Well, are clothing retailers doing well or aren't they? It depends on whom you ask.

Teen retailer Abercrombie & Fitch (NYSE: ANF) swung to a greater-than-expected profit in the second quarter, but the company's quarterly report pointed to an increasingly tough retail environment. Abercrombie, once a staple in every teen's wardrobe, has been hit hard by the economic downturn, as many customers have been forced to trade down to less expensive clothing brands.

Abercrombie was able to beat estimates by significantly discounting merchandise to drive sales. While this certainly helped increase sales, it also cut into the companies margins, which likely had investors selling the stock aggressively yesterday. Abercrombie's average unit revenue for its goods dropped 15% in the second quarter to compensate for less consumer spending power.

Abercrombie competitor Urban Outfitters (Nasdaq: URBN) also reported better-than-expected profit for the second quarter, but unlike Abercrombie the company managed to increase its margins. Urban Outfitters was able to keep its merchandise more fresh, resulting in fewer markdowns and buoying gross margins.

However, the biggest difference between the earnings growth of these two retailers has been a story of effective inventory management. While Urban Outfitters has been effective, increasing inventory by only 12% in the second quarter, Abercrombie saw an increase of 47%. This should add further pressure to Abercrombie's margins as more discounting will be necessary to effectively reduce this inventory overhang.

Yesterday, Gap (NYSE: GPS) beat earnings expectations with EPS gains of 10%, while Aeropostale (NYSE: ARO) merely met expectations with a 22% boost. Sales at Gap were up 2%, while those at Aeropostale climbed 9%. Although margins ticked up, Aeropostale provided third-quarter earnings guidance that fell below Wall Street estimates. Gap saw margins off 10 basis points. While the strong clothing retailers held their own, premium-priced Abercrombie has simply had to lower prices to compete at all, it seems. And more price competition will make it tougher for everyone.

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Andrew Bond owns no shares in the companies listed. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.