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Teen Wars Continue, with American Eagle the Q1 Victor

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U.S. malls have become a teen battlefield, and American Eagle Outfitters seems to be winning the war.

Denim-based teen retailers reported mixed results for the first fiscal quarter of 2015, evidence that the struggle to gain share of the U.S. teen specialty apparel market is far from over.

American Eagle (AEO) gained $64 million in sales during the quarter, while rival Aeropostale (ARO) suffered a revenue decline of $75 million and Abercrombie’s (ANF) U.S. business saw sales fall by more than $55 million. Sales at Kearney, Nebraska-based Buckle (BKE) were flat in the period.

All stores in the denim-oriented mall-based teen retail segment continues to lose share to fast-fashion players like privately held Forever 21 and Swedish Giant H&M, whose rapid U.S. store expansion, low prices and broad selection have captured the attention of teens and twenty-somethings.

American Eagle Outfitters reported an 8 percent revenue increase to $700 million at its 1,000 stores, up from $646 million last year. Consolidated comparable sales swung to a 7 percent increase from a 10 percent drop last year.

Gross profit increased 16 percent and 260 basis points to $262 million, or 37.5% of revenue, helped primarily by a reduction in markdowns. Operating income increased to $42 million from $8 million last year, and the operating margin expanded 470 basis points to 6 percent of revenue.

Net income at American Eagle was $29.1 million, or $0.15 per share, a significant increase from $3.8 million, or $0.02 per share, for the comparable quarter last year, and well above guidance of $0.09 to $0.12 and analyst estimates of $0.11.

The company attributed the quarter’s success to improved merchandise innovation, including Denim X and soft and sexy tops, and strong seasonal concepts such as Beach Whites and Indigo Blues that are resonating well with customers and selling through at full prices. There was significant improvement in women’s tops, both knit and woven, as well as dresses and soft accessories. AE bottoms also performed well in the quarter, driven by shorts, pants and women’s denim.

“Our strong first quarter results reflected outstanding merchandise and customer-focused execution,” said Jay Schottenstein, interim CEO. “Both AE and aerie performed well, achieving higher sales and earnings, proving successful in a price promotional retail climate. We will continue to raise the bar by offering great product quality, innovation, style and value. Across the organization, we are focused on the market opportunity to leverage our competitive strengths in merchandising, new technologies and capabilities to gain further market share and deliver earnings growth.”

Aeropostale, with over 820 stores in the U.S. and Canada with the flagship brand and 26 P.S. by Aeropostale childrenswear stores, as well as over 250 licensed stores overseas, reported disappointing results for the first quarter, which it called a period of transformation for the company.

Net sales plummeted 20 percent to $318.6 million from $395.9 million in the prior year period. Comparable sales, which include e-commerce, decreased 11 percent. Gross margin improved by 80 basis points to 18.6% of net sales. The operating loss for the quarter was $40.5 million, or $39.3 million after adjustments. The net loss for the quarter was $45.3 million, or $0.57 per diluted share, an improvement from the prior year’s first quarter loss of $76.8 million, or $0.98 per share.

Aeropostale CEO Julian R. Geiger said, “As we anticipated, the first quarter of 2015 represented a period of transition for us. We worked our way through a number of issues, including a merchandise assortment that was not consistent with our future direction, unseasonably cool weather, and the West Coast port slowdown. However, the performance of our women’s division exceeded our expectations, and we were encouraged by the demand we were able to create through certain key items and promotions.”

At Abercrombie & Fitch, operator of 789 domestic and 173 international Abercrombie & Fitch, abercrombie and Hollister stores, net sales for the first quarter decreased 14 percent to $709.4 million, driven by a comparable sales decline of 8 percent and an adverse effect from foreign currency fluctuations.

U.S. sales decreased 11 percent to $448.9 million and 18 percent to $260.5 million internationally. Comparable sales for the first quarter decreased 7 percent in the U.S. and 9 percent internationally. Abercrombie comparable sales declined slightly in both markets, while Hollister’s comparable sales improved in both, due to positive comparable sales in Asia and broad-based sequential improvement in Europe, including in the U.K.

Net sales from direct-to-consumer and onmichannel grew to approximately 23 percent of the total company net sales in the first quarter, compared to approximately 21 percent of total company net sales last year.

The gross profit rate for the first quarter was 58 percent, 420 basis points lower than last year. The company suffered a net loss of $63.2 million, or $0.91 per share, compared to a net loss of $23.7 million, or $0.32 per share in the prior year.

A&F executive chairman Arthur Martinez said, “During the quarter, the company continued to take major strides to revitalize its brands, enhance performance, and position itself for a return to profitable growth. We knew the first quarter was going to be difficult due to a number of factors, both internal and external and, most significantly, because many of the actions we are taking to improve our business are in the early stages of implementation and have not yet been fully realized.”

At The Buckle, net sales for the quarter decreased 0.1% to $271.3 million from net sales of $271.7 million for the prior year 13-week fiscal quarter ended May 3, 2014. Comparable store sales decreased 2.2%. Online sales increased 12.9% to $24.2 million.

Net income for the first quarter of fiscal 2015 dropped by almost 10 percent to $33.6 million, or $0.70 per share, from $37.3 million, or $0.78 per share in the prior year period.

Known as a denim destination, each of the 463 Buckle stores in 44 states carries a wide selection of fits, styles, and finishes from leading denim brands, including the company’s exclusive brand, BKE.

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