American Eagle Outfitters Inc. might be weathering the weak economy in a much better position, CEO Jim O'Donnell said Tuesday, if young female customers had found its recent jeans and other styles more appealing.
But the AE brand women's business fell dramatically in the three-month period ended Aug. 2, and that figured into the South Side-based company's 26.4 percent drop in profits yesterday.
"Where we have not held our position of strength is in denim," O'Donnell said during a conference call after the results were announced. While sales of jeans, denim skirts and jackets in the spring and early summer were "not catastrophic," several items didn't resonate with many teenage girls and young women, and a couple were outright misses, he said.
"We addressed those," he said, declining specifics, "and we expect to be in a strong denim position for the holiday season."
Financial analysts who follow the company had mixed opinions on its moves to push discounts, tighten inventory and trim costs during times that have proven tough for most retailers. Troy Gravitt of Friedman Billings Ramsey & Co. said in a research note the company is worried about American Eagle's move "down the value chain" as it edges up its target age range.
Concern remained yesterday about the rest of the back to school and holiday seasons, and about how the company will replace its chief merchandising officer. American Eagle announced in late June that Susan McGalla, who also held the president's title, is leaving when her contract expires in January.
Bottom line, the retailer has been unsuccessful with its merchandise assortment of late, and "the buck stopped" with McGalla, said analyst Richard Jaffe of Stifel Nicolaus. The company's stock dropped 14 percent immediately after the McGalla announcement.
O'Donnell said yesterday a new merchandising head, who won't be president, should be named by year's end. Candidates for the job all have strong backgrounds in merchandising, especially women's items, he said.
American Eagle's net income for the 13-week period totaled $59.8 million, or 29 cents a share, down from $81.3 million, or 37 cents, a year ago. Sales fell by 2 percent to $688.8 million, from $703.2 million.
Other retailers recently posted weaker than normal results. J.C. Penney Co. said its second-quarter net income was down 35.7 percent, while Macy's reported a slight profit drop and cut its forecast for the end of the year.
There are bright spots for American Eagle. Men's AE merchandise moved well, and sales at aerie dormwear and underwear stores were strong. A children's line, 77kids, is debuting online only this fall.
Also, the retailer's Martin + Osa line for 28- to 40-year-old women and men continued to improve, though results for the year's second half will determine whether the company commits to more stores, beyond the 28 that are to be operating by December. Martin + Osa should break even by 2010, O'Donnell said.
American Eagle's recent promotions included women's tops under $20, hoodies for $29.50 and buy one, get one half off jeans and T-shirts.
"You will continue to see a variety of planned, value-oriented marketing events, designed to create excitement and drive market share with more competitive pricing," O'Donnell said, adding the strategy is more profitable than limiting sales to end-of-season clearances.
Jaffe and Linda Tsai of MKM Partners LLC both recommended holding shares of American Eagle, which closed yesterday at $14.29, up 55 cents.
Comparable store sales for women's AE merchandise fell in the mid-teens, by percentage, during the second quarter.
The company is playing a good defensive game, said Jaffe of Stifel Nicolaus, but its fashions must get back on track. And denims are the driver for other merchandise.
"If you find the perfect pair of jeans, you buy two tops and a sweater at the same place," he said.
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