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American Eagle Shares Fall on Lackluster Q2 Results

The company said the period was impacted by a lack of innovation and the failure to execute, as well as a highly promotional retail landscape.

An American Eagle store.

Shares of American Eagle Outfitters Inc. dropped 9.9 percent Wednesday after the company posted disappointing second-quarter results.

American Eagle said second-quarter profits rose 3 percent, but were impacted by disappointing product execution, particularly in the women’s category. American Eagle shares closed at $14.76 in trading on the New York Stock Exchange.

For the three months ended Aug. 3, net income was $19.6 million, or 10 cents a diluted share, from $19 million, or 9 cents, in the year-ago quarter. Net revenue fell 1.7 percent to $727.3 million from $739.7 million. Consolidated comparable sales fell 7 percent in the quarter, against an 8 percent rise last year.

The retailer earlier this month cut its second-quarter profit estimates in half based on weakness in the women’s business. The Pittsburgh-based operator of American Eagle and aerie had guided earnings from continuing operations to 10 cents a diluted share, less than half the 21 cents registered in the second quarter of 2012. The new projection was also about half the range of 19 to 21 cents provided as guidance by American Eagle on May 22, when it reported first-quarter earnings.

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Prior to the update, analysts, on average, had expected American Eagle to generate earnings per share of 21 cents on revenues of $760 million.

For the six months, net income fell 19 percent to $47.6 million, or 24 cents a diluted share, on a net revenue decline of 2.9 percent to $1.41 billion.

Robert Hanson, chief executive officer, told Wall Street analysts during a conference call, “Needless to say we’re not at all happy with our second-quarter performance, which was a result of two factors: First, a disappointing women’s assortment primarily within our core and core fashion businesses where we just didn’t execute well. And second, a choppy and unpredictable external environment including highly promotional retail competition which has continued into the third quarter.”

The ceo said store traffic in North America was uneven and below expectations, with further deceleration in July. While most components of the North American business were below the company’s expectations, the women’s business was hardest hit, comping down 9 percent in the quarter.

“With the exception of dresses, fashion styles performed the best overall, particularly within pants and tops. We saw weakness primarily in core and core fashion styles. While the assortment architecture was on strategy as a team, we were overly focused on fashion and didn’t pay enough attention to our foundational key items. We didn’t deliver the trend relevancy, innovation and value that our customers expect from us,” Hanson said.

For both men’s and women’s, 30 percent of the business is in core product, 45 percent in core fashion and 25 percent in fashion merchandise.

Aerie’s performance was on track to deliver “double-digit EPS this year,” while factory stores comped slightly down, but with “total revenue growth of 29 percent,” Hanson told analysts.

In a telephone interview, the ceo said, “We feel that we had taken our eye off the ball on the balance of our assortments. We need to be innovating across all parts of the business, not just fashion.”

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Core merchandise in women’s include jeans, pants and shorts, and woven and knit tops. The men’s business, down 4 percent, performed closer to plan, the ceo said.

Hanson said the company has reassorted the mix for late third quarter and early fourth quarter to ensure product innovation for newness and fashion style, as well as value, for both the men’s and women’s businesses.

American Eagle provided third-quarter diluted EPS guidance of between 14 and 16 cents, based on a mid- to high-single-digit decline in comparable sales.

Wells Fargo analyst Paul Lejuez said, “American Eagle is now another ‘kid with a cough’ in the competitive teen landscape, struggling on the top line…. While management did all the right things to positively impact the business in fiscal year 2012, high levels of sales productivity and EBIT margins, combined with an intense teen retail environment are proving to be a challenge to [the retailer] in fiscal year 2013.”

Richard Jaffe, specialty retail analyst at Stifel, who trimmed his target price for the stock to $20 from $22, said, “We are hopeful that an improved merchandise assortment, combined with a stronger marketing campaign, will drive increased traffic and fewer markdowns.”