Tumbling Tween Brands

Wow! What can you say after Tween Brands' (NYSE: TWB  ) showing yesterday?

After Tween reported earnings that fell well below expectations, and lowered guidance for the remainder of the year, investors fled for the exits, driving the stock down a staggering 28.5%. If there weren't junior Fools out there, I'd have much more descriptive phrases to use. Was the Street's reaction an unnecessarily extreme, or is the company really that functionally unsound? Let's take a look for ourselves.

The top line starts off with some positive numbers, with sales jumping 15% to $213.7 million. Alas, that about sums up the good news. The revenue increase came only from new stores, since comps fell 2%. Things got even worse on the bottom line, as rising costs pushed profits down 64.4% from last year, to $0.07 per share.

Management explained the reason for its dismal performance, stating, "We underestimated the impact of so many schools in our markets moving their back-to-school dates later, as well as Texas and Florida shifting their state sales tax holidays from July to August." Sounds reasonable enough.

And that means that as bad as the second quarter was, the third quarter should be inversely strong. After all, according to management, sales should just shift from the second quarter to the third. So why did it lower earnings for that period, too? Tween now expects to earn between $0.40 and $0.45 per share in the third quarter, well below analysts' estimates of $0.68 per share and last year's earnings of $0.58 per share.

To explain, the company pointed to a calendar shift that moved the first week of August, which typically has strong sales, from the third quarter to the second quarter. Huh? Shouldn't that have meant stronger results in the second quarter? If nothing else, these factors should have canceled each other out. Instead, the company disappoints in the second quarter and lowers its outlook for the third. I'm starting to think that management is failing to tell us something, and attempting to make excuses to investors by blaming its problems on confusing calendar shifts.

The bigger problem appears to be what management must do with a growing amount of inventory on the balance sheet. The company plans to mark down merchandise at its Limited Too locations, hoping to improve its inventory levels and mix going into the all-important holiday season. But those reductions come at a price, and they're a big reason why the earnings estimate came down.

Even after the huge discount, I won't be scooping up any shares of Tween Brands. The price may inch back up, but I need to see that the company can get its performance back on track. There are simply too many other companies offering products and investment opportunities, from Children's Place (Nasdaq: PLCE  ) and Gymboree (Nasdaq: GYMB  ) for the younger girls to Abercrombie & Fitch (NYSE: ANF  ) and American Eagle (NYSE: AEO  ) for the older ones.

To return to better times for Tween Brands, read:

American Eagle is a Motley Fool Stock Advisor pick. Join the Gardner brothers free for 30 days to check out the latest market-beating stocks for your portfolio.

Fool contributor Mike Cianciolo owns shares of American Eagle, but no other company in this article. The Fool's disclosure policy is, like, totally cool.

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