Should You Buy or Hold American Eagle Stock Post Q2 Earnings?

American Eagle Outfitters, Inc. AEO delivered a solid second-quarter fiscal 2026 performance, with revenues and comparable sales increasing year over year as strong momentum at Aerie and OFFLINE helped offset softness at its core American Eagle brand. The company is investing in digital capabilities, marketing, inventory management and supply-chain initiatives to strengthen its brands, improve operating efficiency and support long-term growth.

AEO's second-quarter results also reflected a significant benefit from IEEPA tariff refunds, which boosted gross and operating margins. While this benefit is largely nonrecurring, underlying business trends are improving, particularly at Aerie, where customer engagement, product momentum and brand awareness continue to expand. Management also expects sales growth and higher gross margins for fiscal 2026.

Shares of American Eagle have declined 21.6% in the past three months, while the industry has also fallen 18.1%.

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American Eagle's Q2 Results

American Eagle reported earnings of 79 cents per share for the second quarter, up from 45 cents in the year-ago quarter and significantly above the Zacks Consensus Estimate of 21 cents. Net revenues increased 8% year over year to $1.38 billion, while comparable sales increased 6%. Aerie remained the key growth engine, with comparable sales rising 19%, while American Eagle comps declined 1%.

Profitability improved sharply, although the gains were substantially influenced by tariff refunds. Gross profit increased 34% to $672 million, while gross margin expanded 980 basis points to 48.7%. The quarter included a $179 million net tariff-refund benefit in gross profit, which contributed 1,300 basis points to gross-margin expansion. Merchandise margin, however, deleveraged 330 basis points as improvement at Aerie was more than offset by markdowns at American Eagle.

Operating income increased to $211 million from $103 million a year ago, while operating margin expanded to 15.3% from 8%. A $161 million net operating income benefit from tariff refunds accounted for a substantial portion of the improvement. SG&A increased 19% to $408 million, reflecting planned advertising investments and tariff-refund-related incentive compensation.

Inventory increased 14% year over year at cost, with units up 9%, partly reflecting incremental tariffs. Management plans to continue rebalancing inventory between brands and categories during the remainder of the year.

AEO's FY26 Outlook Signals Continued Growth

Management expects fiscal 2026 comparable sales to increase in the mid-single digits, with gross margin projected to expand year over year. Operating income is expected in the range of $540-$550 million, inclusive of the net tariff-refund benefit. For the third quarter, comparable sales are expected to increase in the mid-to-high single digits, while operating income is projected at $110-$115 million.

Aerie and OFFLINE are expected to remain the strongest contributors, with third-quarter comparable sales projected in the high-teens to 20% range. In contrast, American Eagle comps are expected to be approximately flat. The company expects third-quarter gross margin to be roughly flat year over year, while SG&A is projected to rise in the high-single digits.

The Case for AEO Stock

Aerie remains a powerful growth engine. Aerie revenues increased 25% in the second quarter to $536 million, while comparable sales rose 19%. Growth was broad-based across stores, digital channels and categories, including apparel, intimates and activewear. The brand is also expanding its customer base, with its Advocate program nearly doubling during the quarter.

Aerie's relatively lower brand awareness compared with American Eagle provides additional room for expansion. Management is using digital marketing, in-store events, Realmakers and advocacy initiatives to increase engagement and attract new customers. Continued innovation across bras, intimates, apparel and coordinated outfitting should provide multiple avenues for growth.

Strategic investments are strengthening the broader business. American Eagle has been investing in digital capabilities, distribution-center automation, inventory management and supply-chain diversification while working with sourcing vendors to reduce costs and lower exposure to China. These initiatives are designed to improve agility, inventory discipline and margin health.

Operating leverage presents another opportunity. Management expects advertising to become a leverage line on a forward 12-month basis as the company laps elevated spending. AEO is also targeting SG&A leverage in fiscal 2027 if comparable sales grow at low-to-mid-single-digit rates. Continued efforts to control rent, delivery and distribution costs could further improve profitability if revenue growth remains healthy.

The company also retains financial flexibility to fund growth initiatives and return capital to shareholders. AEO ended the second quarter with approximately $148 million in cash and investments and $783 million of total liquidity, including its revolver. It returned $21 million through its quarterly dividend during the quarter.

AEO Stock: Risks to Watch

Uneven performance at American Eagle remains a key concern. While consolidated comparable sales increased 6%, American Eagle comps declined 1%. Men's delivered a fourth consecutive quarter of positive comps, but the women's business continues to require improvement. The company is working through older denim fits and seasonal inventory, with shorts identified as a major area requiring cleanup.

These challenges are also weighing on merchandise margins. AEO expects additional markdowns in the third quarter as it rebalances inventory. Consequently, the pace of margin recovery could remain constrained until the core American Eagle business achieves more consistent product and inventory execution.

The second-quarter results benefited substantially from $196 million of IEEPA tariff refunds, including interest. The net operating-income benefit was $161 million, while substantially all refunds tied to submitted claims have now been received.

Higher selling, general and administrative (SG&A) expenses could limit near-term operating leverage. SG&A increased 19% in the second quarter, driven primarily by planned advertising investments and tariff-refund-related incentive compensation. Management expects SG&A dollars to increase at a low-double-digit rate for fiscal 2026. While advertising is expected to begin leveraging as the company laps elevated spending, expense growth could remain a near-term pressure on profitability.

Buy or Hold AEO Stock?

American Eagle is showing encouraging signs, but the investment case remains dependent on whether strength at Aerie can continue to offset uneven trends at the core American Eagle brand. Aerie's strong comparable-sales growth, expanding customer base and product momentum provide a meaningful growth opportunity, while investments in digital capabilities, marketing, inventory management and supply-chain efficiency should support longer-term improvement.

Further, AEO's improving sales trends, strong Aerie performance, potential for operating leverage and relatively attractive valuation support a favorable outlook. The stock trades at about 7.87X forward 12-month earnings, below the Zacks sub-industry average of 11.98X.

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Given Aerie's strong growth trajectory, improving execution at American Eagle and opportunities for margin expansion, AEO appears positioned for further upside, although investors should closely monitor the core brand's recovery and the normalization of tariff-related benefits. AEO currently carries a Zacks Rank #3 (Hold).

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

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