American Eagle Outfitters Inc.’s plan to close 150 more stores and its 86.2 percent drop in first-quarter net income shows there’s no end in sight to the struggles teen retailers face.
This story first appeared in the May 22, 2014 issue of WWD. Subscribe Today.
While the chain has been evaluating its overall business, one way it hopes to grow is shift its near-term international store growth to a licensed model.
Jay Schottenstein, interim chief executive officer, told Wall Street analysts that as part of management’s overall business assessment, the company its shifting its near-term international growth plans. “We are gearing our international approach towards licensed stores where we see strong profitability.” He said the chain expects to reveal new partnerships near the end of the year, and that it sees “tremendous global appetite for our brands.”
The company has more than 100 licensed stores in 14 countries, and is eyeing a licensed structure for stores in Korea, company executives said on the call.
The teen chain’s net income fell to $3.9 million, or 2 cents a diluted share, for the three months ended May 3 from $28 million, or 14 cents, a year ago. Analysts were expecting zero cents in earnings per share. The company saw net revenues fall 4.9 percent to $646.1 million from $679.5 million. Consolidated comparable-store sales declined 10 percent.
The chain expects second-quarter EPS to be breakeven, on a high-single-digit decline in comps, versus 10 cents a diluted share a year ago. The second-quarter projection excludes any impact from potential impairment and restructuring charges.
Shares of American Eagle fell 6.4 percent to close at $10.60 in Big Board trading, reflecting the dismal earnings report and weak outlook.
While the first quarter saw elevated inventories due to soft traffic, Schottenstein said management was making progress to improve profitability. The retailer, eyeing omnichannel capabilities, plans to optimize its online platforms to improve the shopping experience. “Throughout the year, we will launch upgrades to our site to include improved product displays and navigation. We will release a new mobile app later this summer with better functionality and speed,” the interim ceo said.
The overall business assessment includes more cost cutting on its real estate base and its operational structure. An additional 150 store sites will be shuttered over the next three years, including 100 American Eagle locations. For this year, the company will close 50 American Eagle stores and 20 aerie sites in North America, which will result in annualized aftertax savings of $10 million to $15 million beginning in 2015. Schottenstein said the operational structure will be simplified to eliminate redundancies, such as in corporate overhead and professional services.
Roger Markfield, vice chairman and executive creative director, told analysts that the retailer saw “healthy demand for certain categories, including our heritage business, denim and pants.” He said the company was building upon its heritage bottoms businesses, the chain’s core strength, by focusing on trend styles and adding newness to the collections.
“As we get inventories down in the second half, our goal is to continue to selectively reduce promotions. Improved product and more relevant marketing events will also support a better overall pricing strategy. The challenges we faced in the quarter underscore the importance of continuing to evolve as the retail industry changes,” Markfield said.
Other specialty chains reporting first-quarter earnings for the period ended May 3 include L Brands Inc. and urban-fashion value chain Citi Trends Inc.
At L Brands, which operates the Victoria’s Secret and Bath & Body Works nameplates, net income rose 10.1 percent to $156.9 million, or 53 cents a diluted share, from $142.5 million, or 48 cents, a year ago. The company beat Wall Street’s estimate of 52 cents by 1 cent. Net sales rose 5.4 percent to $2.39 billion from $2.27 billion. Comps at the Victoria’s Secret stores rose 2 percent, while comps for Bath & Body Works also increased 2 percent. The company, which reported after the markets closed, expects second-quarter EPS at between 57 cents and 62 cents. It forecast full-year EPS at between $3 and $3.15, lowering guidance at the high end from previous expectations of between $3 and $3.20. The change reflects the company’s earlier announcement of its exit from certain categories in the Victoria’s Secret direct and beauty businesses.
Citi Trends beat analysts’ expectations for both EPS and sales projections. The company said net income jumped 47.3 percent to $9.1 million, or 61 cents a diluted share, from $6.2 million, or 42 cents, a year ago. Analysts were expecting 53 cents in EPS. Net sales rose 3.4 percent to $188 million from $181.8 million. Analysts were forecasting $187.7 million in sales for the quarter.