A two-year down-trend in American Eagle (NYSE:AEO) shares looks like it’s finally been broken. Shares had been weak and uninspiring since 2018’s decade high, with their brick and mortar sales-focused strategy clearly not evolving quick enough.
When COVID hit in March, it looked like it was going to be the death knell for the $2 billion teen and young adult retailer. By April, clothing sales were down 79% across the board. American Eagle shares crashed through multi-year support and fell all the way back to 2008 levels. But sometimes it takes a near disaster to force the best out of companies. After all, what’s a diamond but a lump of coal that was able to handle some pressure? Shares are now up more than 125% from the lows of April and seem to be at the beginning of a fresh uptrend.
Cloud With A Silver Lining
Like many other stocks out there across various industries, COVID ended up being a blessing in disguise in many ways. There may have already been plans afoot to drive digital and e-commerce sales, but the lockdowns and shutdowns drove consumers to buy online at a scale that would have seemed unimaginable before COVID. Companies that were able to take advantage of it have watched their shares more than recover, while those that have not have had to watch their shares languish at long term lows.
The big driver in American Eagle’s recovery has been growth in its digital sales segment. As reported in their last earnings print in September, a 74% jump in digital revenue helped to make up for the overall drop in sales of 15%. The closure of malls, where American Eagle has most of their stores, was a crippling blow to a company that had been working hard to turn things around.
But the jump in digital sales has given AEO an opportunity to rethink and redefine who they are and how they can appeal to consumers as we turn into a new decade. Their Aerie sub-brand, known for its intimate apparel pieces, has in particular been the shining star that the recovery has been built around. September’s earnings showed digital revenues for Aerie alone jumped more than 140%. It turns out that even in the midst of a pandemic, people still want to buy fashionable underwear and American Eagle has been more than willing to provide. Going forward, there’s every reason to think this trend towards digital will continue.
Solid Momentum
As Wall Street digested the earnings report last month, sell-side firms weren’t slow about coming out in the bulls' corner. JPMorgan (NYSE:JPM) have since maintained their Overweight rating and believe the company is at “a positive multi-year inflection point with Aerie’s double-digit top/bottom-line profile (including high-teens+ annual footage growth & double-digit comps) reaching scale at $1B revenues and AE brand store closures representing a positive sum-of-the-parts catalyst”.
Management is still on track to open upwards of 70 fresh new stores this year which speaks volumes to their confidence in their ability to continue delivering. Still, it’s unlikely to be all plain sailing and there are some who are urging caution.
On Wednesday, Loop Capital were out with a Hold rating on the stock, moving it up from a Sell. Analyst Laura Champine struck a cautiously bullish tone when she said "though there is still massive uncertainty leading into the holiday, we see a consumer that is eager to return to a more normal lifestyle. We still believe the back-to-school season was down YoY, but there is a likelihood for sequential improvement that is greater than our previous estimate”.
Loop’s price target of $15 is right around where AEO is trading right now and Wall Street will be watching their next earnings release in December closely to see if they can keep the rally going. For now though, American Eagle is definitely back and striving to be better than ever.
