American Eagle Outfitters Inc. ( AEO Quick Quote AEO - Free Report) has been losing momentum lately, particularly after the soft holiday season which impacted the top line in the last reported quarter. Notably, the shares of American Eagle have dropped nearly 13% since reporting financial results early last month. Moreover, the stock tumbled yesterday to hit 52-week low mark of $13.13 before closing a notch higher at $13.21. The overall weakness in the American Eagle stock is well evident from the 23.7% decline in the last six months. Further, this reflects a significant downside compared with the Zacks categorized Retail – Apparel/Shoe industry’s decline of 15.7%. However, we note that the gap between American Eagle and the industry has considerably narrowed in the recent months. Evidently, American Eagle has declined nearly 13% year to date while the industry is down 11.9%. Nonetheless, this does not make the picture any better for this Zacks Rank #4 (Sell) stock. The lack of confidence on investors’ part is clear from the negative estimate revision trend in the past 30 days. The Zacks Consensus Estimate for fiscal 2017 and fiscal 2018 has declined by 2 cents each to $1.25 per share and $1.31 per share, respectively, in the last 30 days. Though the company’s first-quarter fiscal 2017 estimates have been stable ahead of earnings release, the current Zacks Consensus Estimate of 17 cents per share reflects 24.6% decline from the prior-year quarter. Moreover, analysts polled by Zacks expect revenues of $744.1 million for the fiscal first quarter, down nearly 1% from the year-ago quarter. What’s Wrong? Clearly, the stock is in the doldrums due to American Eagle’s soft revenues in fourth-quarter fiscal 2016 owing to a tough holiday season. The holiday season was marked by intense promotions and sluggish mall traffic. Also, management issued a soft first quarter view, in line with the trends witnessed so far in the quarter. 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. Is this a Temporary Phase? Though drab outlook and the resultant decline in estimates portray a negative picture, we cannot ignore the company’s solid surprise trend and strategic initiatives that position it for growth. Notably, the company has delivered positive earnings surprises in eight out of the past nine quarters, with an average trailing four-quarter surprise of 8.6%. Further, fiscal fourth quarter marked the company’s 10th straight quarter of improved profits.
Further, American Eagle is poised to gain from constant efforts to enhance brands through innovations, efficient utilization of omni-channel capabilities and commitment toward enriching consumer experience. Notably, the company’s solid online sales, which were backed by omni-channel initiatives and efforts to enhance customer experience, boosted comps in the fiscal fourth quarter.
Based on these factors, along with the company’s VGM Score of “A” and a long-term earnings growth rate of 15%, we believe the slump in the stock price may be a temporary phase. Bottom Line 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, we would suggest staying away from the stock until the impact of the challenging retail environment subsides and more pronounced effects of the company’s initiatives are visible. Key Picks Meanwhile, investors may consider better-ranked stocks like The Children's Place, Inc. ( PLCE Quick Quote PLCE - Free Report) sporting a Zacks Rank #1 (Strong Buy), Foot Locker Inc. ( FL Quick Quote FL - Free Report) and Kate Spade & Company , both carrying a Zacks Rank #2 (Buy). You can see . the complete list of today’s Zacks #1 Rank stocks here The Children's Place, with a long-term earnings growth rate of 8%, has surged 13% year to date. Kate Spade has returned 4.2% year to date. Also, it has a long-term earnings growth rate of 28.3%. Foot Locker has jumped 6.6% in the last six months. The stock has a long-term earnings growth rate of 9.7%. Zacks’ Best Private Investment Ideas In addition to the recommendations that are available to the public on our website, how would you like to follow all Zacks' private buys and sells in real time? Our experts cover all kinds of trades… from value to momentum . . . from stocks under $10 to ETF and option moves . . . from stocks that corporate insiders are buying up to companies that are about to report positive earnings surprises. You can even look inside exclusive portfolios that are normally closed to new investors. Starting today, for the next month, you can have unrestricted access. Click here for Zacks' private trades >>