American Eagle Could Be Closing More Stores; Q1 Inventory Level High

American Eagle Outfitters Inc. is looking at closing more stores, and it has more work ahead of itself beyond just adjusting its store base.

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The company on Wednesday posted first-quarter results that missed Wall Street’s adjusted earnings per share estimate by 1 cent, and provided second-quarter guidance that was below analysts’ current estimates for the period. Investor reaction was quick, and they sent shares of American Eagle tumbling down 14.7 percent to close at $11.05 in New York Stock Exchange trading.

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For the quarter ended April 29, net income dropped 37.7 percent to $25.2 million, or 14 cents a diluted share, on a 1.7 percent revenue gain to $761.8 million. Excluding certain restructuring charges, adjusted EPS was 16 cents. Wall Street was expecting 17 cents in EPS on revenues of $741.7 million. Comparable-store sales were down 1 percent at American Eagle stores, but up 25 percent at the Aerie intimates concept. Gross margin in the quarter slipped to 36.5 percent from 39.2 percent a year ago.

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Chief financial officer Robert L. Madore said on a conference call with analysts that the company is “looking to get a little more aggressive in our store closures.” He said many stores are still profitable even if they show some decline in comps. And he noted that the analysis on which stores to close includes a look at sales migration either to online or nearby stores.

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Jay Schottenstein, chairman and chief executive officer, said, “We want to do it in a smart way so when we do close a store, we pick up those sales and we pick up those profits. We just don’t want to close stores to close stores. We want to figure out how to optimize and maximize those sales so when we do close, we’re able to keep the majority of [the sales].”

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While Schottenstein acknowledged that first-quarter results reflected mall traffic headwinds, he also said the company is “taking the right steps” to improve and adjust its business for today’s evolving retail environment.

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The teen retailer will have to figure out how to improve margins and not have so many deep promotions, something that’s tough to do when there is a lot of inventory that hasn’t entirely resonated with consumers. And while online sales grew significantly in the quarter, that also resulted in higher shipping costs.

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According to Wolfe Research’s Adrienne Yih, “Sales-to-inventory spread significantly worsened to negative 1,136 basis points. We believe this could mean future margin pressure,” particularly in the second half of 2017. She noted that the retailer layered in higher-price goods in combination with lower average unit costs on like-for-like product in last year’s third quarter, adding “this would be difficult to anniversary in our opinion.”

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Analyst Jane Hali at Jane Hali & Associates, said, “The inventory is too high and American Eagle had to be very promotional. That’s why the gross margin is the lowest it has been in a long time.”

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While American Eagle has been the better investor option among the retailers in the teen space, Cowen & Co.’s Oliver Chen said the company’s “denim dominance is not enough to offset store traffic challenges.”

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On the product and merchandising side, women’s apparel comps were up 2 percent but were down 6 percent at the men’s business. In men’s, tops were weaker than the bottoms business, and the company has hired a new men’s designer to improve the category. Over at Aerie, the company said it sees continuing momentum that could make it a $1 billion business down the road. In addition to intimates, it has a growing swim business.

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Company executives didn’t discuss whether they were exploring the possibility — nor were they asked about it — of acquiring its competitor down the mall, Abercrombie & Fitch. Market sources said last week that there was a chance the interest might be centered on Abercrombie’s Hollister brand. Earlier this week, market sources told WWD that American Eagle has had its eye on Abercrombie before, much like the way VF Corp. kept tabs on Timberland before eventually buying the firm. These individuals also said any discussion between the two teen retailers were likely in the early stages.

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Separately, a financial analyst on Wednesday called American Eagle a “terrific company,” adding that if Abercrombie is looking to sell itself, it would “make sense for American Eagle to take a look” since “it’d like to see every bit of information about its competitors.” This individual emphasized that just because a conversation has taken place, that “doesn’t mean that [American Eagle] would actually [want to] do a transaction.”

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