American Eagle Outfitters Inc. flew into pockets of turbulence in the first quarter, cutting profits in half, and said Wednesday it expects more choppy skies ahead.

This story first appeared in the May 27, 2010 issue of WWD. Subscribe Today.

While heavy discounting and the cost of closing the Martin + Osa division took their toll on first-quarter results, a second-quarter earnings projection slightly below analysts’ expectations played a larger role in dropping shares of the Pittsburgh-based teen specialty retailer $2.57, or 16.7 percent, to $12.81.

For the 13 weeks ended May 1, net income totaled $10.9 million, or 5 cents a share, compared with $22 million, or 11 cents, a year earlier. Stripping out charges from the closure of the 28-door Martin + Osa chain, adjusted profits amounted to 17 cents a share, matching analysts’ estimates.

Sales for the quarter increased 7.8 percent to $659.5 million from $612 million. Comparable-store sales rose 5 percent. Gross margin improved to 37.7 percent of sales, versus 36.1 percent a year earlier, as markdowns declined.

“Within tops, we entered the spring season with a unit-driven planned promotional strategy designed to send a clear message of value and gain market share,” said Joan Holstein Hilson, executive vice president and chief financial officer, on the company conference call. “This strategy did not deliver the planned margin. Beginning with the third quarter, we have adjusted our assortment plans, providing for a better balance between pricing and units, enabling us to capture a higher margin.”

Citing an excess of graphic T-shirts that will require liquidation, Majestic Research specialty analyst Chandi Neubauer said, “Inventory is a problem right now.”

While “most optimistic” it would improve its merchandising in the back half of the year, the retailer said it expected “weaker business trends” in the current second quarter, and projected quarterly earnings per share of between 12 cents and 16 cents, below analysts’ expectations of 21 cents a share.

Zale Corp. was able to narrow third-quarter losses beyond the expectations of analysts, but its shares received a hostile reception on Wall Street, falling 16 cents, or 6 percent, to $2.52.

For the three months ended April 30, losses were $12.1 million, or 38 cents a diluted share, against red ink of $19.5 million, or 61 cents, in the year-ago quarter. On average, analysts expected a loss of 95 cents a share, according to Yahoo Finance.

Revenues fell 5.1 percent to $359.8 million from $379.1 million. The company said same-store sales fell 2.2 percent in the quarter. Gross margin rose to 50.8 percent of sales from 50.1 percent.

Theo Killion, president and interim chief executive officer, told Wall Street analysts during a conference call that the “results are better than a year ago, but not good enough overall. I do, however, believe that we’ve made progress in executing our turnaround plan.”

He also noted the retailer during the quarter reduced some promotional activity, eliminating 27 days of discounting when everything in Zale stores was marked down 10 percent or more.

For the nine months, the loss was $65.2 million, or $2.03 a diluted share, versus a loss of $99.7 million, or $3.13, a year ago. Revenues declined 10.6 percent to $1.27 billion from $1.42 billion.

Reporting after the close of the markets on Wednesday were Dress Barn Inc. and Rue 21 Inc., both of which registered strong bottom-line growth.

For the third quarter ended April 24, Dress Barn’s net income more than doubled to $48 million, or 59 cents a diluted share, from $23.1 million, or 37 cents a share, in the year-ago period. Stripping out charges, that included costs related to last year’s acquisition of Tween Brands and the Justice nameplate, the Suffern, N.Y.-based firm had EPS of 60 cents. Analysts predicted EPS of 59 cents on sales of $645.8 million, according to Yahoo Finance.

Comps for the quarter were up 14 percent. By division, comps rose 9 percent at Dress Barn, 8 percent at Maurices and 23 percent at Justice. Gross margin improved to 43.8 percent of sales versus 41.3 percent a year earlier.

For the nine months, the women’s apparel retailer said its net income soared to $91.4 million, or $1.19 a diluted share, compared with $41 million, or 66 cents a share, a year earlier. Sales for the period expanded 51.9 percent to $1.66 billion from $1.1 billion.

Rue 21 nearly doubled first-quarter income, beating analysts’ estimates, and raised second-quarter guidance.

Net income for the three months ended May 1 rose 94.7 percent to $5.8 million, or 23 cents a diluted share, from $3 million, or 13 cents, in the year-ago quarter, as sales grew 27.6 percent to $137.8 million from $108 million on a 7.7 percent increase in comps. Gross margin expanded to 37.9 percent of sales from 35.1 percent.

“We remain focused on continuing to grow our top and bottom line consistently using a combination of new store growth, store conversions, same-store sales growth, combined with margin expansion,” said Bob Fisch, president and ceo.

Second-quarter EPS is now projected at between 23 cents and 25 cents and full-year projections, previously at $1.08 to $1.13, were raised to $1.14 to $1.19.