American Eagle Continuing To Flounder As Margins Disappoint

Among Warren Buffett’s many famous sayings is, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact,” and that quote seems pretty fitting for American Eagle Outfitters (AEO) as an otherwise well-regarded management team continues to struggle with a host of margin challenges.

This was supposed to be a year where AEO started better leveraging past SG&A spending, and while sales have improved and SG&A leverage has also improved, greater than expected weakness at the gross margin line has more than canceled out any benefit. Although buying AEO on dips has historically been a money-making opportunity, this “dip” could well see the shares drop below $11 before reversing, and the company’s higher apparent fair value is really moot until management can post consistent numbers that move sentiment in a more positive direction.

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American Eagle Continuing To Flounder As Margins Disappoint