Why American Eagle Stock Dropped Today
Key Points
American Eagle is struggling to adapt to changing fashion trends.
Discounted merchandise is denting the company's margins.
Shares of American Eagle Outfitters (NYSE: AEO) fell on Thursday after the apparel retailer issued a disappointing profit forecast.
Image source: American Eagle Outfitters.
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New fashion trends are weighing on AEO's results
AEO's total net revenue rose 8% year over year to $1.4 billion in its fiscal second quarter, which ended on Aug. 1.
Yet the retailer's performance was more bifurcated than it might appear at first glance.
Aerie, AEO's intimate apparel brand, saw its comparable sales jump 19%. Aerie's revenue, in turn, surged 25% to $536 million.
Yet the company's namesake American Eagle brand saw comps decline by 1%. Despite an attention-grabbing marketing campaign featuring actress Sydney Sweeney, American Eagle's sales have been slowed by shifting fashion trends.
That's forcing the retailer to discount its wares to clear excess inventory, leading to a 3.3-percentage-point decline in AEO's merchandise margins.
"What we are needing to work through right now is just some of the older fits and really just rebalancing our inventory," president and executive creative director Jen Foyle said during a conference call with analysts.
Lackluster guidance
Looking ahead to the third quarter, AEO is targeting operating income of $110 million to $115 million.
Investors were disappointed by management's guidance, as it fell well short of Wall Street's expectations for operating profit of roughly $124 million.
Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool recommends American Eagle Outfitters. The Motley Fool has a disclosure policy.