UBS analysts believe American Eagle Outfitters is positioned for a stronger second half of the year, with its Aerie lingerie and loungewear brand leading the way. The bank raised its 2026 sales forecast for the retailer, but it also trimmed its earnings estimates for 2027 and 2028, citing persistent markdowns and higher selling, general, and administrative (SG&A) expenses.
The firm lowered its price target on American Eagle shares to $27 from $31, reflecting a more cautious view on profitability in the coming years. The stock, which has been under pressure recently, may react to the mixed signals from the analyst note.
What's driving the optimism?
Aerie has been a standout performer for American Eagle, consistently outpacing the company's namesake jeans and apparel brand. The brand's focus on comfort, inclusivity, and direct-to-consumer sales has resonated with younger shoppers, helping it gain market share in a competitive apparel landscape.
UBS's decision to lift the 2026 sales outlook suggests the bank expects Aerie's momentum to continue, potentially offsetting weakness in the core American Eagle brand. This is a key point for investors, as Aerie's growth has been a major driver of the company's overall revenue in recent quarters.
However, the bank's decision to cut 2027-2028 earnings estimates highlights lingering concerns. Markdowns—price reductions used to clear inventory—have been eating into margins across the retail sector, and American Eagle has not been immune. Higher SG&A costs, which include expenses like marketing and store operations, are also pressuring profitability.
What it means for investors
For everyday investors, the UBS note offers a nuanced view of American Eagle's prospects. On one hand, the raised sales outlook for 2026 suggests that revenue growth could remain solid, driven by Aerie. On the other hand, the lowered earnings estimates for 2027-2028 indicate that profit growth may be slower than previously expected.
The price target cut to $27 from $31 reflects this mixed picture. While the bank still sees upside from the current share price, the reduced target signals less confidence in the company's ability to expand margins in the medium term.
Investors should also consider the broader retail environment. Many apparel retailers are grappling with inventory gluts and cautious consumer spending, which often leads to increased discounting. This dynamic is likely contributing to the markdown pressure that UBS highlighted.
American Eagle's recent performance has already reflected some of these challenges. The company's shares have been volatile, and a previous slide of 11% came after the company issued a flat margin outlook as discounts piled up. That context is important for understanding why UBS is being cautious about long-term earnings.
Still, the bank's decision to raise the 2026 sales forecast suggests that Aerie's strength could provide a buffer. If the brand continues to resonate with consumers, it could help American Eagle navigate the current headwinds.
Looking ahead
Investors will be watching American Eagle's upcoming quarterly results for signs that Aerie's momentum is holding up and that markdown pressure is easing. The company's ability to manage inventory and control costs will be critical to meeting the lowered earnings expectations.
UBS's move also comes amid a broader trend of analysts adjusting forecasts for retailers. For instance, Chewy recently received a price target cut despite an upbeat sales forecast, highlighting the delicate balance between revenue growth and profitability in the current environment.
For American Eagle, the key question is whether Aerie can continue to carry the company. If the brand's growth remains robust, it could offset some of the margin pressures. But if markdowns persist and costs stay elevated, the lowered earnings estimates for 2027-2028 may prove accurate.
As always, investors should consider their own financial goals and risk tolerance when evaluating any stock. The UBS note provides a useful framework, but it's just one perspective in a complex market.
