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Guess?, American Eagle Outfitters, and Abercrombie & Fitch: The Bad, the Worse, and the Downright Ugly

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Teen apparel has always been a tough and competitive industry, and the current economic environment is proving to be especially hard on the sector. Recent earnings reports from companies like American Eagle Outfitters (NYSE: AEO  ) , Guess? (NYSE: GES  ) and Abercrombie & Fitch (NYSE: ANF  ) are signaling major difficulties for the sector.

American Eagle crashes down
American Eagle crashed by nearly 9.5% on Friday as the company reported falling sales and earnings for the quarter ended on Nov. 2. Total net revenue decreased 6% versus the previous year to $857 million and consolidated comparable sales decreased 5% during the quarter.

Earnings per share for the third quarter decreased by 54% to $0.19, this was in line with Wall Street analysts' expectations. However, guidance for the fourth quarter was a big disappointment as management is expecting earnings per share of $0.26 to $0.30 versus an average estimate of $0.39 by Wall Street analysts. Comparable sales are expected to fall in the mid single digits in the coming quarter.

CEO Robert Hanson pointed to a weak economic environment as a major challenge for the company in the middle term.

"Our financial performance is clearly unsatisfactory and not consistent with our objectives. As we continue to navigate through an intensely promotional North American retail landscape, we are making improvements in merchandising and marketing, while aggressively pursuing efficiency gains, expense reductions and ensuring disciplined inventory management."

Guess? disappoints
Guess? took a hit on Dec. 5 as the company reported lackluster results and a reduced guidance for the third quarter of fiscal 2014. Earnings per share were actually better than expected due to lower taxes and advertising expenses, but both sales and earnings fell in comparison with the same quarter in the previous year.

Total sales decreased by 2% to $613 million, and performance was weak across the board. North America sales fell by 3% on the back of a 5% decrease in comparable retail sales. Revenues in Europe fell 1%-7% in local currency-and sales in Asia decreased by 3% in U.S. dollars and 6% in constant currency.

Adjusted earnings per share of $0.42 were also lower than the $0.43 per share the company delivered in the same quarter of the previous year. Management reduced sales guidance for the full year, the company is now expecting revenues in the range of $2.55 billion to $2.57 billion versus a previous guidance of $2.56 billion to $2.59 billion.

CEO Paul Marciano remains cautious about the outlook for the industry.

"As we enter into the fourth quarter we are pleased with the trends we are seeing, reflecting the impact of our focus on delivering a better product assortment. However, the economic climate remains challenging.Therefore, although we are encouraged by our overall results in the first nine months of fiscal 2014, we will continue to plan our business cautiously given the uncertain environment."

Abercrombie & Fitch remains out of style
Abercrombie & Fitch has been under pressure for quite some time, and earnings for the last quarter showed no sign of a turnaround. On Nov. 21 the company delivered a big decrease of 12% in revenues for the third quarter to $1.033 billion due to declining comparable sales both in the U.S. and in international markets.

Total comparable sales for the quarter, including direct-to-consumer sales, decreased 14% with comparable U.S. sales decreasing 14% and comparable international sales decreasing 15%. This was the seventh consecutive quarter with declining comparable sales for the company, so Abercrombie´s problems are clearly reflecting company-specific issues in addition to weak demand for the industry.

The company had a net loss of $15.6 million during the quarter, or a loss of $0.12 per share. Excluding restructuring costs, impairments and other one-time charges, Abercrombie delivered an adjusted non-GAAP gain of $0.52 per share.

According to CEO Mike Jeffries:

"Our results for the third quarter reflect weakness in top-line performance, which we expect to continue in the fourth quarter. However, we continue to work hard to offset these conditions and are aggressively pursuing initiatives we believe will improve the sales trend as we go forward.

Bottom line
It´s tough being a teen apparel retailer these days, as young people seem to be keeping their wallets closed or spending their money in other kinds products like electronics.
Uncertainty usually creates opportunity, and there is plenty of uncertainty around these companies. On the other hand, challenging industry conditions mean that investors need to be especially cautious and selective when making investment decisions in the sector.

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9/30/2016 2:43 PM
AEO $17.86 Up +0.14 +0.76%
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GES $14.71 Up +0.35 +2.44%
Guess? CAPS Rating: ***