Will American Eagle Outfitters, Inc. (AEO) Fall With Other Teen Retailers?

American Eagle Outfitters, Inc. (AEO) is an apparel and accessory retailer that operates approximately 1,000 brick and mortar retail locations primarily within the US, with additional but less significant presence in Mexico, Canada, China and Hong Kong. The company’s primary consumer demographic is young men and women in the 15-25 age range, and as such is a direct competitor with similar retailers Abercrombie & Fitch (ANF) and A√©ropostale (ARO), both of which also reported earnings earlier this week. At the time of this post (10:15AM CST), AEO is currently trading down to 13.80, a move lower of 3.90% on the day. AEO is currently trading just over the mid point of its 52 week range of 10.12-16.50, and is set to report earnings today, 12/4/2014 after the market close.

Over the last eight quarters of earnings data available, AEO has reacted primarily bearishly in the trading sessions immediately following earnings, trading lower five out of eight times after the EPS release. The historical move during this period was 7.2%, but it may be worth noting that three of the five one-day moves lower have been of a magnitude of at least -9.5%. The options market is currently pricing in a move of around 10.18% based on the ATM straddle in AEO, reflecting what would be a $1.40 move in the underlying stock by this Friday’s weekly expiration. Part of the reasoning for this expected volatility may be related to the earnings of previously mentioned competitors ANF and ARO, the latter down over 25.24% on today’s session following a very negative earnings reaction from investor response to another quarter of losses and missed expectations. ANF is also down over 4.5% on the session after initially trading higher following its EPS release the previous day. Although American Eagle has managed to hold and rebound off of its lows in late May and early June, the teen apparel market seems to be having a very tough time maintaining any traction in recent quarters, and I am inclined to maintain my bearish lean on AEO going into their report this afternoon.

Trade: Buying the AEO Dec 5th Weekly 13.5-12.5 Put Spreads for $0.28
Risk: $28 per 1 lot
Reward: $72 per 1 lot
Breakeven: $13.22