What a brutal six months it’s been for American Eagle. The stock has dropped 28.6% and now trades at $17.51, rattling many shareholders. This may have investors wondering how to approach the situation.
Is there a buying opportunity in American Eagle, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is American Eagle Not Exciting?
Despite the more favorable entry price, we’re sitting this one out for now. Here are three reasons we avoid AEO, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, American Eagle’s 3.8% annualized revenue growth over the last three years was sluggish. This was below our standard for the consumer retail sector.
2. Lack of New Stores, a Headwind for Revenue
The number of stores a retailer operates is a critical driver of how quickly company-level sales can grow.
American Eagle operated 1,170 locations in the latest quarter, and over the last two years, has kept its store count flat while other consumer retail businesses have opted for growth.
When a retailer keeps its store footprint steady, it usually means demand is stable and it’s focusing on operational efficiency to increase profitability.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
American Eagle historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.8%, somewhat low compared to the best consumer retail companies that consistently pump out 30%+.
Final Judgment
American Eagle isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 10.3× forward P/E (or $17.51 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re fairly confident there are better investments elsewhere. Let us point you toward one of our all-time favorite software stocks.
Stocks We Would Buy Instead of American Eagle
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