Investing.com -- Barclays downgraded American Eagle Outfitters (NYSE:AEO) to Underweight from Equal Weight, citing a weakening consumer environment, rising tariff concerns, and soft mall traffic that could pressure margins.

The firm expects macroeconomic headwinds to weigh on teen spending in 2025, forcing retailers like AEO to rely on promotions to drive sales.

Barclays also flagged a negative sales-to-inventory inflection in AEO’s fiscal third quarter, suggesting potential margin pressure ahead.

While some of these risks may already be reflected in AEO’s valuation, analyst see the stock trading in a narrow range in the near term, with potential downside if consumer spending weakens further.

There are early signs of deeper promotional activity in the first quarter, with front-of-store markdowns aimed at boosting traffic and conversion.

The company has now reported two consecutive quarters of inventory growth outpacing sales, a trend that could continue to weigh on merchandise margins.

American Eagle recently cut its first-quarter operating income guidance by 71% at the midpoint and lowered its full-year outlook by 20% versus consensus estimates.

AEO shares fell 5% in aftermarket trading following the earnings call.

On the tariff front, AEO faces potential risks from its sourcing exposure. While the company manufactures little in Canada or Mexico, about 20% of its global production came from China in fiscal 2024, with plans to reduce that below 10% in 2025.

However, concerns are rising over potential U.S. tariffs on Vietnam, another key sourcing region. Management has factored in a $5 million to $10 million impact from China-related tariffs in its fiscal 2025 outlook, net of mitigation efforts.

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