March 7, 2012 / 1:10 PM / 8 years ago

American Eagle expects margins to improve

(Reuters) - Teen clothing retailer American Eagle Outfitters Inc (AEO.N) said the spring quarter started on a strong note and its margins will benefit from lower markdowns and costs as the year progresses, sending its shares up 5 percent.

Pedestrians walk past an American Eagle Outfitters store in New York, June 23, 2009. REUTERS/Brendan McDermid

American Eagle, whose prices are between high-end rival Abercrombie & Fitch Co (ANF.N) and more affordable Aeropostale Inc ARO.N, is changing its merchandising and sourcing strategies under former Levi Strauss & Co LEVST.UL executive Robert Hanson, who was named chief executive in November.

The company is now buying fashion merchandise with the aim of selling out each season, as opposed to over-buying and getting stuck with unsold items that become dated, Hanson said in a conference call with analysts. “We must especially turn fashion items faster,” he said.

American Eagle said comparable sales in February were “positive” as it balanced full-price selling of spring products and clearance of old merchandise. The company on Wednesday also reported adjusted fourth-quarter earnings in line with expectations.

For the first quarter ending in April, American Eagle said it expects to earn 8 cents to 10 cents a share. Analysts on average expect 10 cents, according to Thomson Reuters I/B/E/S.

Lower product costs should help margins in the second half of the year, the company said, and it plans to temper markdowns as inventories improve.

Last month, Abercrombie said it expected gross margins to recover “significantly” this fiscal year, helped partly by easing cotton costs.

Cotton, a key raw material for clothing companies, is now much cheaper than it was last year. That is expected to give retailers some breathing room as they head into the second half of the year.

But for the near term, American Eagle still sees the potential for high discounts.

The first-quarter forecast assumes “continued margin pressure from product costs, higher markdowns, and the potential for increased promotions,” the company said in a statement.

For the fourth quarter, ended January 28, earnings fell to $51.3 million, or 26 cents a share, from $87 million, or 44 cents a share, a year earlier.

American Eagle earned 35 cents a share after adjusting for store impairment and other costs. That was in line with Wall Street estimates.

Sales rose 14 percent to $1.04 billion.

Shares of American Eagle were up 5 percent at $15.36 in morning trade on the New York Stock Exchange after rising as much as 8 percent earlier.

Reporting by Nivedita Bhattacharjee in Chicago; Editing by Gerald E. McCormick, Lisa Von Ahn and John Wallace

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