American Eagle Outfitters continues to grow. But investors are still not satisfied with the results.
That’s because while the retailer improved on top and bottom lines during its most recent quarter — with the steady growth of the jeans and Aerie businesses — the results were below the Street’s expectations, causing the stock to slide 6.55 percent to $14.13 at the end of Wednesday’s trading session.
The culprits: misses in men’s and women’s tops at the American Eagle brand, which led to higher markdowns.
“The team has been working hard to quickly course-correct and our focus is squarely on continuing to capitalize on the strength of our brands, accelerating the growth of Aerie, and creating shareholder value,” Jay Schottenstein, American Eagle Outfitters Inc.’ chairman and chief executive officer, said in his prepared remarks.
More specifically, Chad Kessler, American Eagle’s global brand president, said the error was in moving too fast in updating the assortment, particularly in men’s apparel.
“There’s so much around Ts and fleece as really being the defining wardrobe for this guy today with his jeans,” Kessler said on Wednesday morning’s conference call. “And we shifted a lot of the assortment to those categories and walked away from some legacy items that while they were down-trending were still meaningful in volume. And I think as we shifted, we expected that the customer would move as quickly as we did into sort of the dominance of the Ts and fleece that you see in the assortment today.
“We just need to make sure we’re more balanced going forward,” he added. “And the team has been all over that.”
Other headwinds include continued tariff tensions with China. Robert Madore, chief financial officer and executive vice president of American Eagle Outfitters, said on the conference call that the company expects a $3 million to $4 million impact in the current quarter because of the tariff situation. China represents roughly 30 percent of the company’s unit volume sourced globally, he said.
Even so, sales and profits rose during the latest quarter. Total revenues for the three-month period ending Nov. 2 increased to $1.06 billion, up from just over $1 billion during 2018’s third quarter. Income also grew to much as $186.4 million, up from $185.7 million the same time last year.
“Strong top-line performance across brands and channels led to our 19th consecutive quarter of comparable sales growth and record third-quarter revenue,” Schottenstein said. “In a tough environment, we reported [earnings per share] in line with our guidance. We continued to deliver on our strategic pillars, with Aerie and American Eagle Jeans demonstrating strong sales and profit growth.”
In fact, American Eagle’s jeans business and Aerie’s intimates businesses dominated their respective markets last quarter.
Aerie’s comparable sales comps surged 20 percent. That’s on top of a 32 percent increase the same time last year.
“Aerie’s strength lies in its unique brand position and how we connect with our customers in a real authentic way,” Foyle said on the conference call. “We are a brand for real women.”
The intimates business opened 24 new stores during the quarter and is on track to open about 60 for the full fiscal year. Digital sales are growing, too, representing roughly 40 percent of Aerie sales during the quarter.
“A lot of our competitors are now following suit,” Foyle said. “It keeps us ahead of our game. We have to keep on thinking of what to do different next year and how we can keep on surprising our customer.
“I love competition,” she added. “Because it makes us think harder and sweat things out a little bit more and keeps us humble. So I welcome it.”
Madore predicted earlier this year that Aerie would likely reach billion-dollar status within the next year or year and a half.
Other growth drivers include the men’s and women’s accessories business and beauty. Schottenstein noted on the conference call that an expanded assortment of footwear is another potential opportunity for the company.
Jen Redding, an analyst at Wedbush, wrote in a note that American Eagle and Aerie were winners during this year’s Black Friday and Cyber Monday shopping weekend with their “heightened demand for Eagle’s compelling assortment, given more inclusive sizing, better ranges [and] subscription services.” The period represents a crucial selling period for retailers, marking the start of the holiday season.
In addition, American Eagle Outfitters has continued to embark on a number of collaborations. Like a streetwear collection with rapper Lil Wayne and a new line of CBD-infused beauty products. Earlier this month, the company released an apparel and accessory collection with QR codes. Consumers can contribute directly to Delivering Good, a nonprofit that works to prevent poverty, by scanning the bar codes with their smartphones.
Still, the company’s stock is down roughly 16 percent year-over-year.
“While [American Eagle Outfitters] is clearly a share-gainer, near-term pressures on [average unit retail prices] and conversion are suggesting those share gains are coming at a cost,” Kate Fitzsimons, an analyst at RBC Capital Markets, wrote in a note. “Comps and margin pressures are set to worsen in Q4 as tops execution issues step up markdowns on top of inventory carryover.”