American Eagle profit soars, but sales grow slower than expected

American Eagle on Wednesday said it’s making gains in boosting profitability as it works to improve its product assortment and tweak operations. Still, its fiscal first-quarter sales came in weaker than Wall Street expected. 

Nevertheless, revenue gained 6% year over year and marked a record for the first quarter, the company said in a news release. 

Shares fell about 5% in extended trading on Wednesday.

Here’s how the apparel company did compared with what Wall Street was anticipating, based on a survey of analysts by LSEG:

• Earnings per share: 34 cents vs. 28 cents expected
• Revenue: $1.14 billion vs. $1.15 billion expected

The company’s reported net income for the three-month period that ended May 4 nearly quadrupled compared to the year-ago period. American Eagle posted net income of $67.8 million, or 34 cents per share, compared with $18.5 million, or 9 cents per share, a year earlier. 

Sales rose to $1.14 billion from $1.08 billion a year earlier.

American Eagle said it’s continuing to expect operating income in the range of $445 million to $465 million, reflecting revenue growth of up 2% to 4% compared to the prior year. That’s slightly below estimates of up 3.4%, according to LSEG.

Finance Chief Mike Mathias told CNBC that American Eagle is maintaining a “cautious” view for the back half of the year as it prepares to lap some tougher comparisons, awaits interest rate decisions from the Federal Reserve and prepares for “noise” around the upcoming presidential election. 

He added the company is waiting to see how the back-to-school shopping season goes to get a better idea on how the rest of the year plays out. 

For the current quarter, American Eagle expects operating income in the range of $95 million to $100 million, reflecting revenue growth of high single digits, which is in line with the 7.4% uptick that analysts had expected, according to LSEG. 

The apparel company, which runs its namesake banner and intimates brand Aerie, is in the midst of a new strategy to boost growth. It’s looking to grow sales by 3% to 5% each year over the next three years and get its operating margin to about 10%.

Some of its efforts are beginning to bear fruit. During the fiscal first quarter, American Eagle grew its gross margin by 2.4 percentage points. Mathias said that’s the company’s second highest rate since 2008 in the company’s earning call. The gains were driven by better inventory management, lower product and transportation costs and leverage on expenses including rent, delivery and distribution and warehousing. 

“Key drivers of growth included women’s overall, especially in tops which as I reviewed is a major priority for us. I’ll also highlight strength in dresses, skirts and jeans, in these areas we are seeing a positive customer response as we look to capture the social casual dressing occasion and a wider age demo. Both of these are key growth opportunities within our long term plan,” American Eagle’s president and executive creative director Jennifer Foyle added in the earnings call.

American Eagle’s strategy has also focused on revamping its product assortment, removing items that weren’t working for its customers and drilling down on the categories that are resonating. 

Foyle told CNBC that the company was just “over-skued” — meaning it had too many different individual products, often referred to in the industry as SKUs, for consumers to choose from. 

“We knew we could do more with less,” said Foyle. “So deeper investments in our bottoms but less SKUs so that we are servicing our customer on the fits that they’re demanding from us.” 

“We’ve really taken that category back, we’re winning,” Foyle said of the company’s denim business. “Definitely in women’s, some early earnings in men’s, as I mentioned you will see more of that earnings in Q3. We remain very nimble in that category but we’re definitely more balanced than we had been in the past.”

The company has also been working to revamp its stores and introduce new formats. It recently implemented a new store design for American Eagle, which is “outpacing the balance of the chain,” said Foyle. 

“We’re excited about remodeling our stores with a new feeling for the brand that I think expresses exactly what we’ve been up to,” she said. “The customer, obviously is loving what they see in that store design based on the results.”