Seeking Alpha: American Eagle Back On Track, But The Shares Reflect It

I liked American Eagle Outfitters (NYSE:AEO) as a long-term turnaround play back in February of 2014, and while there were some hard times still to come (the shares traded down another 25% or at their worst), the stock is up more than 25% overall since then - better than the S&P 500, better than Gap (NYSE:GPS) or Urban Outfitters (NASDAQ:URBN), and much better than still-struggling Aeropostale (NYSE:ARO) and Abercrombie & Fitch (NYSE:ANF).

I don't believe AEO's share price recovery has been based on wishful thinking; management has made real progress in rationalizing its selling space, improving its inventory management, increasing its floorset turnover, and upgrading its merchandise assortment. The question is where the business can go from here. I think American Eagle is still going to have a tough time growing revenue at more than a mid-single digit rate given rampant competition, and I likewise believe there is only so far the company is likely to go with its margin improvements. A return to the good old days of mid-teens FCF margins would support a fair value well into the $20s, but I don't see that as particularly likely and I think the shares are more likely only a dollar or two undervalued today.

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American Eagle Back On Track, But The Shares Reflect It