Tariffs Test Margins, Campaigns Fuel Traffic: Can AEO Balance Both?

American Eagle Outfitters Inc. AEO is facing mounting cost pressures, particularly from tariff-related expenses and higher supply chain costs. These headwinds weighed on gross margins despite disciplined inventory management and pricing actions. Management highlighted that tariffs are expected to impact gross profit by $20 million in third-quarter fiscal 2025 and by $40-$50 million in fourth-quarter fiscal 2025.

On the last earnings call, the company noted that the previously estimated unmitigated annual tariff impact of $180 million is now reduced to $70 million, due to freight optimization, cost negotiations with vendors and balancing country of origin. The company remains focused on its plan to make the supply chain more efficient and to optimize expenses and gross margin.

Despite margin pressures, the company’s strategic campaigns featuring Sydney Sweeney and Travis Kelce have generated unprecedented new customer acquisition and strong positive traffic throughout the third quarter, with a staggering 40 billion impressions, and for these factors, the company also witnessed record Labor Day results.

American Eagle has seen positive consumer sentiment and a noticeable increase in purchase intent in recent months. The company is focusing on denim as a key growth driver, backed by solid demand and successful marketing strategies.

AEO has clearly shown that it can balance managing profit margins while executing marketing campaigns. The company believes there’s still a chance to ease some of the impacts from tariffs by pushing ahead with its cost-saving and sourcing strategies. At the same time, the company is using strong marketing efforts and merchandising to drive traffic and expand its brand. This two-pronged approach gives AEO a solid way to tackle both margin and growth hurdles through the rest of fiscal 2025 and heading into fiscal 2026.

The Zacks Rundown for AEO

AEO’s shares gained 6.6% year to date against the industry’s decline of 18.3%. AEO carries a Zacks Rank #2 (Buy).

From a valuation standpoint, AEO trades at a forward price-to-earnings ratio of 13.57X, lower than the industry’s average 16.13X.

The Zacks Consensus Estimate for AEO’s current fiscal-year EPS implies a year-over-year decline of 36.2% and next fiscal-year EPS suggests a year-over-year rise of 22.9%.

Stocks to Consider

Boot Barn Inc. BOOT operates specialty retail stores in the United States and internationally. At present, Boot Barn sports a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The consensus estimate for Boot Barn’s current fiscal-year sales and earnings implies growth of 16.2% and 20.5%, respectively, from the year-ago figures. BOOT delivered a trailing four-quarter earnings surprise of 5.4%, on average.

Amazon.com Inc. AMZN engages in the retail sale of consumer products, advertising, and subscription services through online and physical stores in North America and internationally.  At present, Amazon holds a Zacks Rank of 2.

The consensus estimate for Amazon’s current fiscal-year sales and earnings implies growth of 11.8% and 29.3%, respectively, from the year-ago figures. AMZN delivered a trailing four-quarter earnings surprise of 22.5%, on average.

Casey’s General Stores CASY operates convenience stores under the Casey's and Casey's General Store names in the United States. At present, Casey’s General Stores holds a Zacks Rank of 2. 

The consensus estimate for CASY’s current fiscal-year sales and earnings implies growth of 12.3% and 10.5%, respectively, from the year-ago figures. CASY delivered a trailing four-quarter earnings surprise of 24.6%, on average.

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This article originally published on Zacks Investment Research (zacks.com).

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