American Eagle Net Up, Aéropostale Down in 3rd Qtr.

Promotions, cost increases hurt margins at both teen chains.

Inside American Eagle's flagship store.

Promotions cut both ways for American Eagle Outfitters Inc. in the third quarter, helping to restore its sales momentum even as they limited its profit improvement.

This story first appeared in the December 1, 2011 issue of WWD.  Subscribe Today.

Teen retailing rival Aéropostale Inc., however, continued to see top- as well as bottom-line erosion, with same-store sales falling 9 percent in the quarter.

American Eagle said Thursday it enjoyed strong sales over the Thanksgiving weekend “driven by increased traffic and conversion. Powerful unit sales growth reflected a positive consumer response to the holiday assortment and planned promotions.” It added that margin pressures evident in the just-concluded period, both from higher cotton costs and its aggressive promotional cadence, are expected to carry into the fourth quarter.

In the three months ended Oct. 29, net income increased 58.8 percent to $52.4 million, or 27 cents a diluted share, matching analysts’ estimates, from $33 million, or 17 cents, in the year-ago period. The 2010 quarter included a $24.4 million loss on the sale of securities, without which year-ago earnings per share would have been 29 cents.

Sales rallied 10.7 percent, to $831.8 million from $751.5 million, with comparable-store sales company-wide and at both the American Eagle and Aerie divisions up 5 percent, versus a 1 percent increase a year ago. AEO Direct revenues were up 21 percent. Gross margin traveled in the opposite direction, falling 450 basis points to 37.1 percent of sales from 41.6 percent.

On a Wednesday morning conference call, chief executive officer Jim O’Donnell cited “spot-on” inventory investments that “resulted in record conversion rates and double-digit unit sales growth.” Positive sales trends helped offset higher cotton costs and limited the firm’s decrease in gross profit to 1.1 percent, but the ceo was optimistic that some degree of margin relief would arrive along with lower cotton costs starting in the back half of 2012.

Roger Markfield, vice chairman and chief design officer, said denim, knit tops and accessories performed well for the Pittsburgh-based teen specialty chain, with jeans posting same-store sales increases in the high single digits. He also noted that the company was caught shorthanded on men’s stock during last year’s holiday season, with the shortfall estimated at about $40 million.

“This year, we have that inventory,” he boasted to analysts.

Aéropostale ceo Thomas Johnson cited “many teen retailers increasing both the depth and breadth of their promotions” as the company logged in with a 58.8 percent drop in profits to go with its 1 percent decline in revenues.

In the third quarter, net income was $24.1 million, or 30 cents a share, above the 28 cents expected by analysts, versus profits of $58.5 million, or 63 cents, in the year-ago period. Even with e-commerce sales up 19.3 percent to $45.7 million, total revenues fell to $596.5 million from $602.8 million, with the 9 percent comp slip split between an 11 percent decline in women’s and a 4 percent drop-off in men’s. Gross margin fell 950 basis points, to 27.1 percent of sales from 36.6 percent in the third quarter of 2010, as the company was beset by lower merchandise margins, higher costs and brisk promotional activity.

Despite some progress on the fashion front, Johnson told a conference call late Wednesday that the company entered the holiday season “a little bit commodity-driven” during Black Friday weekend and experienced comp and margin trends similar to those seen during the third quarter.

EPS for the fourth quarter is expected to come in between 35 cents and 38 cents a diluted share, versus a previous expectation of 44 cents among analysts.