J.P. Morgan Discusses American Eagle, Aeropostale (AEO, ARO)

J.P. Morgan Chase & Co. is out with a research report discussing American Eagle AEO and Aeropostale ARO. It has a Neutral rating on both companies, and a $17 and $24 price target on shares, respectively. In a note sent to clients, J.P. Morgan writes about AEO, "Lack of consistency at AEO continues to disappoint investors as after a bullish 3Q call and two new OW ratings, flat November comps were below expectations and nothing to write home about, especially considering ANF's sharp gain. Between greater SG&A reduction ($20-$30 mm of benefits flowing through P&L in the next 12-24 months) and markdown opportunity (with markdowns still 500-700 bps above historical levels and inventories finally tightly controlled), we think AEO could have interesting risk/return into 2011, but without more consistent top line, we think the stock is range bound for now. Even a $0.50 special dividend left investors uninspired." Regarding ARO, J.P. Morgan writes, "ARO's position as the value leader in the teen space leaves the company vulnerable to an increasingly promotional retail environment, and we see additional margin pressure in 2011 as a result of product cost inflation, especially on top of several years of significant gross margin gains. While the stock is cheap, we think it's too early to get more constructive, especially as ARO could have down earnings for at least the next two quarters. In addition, Mindy Meads, former Co-CEO and who is credited with turning around ARO's assortment and improving brand image, is stepping down, just as the business becomes more challenged."