Can Sydney Sweeney and Travis Kelce Make This Retail Stock a Winner?

American Eagle Outfitters (AEO) is experiencing a notable recovery, evidenced by better-than-expected Q2 results and raised guidance, largely propelled by successful celebrity partnerships with Sydney Sweeney and Travis Kelce. Sweeney's campaign attracted 1 million new customers and boosted sales, while Kelce's collaboration is driving men's web traffic, with their full impact expected in Q3 and Q4. Despite a 1% comparable sales decline in Q2, EPS rose 15% due to significant share buybacks, and AEO projects low single-digit comparable sales growth for the latter half of the year, though margins are anticipated to fall. This strategic marketing, potentially underestimating its impact in current guidance, positions AEO for possible upside in a challenging retail landscape.

Analysis

Apparel retailing is a challenging business. There are low barriers to entry, it's highly competitive, and fashion tastes tend to be fickle. What was a hot brand one year can be ice cold just a few years later, and poor inventory management can lead to widespread markdowns, crushing margins. Just look at Nike or Lululemon. Both of those stocks are among the biggest winners in the history of the apparel sector, but have fallen on tough times lately for a range of reasons, including style misses and new competition, leading to declining sales for both companies in the U.S. Teen apparel retailer American Eagle Outfitters (AEO -0.06%) has had a volatile history, swinging back and forth between peaks and valleys over the last 20 years, as the chart below shows. As you can see, American Eagle also appears to be in the middle of an upswing following better-than-expected second-quarter results and a hike in its guidance. Two new celebrity partnerships seem to be driving a recovery. American Eagle's splashy moves American Eagle launched a controversial ad campaign with the actress Sydney Sweeney in July. The campaign, with the tagline "Sydney Sweeney Has Great Jeans," featured video and photos of her in American Eagle jeans with a voice-over describing genetics. The ad generated a lot of buzz, not all of it positive, but it did provide a measurable lift to the company's sales and even got a comment from President Donald Trump. Sweeney-branded items like a denim jacket and a wide-leg pair of jeans sold out quickly. According to The Wall Street Journal, the campaign helped bring in 1 million new customers between July and September. The company plans to continue running those ads at least through the end of the year, and Sweeney has signed on as the brand's ambassador for the rest of the year as well, with her top-selling items set to be restocked ahead of the holiday season. NYSE: AEO Key Data Points American Eagle is also collaborating with one of the country's most influential athletes, Kansas City Chiefs tight end Travis Kelce, who is now engaged to Taylor Swift. The retailer launched a tie-in with Kelce's Tru Kolors clothing brand the day after he and Swift announced their engagement. According to early press coverage, the collaboration is doing well, leading men's web traffic. And a second collection is set to be released soon, with the campaign including a one-day pop-up store in Kansas City, Missouri. American Eagle also made Kelce creative director of the partnership. The impact of that launch, which came at the end of August and after the second quarter ended, is likely to show up in American Eagle's third-quarter results. Is American Eagle a buy? It's been a challenging time for the apparel retail sector as consumer discretionary spending has been down in the U.S. due to the weakening job market and fears about tariffs and rising prices. In American Eagle's second quarter, which mostly took place before the new campaigns, overall comparable-store sales (comps) were down 1%, though earnings per share rose 15%, due almost entirely to share buybacks. The company reduced shares outstanding by 13.2% over the last year, showing its commitment to returning capital to shareholders and taking advantage of its low stock price. American Eagle's guidance is also looking up as the company called for comps to be up by the low single digits in the third and fourth quarters, its seasonally strongest times of year. Although the company does see margins falling, which factors in pressure from tariffs, leading to a decline in operating income. Still, that guidance may be underestimating the impact of its campaigns with Sweeney and Kelce, and those moves also show why American Eagle has had staying power in an industry that is no stranger to bankruptcies, such as Aéropostale's. If the momentum continues, the stock could have a pleasant surprise for investors in the second half of the year. At a price-to-earnings ratio of 17, there's certainly room for the stock to go higher if the results warrant. American Eagle Outfitters (AEO) is exhibiting signs of a potential turnaround within a challenging apparel retail sector, which has recently seen peers like Nike and Lululemon face declining sales. The company's second-quarter results were mixed, with comparable-store sales down 1%, but earnings per share (EPS) rising 15%, a gain almost entirely attributable to a significant 13.2% reduction in shares outstanding via buybacks. The primary driver for renewed optimism stems from two high-profile celebrity partnerships. A campaign with actress Sydney Sweeney reportedly attracted 1 million new customers between July and September and led to specific items selling out. Concurrently, a collaboration with athlete Travis Kelce, launched late in the quarter, is showing early positive signs by leading men's web traffic. While AEO's management has guided for low single-digit comparable sales growth for the third and fourth quarters, they also anticipate margin compression and a decline in operating income due to tariff pressures. This guidance may be conservative, potentially underestimating the full top-line impact of these marketing initiatives, which are expected to materialize more fully in the second half of the year. With the stock trading at a price-to-earnings ratio of 17, there is valuation headroom if this celebrity-driven sales momentum translates into better-than-expected financial results.

Key Decisions for Investors

• Investors should consider that current guidance for low single-digit comparable sales growth may be conservative, as the full positive impact of the Sweeney and Kelce campaigns will only be reflected in Q3 and Q4 results, creating potential for an earnings surprise.
• It is crucial to monitor gross and operating margins in upcoming quarterly reports, as management's forecast for a decline due to tariffs could offset any top-line strength and pressure profitability.
• Note that recent 15% EPS growth was driven primarily by aggressive share buybacks, not operational improvement, so investors should scrutinize future reports for evidence of organic sales growth and margin expansion to validate the turnaround thesis.