American Eagle Outfitters reported on Wednesday that second quarter total net revenue rose 3% to $844.6 million from $822.6 million last year, besting the $824.0 million FactSet consensus cited by MarketWatch. Same-store sales rose 2%, well above the FactSet estimate for a 0.4% decline, after a 3% increase last year.
The teen apparel retailer saw gross profit in the quarter of $294 million compared to $307 million last year. The gross margin rate fell to 34.9% compared to 37.3% last year, a 240 basis point decline, primarily due to increased promotional activity, shipping costs and rent, according to a company press release.
The company’s Aerie lingerie brand is boosting its results, with same-store sales growing 26% (after a 24% rise in the year-ago period) compared to flat same-store sales at American Eagle (after a 1% rise a year ago). Shares rose more than 11% after the premarket report. Adjusted earnings in the quarter were 19 cents per share, down from 23 cents per share in the year-ago quarter but beating the 16-cent per share forecast from FactSet analysts noted by MarketWatch.
Wall Street loved American Eagle’s second-quarter results, but they demonstrate troubles at the teen retailer’s flagship. "On the one hand, Aerie continues to power ahead with robust sales uplifts," GlobalData Retail analyst Anthony Riva noted in an email to Retail Dive. "On the other hand, American Eagle is struggling to connect with consumers and generate growth."
Riva went so far as to say that "Aerie continues to glitter," noting that the brand is taking market share from rivals, including the dominant player in the space, Victoria's Secret. "Its fresh take on lingerie – especially in the sense of using ordinary women as models and its body-positive advertising – is still striking a chord with consumers," Riva said. "New stores and effective marketing have also helped to drive sales."
The retailer opened nine new Aerie locations, of which seven were in new markets, the company said Wednesday, along with six new American Eagle stores, with two in Mexico and four in the U.S. The company also opened nine international licensed stores and closed three. For the remainder of the year, the company plans to open another five American Eagle stores and five Aerie stores in the U.S., Canada and Mexico, as well as 32 international licensed stores to support the company’s global growth strategy. The company is on track to close a total of 25 to 40 stores this year.
In a market beset by falling mall traffic and a notoriously difficult consumer demographic, American Eagle itself is benefitting from ongoing improvements to its assortments, notably denim, and especially the current back-to-school season, Riva also said. "The success in jeans also had a positive impact on other assortments, like women's tops," according to Riva. "Good cross-merchandising in store and a strong summer range helped to persuade many female shoppers to buy additional items along with their denim purchase. Unfortunately for American Eagle, the success in womenswear did not replicate itself in men’s."
That could improve in the fall and winter, when men are more likely to be interested in buying clothes, Riva said, though the retailer needs a "much clearer identity and a much more compelling men's range ... to win back share."
The company's hit to margins also doesn't help, brought on by the need to clear inventory and by the company’s closure of stores in the U.K. and Hong Kong, and a reconfiguration of ownership in China. "This remains an area of concern, not least since discounting seems to have become the norm at American Eagle and, indeed, other players in its space," Riva said.
Difficulty remains on the horizon, he warned. "[W]e remain positive about AEO in the sense that the business has been stabilized and is on a sound footing," he said. But "we do not see a significant positive change in sales performance over the remainder of this year … AEO has much more work to do before it is back on the path to growth."