BMO Capital Markets has upgraded American Eagle Outfitters (NYSE: AEO) to Outperform from Market Perform on the stock's pullback and the upcoming solid
third-quarter results, with outperformance expected in the fourth quarter and continuing into the spring season.
"Nearly halfway through the key fall season, our field research and data mining point to continued product improvement and
market share gains despite ongoing promotional activity around them. In light of the stock's pullback over broader sector concerns,
we see meaningful upside to the shares," analyst John Morris wrote in a note.
Morris noted that American Eagle is trading at the low end of its forward multiple range, likely due in part to
Aeropostale Inc (OTC: AROPQ)'s aggressive
promotions ahead of its store closings. While this is a near-term headwind, the analyst expects it to subside once Aeropostale is
done with its closures.
Related Link: So Far
So Good For American Eagle Outfitters This Year
Upgrade Justification
Following are the key supports for the upgrade thesis:
"American Eagle is the denim destination in an up-trending denim cycle, driving traffic improvement and margin upside."
"We
see strength across the product assortment, beyond denim, in other bottoms classifications and selected tops categories (knits and
sweaters), boding well for the more seasonable fall/Holiday." "Our proprietary data mining shows improvement in the breadth and
depth of markdowns with higher pricing architecture on last year's increases, indicating potential better-than-expected merchandise
margins." "We expect direct competitors such as
Abercrombie & Fitch Co. (NYSE:
ANF) are losing market share to American Eagle due to their own mis-execution."
"American Eagle's continued growth opportunity from its aerie division and improvement from innovation in the men's category." "An
easier Q4 comparison in comps and margins to last year's hiccup. "For the spring, the competitive backdrop improves as we estimate
competitors will close over 500 stores, along with Victoria's Secret (
L Brands Inc (NYSE:
LB)) planned exit of the swim category."
Accordingly, the analyst raised his fourth-quarter EPS estimate to $0.47 from $0.45, putting it above consensus. In addition,
Morris also increased his CY2017 EPS estimate to $1.50 from $1.40.
Further, Morris hiked his price target to $21 from $18, while the stock closed Friday's trading at $17.47.
At last check Monday morning, American Eagle was up 2.78 percent at $17.96.
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