On Monday, TD Cowen maintained its Market Perform rating on American Eagle Outfitters (NYSE:AEO) and increased the price target to $23.00 from $21.00. The adjustment follows American Eagle's fourth-quarter earnings per share (EPS) for fiscal year 2023, which exceeded expectations by 11 cents, driven by higher gross margins.
The company also provided guidance for fiscal year 2024 and the first quarter of 2024 that surpassed analyst forecasts.
American Eagle's management has outlined a three-year strategic plan with financial targets aiming for a compound annual growth rate (CAGR) of 3-5%, mid to high teens EBIT (earnings before interest and taxes) growth, and an EBIT margin of approximately 10% by fiscal year 2026.
TD Cowen acknowledged the potential for the company to achieve these objectives if it can sustain a consistent low single-digit percentage growth rate.
The firm also recognized the opportunities for Aerie, American Eagle's lingerie and activewear brand, to expand in the activewear market due to its robust brand positioning. However, concerns were raised regarding potential fashion and inventory risks as the American Eagle brand attempts to expand into tops and adjacent product categories.
Additionally, there is skepticism about American Eagle's ability to meet its 300 basis points margin expansion target over the next three years, given that merchandise margins are already at what the analyst considers peak levels.
TD Cowen's revised price target of $23.00 is based on approximately 12 times the fiscal year two price-to-earnings (P/E) ratio and the firm's fiscal year 2025 EPS estimate of $1.92. The valuation, which is consistent with the historical average of around 12x P/E and approximately 7x enterprise value to EBITDA, suggests limited potential for valuation expansion, according to the firm's assessment.
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