Jefferies said American Eagle Outfitters could face trouble down the road.
Analyst Randal J. Konik downgraded the retailer to "hold" from "buy." The analyst believes American Eagle will perform poorly in the face of a possible U.S. recession that would lead to a slowdown in consumer spending. He also cut his price target for AEO to $16 from $18. The new target price is slightly below American Eagle's closing price on Tuesday.
Konik wrote in a note Wednesday: Apparel/footwear is typically an underperforming category from the beginning to the end of a recession, and typically recovers as overall spending increases. On average, in the last eight recessions, the apparel/footwear category didn't grow until the quarter the recession ended.
He also lowered his forecast for American Eagle's sales growth through 2023, predicting revenue this year will be flat compared to last year. That was below consensus forecasts for a 3 per cent rise. The stock is trading at 14 times forward earnings, a premium to its three - and five-year average valuation, Konik added.
Shares of American Eagle Outfitters are up more than 14 percent in 2023. The stock is also up 64 per cent since the end of September. AEO was down 1.8% in pre-market trading on Wednesday.
Jefferies also downgraded other apparel companies to "hold" from "buy," including AKA Brands, Torrid Holdings and Lulu's Fashion Lounge, citing risks to slowing demand. Konik reiterated his buy ratings on footwear brands Nike, Foot Locker and Boot Barn, citing expectations of greater resilience in the footwear sector.
While our analysis of spending in the personal consumer category combines footwear and apparel sales, we believe footwear will be more resilient, Konik wrote. Footwear typically has a shorter replacement cycle than clothing, which we believe enhances sales resilience. In footwear, we prefer the BOOT, FL and NKE.