The American Eagle Outfitters store in Tokyo

American Eagle Outfitters Inc., riding double-digit sales gains from merchandise and marketing improvements, reported diluted earnings per share of 17 cents for the second quarter, beating guidance of 11 cents to 14 cents and far exceeding the 3 cents a share earned in the year-ago quarter.

Total revenues at the Pittsburgh-based casual apparel retailer targeting teenagers up to those in their mid-Twenties, increased 12 percent to $797 million in the quarter ended Aug. 1, from $711 million last year. Comparable sales increased 11 percent, compared to a 7 percent decrease last year.

AEO’s gains are particularly noteworthy considering the troubled state of most fashion retailers targeting the youth market. Asked to attribute the standout performance, Mary Boland, AEO’s chief financial and administrative officer, told WWD, “It’s the overall strength of our assortment, coupled with stronger marketing.” She said she was especially happy that the revenue results were achieved on reduced promotions and customers shopping AEO products at higher average unit retail prices.

She said both the American Eagle and Aerie brands performed well. Even so, the stock price on Wednesday dropped 7.5 percent, or $1.37, to $16.90 on the New York Stock Exchange, possibly due to profit-taking or investors expecting a stronger forecast for the third quarter. In the last 52 weeks, the stock has ranged from $11.77 to $18.49.

For the third quarter, AEO anticipates a mid-single-digit increase in comparable sales, and 28 cents to 31 cents earnings a share, compared with adjusted EPS of 22 cents last year. The guidance excludes potential asset impairment and restructuring charges. The company did not forecast the fourth quarter. “It’s way too early to talk about the fourth quarter,” Boland said.

“Mall traffic continues to be challenged but with the traffic we have seen, we’re doing better,” Boland said. She also said that AEO’s e-commerce “continues to grow at a high rate” and that the company has made significant investment in technology over the last couple of years. “It’s really about the customer being able to shop whatever channel they choose, or technology they choose or whatever physical space they choose.”

“What was most exciting for me in Q2 were the positive comps across the board in both men’s and women’s tops as well as men’s and women’s bottoms,” said Chad Kessler, global brand president of the American Eagle brand. “The strong Seventies, Bohemian trend fits right into our brand handwriting.”

Fabric innovations have also helped, with Kessler citing soft, sexy, “bouncy” jersey in much of the knit line, and last fall’s introduction of “denim X,” which Kessler described as a “supersoft denim fabric that won’t bag out.” It runs through such categories as jeans, pants and shorts.

“Prior to last fall, we were trying to compete on price [against] a lot of players with highly promotional, cheap $10 programs,” Kessler said. However, the chain has shifted the focus on “providing the best value on updated product, which in some cases means higher tickets,” and no longer trying to sell the cheapest products.

In addition, “We have expanded the breadth of the assortment. It makes [the collection] more interesting, but we still try to make sure it’s highly focused and highly curated.”

The executives said their company’s upward trend has been evident since the fourth quarter of last year, and Boland said she expects to see the trend continue in the back half of this year.

In the second quarter, operating income increased to $53 million from $12 million last year, and the operating margin expanded 500 basis points to 6.7 percent as a rate to revenue.

Total merchandise inventories increased 4 percent to $409 million compared to $393 million last year.

“I’m pleased to report another strong quarter, and to see positive momentum continue,” said Jay Schottenstein, American Eagle Outfitters’ interim chief executive officer. “The team is delivering exceptional execution, and our customers have taken notice of improvements to our merchandise and overall customer experience. Both American Eagle and Aerie delivered strong sales and earnings growth across channels.”

In a conference call, Schottenstein said that of American Eagle’s fleet of more than 1,000 stores, only 23 locations are not four-wall profitable. He said American Eagle’s comparable sales were up 10 percent, and Aerie’s rose 18 percent. “Aerie presents an incredible growth in opportunity which I believe can double in size over the next several years,” he said.

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