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Teen apparel retailer American Eagle Outfitters Inc. reported a 1.5 percent drop in third-quarter earnings on Tuesday because of higher markdowns and costs related to the opening of new stores.

American Eagle shares hit a 52-week low of $20.20 after earnings were posted, but bounced back to close down 1.7 percent to $21.01.

For the three months ended Nov. 3, income fell to $99.4 million, or 45 cents a diluted share, from $100.9 million, or 44 cents, in the year-ago period. Results were in line with analysts’ expectations. The company posted higher earnings per share in the most recent quarter because it had fewer shares outstanding after buying back about 9.9 million shares for $264.7 million. Sales jumped 6.9 percent to $744.4 million from $696.3 million. Same-store sales increased 2 percent in the quarter.

For the nine-month period, earnings rose 9.4 percent to $259.5 million, or $1.17 a diluted share, from $237.2 million, or $1.04, last year. Sales climbed 13.1 percent to $2.06 billion from $1.82 billion.

The company said merchandise margin declined in the third quarter as a result of higher markdowns, which were partly offset by lower product and transportation costs. In addition, increased buying, occupancy and warehousing costs rose as a percent of sales. This was driven mostly by rent expense relating to the opening of 60 new stores in the second half of the year compared with 32 stores last year.

“In the third quarter we delivered a strong operating margin of 20.3 percent even though sales were below our original plan,” chief executive officer Jim O’Donnell said in a statement. “These results reflected the benefits from operational improvements, expense management and technologies that have become inherent in our business over the past several years. We are committed to driving future growth by building a portfolio of brands, while at the same time delivering a strong return on investment and profit improvements.”

During a conference call to analysts, company officials said response has been positive to the f.i.t. workout line launched in the quarter. American Eagle last week introduced a personal care collection, which is expected to provide more gift opportunities.

American Eagle forecast fourth-quarter earnings guidance in the range of 67 cents to 70 cents a diluted share, compared with 66 cents a share last year.

This story first appeared in the November 28, 2007 issue of WWD.  Subscribe Today.