American Eagle Outfitters Could Soar In The Second Half Of 2016; BMO Upgrades

BMO Capital Markets has upgraded American Eagle Outfitters AEO to Outperform from Market Perform on the stock's pullback and the upcoming solid third-quarter results, with outperformance expected in the fourth quarter and continuing into the spring season.

"Nearly halfway through the key fall season, our field research and data mining point to continued product improvement and market share gains despite ongoing promotional activity around them. In light of the stock's pullback over broader sector concerns, we see meaningful upside to the shares," analyst John Morris wrote in a note.

Morris noted that American Eagle is trading at the low end of its forward multiple range, likely due in part to Aeropostale Inc AROPQ's aggressive promotions ahead of its store closings. While this is a near-term headwind, the analyst expects it to subside once Aeropostale is done with its closures.

Related Link: So Far So Good For American Eagle Outfitters This Year

Upgrade Justification

Following are the key supports for the upgrade thesis:

"American Eagle is the denim destination in an up-trending denim cycle, driving traffic improvement and margin upside."
• "We see strength across the product assortment, beyond denim, in other bottoms classifications and selected tops categories (knits and sweaters), boding well for the more seasonable fall/Holiday."
• "Our proprietary data mining shows improvement in the breadth and depth of markdowns with higher pricing architecture on last year's increases, indicating potential better-than-expected merchandise margins."
• "We expect direct competitors such as Abercrombie & Fitch Co. ANF are losing market share to American Eagle due to their own mis-execution."
• "American Eagle's continued growth opportunity from its aerie division and improvement from innovation in the men's category."
• "An easier Q4 comparison in comps and margins to last year's hiccup.
• "For the spring, the competitive backdrop improves as we estimate competitors will close over 500 stores, along with Victoria's Secret (L Brands Inc LB) planned exit of the swim category."

Accordingly, the analyst raised his fourth-quarter EPS estimate to $0.47 from $0.45, putting it above consensus. In addition, Morris also increased his CY2017 EPS estimate to $1.50 from $1.40.

Further, Morris hiked his price target to $21 from $18, while the stock closed Friday's trading at $17.47.

At last check Monday morning, American Eagle was up 2.78 percent at $17.96.

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