Options Trading Points to Pressures for American Eagle Outfitters (AEO)

When the COVID-19 crisis first capsized society, fashionable apparel companies like American Eagle Outfitters (AEO) suffered a catastrophic headwind. Suddenly, with white-collar workers sheltering in place, very little incentivize existed to look presentable. Therefore, high fashion fell by the wayside as folks typed away at their spreadsheets in pajamas. However, AEO stock enjoyed a surprising outcome.

From the spring doldrums of 2020, American Eagle soared to an average price of well over $30 in the summer of 2021. And while shares eventually succumbed to pressures impacting the consumer economy, the underlying financials implied that a patient approach might win the long game.

For instance, in the fiscal year ended January 2020, American Eagle posted revenue of $4.3 billion. However, by the following year, sales slipped substantially to $3.76 billion. Later, for fiscal year 2022, the company made a stunning comeback, ringing up $5.01 billion.

To be sure, societal pivots such as revenge travel bolstered the fundamental narrative of AEO stock. As government agencies relaxed their COVID protocols, the restored freedoms inspired consumers to upgrade their wardrobe. Unfortunately, 2022 also sparked intense inflation, which may impose pressure on American Eagle.

Indeed, some clues may be found in its fourth quarter-to-date brand revenue (covering the period ending Jan. 7, 2023). Per management’s disclosure, revenue was down approximately 3%, on the higher end of the company’s expectations. While it’s expected that American Eagle will put a positive spin on its key performance stats, investors may want to read between the lines.

On a trailing-12-month basis, the apparel manufacturer and retailer posted a hair over $5 billion in revenue. Likely then, at best, sales in 2023 will be flat. However, it appears that options traders believe that circumstances will be a bit trickier for AEO stock.

AEO Stock Becomes a Subject of Unusual Stock Options Volume

Following the close of the Jan. 10 session, AEO stock represented one of the highlights in Barchart.com’s screener for unusual stock options volume. This stat shows the difference between the current volume and the average volume over the past month. Traders usually leverage this data to determine which stocks may be due for big moves ahead.

Specifically, AEO’s volume level reached 22,887 contracts against an open interest reading of 160,900. Call volume hit 970 contracts versus put volume of 21,917. Further, the delta between the trailing-month average total volume versus the prior session volume came out to 293.04%. The implied volatility (IV) rank hit 4.63%, which indicates the (at the money) average IV relative to the highest and lowest values over the trailing one-year period.

To summarize, IV signifies the expected volatility of a stock over the life of an option. As certain influencing factors for the underlying investment changes, the IV will likely change as well. Further, as demand for an option increases, so too will its IV.

The IV low for AEO stock was 46.40% on Dec. 2, 2022. Several months earlier on May 24, AEO hit its IV high of 94.75%. Prospective investors should note that per Barchart.com’s technical analysis gauge, AEO ranks as an average 88% buy. 

Short and medium-term indicators point decisively in the optimistic direction, whereas the longer-term indicator features somewhat of a split sentiment. It’s not surprising given that in the trailing five years, shares are down 17% while in the past six months, they’re up over 28%.

At time of writing, most covering analysts maintain a pensive view regarding AEO stock. Three months ago, Wall Street experts rated shares as a “hold,” breaking down as three strong buys, six holds, one moderate sell and one strong sell. In the current month, both the consensus and the individual breakdown are the same.

Also, investors should note that AEO stock currently features a 60-month beta of 1.41, which is conspicuously more volatile than the benchmark equities index. Thus, prospective buyers must exercise reasonable caution despite the recent dramatic upswing.

Fundamental Headwinds Await American Eagle

With Americans generally carrying an optimistic disposition, cautionary takes on publicly traded investments usually don’t attract positive attention. Nevertheless, investors need to be careful about exposing themselves to unnecessary risks, particularly in the present monetary ecosystem.

Back during the initial impact of COVID-19, the Federal Reserve injected liquidity into the system, thereby spiking the real M2 money stock. However, inflation didn’t become the pernicious issue it did until last year. Sure enough, that time period coincided with the acceleration of the velocity of M2 money stock.

On paper, then, skyrocketing inflation already existed in early 2020. However, it lay largely dormant until people started spending money en masse. The return to normal and the relaxing of COVID protocols contributed to this spending. However, now the Fed has the unenviable task of unwinding prior monetary excesses.

That’s going to lead to deflationary dynamics, such as continued layoffs. Over time, such reduced collective demand will impact every sector, but especially the consumer discretionary industries. Therefore, don’t be too eager to jump on AEO stock. The pain could still be in the early innings.

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