Is American Eagle Outfitters (AEO) Now a Buy for Long-Term Growth? Valuing Momentum-Driven Turnaround Potential Amid Competitive Valuation Dynamics

American Eagle Outfitters (AEO) has emerged as a compelling case study in retail resilience, navigating a challenging macroeconomic landscape with a strategic focus on margin discipline, brand innovation, and shareholder returns. As of Q2 2025, the company reported $1.28 billion in revenue—a 1% decline year-over-year—but delivered a 2% increase in operating income to $103 million, driven by a 38.9% gross margin (up 30 basis points) and a 10% reduction in shares outstanding via a $231 million share repurchase program [1]. This performance, coupled with a valuation that appears undervalued relative to industry benchmarks, raises the question: Is AEO now a buy for long-term growth?

Financial Performance: Margin Expansion and Strategic Turnaround

AEO’s Q2 results underscored its pivot from volume-driven growth to profitability-focused operations. While total comparable sales dipped 1%, the Aerie brand—a key growth engine—delivered 3% comp growth, outperforming the core American Eagle brand, which saw a 3% decline [2]. This divergence highlights AEO’s strategic reallocation of resources toward high-margin segments. Aerie’s success, fueled by product innovation (e.g., the Parisian Romance Capsule) and a rebound in intimates/loungewear, has positioned it as a “Star” in the BCG matrix, while the American Eagle brand functions as a “Cash Cow,” prioritizing margin preservation over aggressive sales growth [3].

Cost discipline further bolstered profitability. Selling, general, and administrative (SG&A) expenses fell 1% year-over-year to $342 million, and gross margin expansion was attributed to reduced markdowns and improved sell-through rates [1]. These measures, combined with a 15% year-over-year increase in diluted EPS to $0.45 (far exceeding the $0.20 consensus), demonstrate AEO’s ability to navigate soft demand while maintaining operational flexibility [4].

Valuation Metrics: Undervaluation Amid Industry Averages

AEO’s valuation multiples suggest it is trading at a discount to both industry averages and peers. As of Q2 2025, the company’s EV/EBITDA stands at 8.17x, below the apparel industry average of 9.15x (NYU Stern) and 12.26x for Apparel Manufacturing [5]. Its P/E ratio of 17.73x and P/B ratio of 1.6x further indicate a premium to book value but a moderate multiple relative to earnings. This undervaluation is amplified when compared to Abercrombie & Fitch (ANF), which trades at a 6.5x P/OpInc but has underperformed AEO in operating income growth (-8.4% vs. ANF’s 102.5%) and revenue growth (1.6% vs. ANF’s 10.6%) over the past three years [6].

The discount is particularly striking given AEO’s strong balance sheet and capital allocation strategy. Share repurchases have reduced outstanding shares by 10%, directly boosting EPS, while a $200 million accelerated share repurchase in Q2 signals management’s confidence in the stock’s intrinsic value [1]. Additionally, AEO’s debt-to-equity ratio of 1.2x, though higher than the S&P 500’s 18.6%, is manageable given its operating cash flow and disciplined SG&A management [4].

Competitive Positioning: Aerie’s Growth vs. ANF’s Transformation

AEO’s competitive edge lies in its dual-brand strategy. Aerie’s 3% comp growth and market leadership in intimates (third-largest brand) contrast with ANF’s broader but less focused portfolio, which includes Hollister and Your Personal Best [5]. AEO’s celebrity-driven campaigns—such as collaborations with Sydney Sweeney and Travis Kelce—have generated 40 billion impressions and driven sellouts in denim, a core category for the American Eagle brand [2]. These initiatives, combined with Aerie’s product innovation, have attracted 700,000 new customers in Q2 alone [4].

However, ANF’s recent turnaround under CEO Fran Horowitz—marked by inclusivity-driven marketing, digital innovation, and a debt-free balance sheet—poses a long-term threat [6]. While AEO focuses on profitability, ANF’s lower valuation and stronger ROIC suggest it may outperform in a growth-driven environment. That said, AEO’s current valuation and margin resilience make it a more attractive buy for investors prioritizing stability over aggressive expansion.

Risks and Mitigations: Tariffs and Market Dynamics

AEO faces near-term headwinds, including $20–50 million in tariff-related costs for Q3–Q4 2025. Management has mitigated exposure by rebalancing sourcing geographies and negotiating vendor terms, reducing unmitigated exposure from $180 million to $70 million [1]. These strategies, coupled with selective price increases, demonstrate agility in navigating trade tensions.

Longer-term risks include softness in core categories like men’s apparel and the potential for Aerie’s growth to plateau. However, AEO’s store optimization plan—closing 35–40 underperforming American Eagle locations and opening 30 Aerie and OFFLINE stores—positions it to reallocate capital toward high-growth formats [3].

Conclusion: A Buy for Margin-Driven Growth

American Eagle Outfitters’ Q2 performance and valuation metrics paint a compelling case for long-term investment. The company’s margin expansion, Aerie-led growth, and disciplined capital allocation have created a valuation discount relative to industry averages and peers. While risks like tariffs and competitive pressures persist, AEO’s strategic focus on profitability and brand innovation provides a durable foundation for shareholder value. For investors seeking a buy, AEO offers a unique combination of undervaluation and momentum-driven turnaround potential—a rare alignment in today’s retail landscape.

Source:
[1] AEO Inc. Reports Second Quarter Fiscal 2025 Results [https://investors.ae.com/press-releases/news-details/2025/AEO-Inc--Reports-Second-Quarter-Fiscal-2025-Results/default.aspx]
[2] American Eagle Q2 2025 slides: Profit rises despite sales dip; Aerie outperforms [https://www.investing.com/news/company-news/american-eagle-q2-2025-slides-profit-rises-despite-sales-dip-aerie-outperforms-93CH-4222745]
[3] Deep Dive: Aerie's Strength Fuels American Eagle's Q2 Comeback [https://medium.com/@briangopfa2/deep-dive-aeries-strength-fuels-american-eagle-s-q2-comeback-b1dba78d4ed9]
[4] American Eagle Outfitters Q2 2025 Earnings Call Transcript [https://finance.yahoo.com/news/american-eagle-outfitters-inc-aeo-070341438.html]
[5] Enterprise Value Multiples by Sector (US) [https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/vebitda.html]
[6] Better Bet Than American Eagle Outfitters Stock [https://www.trefis.com/articles/574388/better-bet-than-american-eagle-outfitters-stock-pay-less-to-get-more-from-anf-2/2025-09-05]