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Robert Hanson has his work cut out for him at American Eagle Outfitters Inc., where he assumed the chief executive officer position on Jan. 30. The teen retailer’s growth trajectory has fizzled, higher raw materials and manufacturing costs have compressed margins and its aerie intimates concept is stalled.

This story first appeared in the March 8, 2012 issue of WWD.  Subscribe Today.

Increased discounting during the holidays and higher merchandise costs crimped fourth-quarter earnings at the Pittsburgh-based company. For the three months ended Jan. 28, net income declined 41.1 percent to $51.3 million, or 26 cents a diluted share, from $87 million, or 44 cents a share, in the year-ago period. The results included store impairment charges of 7 cents a diluted share and executive transition costs of 2 cents stemming from the exit of former ceo James O’Donnell.

The promotional activity helped push up net sales in the quarter by 13.8 percent to $1.04 billion, from $916.1 million in the year-ago period, with strength in denim and wovens. Same-store sales in the quarter increased 10 percent, up against an easy comparison a year ago when comps dipped 7 percent.

On a conference call with analysts, Hanson, previously president of the global Levi’s brand, praised the core strength of the American Eagle brand, the company’s strong balance sheet and opportunities for growth internationally. However, he acknowledged, “I clearly recognize the challenges of the past several years. Our top line has been essentially flat and margin erosion has been significant.”

His initial goals include tightening inventory, improving inventory productivity, turning around fashion items faster and devising a sourcing strategy that delivers higher initial markups. Additionally, the company will focus on accelerating growth in its e-commerce business, which accounts for 12 percent of sales.

Roger Markfield, executive creative director at American Eagle, said the company would refocus aerie on its core bra, panties and loungewear business, steering away from apparel and a broader lifestyle concept it previously embraced.

For the full fiscal 2011 year, total square footage increased 1 percent. This year, square footage is expected to decline slightly as the company plans to open 15 new stores and close 20 to 30 existing units. Most of the openings are slated for outlet centers, where productivity is high and American Eagle’s penetration is lower than its competitive set, with just 65 outlet units.

American Eagle operates 911 American Eagle Outfitters stores in the U.S. and Canada, 158 aerie stores and 21 77kids stores.

Gross margin in the quarter was 34.1 percent of sales, a 530 basis point decrease from 39.4 percent a year ago, the result of higher average unit costs for merchandise and increased markdowns during the holiday season.

Selling, general and administrative costs increased 13.2 percent to $219.7 million, from $194 million a year ago, which included $6 million in executive transition costs.

For the year, net income increased 7.9 percent to $151 million, or 77 cents a diluted share, from $140.6 million, or 70 cents. Revenue increased 6.5 percent to $3.16 billion from $2.97 billion.