The shares of trendy retailer American Eagle Outfitters have bounced back from their weak start this morning to edge back above breakeven following a downgrade. The company was lowered at Merrill Lynch to sell. Analyst Lorraine Maikis cited high management earnings targets and inventory for the action. We think estimates are too high for fiscal 2007 and fiscal 2008, and expect earnings adjustments to be a negative catalyst for the stock, she wrote in a note to clients. Entering what may be a weak consumer spending environment, we are looking for turnarounds, companies that have managed inventory well or those that can cut costs.
Meanwhile, Maikis said she prefers Abercrombie & Fitch for its productive square footage growth, cost control and lower inventory levels.
AEO hasn't received a lot of love from Wall Street recently. Ahead of today's downgrade, Zacks reported that AEO had received 7 strong buy ratings, 12 holds, and 2 sell rating. Meanwhile, analysts are a little more optimistic about ANF. The stock has earned 10 buys, 5 holds, and 1 sell rating.
AEO is struggling to break out of the downtrend that has seen the shares decline more than 27% since early February. During this time, the equity has been led lower by its 10-week and 20-week moving averages. This technical weakness doesn't exactly paint an appealing picture for investors. However, options players are quite optimistic. Schaeffer's put/call open interest ratio for AEO is lower than 90% of those taken during the past 52 weeks. As more of these bulls run to the bears' camp, the stock could succumb to additional selling pressure.