American Eagle Outfitters (NYSE: AEO), which sells men’s and women’s apparel and accessories under the American Eagle, Tailgate, Todd Snyder, and Aerie brands currently trades at $17 per share, around 56% below its level of $38 seen on April 25, 2021 (pre-inflation shock high), and has the potential for sizable gains. AEO saw its stock trading at around $9.73 at the end of October 2022, when the Fed kept increasing rates, and now remains up by about 72% from those levels. In comparison, the S&P 500 gained only about 6% during this period. AEO stock has benefited from better-than-expected fiscal first-half results. Despite flattish sales in the first two quarters of 2023, the retailer’s gross profit and operating income saw significant improvements – leading to a turnaround in earnings per share. With better inventory control and lower transportation and product costs, management achieved margin expansion thanks to fewer markdowns. That said, AEO’s gross margins in the fiscal first half came in at 37.7%, a large 680 basis points up year-over-year (y-o-y). Similarly, its operating margin during the same period came in at 5.4%, up from a mere 1.2% in the same period last year. AEO saw a profit of 25 cents per share in the first six months of FY’23 compared to a negative 24 cents in the same period last year.
Notably, AEO stock had a Sharpe Ratio of 0.3 since early 2017, which is lower than the figure of 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
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