American Eagle Outfitters (NYSE:AEO) is one of my favorite stocks in the crowded retail apparel sector. Its namesake brand is strong, especially with teens, and its smaller Aerie lingerie and activewear brand regularly generates double-digit comps growth. The stock also trades at less than 10 times forward earnings and pays a forward yield of 3%.

I highlighted many of these strengths in a recent article, but two new catalysts recently appeared: the introduction of CBD products in its stores, and a significant acceleration in buybacks. Let's see how these two tailwinds could boost its stock price.

A summer ad campaign from American Eagle Outfitters.

Image source: American Eagle Outfitters.

Jumping on the CBD bandwagon

Last December, Congress formally legalized CBD, the non-psychoactive ingredient in marijuana. Shortly afterwards, a growing number of retailers started selling CBD-infused products like oils, body care products, and beverages.

CBD products generated about $600 million to $2 billion in sales last year according to Cowen & Co. analysts, and that figure could hit $16 billion by 2025. In response, mainstream retailers like Designer Brands' DSW, GNC, and Abercrombie & Fitch started selling CBD products.

That's why it wasn't surprising when American Eagle jumped on the bandwagon by partnering with Green Growth Brands, the CBD body care product maker that partnered with DSW and Abercrombie. Starting in October, American Eagle will start selling Green Growth's CBD-infused body care products -- which include muscle balms and lotions -- online and at nearly 500 American Eagle stores.

That represents nearly half of American Eagle's current fleet of 1,055 stores. AEO already generated 17 straight quarters of comps growth, and plans to increase its store count this year, so the addition of CBD products isn't a desperate bid to stay relevant and boost sales.

Instead, it could give AEO's core base of Gen Z and younger millennial shoppers another reason to visit its stores. U.S. teens ranked American Eagle their second favorite apparel brand in Piper Jaffray's latest "Taking Stock with Teens" survey, while millennials ranked it their 29th favorite overall brand (including other industries) in ad agency Moosylvania's annual ranking of the "Top 100 Millennial Brands" last year.

Bottles of CBD oil with hemp leaves.

Image source: Getty Images.

Buying back 30 million more shares

American Eagle Outfitters repurchased 7.3 million shares for $144 million last year. It bought back another 911,000 shares for $20 million during the first quarter. Those buybacks reduced its outstanding shares 2% annually in the first quarter of 2019.

However, AEO recently authorized the repurchase of 30 million additional shares through Feb. 3, 2024, which boosts its total authorization to about 37.4 million shares. CEO Jay Schottenstein stated that that increased buyback plan and its continued dividend payments "underscore our confidence in long-term growth initiatives and AEO's commitment to delivering shareholder returns."

Schottenstein also noted that the retailer generated "a strong free cash flow and a substantial cash balance even after making investments" to "fuel future growth" -- which is reflected in the growth of American Eagle and Aerie over the past year.

These buybacks should tighten up American's Eagle valuations and buoy its earnings growth, which could offset a potential deceleration in sales as its Aerie brand faces ever-tougher year-over-year comparisons. They also indicate that unlike many other brick-and-mortar retailers, which are desperately pouring cash into their e-commerce platforms, AEO doesn't need extra cash to support the digital business, which generated 30% of its sales last quarter.

The road ahead

AEO isn't a flawless stock -- its gross margin is weighed down by markdowns and higher delivery costs for online orders, and Aerie's growth could decelerate as it faces tougher competition. However, AEO remains a "best in breed" play in a tough sector, and fresh catalysts like CBD products and bigger buybacks are merely icing on the cake.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.