American Eagle Outfitters (AEO) reported a dramatic 60% increase in profits for the second fiscal quarter of 2024, driven primarily by reduced product costs. However, despite this substantial profit growth, the company fell short of Wall Street's sales expectations for the second consecutive quarter, leading to a notable drop in its stock price.
For the quarter ending August 3, American Eagle posted earnings of 39 cents per share, exceeding analysts' expectations of 38 cents, but revenue of $1.29 billion fell short of the anticipated $1.31 billion. The company's net income surged to $77.3 million, up from $48.6 million a year earlier. The revenue increase, which represents an 8% rise from the $1.2 billion reported in the same quarter last year, was partly aided by a favorable calendar shift that contributed an additional $55 million.
Despite the revenue miss, American Eagle's gross margin improved to 38.6%, up 0.9 percentage points from the previous year. This margin expansion was largely due to "favorable product costs," which indicate that the company reduced expenses associated with manufacturing its products. However, it remains unclear if these cost reductions translated into lower retail prices for consumers.
The retailer's performance in specific segments was a mixed bag. The Aerie intimates line saw a 9% increase in revenue, while the American Eagle brand itself grew by 8%. Nonetheless, the overall sales figures did not meet the high expectations set by market analysts.
American Eagle's stock fell more than 5% in premarket trading following the announcement of these results. The decline reflects investor concern over the company's inability to meet revenue targets despite its impressive profit growth. Analysts and investors are particularly focused on the company's outlook for the remainder of the year.
Looking ahead, American Eagle has issued a cautiously optimistic forecast for the current quarter, expecting comparable sales to grow between 3% and 4%. This projection is slightly better than the 2.8% growth anticipated by analysts. For the full year, the company expects a comparable sales increase of approximately 4% and total revenue growth of 2% to 3%, which falls short of analysts' projections of a 4.2% rise in comparable sales and a 3.5% increase in overall revenue.
In a statement, American Eagle's Executive Chairman and CEO, Jay Schottenstein, highlighted the company's progress under its "Powering Profitable Growth" strategy. "The second quarter marked our sixth consecutive quarter of record revenue," Schottenstein said. He emphasized that the company is on track to achieve the high end of its operating profit outlook for 2024, despite the revenue shortfall.
Finance Chief Mike Mathias had previously expressed a cautious outlook for the latter half of the year, citing uncertainty related to Federal Reserve interest rate decisions and potential political "noise" surrounding the upcoming presidential election. The company has been focusing on cost-cutting measures and operational efficiencies to safeguard its profit margins in a challenging retail environment.
American Eagle's efforts to bolster its profitability included a substantial 55% increase in operating income, which reached $101 million. The operating margin improved by 2.4 percentage points to 7.8%, benefiting from the calendar shift that added $20 million to the metric. The company's strategy includes annual sales growth targets of 3% to 5% and an operating margin goal of around 10% over the next three years.
Despite the profit gains, American Eagle's stock performance reflects ongoing concerns about its ability to sustain revenue growth amidst a shifting retail landscape. The company faces challenges from slowing demand for discretionary items and increased competition in the apparel sector.
