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American Eagle Gets Shot Out of the Sky

The third quarter of 2013 hasn't been what anyone would call "good for retailers." Consumers are still feeling unsure about the future for a variety of reasons -- income stagnation, political gridlock, tax changes, unemployment, etc. -- leaving them less likely to buy jeans for their horrible teenage kids. While a few companies have managed to squeak by, American Eagle Outfitters  (NYSE: AEO  ) isn't one of the lucky ones. The retailer's third quarter was a disaster, as evidenced by CEO Robert Hanson's recent statement that the company's financial performance was "clearly unsatisfactory."

Now that it's out there for the entire world to see, how does American Eagle stop being bad?

Third-quarter failings
On the plus side, it looks like American Eagle didn't have any locations spontaneously combust. So that's a winner. On the downside, comparable-store sales, gross margin, operating margin, and net income all fell, and some employees probably lost a few bucks on lotto tickets. Stepping back to assess the scene, it's clear that the company has fallen out of favor with its teenage core demographic.

Competitors such as The Gap (NYSE: GPS  ) managed to make small gains in the third quarter, increasing comparable-store sales slightly even in the tough environment. Gap's success came from its ability to appeal to its core demographic in a way that American Eagle failed to do. With times being so tight, every little gain makes a difference.

American Eagle looks even weaker when compared to the current hot brands. Urban Outfitters' (NASDAQ: URBN  ) Anthropologie brand has had excellent success all year, and in the "tough" third quarter the brand increased comparable-store sales by 13%. The whole company managed a 7% increase in comparable-store sales growth over last year, and managed to bump operating margin up at the same time.

American Eagle's plan for the future
On its earnings call, American Eagle said sales were looking better on Black Friday, but that they were also promotionally driven. Pushing margins down isn't a great plan, but it's better than nothing I suppose.

The company believes that 2014 is going to be more of the same challenge, and its plan to deal with that is threefold. First, it wants to get its clothes to market faster, so that they're relevant when they hit the shelves -- good plan. Second, it plans to move from storewide promotions to targeted promos, getting shoppers in the store without selling everything for 50% off -- good. Finally, it wants to spend less making its clothing to increase margins -- dangerous.

American Eagle simply cannot afford get a reputation for cheap merchandise. The company has said that it can drop production costs by removing "waste in [its] product that doesn't deliver intrinsic consumer value." That's a fine line to walk, and if American Eagle gets it wrong in 2014 expect things to get much worse for everyone involved.

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  • Report this Comment On December 11, 2013, at 8:03 AM, Mark2013 wrote:

    "American Eagle Gets Shot Out of the Sky"

    Catch phrase gimmick to get someone to look at a SUBJECTIVE article which is desperation.

    American Eagle is going to be just fine down the road thus; those who buy at such low prices will be well rewarded and those able to average down if it went lower before coming back up where it should be will be more rewarded imo

    There is a way to take all risks out of long term investments and only one way that I know of and that is if one is smart buying up BBRY, AEO and others being sold in a panic over nothing and filled with shorts that will soon get burned is to trade these stocks or other stocks on the side to save up money to pay for all longs being held. This way if for some reason a given stock did not work out in long term and went to zero, you lost nothing of your own money starting out with. imo

    BBRY is hilarious how people have sent price down so low because there is well over two billion in cash and zero debt so it could research and become another great type company in two years if it needed or could advance on technology it has so that one is a no brainer buy just as is AEO for other reasons.

    Expect BBRY up 400% in 14 and AEO 200%. I expect both are either at or near bottom which will happen soon and then bounce this month of December before a little pullback last day or two of month and then up big in winter months J-M.

    JMO and subjective articles are fun but not relevant to anything more than hype or bashing of a stock so I go by objective material only but will post when I see one being pumped or bashed.

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9/27/2016 1:39 PM
AEO $17.99 Up +0.13 +0.70%
American Eagle Out… CAPS Rating: ****
GPS $22.15 Down -0.09 -0.38%
Gap CAPS Rating: **
URBN $35.08 Up +0.07 +0.19%
Urban Outfitters CAPS Rating: ****