Chico's profit beats; J Crew cuts view

NEW YORK Tue Aug 26, 2008 5:33pm EDT

Models wear American Eagle clothing in a publicity photo. REUTERS/PRNewsFoto

Models wear American Eagle clothing in a publicity photo.

Credit: Reuters/PRNewsFoto

NEW YORK (Reuters) - Apparel retailers Chico's FAS Inc (CHS.N) and American Eagle Outfitters Inc (AEO.N) posted better-than-expected profits on Tuesday despite taking deep markdowns to lure shoppers of all ages, sending their shares higher.

J Crew Group Inc JCG.N, which markets its fashions to women, men and children, posted a disappointing profit and cut its full-year forecast, citing a weak economy and unexpected costs to fix its direct business. Shares fell 14 percent in extending trading.

Shares of Chico's, which targets mature women, jumped as much as 17 percent as it said it expects trends to improve and that it would be profitable in the second half of the year. The company said lower inventories should allow it to take fewer markdowns in a climate it expects to be difficult.

Chief Financial Officer Kent Kleeberger said on a conference call he could not predict when Chico's would see sales increase at stores open at least a year. But there is "noticeable improvement" in select merchandise categories, such as jackets and its new Travelers collection, he said.

American Eagle, whose namesake chain targets 15- to 25-year-olds, was similarly cautious, forecasting profit for the current third quarter that was below analysts' estimates.

Chief Financial Officer Joan Hilson cited "a view that the business environment remains challenging through the back half of the year."

The company also said it was backing off opening new Martin + OSA stores, which target 28- to 40-year-olds, until it sees results for the second half of the year, including the back-to-school season and key December holidays.

Despite the forecast, American Eagle shares rose nearly 4 percent. Thomas Weisel Partners analyst Liz Dunn said investors already priced a lower outlook into the stock, which had shed nearly 34 percent this year.

PROFITS TUMBLE ON FALLING SALES

Chains including Chico's, Talbots Inc TLB.N and Coldwater Creek Inc CWTR.O, have been especially hurt by the economic slowdown in recent quarters. Their core customers, women over 35, often cut back on shopping for themselves before cutting back on their families, tend to be less driven by fashion trends and usually have extensive existing wardrobes.

Credit Suisse analyst Tracy Kogan said the challenges should continue in the near term.

"However we believe there is longer-term value in the Chico's portfolio of brands and the slowing growth and expense initiatives should help enable an eventual recovery in operating margin," Kogan wrote in a research note.

American Eagle said second-quarter net income fell 26 percent to $59.8 million, or 29 cents per share, from $81.3 million, or 37 cents per share, a year ago. Total sales were down 2 percent to $688.8 million, while same-store sales fell 9 percent.

American Eagle said it expects to earn 31 cents to 36 cents per share in the third quarter, below Wall Street's expectation for 39 cents per share and its year-ago profit of 45 cents.

Chico's, which also operates the White House Black Market and Soma Intimates chains, said second-quarter profit tumbled 83 percent to $6.7 million, or 4 cents per share, from $38.7 million, or 22 cents per share, a year earlier.

Chico's sales for the quarter fell 7.1 percent to $405.2 million. Same-store sales fell 15.9 percent, hurt by a 19 percent decline at its Chico's chain and a 12 percent decline at White House Black Market.

J Crew second-quarter net income fell to $18.1 million, or 28 cents per share, from $20.6 million, or 32 cents per share, a year ago. Excluding costs from an upgrade to its direct business segment, J Crew's profit per share came to 31 cents, below the average analysts' forecast of 32 cents per share, according to Reuters Estimates.

The company forecast third-quarter earnings per share of 28 cents to 33 cents and cut its full-year earnings view to a range of $1.44 to $1.54 per share from a previously expected $1.70 to $1.75 per share.

Chico's shares, which had fallen nearly 45 percent this year through Monday's close, rose as high as $5.83 before closing up 2.2 percent at $5.09.

American Eagle rose 55 cents to $14.29. J Crew slumped to $23 on the earnings news from its close of $26.64.

(Additional reporting by Sarah Coffey and Michele Gershberg; Editing by Dave Zimmerman and Gunna Dickson)

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