American Eagle Outfitters Earnings: What to Expect Tuesday

American Eagle Outfitters (AEO -0.13%) will release its quarterly report on Tuesday, and investors expect to see the impact of a tough holiday quarter on the teen retailer's earnings. Even though the damage likely won't be as bad as most expect from Aeropostale (AROPQ), investors hope that American Eagle can produce the strong positive surprise that Abercrombie & Fitch (ANF -3.67%) gave its shareholders in its earnings report.

The teen-retail environment has become cutthroat from a competitive standpoint, as American Eagle, Abercrombie, Aeropostale, and a host of other players in the industry strive to earn the loyalty of teen shoppers. Yet recently, times have gotten even harder for the retail group, as the most recent holiday season included widespread promotional discounting and margin-crushing efforts to clear inventory even at much lower prices in some cases. What will the net effect of this trend be on American Eagle? Let's take an early look at what's been happening with American Eagle Outfitters over the past quarter and what we're likely to see in its report.

Stats on American Eagle Outfitters

Source: Yahoo! Finance.

Will American Eagle earnings bounce back?
In recent months, analysts have gotten much less optimistic about American Eagle Outfitters earnings, cutting January-quarter estimates by a dime per share and projections for the current fiscal year by about 15%. The stock has mirrored that bad news, falling 11% since early December.

We've already gotten a sense of how American Eagle's holiday quarter went, with the company having said in January that the key nine-week period ending January 4 showed a 7% decrease in same-store sales. The retailer also guided earnings to the lower end of its previously expected range, with comments about the highly promotional environment that mimic what Abercrombie, Aeropostale, and others have said about the holiday quarter.

But the departure of CEO Robert Hanson in January was even more troubling, as it came without much warning. For American Eagle, having to find new leadership is just another hurdle for the retailer to overcome, although it does potentially set the stage for a transformative change in strategy if the company wants to move in another direction. The grittier Urban Outfitters (URBN -0.14%) could provide one model to follow, as it managed to boost holiday sales by 6% on a 1% increase in comps on the strength of its more distinctive approach to merchandise selection and marketing.

One question American Eagle investors have is whether activist investors might take a bigger interest in the company. So far, rival Abercrombie has attracted a lot of activist attention, with criticism directed at Abercrombie CEO Mike Jeffries and an impending proxy battle from hedge fund Engaged Capital. American Eagle might learn some lessons from Abercrombie's experience, as both have struggled lately to connect with fashion-conscious shoppers.

Still, American Eagle is making efforts to boost sales. Its aerie Real campaign is designed to poke back at Abercrombie and some of the controversy it has seen lately, as the American Eagle lingerie division features un-airbrushed models of all sizes to market to "the real you." If American Eagle can capitalize on the flak that Abercrombie has taken about its lack of plus-size offerings, it could prove a useful differentiator in the competitive industry.

In the American Eagle earnings report, watch to see how the retailer is handling its leadership transition. Without a quick but constructive resolution to the leadership vacuum, American Eagle will have trouble keeping up in a rapidly changing competitive environment.

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