Should You Buy This Stock? Down 53%

  • American Eagle stock has crashed that other retailers in 2022
  • The company could be struggling because of inventory problems like other retailers.
  • Its debt condition might change its course.

American Eagle shares (like other retail stocks) have experienced a blow this year. However, its issues might stretch further than other retail firms.

Slowed consumer discretionary spending and recession fears have deteriorated retail stocks in 2022. Also, extended inventory issues have overwhelmed retail shares. American Eagle Outfitters, the young adult clothing retailer, isn’t an exception.

Besides the broader problems, American Eagle took its first debts (in history) in 2022 to cushion the then-emerging COVID pandemic. The company plans more deficit applications. Meanwhile, AEO stock remains lower than other retailers and could appear like a lucrative bargain. Here is why that could not be the case.

Excess of Something

Consumers had extra cash to spend when the COVID-driven stimulus hit their checking accounts. Moreover, at-home orders fueled discretionary spending, saving individuals the money they would have spent on traveling, movie outs, and dinners. American Eagle flourished in 2022 following such changes. The company closed the year with annual sales at $5 billion record high.

Moreover, the company concluded the year with the highest inventory level. Meanwhile, Fed started hiking interest rates, citing the red-hot US economy. The Federal Reserve continued to hike rates this year. Meanwhile, the timing appeared worse for AEO shares and the company.

The firm’s Q1 earnings report revealed a 23% inventory jump to $628.1 million. Also, it confirmed expecting sales to surge in low-one-digit percentages because of macroeconomic shifts. The modest sales increase will challenge it in selling the elevated inventory, with fashions changing between spring and summer.

Painful markdowns could solve the firm’s inventory issues. And that might obstruct gross margins in the upcoming quarters. Moreover, it can take inventory write-downs. Investors might think the 53% decline in 2022 reflects all the stock’s negative news. However, American Eagle Outfitters has further problems beyond the inventory surfeit.

Doubtful Capital Allocation

American Eagle Outfitters took a $643M long-term debt following fears of the worst as COVID emerged. The obligation comprised 3.75 percent convertible notes plus borrowings under the variable-rate credit facility. The firm has since paid most of its debts on the revolver and declared exchanging most of the mentioned convertible notes.

Investors analyzing retail stocks that might return to past glory could access several options, but American Eagle Outfitters (AEO) might not be among them.

Leave a Comment