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Struggling teen retailer American Eagle Outfitters (NYSE: AEO) is in free-fall mode this morning after a surprise announcement on Wednesday after the market closed that CEO Robert Hanson was leaving the company. AEO shares are down 10% in regular trading.
RBC analyst Howard Tubin is quoted as saying the news comes as a complete surprise. Tubin went further to say that Hanson was implementing positive changes at the company and was mostly liked by Wall Street. Coming on a down day for stocks, shares of American Eagle have been hit particularly hard.
The news should be treated as a screaming buying opportunity. Occasionally, the stock market acts like a petulant child. This is one of those moments. When it is announced that the CEO is leaving, the child is disappointed and throws a tantrum. I see today’s move as nothing more than a tantrum.
While I can appreciate the market being concerned about a change in management, a 10% selloff in AEO stock is ludicrous. Yes, a bad manager can have a detrimental impact on the performance of a company, but let’s not get carried away here.
The company deserves the benefit of the doubt in its ability to find an adequate replacement. My guess is American Eagle will do just that. It’s a plum job and I suspect there will be plenty of candidates to choose from.
AEO Stock: Looking Ahead
What really ultimately matters is the valuation of the stock. AEO shares were already depressed before this news. They are even cheaper now.
I would also add that they are attractive at current levels. Not everyone agrees.
Stifel Equity Research Group cut the rating on the stock to hold from a buy citing the uncertainty of the turnaround and now CEO search demands on the company.
Talk about a vague reason for the downgrade. When I hear such things, it tells me the analyst simply doesn’t know what he is talking about. Instead of showing leadership, the analyst punts and downgrades the stock.
One analyst holding his buy rating on American Eagle is Randall Konik of Jeffries. He views the news as short-term negative. He thinks the company can continue to build momentum restoring its brand.
Before this news, American Eagle was poised to rally – not too dissimilar to what transpired with Abercrombie & Fitch (NYSE: ANF) when that stock soared after good news.
Analysts expect American Eagle to grow profits by 23% from the current fiscal year ending Jan. 31, 2014 to the next fiscal year. At current prices, the stock trades for only 14 times next fiscal year estimated earnings.
As for the reason that Robert Hanson left the company, there is no specific news cited. It could be any number of things, with most of the reasons having nothing to do with the performance of the company. Whatever the case may be, American Eagle is bigger than just the CEO and as such, I would use the selling as a buying opportunity.
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