spending driven by higher payroll taxes and adverse weather conditions in February.

Why Downgrade?

We are impressed with American Eagle’s consistent earnings performance, strong revenue growth and strategic initiatives to expand and control costs. However, we remain slightly cautious due to the company’s soft guidance based on a weak consumer spending environment.

Looking at its earnings surprise history, American Eagle has either met or beaten the Zacks Consensus Estimates in the past 6 quarters. The average positive surprise in the trailing 6 quarters comes to 1.3%.

The most recently reported earnings of 55 cents per share for fourth-quarter fiscal 2012, was in line with the Zacks Consensus Estimate, while surging over 41% from the prior-year comparable quarter. The year-over-year improvement was driven by robust top-line growth coupled with lower input cost and favorable markdowns. Revenues and comparable-store sales increased by 9% and 4%, respectively.

American Eagle is relentlessly focusing on initiatives to cut down costs through supply chain efficiencies and is updating product allocation systems to boost its bottom line. Additionally, the company’s fundamentals remain strong given its AE’s rewards program and strategic store expansion plan. We believe that American Eagle’s cost-saving initiatives and long-term growth strategy have not only provided financial flexibility, but helped drive value proposition.

However, we remain cautious on the stock given a soft first-quarter fiscal 2013 outlook driven by adverse weather conditions in February and some macroeconomic challenges. The company projects earnings for the quarter to come between $0.16 and $0.19 per share compared with 22 cents reported in the first quarter of fiscal 2012.

Other Stocks Worth Considering

American Eagle currently has a Zacks Rank #4 (Sell) rating. Other stocks worth considering in the retail space are Cabela’s Inc. (CAB - Analyst Report), which has a Zacks Rank #1 (Strong Buy), DSW Inc. (DSW - Snapshot Report) and New York & Company (NWY - Snapshot Report), both of which hold a Zacks Rank #2 (Buy).

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