Is American Eagle Outfitters Stock a Buy After a Successful Ad Campaign?
Key Points
American Eagle Outfitters (NYSE: AEO) has generated a significant amount of buzz with the advertising campaign released on July 23. The ads featuring actress Sydney Sweeney have inspired considerable amounts of both praise and outrage, amounting to untold millions in free advertising amid heavy media coverage.
Admittedly, the stock price’s recent surge of approximately 25% might induce more investors to buy this stock. Nonetheless, American Eagle also faces a risk of selling off once the campaign is no longer trending. Amid such possibilities, should investors buy the stock or stay on the sidelines?
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American Eagle Outfitters and its ad campaign
American Eagle Outfitters has existed since 1977. It offers clothing, accessories, and personal care products to young adults. Its brands include intimate apparel designer Aerie, luxury brand Unsubscribed, and vintage brand Todd Snyder.
However, the majority of attention in recent days has revolved around its jeans. Its decision to hire Sweeney has attracted attention from various groups, and the approximately $450 million increase in the stock’s market cap during that time has caught the eye of many investors.
That could bode well for American Eagle’s sales in the coming quarters. Additionally, American Eagle has since featured other models of differing ethnicities modeling the same jeans, a decision that could blunt some of the negative publicity. Still, with the short amount of time since the campaign’s release, the longer-term impacts of the Sydney Sweeney ads are not yet clear.
Making sense of the numbers
Moreover, even measuring the short-term numbers is a challenge. Over the last few days, some influencers on X have claimed that American Eagle jeans have “sold out,” and the company’s website claims the AE x Sydney Sweeney Ultra Wide-Leg jeans are “going fast.”
Nonetheless, the latest financials, which do not account for the recent ad campaign, are considerably more subdued. In the first quarter of fiscal 2025 (ended May 3), net revenue declined 5% over the previous 12 months to $1.1 billion, and comparable sales decreased 3%.
Furthermore, the company’s costs and expenses increased over that period. Hence, its net loss of $65 million in fiscal Q1 was a departure from its $68 million profit in the year-ago quarter.
Additionally, the company’s outlook appeared poor at the time of the Q1 release. American Eagle forecasted a 5% yearly drop in revenue, though that was before it released the latest ad campaign.
Also, its 3.8% dividend yield has drawn attention since it is well above the S&P 500 average of 1.2%. Investors should note that it has paid dividends since 2000, and other than a brief suspension in 2020 during the pandemic, that payout has typically risen or remained steady since that time.
Still, the dividend cost the company almost $22 million in the latest quarter, and considering the $116 million in negative free cash flow for the same period, the company may need the newest ad campaign to succeed to sustain the payout.
Furthermore, questions may arise regarding whether the company can maintain its stock gains. American Eagle first reached its current stock price 20 years ago, with previous gains evaporating when market sentiment turned negative. That history could discourage investors from buying into the stock, though its price-to-earnings (P/E) ratio of 16 could make the stock attractive to some prospective shareholders.
Is American Eagle Outfitters stock a buy?
Under current conditions, investors should probably avoid this stock unless one is a risk-tolerant dividend investor or open to speculative positions.
Admittedly, dividend investors tend to be more risk-averse, prompting them to stay away from this stock. However, the ad campaign is likely to significantly improve American Eagle’s financials, making a dividend cut or suspension considerably less likely. That situation could serve income investors well and give speculators a return while they wait for American Eagle to prove itself.
As for the stock’s future, the lack of ability to sustain gains historically should concern investors, and indeed, growth investors should not assume it is a long-term hold yet. Still, for some investors, the stock’s income potential, above-average dividend yield, and low P/E ratio could provide the needed justification to open a position.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends American Eagle Outfitters. The Motley Fool has a disclosure policy.