American eagle Wall Street stocks missed their sales targets for a second straight quarter on Thursday, but profits rose nearly 60% thanks in part to lower product costs.
The company's shares fell about 3% in early trading Thursday.
Here's how the apparel company fared in its fiscal second quarter compared with what Wall Street expected, according to a survey of analysts by LSEG:
- Earnings per share: 39 cents vs. 38 cents expected
- Revenue: $1.29 billion vs. $1.31 billion forecast
The company's reported net income for the three-month period ended Aug. 3 was $77.3 million, or 39 cents per share, compared with $48.6 million, or 25 cents per share, a year earlier.
Sales rose to $1.29 billion, up 8% from $1.2 billion a year earlier. That sales increase would have been smaller if not for a calendar change, which positively impacted second-quarter sales by $55 million.
During the quarter, American Eagle's Aerie intimates line saw revenue grow 9%, while its namesake brand grew 8%.
American Eagle's gross margin was 38.6%, up 0.9 percentage points from a year earlier and in line with what analysts expected. The gross margin expansion was driven by “favorable product costs,” indicating that American Eagle spent less to manufacture its assortment during the quarter. It's unclear whether it reduced prices as a result.
The historic mall brand issued a better-than-expected outlook for the current quarter but lowered its forecast for the full year than anticipated, indicating the company is still preparing for a turbulent second half.
For the current quarter, American Eagle expects comparable sales to grow between 3% and 4%, which is better than the 2.8% growth that analysts had expected the company to forecast, according to StreetAccount.
The retailer expects total revenue to remain flat or increase slightly in the third quarter, in line with expectations, according to LSEG.
For the year, the company expects comparable sales to rise about 4%, with total revenue up 2% to 3%, below what analysts had expected. Wall Street had expected its full-year comparable sales forecast to rise 4.2% and overall sales to rise 3.5%, according to StreetAccount and LSEG.
In May, CFO Mike Mathias told CNBC that American Eagle maintains a “cautious” view for the second half of the year as it awaits Federal Reserve interest rate decisions and prepares for “noise” around the upcoming presidential election.
Like other retailers facing declining demand for discretionary items, American Eagle has sought to cut costs and increase efficiency so it can protect profits even as sales are slow. Earlier this year, it unveiled a new strategy to boost profits and is working to increase sales by 3% to 5% each year for the next three years and bring its operating margin to about 10%.
“In all the years I've been in this business, I see probably the biggest opportunity in the company's history,” Chief Executive Jay Schottenstein said on the company's earnings call Thursday. “From our perspective, we're a $5 billion business today. We believe that in the next few years we could be a $10 billion business. And I want to emphasize this: We're committed to making the investment necessary to become that business.”
During the quarter, American Eagle made some progress toward meeting that goal. It posted operating income of $101 million, up 55%, while its operating margin grew 2.4 percentage points to 7.8%. Operating income would have been lower had it not been for the calendar change, which positively impacted the metric by $20 million.
While the back-to-school season has already started with a “strong showing” for the company, executives expect it to extend into September and take a second wind after Labor Day, a trend Matthias said the company has seen in recent years, especially in the Northeast.
President and executive creative director Jennifer Foyle added that while the American Eagle brand is leaning into the women's and denim categories, the brand's core segment, it is also looking to expand into new trends in the future.
Foyle also said the menswear business is starting to pick up.
“We're no longer a one-model brand… We're making sure we're prepared as we move into the second half of Q3 and Q4 and we're ready to play,” Foyle said.
