Retail

There's more upside for American Eagle: Analysts

American Eagle shares slid another 2.5 percent on Thursday, as the teen retailer's third-quarter outlook continued to spark concern among investors.

But analysts were quick to call the selloff overdone, saying the company continues to steal share from its competitive set, even as it raises prices.

"Despite a highly promotional retail environment, American Eagle was able to drive sales while successfully reducing promotions," said Stifel Nicolaus analyst Richard Jaffe, who has a $20 target price and "buy" rating on the retailer.

"This is evidence to us that the customer is responding favorably to the company's improved merchandise," he said.

Though investors balked at the retailer's forecast for a mid-single digit increase in same-store sales for the third quarter—which would mark a deceleration from the current quarter's 11 percent growth—analysts said there are a number of factors weighing in American Eagle's favor.

An American Eagle Outfitters store in San Francisco.
David Paul Morris | Bloomberg | Getty Images

Among them: the ability to further improve margins, as product continues to improve and more consumers recognize this change; a shift back toward denim, which plays into the company's sweet spot, and should encourage shoppers to purchase new tops, as well; and a more positive consumer response to its turnaround than those at Abercrombie & Fitch and Aéropostale.

Read MoreDenim is hot, 'bro tanks' are not

"Competition remains back on its heels, providing ample room for American Eagle market share gains to continue," said BMO Capital Markets analyst John Morris, who has a $22 target price and "outperform" rating on the company.

Not everyone, however, was quite as bullish on American Eagle's prospects. Morgan Stanley analyst Kimberly Greenberger, who maintained her "underweight" rating, said the market is "rightly skeptical" of the company's ability to keep up its current momentum.

Millennials' favorite brands
VIDEO3:4503:45
Millennials' favorite brands

She noted that its second-quarter sales gain was driven predominantly by higher prices; in the third quarter, however, it will no longer face easy comparisons in terms of pricing, meaning it will need to rely on generating traffic.

Read MoreWhat's busting mom and dad's budget?

Despite Thursday's pullback, which followed the prior day's 7.5 percent drop, American Eagle shares are still up 18 percent this year.

Both Abercrombie & Fitch and Aéropostale report next week.