American Eagle margins weighed down by markdowns, shares fall

(Reuters) - American Eagle Outfitters Inc AEO.N on Thursday posted results in line with estimates, but prolonged promotions and markdowns to attract customers are hurting gross margins and could weigh on the current fiscal year, sending its shares down 10 percent.

FILE PHOTO: Jeans are seen for sale in an American Eagle Outfitters retail store in Manhattan, New York, U.S., May 13, 2016. REUTERS/Mike Segar/File Photo

The company said it went into the holiday quarter expecting another promotional season and sought to gain market share by offering big discounts. But the move as well as higher expenses dented margins.

Gross margins fell 80 basis points to 34.6 percent. American Eagle President Charles Kessler said the company plans to reduce promotions this year.

At least 16 Wall Street analysts expected gross margins of 35.08 percent for the quarter, according to Consensus Metrix.

Gross margins of 36.1 percent for fiscal 2017 were also the lowest in the past three years.

Analysts said margin pressures through the year showed the company may have lost some of its competitive edge, and noted that it may need to rely on those discounts to keep people coming back through its doors.

“The fear is that they’ve now trained their customers to look for promotions and that will hamper any gross margin growth in future quarters,” Gabriella Santaniello, chief executive officer of retail consultancy firm A-Line Partners, said.

“Basically it’s seen as the beginning of a slippery slope despite all the positivity around the glossy forecast.”

On Thursday, the company said it expects first-quarter earnings per share to be between 20 cents and 22 cents. Analysts on average were expecting 19 cents, according to Thomson Reuters I/B/E/S.

Overall, the company reported strong holiday quarter sales with same-store sales and net sales beating Wall Street estimates, but the higher promotions hit profit, putting earnings per share in line with estimates.

American Eagle’s comparable sales rose 8 percent in the fourth quarter ended Feb. 3, beating analysts’ average estimate of a 7.34 percent rise, according to Thomson Reuters I/B/E/S.

Much of that boost came from its Aerie lingerie brand that caters to millennials and has taken away market share from L Brands' LB.N Victoria's Secret.

Same-store sales for the Aerie brand jumped 34 percent, cruising past the 27 percent rise expected by analysts.

Net income rose to $93.96 million, or 52 cents per share, from $54.62 million, or 30 cents per share, a year earlier.

Excluding a one-item tax benefit of 8 cents, earnings were 44 cents per share, in line with the average estimate.

Net revenue rose 12 percent to $1.23 billion, above analysts’ expectations of $1.21 billion.

Reporting by Vibhuti Sharma in Bengaluru; Editing by Sriraj Kalluvila, Bernard Orr