American Eagle Loses Altitude

Shares of the trandy clothing retailer dipped Wednesday after its earnings forecast disappointed investors

American Eagle Outfitters (AEOS) has gotten more high school and college-aged shoppers to buy its clothes during recent months. But don't count on predictability from teenagers while clothing retailers are fighting each other like dogs. As the Warrendale (Pa.) company builds up its brands to keep them competitive, American Eagle on Mar. 7 announced a slightly disappointing earnings forecast.

American Eagle's earnings per share during the three months ended Feb. 3 gained 40% year over year to 66 cents per share, according to a press release Mar. 7. But then the company expects to have between 31 cents to 33 cents per share during the next three months, compared to 28 cents per share during the same period last year. The mean analyst estimate had been for 66 cents per share during the fourth quarter and 33 cents during the next, according to StarMine.

But CEO Jim O'Donnell promises to keep pushing ahead. So far the company's total sales increased 27% year over year during the February quarter to $973.4 million. Sales at stores open more than a year gained 14% -- and 2006 was the company's third consecutive year of growth.

"For 2007, we remain focused on delivering profitable growth, while expanding our lifestyle brands and investing in systems to drive further advances in productivity," the CEO said in a press release March 7. His company has taken recent steps like the September launch of its new sub-brand aerie, which includes underwear, bra and dorm-wear products. American Eagle expects to open enough new stores in 2007 to grow its total square footage of store space by around 10%.

Standard & Poor's thinks the company's investment in its clothing brand Martin + Osa will drag a little on profits during the year ended Jan. 2008, as the company fine-tunes its merchandise assortment. But it's not all bad. "We see continued brand momentum for American Eagle and growth opportunities in M&O, as well as in aerie, which goes to 15 freestanding stores in '08 and is as productive as the average American Eagle store," analyst Marie Driscoll said in a research note. (S&P, like, is owned by The McGraw-Hill Companies.) She reiterated a buy opinion on the stock.

Investors accentuated the negative on Mar. 7, driving the stock price down 3.9% to $28.68 per share in early afternoon New York trading on the Nasdaq. American Eagle was one of the few retailers not to rally on Mar. 7. Saks (SKS), for example, gained 5.8% to $19.82 per share, after the New York luxury retailer announced that it swung to a profit in the fourth quarter from a loss during the prior year period.

"For teen apparel retailers such as American Eagle, success is largely a product of how well merchandise stays relevant to young adults," Morningstar analyst Brady Lemos said Dec. 19. "In our opinion, low customer switching costs and intense competition from the likes of Abercrombie & Fitch (ANF) and Aeropostale (ARO) present a significant obstacle to building a sustainable competitive advantage."

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