What happened
Throw another retailer onto the pile. After Abercrombie & Fitch (ANF -2.08%) reported its disastrous earnings Tuesday, fellow retail clothier American Eagle Outfitters (AEO 0.31%) reported its own earnings last night, and the news isn't much better here.
Expecting profits of $0.25 per share on sales of $1.14 billion, American Eagle disappointed investors when it reported just $0.16 in earnings per share on sales of $1.06 billion -- missing on both the top and bottom lines. And now its stock is down 5% as of 1:20 p.m. ET on Friday.
So what
Give American Eagle credit, though: It fessed up to its sales miss in the second line of its earnings announcement last night, explaining that a shifting macro environment and weak consumer demand for clothing made for a challenging quarter. The company missed its sales targets, and that resulted in lower profit margins than expected, and worse profits on the bottom line.
Total sales increased only 2% year over year (although as expected, its Aerie label outperformed with 8% sales growth). Gross profit margins were pressured by higher freight costs, while operating margins took a hit from higher selling, general, and administrative expenses -- primarily high labor costs.
Per-share profits slumped 65% year over year, to the aforementioned $0.16.
Image source: Getty Images.
Now what
The big story in retail this quarter has been inventories: how retailers have been buying more goods to ensure they have stock to sell despite supply chain snarls -- and how inflation is raising the cost of building inventory even further. American Eagle wasn't immune, either.
Its inventories surged 46% in size in comparison to last year's first quarter, a monstrous increase given that sales only inched up 2%. And that foreshadows perhaps extreme discounting as the company works to unload stale inventory. In that regard, management promised to take "swift measures to reset inventory and expense plans for [the] second half to better align with consumer demand."
Again, management was up front about what this means for the future: "higher markdowns to clear through spring inventory, higher freight costs and the impact of the supply chain acquisitions." Management didn't give a hard and fast number for how much it expects to earn (or lose) from these measures, but one thing seems certain: If you think the first quarter was ugly, you may not want to stick around to see the second.
