UPDATE 3-American Eagle profit plunges, outlook weak

* Q2 EPS 14 cents meets Wall St expectations

* Q2 sales fall 4.5 pct to $657.6 mln

* Sees 3rd-qtr EPS $0.17-$0.20; Street view $0.24

* Stands by plans for Martin + Osa chain for now

* Shares down 1.6 percent (Adds company, analyst comments, byline; updates stock move)

By Jessica Wohl

CHICAGO, Aug 27 (Reuters) - American Eagle Outfitters Inc (AEO.N) posted a 52 percent drop in quarterly profit on Thursday and gave a weaker-than-expected forecast, as teens cut back on spending.

The clothing retailer, which also operates the aerie lingerie line for teen girls and newly launched 77 Kids stores for children, has faced fierce competition from lower-cost rivals in the mall, especially from high-flying Aeropostale Inc (ARO.N).

The battle for dollars has intensified during this back-to-school season, as retailers hope to lure shoppers.

American Eagle said it would introduce new styles of jeans, revamp its knit tops and add more accessories. It will also open a four-floor flagship store in New York's Times Square in November featuring unique merchandise. The store will also serve as a testing ground for fresh items.

Excluding a tax benefit, American Eagle's third quarter forecast calls for earnings of 17 cents to 20 cents a share, well below analysts' average forecast for 24 cents, according to Reuters Estimates.

Analysts expressed concern that American Eagle's efforts are still not bearing fruit, with big discounts noticeable at American Eagle stores during the quarter. Chief Executive Jim O'Donnell admitted during a conference call that the company needs to do work in order to improve sales.

O'Donnell added that American Eagle customers expect the chain to react to trends faster and offer greater variety at more compelling prices.

He also stood by the company's smaller Martin + Osa chain aimed at 28 to 40-year-olds, but admitted more must be done to make it profitable. He said about 3 of the chain's 28 stores are not meeting expectations.

"Martin + Osa is a challenge, but it's a welcome challenge. I still feel strongly that we're making the right decision and we should stay the course, but we are monitoring it very, very closely," O'Donnell said. "If we don't show progress, the answer is rather obvious."

American Eagle shares fell 22 cents to $14.36 in late morning trade on the New York Stock Exchange. Shares of rival Aeropostale fell 1.5 percent to $39.71. Last week, it beat expectations with an 83 percent jump in second-quarter profit. [ID:nN20531556]

PROFIT PLUNGES

American Eagle's net income in the second quarter ended Aug. 1 fell to $28.6 million, or 14 cents per share, from $59.8 million, or 29 cents per share, a year earlier.

Analysts, on average, expected 14 cents per share. Earlier this month the company said it expected 16 cents per share, up from a prior forecast of 12 cents to 15 cents.

Sales fell 4.5 percent to $657.6 million. Sales at stores open at least a year fell 10 percent. American Eagle has posted weak sales over the past year.

One area where sales are picking up is through the company's Web sites, where sales jumped 17 percent in the second quarter.

Analysts, on average, expect American Eagle's same-store sales to fall 7.5 percent in August, but expect Aeropostale's same-store sales to climb 7 percent, according to Thomson Reuters.

American Eagle did not give a specific third-quarter sales forecast, though it expects to see a modest same-store sales improvement from the second quarter. (Additional reporting by Alexandria Sage in San Francisco; Editing by John Wallace and Derek Caney)