Digital Competition And Declining Traffic Will Hurt Retail Prospects

Key Takeaways

• Intensifying digital and mall-related competition threaten both sales growth and foot traffic, placing sustained pressure on revenue and in-store performance.
  
• Rising costs, narrow brand focus, and volatile consumer demand increase risks to profit margins and long-term business stability.
  
• Brand-driven marketing, supply chain optimization, digital investment, and Aerie expansion are set to diversify revenues, boost margins, and enhance long-term profitability.

Catalysts

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

• As e-commerce juggernauts like Amazon continue to capture greater online apparel market share, American Eagle faces intensifying digital competition that threatens both digital and physical traffic, likely resulting in sustained pressure on long-term comparable sales growth and revenue.
  
• The company remains overexposed to declining mall foot traffic due to a significant portion of its store fleet residing in traditional shopping centers, which structurally limits in-store sales and could hinder overall top-line growth despite attempts at strategic store closures.
  
• Despite short-term boosts from celebrity-driven marketing collaborations, heightened consumer price sensitivity and unpredictable demand among younger shoppers increase volatility in transaction volumes, raising the risk that recent customer acquisition trends will not translate into durable revenue expansion or higher customer lifetime value.
  
• Persistently rising labor, freight, and raw material costs-exacerbated by significant tariff headwinds-are expected to compress gross and operating margins for the foreseeable future, undermining earnings growth even if revenue stabilizes.
  
• Major reliance on the American Eagle and Aerie brands with limited portfolio diversification leaves the company vulnerable to rapid shifts in fashion cycles and aggressive moves by ultra-fast fashion players, heightening the risk of inventory markdowns and long-term margin erosion.

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 grow by 1.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.7% today to 6.5% in 3 years time.
• The bearish analysts expect earnings to reach $356.3 million (and earnings per share of $1.5) by about September 2028, up from $197.1 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 5.1x on those 2028 earnings, down from 16.5x today. This future PE is lower than the current PE for the US Specialty Retail industry at 18.7x.
• 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 9.89%, as per the Simply Wall St company report.

American Eagle Outfitters Future Earnings Per Share Growth

Risks

• American Eagle's recent celebrity-driven marketing campaigns with Sydney Sweeney and Travis Kelce have resulted in record-breaking new customer acquisition, significant national brand awareness, and strong product sell-throughs across genders and age groups, which could contribute to sustained top-line revenue growth and improved customer lifetime value.
  
• The company is executing on a long-term strategy to optimize its supply chain-including country of origin remixing, vendor cost negotiations, freight optimization, and ongoing automation efforts-to significantly mitigate tariff and input cost pressures, which could stabilize or grow gross and operating margins in the coming years.
  
• The continued expansion and strong rebound of the Aerie brand, particularly in the high-margin intimates segment and loungewear, is diversifying revenue streams and positioning the business to capture secular growth in categories aligned with consumer lifestyle trends, supporting consolidated revenue and profitability.
  
• American Eagle's investments in digital channel enhancements and omni-channel retailing, evident in increasing digital traffic and higher average unit retail (AUR) in the digital business, indicate an ability to capture rising e-commerce demand and enable better data analytics for personalization, potentially improving conversion rates and earnings over time.
  
• Effective SG&A control and cost management, along with a targeted approach to optimizing the store fleet and increasing modernized store designs for Aerie and offline locations, are likely to support margin improvement and operational efficiency, strengthening earnings and free cash flow in the long term.

Valuation

• The assumed bearish price target for American Eagle Outfitters is $10.0, 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 $21.5, and the most bearish reporting a price target of just $10.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $5.5 billion, earnings will come to $356.3 million, and it would be trading on a PE ratio of 5.1x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of $19.25, the bearish analyst price target of $10.0 is 92.5% 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.