American Eagle, the popular clothing and accessories retailer, experienced lower-than-expected sales for the second quarter in a row. Despite this, the company saw a significant increase in profits, thanks in part to lower product costs. The news caused shares to fall more than 5% in premarket trading on Thursday.
In terms of earnings per share, American Eagle reported 39 cents, slightly surpassing the 38 cents that analysts had predicted. However, revenue fell short of expectations, coming in at $1.29 billion compared to the anticipated $1.31 billion.
The company’s net income for the three-month period that ended on August 3 was $77.3 million, or 39 cents per share, which marked a substantial increase from the $48.6 million, or 25 cents per share, reported during the same period the previous year. Sales also rose by approximately 8% to $1.29 billion.
It’s important to note that this sales gain was partially due to a calendar shift, which positively impacted second-quarter sales by $55 million. Nonetheless, American Eagle’s intimates line Aerie saw a 9% increase in revenue, while its namesake brand grew by 8%.
The company’s gross margin for the quarter was 38.6%, which was slightly higher than the previous year and aligned with analysts’ expectations. This increase can be attributed to “favorable product costs,” indicating that American Eagle spent less to manufacture its assortment. It remains unclear if this cost reduction resulted in lower prices for customers.
Looking ahead, American Eagle provided a better-than-expected outlook for the current quarter. However, its forecast for the full year fell short of expectations, indicating potential challenges in the second half of the year.
For the current quarter, the company expects comparable sales to grow between 3% and 4%, surpassing analysts’ initial forecast of 2.8% growth. Additionally, American Eagle predicts that total revenue for the third quarter will remain flat or experience a slight increase, in line with expectations.
However, for the full year, the company anticipates a 4% increase in comparable sales and a 2% to 3% increase in total revenue. These figures fall short of what analysts had initially predicted, with expectations of a 4.2% increase in comparable sales and a 3.5% increase in overall sales.
This cautious outlook for the second half of the year is consistent with American Eagle’s approach in light of economic uncertainties, such as interest rate decisions from the Federal Reserve and the upcoming presidential election.
To combat slowing demand for discretionary items, American Eagle has been focusing on cost-cutting measures and operational efficiencies. The company unveiled a new strategy earlier this year, aiming to increase profits and achieve annual sales growth of 3% to 5% over the next three years. Additionally, American Eagle aims to achieve an operating margin of approximately 10%.
During the second quarter, the company made progress towards these goals. It posted an operating income of $101 million, a 55% increase, and its operating margin grew by 2.4 percentage points to 7.8%. However, it’s worth noting that the calendar shift positively impacted the operating income metric by $20 million.
In conclusion, while American Eagle faced challenges with sales falling short of expectations, the company managed to increase profitability through cost reduction and operational improvements. However, the cautious outlook for the remainder of the year suggests that the company is preparing for potential economic and political volatility.
