Is American Eagle About To Take Off?

American Eagle Outfitters (NYSE: AEO) came into the coronavirus pandemic already on the back foot. Shares had fallen more than 50% from July 2018 through the start of the year and then fell another 50% through March as equities were smashed en masse. As retailers go, they are fairly exposed to the whims of the pandemic and the shutdowns and lockdowns that have been implemented. Not only are they a brick and mortar store at heart but they’re also a shopping mall staple and absolutely a non-essential business.

But with shares up 90% from their lows of last quarter and 20% in August alone, maybe it’s time for investors to reconsider the bet down stock and ask themselves if the worst is baked into the current share price.

Upside Potential

On Wednesday, the folks over at JPMorgan did just that when they upgraded the stock from Neutral to Overweight and raised their price target to $17. This suggests room to the upside of about 40% and would put shares well above pre-COVID levels.

Analyst Matthew Horvers is a fan of the risk/reward profile in play with the company and that over the longer term, the outlook is bright. In a note to clients, he said, "digging deeper, we see the AEO story at a positive multi-year inflection point with Aerie’s double digit top/bottom-line profile reaching scale at $1B revenues and AE brand store closures representing a positive SOTP catalyst (w/ ~50% of leases expiring by 2021-end including 75% of C mall locations) and profitability/SG&A multi-year efficiency opportunity (similar to peer LB)."

The company’s Aerie brand of intimate apparel has become the base that the recovery will be built around. In their fiscal Q1 earnings report in June, Aerie’s revenue was shown to fall only 2% year on year, after a 25% jump last year, compared to the American Eagle brand which saw revenues falling 45% after growth of only 5% last year.

Online Sales Increasing

That same report gave investors a finger on the pulse of how well the company has been able to pivot to e-commerce sales. Despite overall revenue contracting 38% year on year, first quarter revenue from digital sales was up 9%, with Aerie’s online sales up 75% alone. With about two weeks to go until the next earnings report, Wall Street will be watching closely to see if the numbers justify the recent momentum in the stock.

In June, Wedbush highlighted the upcoming back-to-school season as offering solid upside potential to the teen favorite and this will be an interesting catalyst too. They also praised management for swift action at the onset of the pandemic which is paying off now. While raising her price target to $15, analyst Jen Redding wrote “clean inventories support 2Q margin health due to the drastic and swift action taken by management during the initial stages of the crisis. Inventories are clean, and momentum is strong, consumers are engaged".

Getting Involved

From a technical perspective, shares are coming off solid support but facing a tough-looking downtrend. At the same time, the coronavirus hasn’t gone away, businesses have just adapted. Still, they have a blue-chip management team that has done everything right so far and looks capable of guiding them out of these choppy waters.

The company’s balance sheet is healthy, with Wedbush particularly impressed with their “$417M cash and available-for-sale investments at FY19 year-end, and the proceeds of approximately $389M from the recent convertible unsecured note offering, leaving the company with more than enough cash to sustain through the next 3 years without positive free cash flow”.

On top of all that, investors who buy into the recovery story have a tempting 4.50% dividend yield to reward them for their patience.