American Eagle Outfitters Plots Denim Revival

The teen retailer's new strategy is to build inventory in “heritage” categories — such as denim, fleece and graphic T-shirts — to reclaim lost market share.

American Eagle Outfitters Inc. on Wednesday set out a new strategy of building inventory in “heritage” categories such as denim to reclaim lost market share as the teen chain reported that it doubled net income against a year-ago quarter that was hurt by losses from discontinued operations.

This story first appeared in the May 26, 2011 issue of WWD.  Subscribe Today.

In the three months ended April 30, the Pittsburgh-based specialty chain registered net income of $28.3 million, or 14 cents a diluted share, compared with profits of $10.9 million, or 5 cents a share, in the year-ago quarter. Excluding extraordinary items, such as the year-ago loss from discontinued operations, income from continuing operations was $14.6 million versus $17.8 million in the year-ago quarter.

A dearth of inventory, notably in the denim category, contributed to a 6 percent dip in quarterly net sales to $609.6 million from $648.5 million, the retailer said

The performance matched Wall Street’s EPS expectations of 14 cents a share but fell short of revenue estimates of $636.3 million.

Quarterly comparable-store sales declined 8 percent, as gross margin fell to 38 percent of sales from 39.7 percent a year ago.

“Every once in a while for some reason we let go of our key ‘heritage’ programs and we let people take market share from us,” said Roger Markfield, vice chairman and executive creative director, on the company conference call. “We will protect our turf as we move into back-to-school. We’re going to have enough fashion so you’ll have the sprinkles you need in the store, but our intensity is in the key ‘heritage’ items we know about and a very strong denim impact.”

Building “heritage” inventory means flowing more denim, fleece and graphic T-shirts in stores, a move that the company said will allow it to introduce “classic preppy” back into its assortment.

That might not be the best idea, according to Stifel Nicolaus analyst Richard Jaffe, who rates the firm’s stock “hold.”

“We do not share management’s optimism regarding the new merchandise strategy. First, we believe there has been a shift away from the preppy teen uniform with teenagers looking for more fashion-forward items,” he said. “Second, in the teen retail space, the preppy merchandise space is very crowded (Aéropostale, American Eagle, Abercrombie and Hollister), likely resulting in companies competing on price given a lack of differentiation between brands.”

The analyst said he foresees “deep promotions” on key items, which will pressure margins.

For the second quarter, the company said it expects earnings in the range of 10 cents to 13 cents a diluted share, and annual earnings of $1.02 a share. Analysts are looking for second-quarter EPS of 13 cents and yearly EPS of 99 cents.

Shares fell 64 cents, or 4.7 percent, to 13.02 in New York Stock Exchange trading Wednesday.