By  on October 19, 2009

American Eagle Outfitters Inc. may be poised to fly high, or at least a little higher, this holiday season, according to analysts who attended the teen retailer’s holiday fashion preview in New York City.

After a lackluster year in which earnings suffered and merchandising lagged, the Pittsburgh-based company has been ramping up its fashion content in hopes of turning around the business by holiday.

AEO brought back Roger Markfield as vice chairman and executive creative director in January in order to improve its collection. But the former chief merchandising officer and co-chief executive officer’s presence has yet to be felt financially — in the second quarter ended Aug. 1, earnings fell 52.2 percent, to $59.8 million, and same-store sales were down 10 percent.

But that changes for holiday, when Markfield’s hand will “fully impact the product,” said FBR Capital Markets retail analyst Adrienne Tennant. “Markfield’s product lives up to the hype.”

Needham & Co. specialty retail analyst Christine Chen took note of “significant improvement” in the company’s flat comparable-store sales in September, which beat most analysts’ projections of a drop of 4 to 6 percent. She expects AEO’s comps to turn positive for holiday and said she was “blown away by the improvement in fashion and quality of the merchandise.”

Additionally, she highlighted the improved speed-to-market time — 45 days from 90 days — in “key categories” such as knitwear.

American Eagle’s shares ended the trading day Friday at $19.45, up 10 cents, or 0.5 percent.

Along with its focus on fashion, the company emphasized value, and mentioned sharper pricing and aggressively planned promotions.

Dubbing AEO a “value brand,” Markfield took a few jabs at the chain’s rivals. “Unlike our competitors, we are not disposable. We are not about being too cool, just about being cool enough,” he said, “We’re the dominant brand of the college kid in America.”

But consumers have been flocking to value-centric Aéropostale Inc., which has incrementally upped its fashion quotient and stolen market share from AEO and higher-priced Abercrombie & Fitch Co.

“Our favorite name in the teen space remains Aéropostale,” said Brean Murray, Carret & Co. analyst Eric Beder. “We saw nothing in the American Eagle presentation which leads us to believe Aéro will not once again be the key market share leader in the holiday season.”

In the second quarter, Aéro posted an 83.3 percent jump in profits to $38.6 million, or 57 cents a share, while revenue increased 20.7 percent, to $861 million, and comps grew 12 percent. In September, the teen retailer’s comps rose 19 percent.

Beder, who maintained his “sell” rating on AEO, said “while we can see the path to a return to prominence, we believe in many respects the current valuation of AEO almost fully reflects a quick turn in both the top line and operating margins. We remain skeptical both of those will shift in the holiday season.”

He also warned that AEO’s promotional stance further confirmed that holiday in the teen space is going to be “one of the most aggressive in terms of pricing in recent history and that the ‘ultra bull’ case of a return to peak margins, also in the short term, is misplaced.”

Credit Suisse retail analyst Paul Lejuez, who rates the stock as “neutral,” had a more measured response.

There’s “no question,” he said, that AEO has a great opportunity in the fourth quarter, considering its 1000 basis-point decline in gross margin in the fourth quarter of 2008. “What is less clear is how much of that can they get back, considering the mall is likely to still be promotional this holiday. Then the question becomes how much of the improvement is already baked into the current stock price. We believe expectations are fairly high and the risk-reward is balanced.”

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