Teen apparel retailer American Eagle Outfitters’ (NYSE:AEO) stock crashed by roughly 11% on Thursday, after the disclosure of holiday sales results.  While American Eagle reported impressive growth of 15% in its net holiday sales and 12% in its holiday comps, the apparent reason for the decline was the trimming of its Q4 earnings outlook from $0.40 – $0.44 per diluted share previously to $0.33 – $0.35 per diluted share. We believe the revised earnings outlook reflects a decline in its margins, which was a combination of both fiercely competitive teen apparel market and the company’s inventory hangover at the end of holidays. American Eagle competes with other specialty retailers such as Aeropostale (NYSE:ARO), Abercrombie & Fitch (NYSE:ANF), Gap Inc. (NYSE:GPS) and Urban Outfitters (NASDAQ:URBN) in teen apparel space.
Massive Inventory Levels from The Beginning Proved Troublesome Throughout The Holidays
As American Eagle started its holiday campaign with a 40% increase in its inventory levels, managing inventories was always going to be difficult. Taking cues from encouraging results at the end of Q3, American Eagle chose to walk a tight rope by carrying huge inventory hoping to repeat the success throughout the holidays. The company did have its share of success initially with record breaking sales over Thanksgiving weekend with near 20% increase in comps, however the holiday rush fizzled out in the first half of December, thus making the teen apparel market fiercely competitive.
As competitors increased their span of promotions to woo the shoppers near Christmas, American Eagle was forced to churn out bigger promotions, which took a toll on its margins. Additionally, we believe the company may have found itself wrong-footed after early December slump and was left with higher than desired inventory levels. This resulted in further increase in the depth of its promotions and thus bigger impact on the margins.
Check our article: Apparel Companies’ Heavy Discounts Could Signal Inventory Hangover in 2012
While the surge in sales in last two weeks of December came on the expense of margins, we believe this was a bitter pill American Eagle had to swallow. Ending up with higher than expected inventory levels this quarter would have meant a further delay in realizing the benefits of declining cotton prices, which the company till now is stating should happen by the end of Q2 2012.Notes: