What happened

Shares of American Eagle Outfitters (NYSE:AEO) stock jumped more than 6% in early trading Wednesday before settling down to about a 4% gain as of 2:50 p.m. EST. The stock price movement comes in response to AE's third-quarter 2020 earnings report, which was released after close of trading Tuesday evening.  

In this report, AE reported earning $0.35 per share pro forma, which was ahead of analyst estimates, on sales of $1.03 billion, which met expectations.  

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Image source: Getty Images.

So what

Earnings when calculated according to generally accepted accounting principles (GAAP) came in at $0.32, down roughly 33% from the $0.48 per share earned in last year's Q3, and sales declined 3%. But even so, CEO Jay Schottenstein said the results "exceeded our expectations" -- and Wall Street's as well.

Sales at the company's flagship American Eagle stores declined 11% year over year, largely tied to "mall traffic declines related to COVID-19," but sales at AE's Aerie lingerie business grew 34% year over year, and digital sales grew 29%.

Now what

American Eagle did not provide guidance for what to expect in the fourth quarter, or for the year as a whole, but analysts are optimistic that things are continuing to improve at the clothing chain. Street forecasts envision sales declining only 1% this current quarter (much better than the expected 13% decline for the year), although profits will probably sink further -- down another 14% in Q4 -- and AE is expected to end up booking a loss for the year.  

Paired with the stronger-than-expected performance in Q3, however, even these expectations were enough to lead four separate analysts to raise their price targets on American Eagle stock today -- to as high as $22 per share, or 19% above where the shares trade right now. With AE stock selling for less than nine times earnings currently, it's hard to argue this stock is not already a bargain.

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.