American Eagle Outfitters on Wednesday reported its 11th consecutive quarter of positive sales growth, as total net revenue in the third quarter rose 2% to $960 million compared to the year-ago period. At the same time, gross profit in the quarter was $375 million, down from $378 million last year, and the gross margin rate declined 120 basis points to 39%. The company said in a press release higher promotions and increased shipping costs, associated with a strong digital business, drove the drop in profit.
Consolidated same-store sales rose 3%, following a 2% increase last year. American Eagle's same-store sales rose 1% (compared to 0.4% in the year-ago quarter) and Aerie's rose 19% (compared to 21% a year ago). E-commerce same-store sales rose in the "high teens," partially offset by a slight decline in store same-store sales, demonstrating a recovery from recent trends, Chief Financial Officer Robert Madore told analysts on Wednesday, according to a transcript from Seeking Alpha.
The company's Cyber Monday sales, which rose 30%, were its best online day ever, CEO Jay Schottenstein told analysts on Wednesday. In some cases, the digital channel also boosted brick and mortar. At Aerie, digital sales rose near its physical stores by a factor of 1.5, Madore said.
American Eagle shares rose 4% on Wednesday as executives predicted a happy holiday quarter on top of its Q3 results. But its performance and optimism about the future is in part thanks to overall improvements in apparel sales, making the retailer's underlying performance harder to gauge, according to GlobalData Retail Managing Director Neil Saunders.
"The uplift was delivered against the backdrop of a stronger period for apparel overall. This raises a question as to how much is down to underlying natural demand, and how much is attributable to the improvements American Eagle has made over the past year," Saunders said in comments emailed to Retail Dive. "The company has much more work to do before it can claim to be back to full health."
Then there's the dip in profits. E-commerce significantly ate away at profits, a stubborn indication of the trade-off retailers face as they stoke digital sales, where fulfillment is more expensive and more complex and the expectation for promotions often higher.
Meanwhile, the brand's growth is now dependent on denim, a potential problem if denim goes out of fashion, Saunders warned. But there's also evidence the retailer is successfully pushing a wider assortment. "From our customer data, there is evidence to suggest that those shoppers who visit to buy jeans are now buying more in other categories too — this is particularly true for men," he said. "By using denim as a springboard to promote other parts of its offer, we believe American Eagle is on the right track."
Aerie is an even better story, serving up robust results, especially online — yet with plenty of room to continue to grow. Saunders said that the brand's potential derives from two sources, its growing customer base and its merchandising expansion, adding that "the category extensions into products like soft knit tops and leggings are helping to increase average transaction values" and helping Aerie grab more spending share.
The company is also experimenting with a new outlet strategy. In five stores, it has eliminated specially made outlet merchandise — a sore point with many shoppers — to sell only excess inventory from its actual storefront brands. Madore said that the retailer found in early tests that "the average unit retail that we're realizing through the liquidation in our own channel is about 100% better than what we had done through a third party jobber."
Executives expressed unbridled confidence about the holidays, saying they expect about the same level of discounting as last year.