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Teen Retailers Get Mixed Grades in Third Quarter

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This past week, three teen retailers reported third-quarter sales that fell from last year, and a mixed bag of earnings performance results, underscoring the challenges faced by mall-based brands trying to appeal to Millennials.

American Eagle Outfitters, Abercrombie & Fitch and Aeropostale were all reportedly affected by weak mall traffic and aggressive promoting in the quarter that has continued into the fourth quarter holiday season. While only Aeropostale and American Eagle are aggressively closing stores, all three are fortifying their direct-to-consumer and omnichannel capabilities in an attempt to accommodate the rapidly changing ways their customers want to shop.

Aeropostale

At Aeropostale, which operates stores under its namesake teen brand and P.S. by Aeropostale for younger children, net sales in the three-month period decreased 12 percent to $452.9 million from $514.6 million in the year ago period. Comparable sales, including the e-commerce channel, decreased 11 percent.

Higher merchandise margins led to a slight improvement (70 basis points) in gross margin rate, to 18.8%. The company reported a net loss for the third quarter of fiscal 2014 of $52.3 million, or $0.66 per diluted share, which included over $15 million in after-tax charges for store impairment, the closing of P.S. from Aeropostale stores and other costs. Excluding charges, the company reported an adjusted net loss of $35.2 million, or $0.45 per diluted share, more or less in line with Wall Street estimates.

Julian R. Geiger, chief executive officer, commented, “During my first 100 days back at Aeropostale, I have developed and begun executing my vision of, and game plan for, positioning and returning the Company to profitability. In that time, we have also continued to support and accelerate a variety of well conceived and executed merchandising, marketing, operational and financial initiatives that started before my arrival. We have made small but measureable steps in the right direction, which led to third quarter results that were in line with our guidance. We ended the quarter with inventories well-controlled, positioning us appropriately as we progress through the fourth quarter.”

Aeropostale ended the quarter with cash and cash equivalents of $109.2 million, which one analyst commented might not be enough to carry it through too many more quarters like the one that just ended, and long-term debt of $136.0 million.

The company reportedly closed 20 net stores during the quarter, 13 Aeropostale and seven P.S. from Aeropostale, and now operates 842 Aeropostale stores in the U.S., 69 in Canada, and 141 P.S. from Aeropostale stores in the U.S. In 2015, it expects to close another 50-75 stores.

The company cut its guidance for the fourth quarter, and now expects operating losses in the range of $28.0 to $34.0 million, which translates to a net loss in the range of $0.37 to $0.44 per diluted share.

American Eagle Outfitters

The teen retailer known for its expertise in denim saw total net revenue decline slightly in the third quarter, to $854 million from $857 million last year, surpassing analyst estimates of $844 million. However, comparable sales decreased 5 percent, driven by a 6 percent decline at American Eagle stores and a 3 percent rise at aerie.

Gross profit increased 6 percent to $315 million and rose 200 basis points to 36.9% of revenue. The margin improvement was driven primarily by reduced markdowns, though included an unfavorable 120-basis-point move in buying, occupancy and warehousing deleverage.

SG&A declined 1 percent to $205 million but remained at 24 percent of sales. Reductions in overhead and variable expenses were partially offset by continued investments in new stores and international expansion, as well as increased incentive expense accruals.

Including restructuring and asset impairment charges, net income plunged 63 percent to $9 million, or $0.05 per diluted share, from $24.8 million, or $0.13 per share, in the comparable quarter last year. Excluding charges, earnings per share rose 16 percent to $0.22 from $0.19 in the prior year period.

Jay Schottenstein, Interim CEO commented, “Consistent with our previous announcement, the third quarter delivered higher margins and 16 percent adjusted earnings growth over last year, in a highly challenging and competitive marketplace. We managed the business better and were able to reduce markdown rates and control expenses. Our ongoing priority to strengthen our business is reflected in the restructuring activities and efforts to drive a better customer experience through improved merchandising, customer engagement and building omni-channel capabilities.”

The Pittsburgh-based company said that it expects to earn between $0.30 and $0.33 per share for the fourth fiscal quarter, below analyst anticipation of $0.34 per share.

During the third quarter, American Eagle opened 20 net new stores, including 10 factory outlets and 8 international stores. In addition, it opened 10 international licensed stores. For fiscal 2014, the company remains on track to reduce its North American store count by closing nearly 50 AE and 25 aerie stores.

Abercrombie & Fitch

The New Albany, Ohio-based company, whose brands include Abercrombie, Hollister Co. and Gilly Hicks  said that its total revenue fell to $911.5 million from $1.03 billion for the quarter that ended Nov. 1, $5 million short of the $916.7 million expected by analysts. Sales by brand were $358.4 million for Abercrombie & Fitch, $81.3 million for Abercrombie kids and $468 million for Hollister. Comparable store sales fell 10 percent overall, with Abercrombie & Fitch down 6 percent, kids down 10 percent and Hollister off by 12 percent.

The gross margin slipped by 80 basis points to 62.2% due primarily to an increase in promotional activity.

Net income was $18.2 million, or $0.25 per share, for the quarter versus a loss of $15.6 million, or $0.20 per share, a year ago. Excluding charges, earnings were 42 cents per share, beating analyst estimates by a penny.

The company now anticipates earning between $1.50 and $1.65 per share for the year. That’s down from its prior forecast of $2.15 to $2.35 per share and analyst estimates of $1.83 per share.

Mike Jeffries, chief executive officer, said: “Our third quarter results were disappointing in what remains a very challenging environment for young apparel. Comparable sales improved somewhat in November, and this improvement was maintained through the Black Friday weekend. However, we expect conditions to remain difficult through the balance of the fourth quarter.”

Jeffries went on to explain that management is taking steps to better position the company for future success, including changes in product assortment, customer engagement, investing in direct-to-consumer and omnichannel, expanding international reach, closing underperforming stores and continuing to reduce expenses.

As of the end of the quarter, the company operated 834 stores in the U.S. (255 Abercrombie & Fitch, 127 abercrombie kids and 452 Hollister) and 166 International stores (27 Abercrombie, six abercrombie kids, 133 Hollister), a total of 1,000 stores.

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