Shares of apparel retailer American Eagle Outfitters (AEO 6.23%) are 7.7% lower as of 2:30 p.m. ET Tuesday, according to data from S&P Global Market Intelligence, upended by even more extreme weakness from a rival retailer's stock.
Don't look for a company-specific reason American Eagle Outfitters is being punished today. You won't find it. Rather, look to peer and rival Abercrombie & Fitch (ANF -2.06%) for the cause. Abercrombie shares are down more than 30% on Tuesday in response to a first-quarter loss that fell well short of expectations. Higher costs are a particular problem.
The retailer went on to warn shareholders that the current year will also be disappointing in terms of sales. Abercrombie & Fitch estimates 2022's top line will be flat to only 2% better than last year's revenue, while operating profit margin rates will roll in between 5% and 6%. Both outlooks are lower than the company's previously suggested metrics for both ranges, while the sales growth outlook is below the analyst consensus of 3.5%.
As for what this has to do with American Eagle, not a lot... at least not directly. Indirectly, though, there's a clear connection. In that Abercrombie & Fitch and American Eagle Outfitters are largely targeting the same audience with the same basic fashions, any headwind Abercrombie is facing is also likely impacting American Eagle. That's the conclusion investors are drawing today, anyway, although the broad market's extreme weakness on Tuesday makes it easier to come to such a defensive assumption.
Generally speaking, guilt-by-association sell-offs tend to uncouple pretty quickly. There's more in play here, however, than just one day's worth of bearish dot-connecting. Investors are seeing lots of red flags from many facets of the economy, and the inflation that's working against Abercrombie & Fitch has already been shown to be working against a variety of other retailers as well.
In other words, investors assuming American Eagle Outfitters and Abercrombie are bumping into the same headwind aren't exactly off-base here.
American Eagle will also be reporting its first-quarter results after this Thursday's closing bell rings. So, this may be one of the last chances to shed AEO stock before the retailer confirms it's in the same trouble that Abercrombie & Fitch is, in a market environment that's seen steady, brisk selling since January even when the selling didn't make a lot of sense.
Given this backdrop and the potential for a poor reaction to American Eagle Outfitters' earnings report, today's action shouldn't be viewed as a buying opportunity.