Oppenheimer Downgrades American Eagle Despite Doing 'Everything Right This Year'

• The share price of American Eagle Outfitters (NYSE: AEO) has appreciated 14.05 percent year-to-date, opening at $16.15 on November 30.
• Oppenheimer’s Anna Andreeva has downgraded the rating on the company to Perform, while lowering the price target from $19 to $17.
• Following the surge in the share price since December 2014, Andreeva prefers to move to the sidelines.

Analyst Anna Andreeva mentioned that the company “has done everything right this year,” and if this momentum persists, with operating margins close to 10 percent and sales productivity in the mid-$500's, “degree of positive earnings revisions likely levels off in '16, on top of tougher compares.”

At 37 percent, American Eagle Outfitters’ gross margins are in line with the five-year average and only slightly below the company’s long-term goal of margins in the high 30s to low 40s range, “driven by strong full-price selling and occupancy leverage.”

The American Eagle Outfitters brand has been benefiting from the competitive environment in recent times. However, with Hollister beginning to gain ground, Andreeva believes that market share gains could become less linear for American Eagle Outfitters.

On the other hand, while the stock’s multiple has expanded since Spring 2014 and the brand continuing to be well positioned to outperform, Andreeva believes that multiple expansion could be limited in the absence of meaningful EPS upside.