American Eagle Outfitters Inc. (NYSE:AEO) shares rose on Wednesday after the stock was upgraded by Bank of America (BoA) analysts ahead of the retailer’s third quarter earnings report due on Tuesday, November 21.
American Eagle shares traded up 5.5% at US$19.66 on Wednesday afternoon.
The BoA analysts upgraded the stock to ‘Neutral’ from ‘Underperform’ as they see near-term momentum for upward estimates revisions driven by stronger-than-expected revenues.
They also upped their price objective on the stock from $12.50 to $19.
The analysts upgraded their 3Q earnings per share (EPS) estimate by 9% to $0.49 and full-year 2023 EPS estimate by 7% to $1.36 on their stronger sales and gross margin forecast.
They wrote that their 3Q EPS estimate implies 4.6% sales growth, 1% growth at American Eagle and 15% growth at its intimate apparel sub-brand Aerie.
Wall Street analysts expect 3Q EPS of $0.47 and a 2.8% year-over-year increase in sales to $1.28 billion.
“We were encouraged by the double-digit sales trends at Aerie in the third quarter to date [guided by management] and recognize this is a major inflection relative to year-to-date trends,” they wrote.
“We see upside potential to 4Q consensus total sales and forecast 7% growth compared to consensus 3.8%.”
However, the analysts cautioned that a slow holiday season posed a risk to their thesis.
“We maintain a relatively cautious view about the demand for apparel retailers this holiday and expect shoppers to seek value,” they wrote.
“We think the biggest near-term risk to AEO is a slowdown in sales trends and the inability to keep promotions controlled given deeper discounting pressure from peers. Over the next several quarters, the lack of progress on right-sizing selling, general and administrative expenses (SG&A) may hurt sentiment and limit upward revisions.”
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