Here's Why American Eagle Stock Plunged Today

Shares of apparel company American Eagle Outfitters (NYSE: AEO) plunged on Thursday after the company reported financial results for its fiscal third quarter of 2024. Sales are slow and management said the one word that investors didn't want to hear. Consequently, American Eagle stock was down 14% as of 1:20 p.m. ET.

Why investors got spooked today

In Q3, which ended Nov. 2, American Eagle had total net revenue of nearly $1.3 billion. This was marginally down year over year even though same-store sales were up for both its namesake retail chain as well as for its Aerie brand. That said, its margins did decline slightly and management partially attributed this to markdowns -- this isn't a good word when it comes to businesses such as this.

Apparel stocks always have to maintain a delicate balance. They need enough inventory on hand but inventory quickly goes out of style. If they overstock their shelves, they need to cut prices to sell clothes before styles change. But lower prices lead to lower profits.

The apparel sector has been quite strong this earnings season. So I believe investors were spooked by American Eagle's need to lower prices, even if they were only modestly lower.

Is American Eagle stock undervalued?

I can't help but think that American Eagle stock may be a good value here. It ended Q3 with $160 million in cash and no long-term debt, so the balance sheet is strong. It's earned $125 million in operating income year to date and expects another $125 million in the upcoming fourth quarter. That's a lot of annual profit compared to its market cap of only $3.4 billion.

Moreover, American Eagle's Aerie brand is strong right now and management plans to scale it up in 2025 with 45 new store openings. For perspective, it only has 317 stores today so this is a meaningful jump for the brand. And considering Aerie's revenue accounts for roughly one-third of the overall business, it could be a growth catalyst for the business as a whole.

I'm not saying it's a no-brainer buy. But American Eagle stock is definitely worth a closer look for investors who like to hunt for bargains.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends American Eagle Outfitters. The Motley Fool has a disclosure policy.