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Why is American Eagle (AEO) Down 8% Since Q4 Earnings?

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Once an investors’ favorite, American Eagle Outfitters, Inc. (AEO - Free Report) has been losing ground of late, as evident from its dismal stock performance. This apparel and footwear retailer has underperformed the Zacks categorized Retail – Apparel/Shoe industry over the past six months, with its shares down 20.4%, compared with the industry’s decline of 13.1%.
 



In fact, this Zacks Rank #4 (Sell) stock has declined nearly 8% since it released fourth-quarter fiscal 2016 results, wherein earnings delivered a positive surprise. Then, what has been weighing upon investors’ sentiment? Let’s find out.

While American Eagle reverted to its positive earnings surprise trend in fourth-quarter fiscal 2016, the company posted soft revenues on account of a tough holiday season. The holiday season remained highly promotional, which along with soft consumer traffic weighed upon the top line. Evidently, total revenue dropped nearly 1% year over year to $1,097.2 million, which also fell short of the Zacks Consensus Estimate of $1,106 million.

Further, consistent with the trends witnessed so far this quarter, management issued a soft outlook for first-quarter fiscal 2017. The company anticipates comps to range from flat to low single-digits decrease. Further, the company expects weak merchandise margins, owing to intense promotional activities. Selling, general and administrative expenses are forecasted to be in line with the year-ago period.

Considering all factors, the company envisions first quarter earnings in the band of 15–17 cents per share, which compares unfavorably with 22 cents recorded in first-quarter fiscal 2016. Following the drab outlook, the Zacks Consensus Estimate witnessed a downtrend, as analysts become less constructive of the stock’s ongoing performance. Evidently, estimates for the first quarter and fiscal 2017 have plunged 22.7% to 17 cents and 6.7% to $1.35, over the past 30 days. 

Apart from this, we remain worried about macroeconomic hurdles like volatile consumer behavior and sluggish mall traffic, looming over the retail industry. Further, the company faces stiff competition from other large players in the industry, which poses threat to American Eagle’s operating performance.

While strong market opportunities makes management hopeful of delivering solid returns to shareholders in the long run, the company’s near-term trajectory appears troubled.

Hence, investors can count on better-ranked stocks in the same industry, like Children's Place, Inc. (PLCE - Free Report) , DSW Inc. and Kate Spade & Company , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Children's Place has an average positive earnings surprise of 36.3% in the trailing four quarters. The stock, with a long-term growth rate of 10.3%, has seen positive estimate revisions in the last 60 days.

DSW Inc.’s long-term earnings per share (EPS) growth rate of 6.8% and impressive earnings surprise history bodes well.

Kate Spade, with long-term EPS growth rate of 28.3%, has seen positive estimate revisions over the past 30 days.

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