American Eagle Outfitters Fell on Weak Earnings Outlook

American Eagle Outfitters (AEO) stock plunged 6.5% today as the company issued weak earnings guidance for the fourth quarter. The company expects fourth-quarter EPS of $0.34–$3.36. This guidance was significantly behind analysts’ estimate of $0.46.

Higher markdowns could hit the company’s fourth-quarter earnings. It also expects flat comparable sales in the fourth quarter against analysts’ forecast of about 4.3% growth. The company’s weak guidance overshadowed its third-quarter performance.

American Eagle Outfitters’ Q3 earnings

American Eagle Outfitters’ third-quarter EPS of $0.48 was in line with analysts’ estimate and remained unchanged on a YoY (year-over-year) basis. Lower gross and operating margins put pressure on American Eagle’s earnings. Its gross margin declined about 160 basis points YoY to 38.2%, reflecting the impact of higher markdowns. Moreover, its operating margin contracted 110 basis points YoY to 9.7%.

The company’s third-quarter revenue grew 6.2% YoY to $1.07 billion. It was ahead of analysts’ estimate of $1.06 billion. Its comparable sales rose 5%. A strong back-to-school season drove its top-line growth. The company’s online sales increased by double digits in the quarter.

Comparable sales of the American Eagle brand grew 2%. Strength in the jeans category was partially offset by softer sales in apparel categories such as men’s and women’s tops following the back-to-school season. The company expects its challenges in the tops category to continue in the fourth quarter.

The Aerie brand’s revenues grew 26%. Sales from new stores and comparable sales growth of 20% drove its top-line growth. This also marked the 20th consecutive quarter of double-digit comparable sales growth in the intimate apparel brand.

Weakness in apparel stocks

American Eagle Outfitters’ weak outlook reflected the gloomy sentiment for apparel stocks. The stock prices of Gap (GPS) and Abercrombie & Fitch fell 2.8% and 6.4%, respectively, today.

Gap announced better-than-expected third-quarter earnings last month. However, Gap’s sales and earnings declined YoY, reflecting continued challenges.

Gap lowered its outlook for fiscal 2019, indicating that sluggishness would continue in the fourth quarter. It expects comparable sales to decline by the mid-single-digits compared to the previous forecast of a low-single-digit decline. Gap predicts its 2019 adjusted EPS to be $1.70–$1.75 compared to the prior outlook of $2.05–$2.15.

Intense competition from online retailers like Amazon and a promotional environment are adversely impacting the sales and margins of apparel companies. American Eagle Outfitters’ Aerie brand has a strong appeal among customers and has been giving tough competition to Victoria’s Secret. However, the company is facing heightened competition for its flagship American Eagle brand from fast-moving fashion brands like Zara and H&M.

Tariffs and the US-China trade war also concern American Eagle, as the company sources about 30% of its unit volume from China. The company expects tariffs to have a $3 million–$4 million impact in the fourth quarter.

American Eagle Outfitters is one of the preferred destinations for young people shopping for jeans. The company is trying to strengthen its jeans business through innovations like its new women’s Curvy collection, women’s Dream Jean, and AirFlex styles for men. It also expects to benefit from store remodelings as well as new stores.