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AEO Stock Tumbles 17% After Tariff News: What's Next for Investors?
Zacks Equity Research
6 min read

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Shares of American Eagle Outfitters, Inc. AEO experienced a notable decline of 17.4% yesterday after the announcement of major new tariffs designed to overhaul global trade and support U.S. manufacturing.

The sharp decline was due to the U.S. government's decision to implement a flat 10% tariff on imports from nearly all countries, along with additional reciprocal tariffs on around 60 nations that the United States claims to impose higher duties on American goods. Among these is Vietnam, which now faces a 46% tariff effective April 9.

With effective tariff rates now standing at 54% for China and 46% for Vietnam, retailers like AEO that rely heavily on cost-efficient sourcing from these regions face a sudden spike in input costs. These elevated duties are expected to significantly pressure margins and may force brands to raise prices for consumers or absorb higher expenses, impacting profitability.

The market decline reflects investor concerns about AEO’s reliance on imported products, especially amid stricter trade regulations in key supply regions. As Wall Street assesses the long-term impact of new tariffs, apparel companies that manufacture primarily in Asia rather than the United States may continue to face challenges.

Factors Weighing on AEO Stock

AEO’s sharp stock decline also highlights broader worries about the apparel retail sector, which is closely tied to consumer spending and overall economic health. Purchases of apparel and accessories are heavily influenced by changes in disposable income, making the industry especially vulnerable during periods of financial stress or inflation.

Tariffs typically add to the costs of doing business. Although they are paid by the importing company, not the country where the goods originate, they still represent a significant financial burden. These costs are often passed on to consumers through price increases.

As margins tighten, companies may be forced to cut back on discretionary spending like advertising and promotions in an effort to balance budgets. However, pulling back on marketing efforts can hurt brand visibility and slow sales growth, creating a tough cycle for retailers like AEO already navigating a challenging retail environment.

In addition to tariff concerns, American Eagle reported a 4% year-over-year decline in net revenues in the fourth quarter due to an $85 million impact from a change in the retail calendar. Breaking it down by brand, American Eagle brand’s revenues dropped 9.1% compared to the prior year.

AEO’s Bleak Outlook Remains a Concern

Following the softer-than-expected fourth-quarter fiscal 2024 results, AEO's management issued a cautious outlook for fiscal 2025, pointing to continued near-term headwinds from consumer spending trends and broader macroeconomic uncertainty.

For fiscal 2025, the company is guiding for a low-single-digit decline in revenues and a reduction in gross margin compared to the prior year. Operating income is expected to be between $360 million and $375 million, factoring in a $20 million currency headwind from a stronger U.S. dollar and a $5-$10 million negative impact from U.S. tariffs.

For the first half of fiscal 2025, management anticipates a mid-single-digit revenue decline alongside falling profits, as cost pressures and soft consumer demand continue to weigh on performance.

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