Morgan Stanley downgrades American Eagle, sees big discounts ahead for the retailer

Shares of American Eagle Outfitters have cratered 48.3% this year, and further downside is in store, according to Morgan Stanley. Analyst Kimberly Greenberger downgraded the retail stock to underweight from equal weight, citing risks to margins and sales. Greenberger also slashed her price target on American Eagle to $8 per share from $22, implying downside of nearly 39%. “Our analysis suggests heightened risk to topline growth at both AE & aerie, and significant risk to 2022 margins & EPS, that put even management’s lowered 2022 financial targets out of reach,” Greenberger said in a note Tuesday. “Additionally, management has yet to lower its optimistic 2023 financial targets, which suggests to us that negative earnings revision risk extends into next year.” American Eagle recently reported quarterly results that missed analyst expectations. And, compared with other mall retailers such as Macy’s — which beat estimates in the recent quarter — AEO’s miss is likely a result of “product execution & poor planning processes rather than a macro issue,” Greenberger wrote. The company’s full-year guidance on operating income also presents an opportunity for more misses, she added. As inflation surges and a potential recession looms, consumer demand continues to dwindle. Between that and “outsized orders” spurred by supply chain delays, Greenberger believes American Eagle will have extra inventory which could force the company to increase promotions and discounts. “Consumers who had been trained to pay full ticket price will quickly realize they can be more price-selective, making it even more difficult for retailers to extract price increases as they attempt to offset input cost inflation & elevated freight expense,” she wrote. “With so many retailers clearing inventory at the same time, we see risk that goods may need to be more deeply discounted than normal clearance requires.” — CNBC’s Michael Bloom contributed reporting