American Eagle clothing and accessories retailer American Eagle store seen in Tokyo.
Budrul Chukrut | SOPA Images | Light Rocket | Getty Images
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We will be buying 250 shares of American Eagle Outfitters (AEO) at roughly $27.49 after you receive this email. Following the trade, the Charitable Trust will own 4,700 shares of American Eagle Outfitters. The buy will increase AEO’s weighting in the portfolio from 2.91% to 3.07%.
After reporting a blowout quarter that we think will prove to be one of the best and cleanest among specialty retail this earning season, shares of American Eagle Outfitters are moving sharply lower Wednesday morning.
We don’t think this decline has anything to do with what AEO management signaled yesterday in their earnings call. We heard a lot of confidence in the business yesterday with plenty of momentum across all three store concepts and a strong inventory position heading into the holidays. The company is profitably growing, and we expect this will continue in the fourth quarter despite industry-wide challenges in the supply chain, which by the way, is an area they are executing better than its peers.
American Eagle getting unfairly punished
So why is AEO trading sharply lower? There is a group move happening in retail Wednesday following the disappointing earnings reports, weak guidance, and overall poor execution from Gap and Nordstrom. The stocks of Gap and Nordstrom are blowing up today and trading more than 20% lower in early trading, dragging down the stock prices of other names in apparel and department stores.
This earning season in retail has created winners and losers. The winners have been companies who have the right combination of product assortment, pricing power, and a handle of their supply chain. The losers are companies that are losing share, getting less full prices and becoming more promotional, and are having a costly time sourcing inventory.
We believe American Eagle Outfitters is in the winners category based on its exposure to casual wear, the higher full-price sales driven gross margins, and manageable supply chain constraints. With shares trading lower today as part of a group move, this is creating a dislocation in true value that we want to take advantage of. After the dust settles this earnings season, we believe the buyers will come back to the winners who reported strong numbers and provided an optimistic view of the fourth quarter.
Keep this point in mind when analyzing whether it’s right for AEO to trade lower on the GPS report: Gap may have a market share problem on its hands this holiday season. The company cited challenges last night in their receipt of inventory due to Vietnam factory shutdowns and congestion in the ports. If Gap can’t get its inventory in time for Black Friday and the start of the shopping season, this should be a tailwind to American Eagle Outfitters’ leading denim business and also their activewear category.
With AEO being a positive standout in apparel over a sea of disappointment this week, we believe it’s wrong to sell AEO based on what Gap and Nordstrom said last night, and we view today’s sell-off as an opportunity to add to our position.
Lastly, we think AEO is an attractive value name in a market that is concerned about multiplies thanks to its cheap price-to-earnings multiple and attractive 2.63% dividend yield.
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(Jim Cramer’s Charitable Trust is long AEO.)