American Eagle (AEO), a Zacks Rank No. 5 (Strong Sell), faces the headwind of a weak profit outlook driven by uncertainty over teen apparel demand, high teenage unemployment, and shifts in purchasing patterns away from apparel into durable items. On Aug. 21, the company guided its Q3 EPS outlook substantially lower to the $0.14 to $0.16 range, compared to the then Zacks Consensus EPS Estimate of $0.36.
Earnings Estimates Have Plunged
American Eagle will have to prove itself to the investment community before buyers come running. FY 2014 and FY 2015 EPS estimates have been each cut 14 times over the past seven days, and the Zacks Consensus EPS Estimates for FY 2014 and FY 2015 have been reduced by 24.6% to $0.89 and 19.8% to $1.41, respectively. The trade is expecting a promotional and competitive environment in the near term, which could have margins and profitability under pressure.
Even though earnings estimates have been reduced, the stocks is trading at 14.1x expected 12-month forward EPS. This is about in line with the 10-year median. Moreover, the PEG ratio is 1.43 compared to a 10-year median of 1.07. American Eagle does not look to be a value.
Cash Flow Conditions Show Deterioration
In FY 2013, the company posted negative free cash flow after the dividend payment, suggesting a deteriorating financial condition. The weak profit picture may further hinder cash generation and could have some ramifications for the dividend and/or capital spending if the trend continues.
American Eagle has made lows in the $7 to $11 area in recent years. Around $14.75, the stock may be rich from a chart perspective and not on the radar screen of bottom fishers.
Those looking for exposure to the apparel space may want to take a look at Citi Trends (CTRN), a Zacks Rank No. 1 (Strong Buy). Citi Trends is a value priced urban apparel retailer. Its earnings estimates have been working higher over the past 30 days, and it appears more strongly positioned in the marketplace.
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