Excessive Promotional Activities Hurt American Eagle’s Earnings

Apparel retailer American Eagle Outfitters (NYSE:AEO) is not immune to the general softness in the retail market, either. The company reported its first quarter results on May 17, wherein it reported a fall in its earnings to 16 cents per share, excluding restructuring charges, down from 22 cents in the same period last year, missing consensus estimates by a penny. The revenues were up almost 2%, driven by the impressive performance of its lingerie and activewear segment, Aerie, as well as the direct-to-consumer sales. However, the stock price of the company plummeted over 12% in the aftermath of the earnings release, seemingly as a result of the weak guidance provided for the second quarter. The company expects the comparable store sales to be in the flat to a low single digit decline range, and an EPS of $0.15 to $0.17. Excessive promotional activities and a shift to the digital channel pressured the margins in the first quarter, and this trend is expected to continue in the current quarter as well.

Aerie’s Strong Performance Continues

Aerie delivered a 25% growth in comparable sales in the first quarter, representing a 13th straight quarter of double digit comps growth. This rate sounds even more impressive when a tough comparison to the 32% growth delivered in the same period last year is taken into consideration. New customers, as well as increased traffic, both online and in stores, resulted in the impressive performance. A new apparel collection – Chill. Play. Move. – was launched in the quarter, which posted strong results. The digital penetration increased to 47%, from 35% last year, signaling the importance of the online segment for the company.

For the company as a whole, the digital sales now account for 26% of the total revenues, up from 19% last year. Effective digital marketing, as well as growth in mobile continued to accelerate growth. Given the high growth rate seen in this segment, the company had also launched an exclusive online-only range, which was well received. The company has taken a number of steps to ensure a seamless online experience, which was also an important factor driving the sales.

Company To Assess Store Locations

Given the ongoing mall traffic declines, the company continues to assess its store locations. AEO’s fleet of stores are largely profitable, but it continues to look into cases where the company is over-stored or there is a high likelihood of sales migration. Furthermore, in its entire portfolio of 1,050 stores, 580 come up for lease expiration in the next three years, giving the company the flexibility to implement its aggressive store closure plans. During FY 2017, the company intends on closing 25 to 40 locations, and is meanwhile, selectively opening stores. These include Aerie stores, and a handful of American Eagle stores in the US and Mexico. Internationally, the company is expected to open 45 stores, and close two licensed store locations.

See our complete analysis for American Eagle Outfitters

Have more questions about American Eagle Outfitters? See the links below:

• American Eagle’s Stock Falls Over Poor Quarter And Weak Guidance
• Investors Overlooking American Eagle’s Growth Potential
• What Is American Eagle Doing To Bolster Its Direct Business?

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