Options Trade – American Eagle Outfitters (NYSE:AEO) Puts 
Sunday, March 09, 2014

**OPTIONS TRADE: Buy the AEO May 2014 15.000 put (AEO140517P00015000) at or under $1.50, good for the day. Place a protective stop limit at $0.60 and a pre-determined sell at $3.00.

by Ian Harvey

March 09, 2014

Introduction

Due to the impact of increased taxes, slow job growth, changing spending patterns, higher healthcare costs and gasoline prices, U.S. buyers spent cautiously last year. This was clearly visible in the holiday season as the U.S. retail industry saw its weakest growth since 2009. Moreover, extreme weather conditions prevented buyers from completing their shopping. As a result, U.S. foot traffic declined by 17.7% in December 2013 as compared to December 2012. Overall, foot traffic during the holiday season decreased by a staggering 14.6%, which was significantly higher than ShopperTrak’s earlier prediction of 1.4% decline. Moreover, while U.S. buyers spent freely on electronics, furniture and building materials, they were hesitant to spend on clothing. According to a Reuters poll conducted before the holiday season, about 27% of consumers were planning to lower their spending on apparel this holiday season.

In January, retail sales fell by 0.4% from a month earlier as consumer confidence slipped and the U.S. witnessed record cold and heavy snowfall that prevented store visits. The Thompson Reuters/University of Michigan’s consumer sentiment index fell to 81.2 in January from 82.5 in the previous month.

American Eagle Outfitters (NYSE: AEO), a specialty retailer, will report its fourth quarter results before the market opens on March 11. The stock has managed a meager 0.3% gain year to date. Headed into the company's quarterly report analysts have forecast earnings of $0.26 per share.

The teen apparel retailer struggled through most of fiscal 2013 due to its missed fashion calls and the weak retail environment. It is apparent these trends continued through the fourth quarter, the results of which the company will report on March 11. American Eagle provided a business update in January stating that its comparable sales during the holiday season declined by a sizable 7%. It also slashed its fourth quarter EPS guidance to $0.26 per share, which is near the lower end of its previous guidance. It is believed that apart from an overall slowdown in the U.S. apparel industry, American Eagle’s weak brand image weighed on its results. Although the company is employing several strategies to enhance the fashion content in its product portfolio, it is not expected to see any noticeable impact on the upcoming results.

Also, in January, American Eagle’s CEO Robert Hanson left the company and Jay Schottenstein (executive chairman) was named interim CEO.

Company Details

American Eagle Outfitters, Inc. (AEO, Inc) is a specialty retailer that operates in the United States and Canada, and online at ae.com. AEO, Inc operates under the American Eagle (AE), aerie by American Eagle (aerie), and 77kids by american eagle (77kids) brands.

Through the Company’s family of brands, it offers clothing, accessories and personal care products. Its online business, AEO Direct, ships to 77 countries worldwide. As of January 28, 2012, the Company operated 1,090 stores in the United States and Canada under the American Eagle Outfitters, aerie and 77kids brands. AEO Direct is its e-commerce operations, ae.com, aerie.com and 77kids.com.

During the fiscal year ended December 31, 2011, the Company opened 33 new stores, which consisted of 11 AE stores, 10 aerie stores and 12 77kids stores. As of December 31, 2011, it operated in all 50 states, Puerto Rico and Canada. During fiscal 2011, the Company remodeled and refurbished a total of 106 AE stores.

Key Statistics for AEO

Current P/E Ratio (ttm) 13.7271
Estimated P/E(01/2014) 19.7257
Relative P/E vs. SPX 0.7927
Earnings Per Share (USD) (ttm) 1.0476
Est. EPS (USD) (01/2014) 0.7290
Est. PEG Ratio 2.0012
Market Cap (M USD) 2,772.32
Shares Outstanding (M) 192.79
30 Day Average Volume 4,724,953
Price/Book (mrq) 2.3244
Price/Sale (ttm) 0.8245
Dividend Indicated Gross Yield 3.48%
Cash Dividend (USD) 0.1250
Dividend Ex-Date 03/31/2014
5 Year Dividend Growth -1.28%
Next Earnings Announcement 03/11/2014

Technical Analysis

American Eagle Outfitters has a 1-year low of $12.59 and a 1-year high of $22.63. The stock has a 50-day moving average of $14.02 and a 200-day moving average of $14.7.

The company has a market cap of $2.665 billion and a price-to-earnings ratio of 16.43.

Earnings

American Eagle Outfitters last posted its quarterly earnings results on Friday, December 6th. The company reported $0.19 EPS for the quarter, meeting the Thomson Reuters consensus estimate of $0.19. The company had revenue of $857.00 million for the quarter, compared to the consensus estimate of $844.76 million.

During the same quarter in the prior year, the company posted $0.41 earnings per share. The company’s quarterly revenue was down 5.8% on a year-over-year basis. On average, analysts predict that American Eagle Outfitters will post $0.73 earnings per share for the current fiscal year.

Lost loyalty

Lately, U.S. buyers have shown low brand loyalty as they have been readily shifting to brands that provide relevant fashion at affordable prices. American Eagle has been at the receiving end of this trend due to its missed fashion calls, over-emphasis on basic products, and limited fashion variety. As a result, teenage buyers have developed a perception that American Eagle brand is no longer “cool”. On the other hand, retailers such as Gap Inc and Urban Outfitters have seen tremendous success by offering a vast variety of trendy products, in line with the changing seasons. Due to this, American Eagle has been unable to grab a sizable share of low consumer spending on apparel. During its January business update, the company stated that its sales were mainly impacted by the traffic driving promotional activities.

Analysts Opinions

American Eagle Outfitters was upgraded by equities research analysts at McLean Capital Management from a “neutral” rating to a “buy” rating in a research note issued to investors on Friday, 21st February, 2014.

However, American Eagle Outfitters was downgraded by analysts at TheStreet from a “buy” rating to a “hold” rating in a research report issued to clients and investors on Thursday, 20th February, 2014.

The analysts wrote, “American Eagle Outfitters (AEO) has been downgraded by TheStreet Ratings from buy to hold. The company’s strengths can be seen in multiple areas, such as its reasonable valuation levels and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, poor profit margins and weak operating cash flow.”

Also, the company has been the subject of a number of research reports:-

• Analysts at Jefferies Group reiterated a “buy” rating on shares of American Eagle Outfitters in a research note on Thursday, January 23rd.

• Separately, analysts at Telsey Advisory Group cut their price target on shares of American Eagle Outfitters from $16.50 to $15.00 in a research note on Thursday, January 23rd. They now have a “not rated” rating on the stock.

• Finally, analysts at Stifel Nicolaus downgraded shares of American Eagle Outfitters from a “buy” rating to a “hold” rating in a research note on Thursday, January 23rd. They now have a $18.00 price target on the stock, up previously from $14.31..

One research analyst has rated the stock with a sell rating, fifteen have given a hold rating and fourteen have issued a buy rating to the company’s stock. American Eagle Outfitters has an average rating of “Hold” and a consensus target price of $18.21.

Conclusion

Competitor Abercrombie & Fitch (ANF) recently posted better than expected results, as did The Gap (GPS), but in both cases the companies lured in consumers with deep discounts, and The Gap issued disappointing forward guidance. It is believed that there is still too much risk in the sector to warrant any upwards movement on American Eagle, especially with the stock rising so sharply over the last two weeks.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the AEO May 2014 15.000 put (AEO140517P00015000) at or under $1.50, good for the day. Place a protective stop limit at $0.60 and a pre-determined sell at $3.00.



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