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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of trendy clothing retailer American Eagle Outfitters (NYSE: AEO ) were looking out of style to investors today, as they watched the shares slide as much as 18% in intraday trading after the company cut its fourth-quarter outlook.
So what: The good news is that American Eagle's holiday sales were particularly strong. Sales for November and December rose 15% from the same period in 2010, while comparable-store sales climbed 12%. The bad news? That strong sales growth was driven by discounting, and as a result, the company was forced to ratchet back its fourth-quarter earnings view. Previously the company had anticipated $0.40 to $0.44 per share in per-share earnings for the quarter; it now expects $0.33 to $0.35 per share.
Now what: It's no secret that we're muddling through what could optimistically be described as a sluggish economy. That's not good for the vast majority of businesses, but for those that sell discretionary items like fashionable duds, the economic weakness is even more punishing. Consumers are willing to spend less and competitors are willing to fight harder -- and accept lower margins -- to snag the dollars that shoppers are willing to part with.
Make no mistake about it: Until the economy improves, American Eagle will have a tough go of it. But the company is still producing significant profits and has a debt-free balance sheet, so it's definitely well positioned to weather the storm.
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