Morgan Stanley Upgrades American Eagle Outfitters On Margin Upside, Liquidity

While American Eagle Outfitters Inc’s AEO operating expense discipline and store rationalization could lend upside to EBIT margins in the medium term, the company’s liquidity position seems adequate for the risk of a second wave of virus outbreak, according to Morgan Stanley.

The American Eagle Analyst

Kimberly Greenberger upgraded American Eagle Outfitters from Underweight to Equal-Weight, raising the price target from $9 to $11.

The American Eagle Thesis

American Eagle’s volumes at both brick and mortar stores and online have exceeded expectations so far in the second quarter, Greenberger said in the note.

The outperformance may have been driven by pent-up demand, customer resiliency, and the company’s improving merchandise execution.

The analyst commended American Eagle for bringing productivity at its reopened stores to 95% of last year’s levels and generating 77% growth in digital, despite operating only about half the fleet.

With a marked shift from store to digital, lease renegotiations and targeted store closures could yield occupancy expense savings, Greenberger said.

American Eagle is likely to have exited the first quarter with excess liquidity of an estimated $631 million, which seems adequate for the company to withstand second wave risks.