We recently compiled a list of the 12 Most Undervalued Retail Stocks To Buy According to Analysts. In this article, we are going to take a look at where American Eagle Outfitters, Inc. (NYSE:AEO) stands against the other undervalued retail stocks.
Is the US Consumer Strong?
Jerome Powell, Chair of the US Federal Reserve, said that the Fed is in no rush to make further rate cuts given the current state of the US economy. The October retail sales numbers indicate that American consumers are still spending, with retail sales growing 0.4% in October. On November 15, Skyler Weinand, chief investment officer of Regan Capital, appeared on Bloomberg to discuss the retail sales numbers.
He said that the Fed will likely cut rates in the current economy in December, with January bringing a 50/50 scenario. The next 13-14 months might bring two or three Fed cuts, bringing the Fed fund rate down to 4%. In the meantime, Weinand says that the backend of the curve might be selling off, and we might see 5% again on the long end of the curve. He says that this is actually welcoming news, as a steep rate curve is wanted.
With the steepening yield curve also being a forecast of the bond market that inflation will be higher in the future, Weinand says that the US consumer and corporations are extremely strong, with corporate balance sheets seeing the least amount of leverage since 1950. Debt to equity in the United States is standing at 19%, and consumer balance sheets are extremely strong as well. Consumer debt, including mortgage debt, has been around the same for the last five years, yet US net wealth has grown to around $165 trillion.
All of this shows that the consumer is strong and that there is a considerable runway for consumers to potentially spend and re-lever. In addition, the government is going to spend $2 trillion next year in a fiscal deficit. Weinand thus believes that there are so many wheels behind inflation that could potentially trigger a rise of 2.5% to 3% above current levels. For him, the fear of inflation is real.
Consumer Spending Rising Amid Holiday Season
CNBC’s NRF Retail Monitor also showed a solid bounce back in consumer spending after a disappointing September, with declining gas prices bringing a little extra money into the pockets of Americans for discretionary spending. On November 12, CNBC’s Steve Liesman joined ‘Squawk Box’ to talk about the Retail Monitor, saying that retail sales grew by 0.7% month over month after a 0.3% decline in September. In addition, core retail grew by 0.8% month over month and 4.6% year over year in October.
A further sector-wise breakdown of retail sales in October shows a 2.7% month-over-month growth in sporting goods and hobbies, a 1.8% month-over-month increase in nonstore retailers, and a 1.7% month-over-month growth in building and garden supplies. Health and personal care grew by 1.4% month-over-month. However, clothes and accessories underwent a 0.6% month-over-month decline, and so did electronics and appliances, falling by 0.8% month-over-month.
On November 16, Rick Caruso, founder and executive chairman of Caruso, joined CNBC’s ‘Power Lunch’ to discuss his take on holiday retail. He said consumers are in “great shape” going into the holiday season. They might start to shop early, with retailers offering earlier sales. Retail sales suggest that the economy has plenty of momentum going into the holiday season, but the 2024 holiday season is likely to have five fewer days of shopping than the holiday season of 2023.
We recently published an article on the 7 Best Department Store Stocks to Buy According to Hedge Funds. Here is an excerpt from it:
An interesting brand loyalty crisis is also emerging this holiday season. Consumers are looking for better prices and deals instead of going back to the brands they always shop at. They are looking for the best value and are generally inching away from brand loyalty, prioritizing quality and price over brand names and tags. According to McCarthy, consumers seek quality, value, and variety when they go holiday shopping. He says that:
“With the perception of higher prices still top of mind, consumers are really caught between trying to stretch their wallets and being festive and so this really means they’re torn between seeking value and remaining loyal.”
He further says that around two-thirds of consumers are expected to switch brands if they find the price too high, and around 50% are willing to switch retailers to save. In addition, 78% of shoppers plan to participate in promotional events this October and November. Trends also show that privately labeled brand sales are expected to grow faster than national brand sales this year.
He suggests that retailers must ensure that they provide good quality, good value price points, and a variety of selection that attracts consumers. He also offers advice to consumers looking to save some dollars without slashing items from their holiday list, saying that:
“Shoppers are encouraged to explore multiple retailers to look for a competitive deal or a price point that they think is going to work for them.”
Our Methodology
To compile a list of the 12 most undervalued retail stocks to buy according to analysts, we used the Finviz stock screener and online sources to compile a list of the top 15 undervalued retail stocks with forward P/E ratios less than 15 as of November 18, 2024. We then checked their upside potential, according to analysts, and chose the top 12 stocks with the highest potential. The stocks are arranged in ascending order of analysts’ upside potential as of November 18, 2024.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close-up of a customer trying on a stylish Aerie item, smiling with satisfaction.
American Eagle Outfitters, Inc. (NYSE:AEO)
Forward P/E: 10.31
Analyst Upside: 24.73%
American Eagle Outfitters (NYSE:AEO) is a global specialty retailer that offers accessories, clothing, and personal care items under its American Eagle and Aerie brands. The company’s operations are split into two segments, with American Eagle functioning as an apparel and jeans brand, and Aerie operating as a lifestyle brand that offers apparel, intimates, activewear, and swim collections. OFFLINE by Aerie offers an elaborate collection of activewear and accessories.
The company’s profitability model is strong, which is why analysts are bullish on the stock. It delivered its sixth consecutive quarter of record revenue while simultaneously achieving meaningful operating income growth in fiscal Q2 2024. It is making consistent progress across its strategic priorities, which align with the company’s multi-year growth plan.
American Eagle Outfitters (NYSE:AEO) functions on three key pillars, including amplification of its brands, optimization of its operations, and execution with financial discipline. Strength across these three pillars resulted in a fiscal Q2 2024 revenue of $1.3 billion, a new record for the company. It managed a 4% comparable store sales growth and an 8% total revenue increase for the same quarter, which highlights its strong operation model.
Since American Eagle Outfitters (NYSE:AEO) exited fiscal Q2 2024 with a healthy balance sheet with $192 million in cash and no debt, it leveraged its healthy cash flow to undertake long-term investments in its brands and operations. It also returned $120 million in cash to its shareholders through a combination of share repurchases and dividends, bringing year-to-date returns to $180 million in line with the company’s commitment to deliver value to its shareholders. It ranks eighth on our list of the 12 most undervalued retail stocks to buy according to analysts.
Overall AEO ranks 8th on our list of the most undervalued retail stocks to buy according to analysts. While we acknowledge the potential of AEO as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AEO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
