By  on November 16, 2005

NEW YORK — Propelled by a 20.4 percent sales increase, American Eagle Outfitters Inc. beat Wall Street profit estimates by a penny while Abercrombie & Fitch Inc. raced past estimates on a 35.1 percent sales gain.

American Eagle said third-quarter profits jumped 27 percent as revenues were propelled by an increase in average store transactions. The company also said it has found a partner in Japan to begin its first expansion outside of North America and that it plans to launch an intimates subbrand targeted at core American Eagle customers.

In the three months ended Oct. 29, net earnings rose to $73.3 million, or 47 cents a share, from $ 57.9 million, or 38 cents, in the year-ago period. Analysts had been expecting a profit of 46 cents in the most recent quarter. Third-quarter net sales climbed to $577.7 million from $479.6 million a year ago, while same-store sales rose 13.6 percent.

Gross profit margin, however, declined to 46.6 as a percent of sales, from 48.8 percent last year. The firm cited lower merchandise margin, which was offset by the leveraging of rent expense.

In the nine months, American Eagle earned $186.6 million, or $1.19, up 66 percent from $112.4 million, or 75 cents, last year on revenues that jumped 28 percent to $1.5 billion.

Susan McGalla, chief merchandising officer, said on a conference call with analysts that women's knit tops, graphic Ts, denim, pants and intimates performed well during the fall back-to-school quarter, while blazers and woven shirts underperformed.

Regarding international expansion, Jim O'Donnell, chief executive officer, said on the call that the company has "signed a memorandum of understanding to open stores in Japan" with an unnamed business partner.

He said American Eagle will have "majority control over the agreement" and "all of the say as it relates to how we do business and our brand presentation, product assortment and so forth."

O'Donnell also said expansion of the specialty retailer's intimates business is "another significant opportunity" and that the company is "poised to launch intimates as a subbrand" targeted at American Eagle customers. He said the company is testing a "side-by-side format" that will place intimate stores adjacent to American Eagle stores. The company plans to open a total of 40 to 50 new American Eagle-branded stores in the next three to five years.Regarding earnings and sales momentum at American Eagle, Wall Street analysts who follow the company are worried that its growth could start to level off next year, especially as it spends money to launch Martin + Osa and explore an international presence. They are also concerned the company could max out on its operating and merchandise margins.

"Although American Eagle has demonstrated notable merchandising improvements over the past two to three years and demonstrated increased efficiencies, new concepts always pose risk," John Morris, an analyst at Harris Nesbitt, wrote in a Tuesday research report.

In the holiday fourth quarter, Warrendale, Pa.-based American Eagle said its earnings-per-share guidance is for 73 cents to 75 cents, below the consensus estimate for 76 cents. Shares of American Eagle lost 4.7 percent in Tuesday trading, closing at $23.21 on the Nasdaq.

At Abercrombie & Fitch, third-quarter earnings nearly doubled to $71.6 million, or 79 cents a diluted share, versus $39.9 million, or 42 cents, a year ago.

Excluding non-recurring charges, the company would have earned 88 cents in the most recent third quarter, versus 64 cents in the year-ago period. On this basis, analysts had been expecting a profit of 80 cents.

Total revenues increased 35.1 percent to $701.9 million, while consolidated same-store sales jumped 25 percent, led by a 62 percent surge in same-store sales at the Abercrombie kids' division.

Year to date, net earnings gained 51 percent to $169.4 million, or $1.87, from $112.1 million, or $1.16, in the same period last year. Revenues advanced 36.7 percent to $1.82 billion.

Abercrombie said its first international location will open in Canada late next year, while its first European location will open in London in early 2007.

The company upped its full-year 2005 EPS estimate to $3.44 to $3.49, excluding non-recurring items, from a prior estimate for $3.10 to $3.30; analysts' consensus is for $3.30.

Shares of the company closed down 4.4 percent at $56.91 in Tuesday's New York Stock Exchange session.

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