Holiday promos and softening demand in apparel drove a weak fourth-quarter outlook at American Eagle Outfitters. The disappointing results put a damper on what was otherwise a positive third-quarter earnings report that bested Wall Street’s estimates in the tough mall-based retail sector.
In a Nutshell: AEO’s women’s intimates brand Aerie continues to show strength, while American Eagle Jeans contributed to the core brand’s profits.
“Strong top-line performance across brands and channels led to our 19th consecutive quarter of comparable sales growth and record third quarter revenue. In a tough environment, we reported EPS 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,” chairman and CEO Jay Schottenstein said.
Jeans led sales in a successful back-to-school season, and investments in new denim fits and sizes are paying off to the tune of “25 consecutive quarters of record sales,” Schottenstein said in a call with investors and analysts Wednesday.
“Jeans were positive across genders with new styles leading the way. Our new women’s Curvy collection is driving incremental growth,” Chad Kessler, executive vice president and global brand president for American Eagle said. The team has been working to strengthen underperforming areas and is “planning a better balance between sales and inventory growth as we move forward.”
In the quarter, Aerie attracted new customers and drove an increase in average spend, Jennifer Foyle, executive vice president and Aerie’s global brand president, said. Aerie’s “store traffic was well ahead of mall averages,” she said. “The average transaction size increased, led by higher average unit retail prices. And despite a highly competitive environment, we controlled promotions and strengthened our margins compared to last year.”
Net Sales: Total net revenue for the quarter ended Nov. 2 rose 6.2 percent to $1.07 billion from $1.00 billion. Consolidated comparable sales rose 5 percent, on top of the 8 percent gain in the year-ago quarter. AEO posted positive comparable sales across both store and digital channels, the company said.
By brand, American Eagle’s comps rose 2 percent on top of a 5 percent gain last year. Aerie comps jumped 20 percent, building on a 32 percent gain last year. The quarter also marked Aerie’s 20th consecutive period of double-digit sales growth.
AEO’s gross profit increased 2 percent to $407 million from $399 million, but the gross margin rate slipped to 38.2 percent versus 39.8 percent last year, mostly due to increased markdowns.
AEO ended the quarter with inventories up 9 percent to $647 million, at cost. The increase reflects inventory levels to meet strong demand–particularly for new styles and an expanded size range–for AE Jeans and to showcase additional merchandise for 170 newly opened Aerie side-by-side locations and 12 freestanding Aerie stores.
Higher markdowns in tops like women’s wovens and in men’s drove the weaker performance, Jeffereis analyst Janine Stichter said, which in turn is weighing on comps and margins. And while higher inventory levels support growth in jeans and Aerie, they are also “tracking ahead of sales” at up 9 percent versus sales at 6 percent, she said.
Earnings: Third-quarter net income fell 5.5 percent to $80.8 million, or 48 cents a diluted share, from net income of $85.5 million, or 48 cents, in the year-ago period.
Wall Street was expecting 48 cents on net revenue of $1.06 billion.
The company said it expects fourth-quarter earnings per share to be in the range of 34 cents to 36 cents, with comparable sales approximately flat. The guidance excludes possible restructuring and other charges. The estimate compares with last year’s fourth quarter EPS of 43 cents, and Wall Street’s expectations of 46 cents before the third-quarter results.
CEO’s Take: “Softer demand in certain [American Eagle] apparel categories led to higher markdowns and has persisted into the fourth quarter. 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,” Schottenstein said.