Declining Physical Stores Will Strain Margins Though Digital May Help

Key Takeaways

• Ongoing shifts to digital channels and demographic changes threaten relevance, compressing margins and curbing long-term revenue and earnings growth.
  
• Heightened competition, sustainability pressures, and alternative retail models undermine profitability and risk prolonged stagnation in market share and cash flow.
  
• Diversified brand growth, digital investments, and supply chain optimization position the company for resilient sales, improved margins, and long-term strength amid changing retail trends.

Catalysts

Operates as a multi-brand specialty retailer in the United States and internationally.

• As consumers increasingly shift toward e-commerce and direct-to-consumer brands, American Eagle Outfitters faces a persistent decline in brick-and-mortar productivity that its ongoing high fixed costs and large physical store footprint may not fully absorb. This is likely to create structural margin pressure and limit future earnings growth, especially as digital-native competitors capture a greater share of the apparel market.
  
• Demographic shifts, including economic strain on Gen Z and Millennials and changes in shopping priorities, threaten to suppress long-term revenue growth as these core customer groups spend less on apparel or divert spending to alternative experiences, digital channels, or secondhand and rental models, undermining the company's relevance and top-line expansion.
  
• Heightened consumer scrutiny of sustainability, combined with growing preference for eco-friendly brands, may force American Eagle Outfitters to increase investment in costly supply chain and material upgrades, further weighing on net margins or contributing to lost market share if the company fails to keep up with evolving expectations.
  
• Intensifying price competition and continued promotional activity, particularly from online disruptors and fast fashion entrants, is likely to erode gross margins over time, with AEO already experiencing margin-diluting markdowns and inventory write-downs in core categories, suggesting challenged profitability into future quarters.
  
• Consolidation in the specialty retail sector and the persistent rise of resale and rental platforms will continue to pressure American Eagle Outfitters' market share and revenue base, as traditional new apparel sales stagnate, resulting in a long-term stagnation or decline in earnings and cash flow even if the chain improves near-term operational execution.

American Eagle Outfitters Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on American Eagle Outfitters compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming American Eagle Outfitters's revenue will decrease by 0.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.7% today to 4.0% in 3 years time.
• The bearish analysts expect earnings to reach $205.8 million (and earnings per share of $1.32) by about August 2028, up from $196.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.2x on those 2028 earnings, down from 11.0x today. This future PE is lower than the current PE for the US Specialty Retail industry at 17.6x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.31%, as per the Simply Wall St company report.

American Eagle Outfitters Future Earnings Per Share Growth

Risks

• Continued expansion and strong performance of Aerie and OFFLINE brands, particularly with Aerie gaining share in intimates and sustained positive growth in activewear, support the case for long-term revenue growth and potential margin upside.
  
• Healthy growth in the customer base across both American Eagle and Aerie, with AE's customer file growing at a high single-digit pace and Aerie at a mid-single-digit rate, indicates brand relevance and supports future sales and cash flow even during challenging periods.
  
• Strategic investments in digital and omnichannel capabilities, shown by increased digital channel traffic and targeted marketing spend, enhance customer engagement and position the company to benefit from the long-term secular trend towards e-commerce, likely improving conversion rates and boosting earnings.
  
• Supply chain optimization initiatives, including fulfillment center rationalizations and reduced sourcing exposure to China, are expected to generate significant cost savings and mitigate macro risks, supporting improved gross margin and operating income over time.
  
• Persistent consumer affinity for denim and casual wear, coupled with American Eagle's stronghold and market share gains in women's denim, means the company is well positioned to capitalize on the long-term industry shift towards casualization, likely providing stable and resilient revenues.

Valuation

• The assumed bearish price target for American Eagle Outfitters is $9.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of American Eagle Outfitters's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $19.0, and the most bearish reporting a price target of just $9.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $5.2 billion, earnings will come to $205.8 million, and it would be trading on a PE ratio of 8.2x, assuming you use a discount rate of 10.3%.
• Given the current share price of $12.44, the bearish analyst price target of $9.0 is 38.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.