UPDATE 4-Thanksgiving sales brighten American Eagle holiday outlook
* Q3 EPS $0.27 vs est $0.27
* Sees Q4 EPS $0.40-$0.44 vs est $0.39
* Says Thanksgiving sales driven by higher traffic, conversion
* Shares up as much as 9 percent
Nov 30 (Reuters) - American Eagle Outfitters Inc is betting that the strong sales it saw over the Thanksgiving weekend will continue through the rest of the holiday quarter and make up for high raw material costs and discounts.
The outlook drove American Eagle shares up as much as 9 percent on Wednesday on the New York Stock Exchange, before they pared some gains to trade up 4 percent at $14.03.
The teen apparel retailer -- priced mid-way between high end rival Abercrombie & Fitch, and more affordable Aeropostale Inc -- has fared better than its peers so far this holiday season.
"If you don't have something new and novel to offer, shoppers won't buy," said Linda Tsai, senior softline retail analyst with ITG Investment Research
"(American Eagle's results are) definitely a combination of merchandising and promotions because everyone is price focused."
For the fourth quarter, Pittsburgh-based American Eagle expects to earn between 40-44 cents a share in the fourth quarter, while analysts, on average, were expecting 39 cents a share.
Clothes retailers are banking on discounts to boost sales and overcome a margin squeeze during the holiday season, which typically accounts for about 30 percent of annual sales.
Even though American Eagle advertised discounts of about 40 percent during Black Friday, they were still not as sharp as rivals.
"Our inventory investments in key items were spot on ... resulted in record conversion rates and double-digit unit sales growth," Chief Executive Jim O'Donnell, who retires soon, said on a conference call with analysts.
American Eagle named Levi Strauss executive Robert Hanson as O'Donnell's successor earlier this month.
BASICS OR FASHION?
American Eagle struggled with sales and missed profit estimates in the beginning of the year, but the retailer has since capitalized on its forte -- denims, knit tops and other wardrobe staples for 15-25 year olds.
"Denim achieved a high-single digit comparable sales ... through a combination of new styles and strong demand for our heritage jeans," Executive Creative Director Roger Markfield said.
He said NPD data showed that the company gained market share in denims and is the number one leading specialty store denim brand for 15-25-year-olds.
However, some analysts were skeptical that plain denims and knit tops would excite American Eagle's fashion-conscious clients.
"We view management's concentration on basic key items as defensive because it is focused on protecting and growing its franchise strengths: denim and knit tops," Stifel Nicolaus analyst Richard Jaffe wrote in a client note.
"American Eagle is in the business of fashion ... must therefore make fashion bets and support them with sufficient inventory."
Currently, roughly half of the company's merchandise leans towards wardrobe staples.
"We believe the company will be unable to inspire the consumer with its overly basic and unexciting assortment this holiday season, thereby pressuring results," Jaffe added.