American Eagle Outfitters: ROCE-Driven Growth Hides in Plain Sight

The stock price of American Eagle Outfitters (AEO) has lagged behind peers in the apparel sector over the past three years, trading at just $18.50 as of May 2025—a far cry from its 2021 peak of $34. Yet beneath the surface, a compelling story of operational revival is unfolding. With Return on Capital Employed (ROCE) improving steadily since 2022 and earnings growth accelerating, AEO presents a rare opportunity to buy a turnaround story at a discount. This is a stock primed to surprise the market.

ROCE: The Underrated Turnaround Metric

ROCE measures how effectively a company generates profits from its capital investments. For AEO, this metric has been on a clear upward trajectory since hitting rock bottom in 2022:

• 2021: 20.6% (pre-pandemic operational challenges weighed on results).
• 2022: 10.3% (supply chain disruptions and store closures derailed efficiency).
• 2023: 14.2% (restructuring efforts began to bear fruit).
• 2024: 15.3% (the highest in three years, signaling restored capital productivity).

This recovery is no accident. Management's focus on cost discipline, inventory optimization, and brand revitalization—particularly in the high-margin Aerie division—has been critical. Aerie now contributes over 30% of AEO's total revenue, with its premium, sustainable lingerie and activewear resonating with younger, affluent consumers.

Earnings Growth Outpaces the Numbers

While ROCE highlights operational efficiency, earnings metrics confirm the bottom-line impact:

• 2020 EPS: $0.55
• 2021 EPS: $0.10 (hurt by pandemic-era store closures).
• 2022 EPS: $0.75 (recovery began).
• 2023 EPS: $1.20 (a 60% jump year-over-year).
• 2024 EPS: $1.60 (estimated, per consensus forecasts).

Even with these gains, AEO's P/E ratio of just 11.5x trails its peers (e.g., L Brands at 15x and PVH Corp. at 18x). The market has yet to recognize the full potential of AEO's turnaround, creating a rare mispricing.

Why Now Is the Time to Act

1. Valuation Discount: At current prices, AEO trades at a 50% discount to its pre-pandemic P/E highs, despite stronger fundamentals today.
2. Debt Under Control: Total debt has been slashed by 25% since 2020, reducing interest expenses and freeing capital for growth.
3. Share Buybacks: AEO has $1 billion remaining under its buyback program, signaling confidence in its undervalued stock.
4. Global Expansion: Aerie's international rollout—now in 15 countries—could unlock $1 billion in incremental sales over the next five years.

Risks to Consider

• Consumer Sentiment: A recession could dent discretionary spending.
• Inventory Risks: Overstocking in a slowing market remains a tailwind.

Conclusion: A Turnaround Stock at a Bargain Price

American Eagle Outfitters is a classic value trap turned value opportunity. With ROCE climbing back toward 2021 levels and earnings growth outpacing the market's expectations, the stock is poised for a re-rating. At $18.50, AEO offers a rare chance to buy a $25 stock at a $15 price—a gap the market will eventually close.

Action Item: Buy AEO now. Set a target of $25 within 12–18 months as the market catches up to its operational turnaround. Historically, buying AEO on earnings announcement dates and holding for 30 days has delivered an average return of 31.63% since 2020, though with notable volatility and risk—including a maximum drawdown of -47.23%—as highlighted by backtests.

Disclosure: The author holds no position in AEO at the time of writing.