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American Eagle posts jump in 2Q profits, slower sales growth

| Wednesday, Aug. 17, 2016, 9:15 a.m.

American Eagle Outfitters Inc.'s sales momentum slowed in the second quarter amid heightened competition for teen apparel and broader pressures weighing on mall-based retailers.

The South Side-based teen clothing retailer on Wednesday posted more modest sales gains than in the past, with sales at stores open more than a year up 3 percent in the second quarter compared with an 11 percent increase a year ago.

The softening in sales growth occurs as rivals such as Urban Outfitters are showing signs of improvement and new competitors enter the market.

Nevertheless, CEO Jay Schott­enstein said he is confident that American Eagle will keep winning customers with innovative styles, particularly women's jeans, and through better integration of its e-commerce business with brick-and-mortar stores.

“We believe we are now out ahead of this profound transformation in our industry, and we intend to stay there,” Schottenstein told analysts Wednesday.

American Eagle's profits jumped 25 percent to $41.6 million, or 23 cents per share, in the period that ended July 30. That was up from $33.3 million, or 17 cents per share, in the same period a year ago.

But the slower sales growth disappointed investors who have come to expect more from the company. American Eagle's stock fell 63 cents, or 3.32 percent, to close at $18.33.

The softer sales occur as American Eagle faces heightened competition. British fast-fashion giant Primark recently began opening stores in the United States, and Urban Outfitters posted a 1 percent increase in same-store sales last quarter when analysts had expected a decline.

American Eagle is set to roll out new fall fashions and a marketing campaign in a couple of weeks that executives hope will deepen its reach with consumers. And the company has kept looking for ways to control expenses.

American Eagle is on track to close 35 to 40 of its least profitable stores this year, said interim CFO Scott Hurd. And it is tightly controlling inventory so that it does not have to offer steep discounts on merchandise.

“Strong inventory management remains a top priority,” Hurd said.

It's unclear whether these efforts will be enough to fend off competitors when retailers are working hard to attract customers amid declining foot traffic at malls.

“There's still competition for the teen space,” said Betty Chen, an analyst at Mizuho Securities. “There's been a lot more entrants in the fast-fashion segment.”

The broader retail segment has struggled in recent years as consumers do more of their shopping online rather than at the mall. Macy's, Sears and Gap have shuttered hundreds of stores, and other retailers such as Wet Seal have filed for bankruptcy.

American Eagle has been able to attract a greater share of foot traffic than other mall-based retailers, Chen said, and has done well to integrate its stores with e-commerce, which accounts for 20 percent of sales.

The company expects to have a low-single-digit increase in same-store sales in the third quarter and earnings of 40 to 41 cents per share, compared with 35 cents per share a year ago.

To achieve that, American Eagle cannot become complacent in keeping up with fashion trends, Chen said.

Women's apparel is a key driver of sales growth for American Eagle, but the second quarter proved much softer than a year ago. Women's apparel sales for American Eagle-branded stores increased 3 percent, compared with 16 percent growth a year ago.

The company's aerie lingerie stores have been the most promising growth opportunity for the company. Same-store sales at aerie locations were up 24 percent from a year ago, compared with 18 percent last year.

Aerie remains a small part of the company's store fleet, with just 91 stores out of a total of 1,044 American Eagle locations worldwide. But their success will become increasingly important to the company, said Simeon Siegel, an analyst at Nomura Securities. American Eagle expects to open 65 aerie locations over the next 18 months.

Chris Fleisher is a Tribune-Review staff writer. Reach him at 412-320-7854 or cfleisher@tribweb.com .

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