American Eagle: Good Management In A Worsening Macro Environment

It’s true that adverse macro conditions don’t impact all companies equally, but for a company of American Eagle Outfitters, Inc.’s (NYSE:AEO) size, there’s not much it can do to escape an increasingly difficult macro environment. I’ve been impressed with management’s efforts in merchandising in the past, as well as their efforts to optimize inventory and supply chain and store operating costs (including optimizing the footprint). That can still help in an environment of double-digit declines in teen retail spending and a potentially oncoming recession.

It's been a while since I’ve written on American Eagle, and at the time of my last article, I didn’t like the valuation or risk-reward balance. Down about 50% since then, I’m more positive on the shares from a valuation point of view, but I do still have concerns about the macro environment - even the best house on the block is at risk if the neighborhood is on fire. Mid-single-digit revenue growth and mid-single-digit free cash flow margins can support a long-term annualized return of around 10%, but investors need to be willing to wait out a few more quarters of pressured results.

 

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American Eagle: Good Management In A Worsening Macro Environment