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American Eagle Outfitters, Inc. (AEO - Analyst Report) posted second-quarter fiscal 2013 earnings of 10 cents per share, down 52.4% from the comparable year-ago quarter figure of 21 cents. However, it was in line with the Zacks Consensus Estimate.

The year-over-year decline in earnings per share was mainly due to lower sales and higher operating expenses.

Quarter in Detail

American Eagle's net sales dropped 1.7% year over year to $727.3 million but came marginally ahead of the Zacks Consensus Estimate of $714.0 million. A fall in revenues was primarily due to poor performance of the women’s collections. An intensely competitive and promotional retail backdrop as well as lower traffic were the additional headwinds.

Consolidated comparable-store sales (comps) including AEO Direct, fell 7% compared with an 8% rise in the year-ago quarter.

Comps at the company's aerie stores decreased 2%, while at AE Total Brand stores, it fell 8%. However, American Eagle’s AEO Direct segments reported year-over-year comps growth of 11%.

Adjusted gross profit for the quarter decreased 11.2% to $245.5 million. Moreover, gross margin declined 360 basis points (bps) to 33.8% owing to increased markdowns and the deleverage of rent.

Adjusted selling, general and administrative (SG&A) expenses increased 4.8% to $186.3 million. Moreover, as a percentage of sales, it expanded 160 bps to 25.6% in the quarter. The increase was driven by higher buying, occupancy and warehousing expenditure.

The company’s adjusted operating income fell 56.0% to $29.4 million, primarily due to lower sales and higher operating expenses. Consequently, adjusted operating margin contracted 500 bps to 4.1%.

Financial Position

American Eagle ended the quarter with cash and short-term investments of nearly $405.0 million compared with $702.0 million at the end of second-quarter fiscal 2012. The lower cash balances were due to share repurchases worth $207 million and payment of special dividend worth $296 million in the preceding quarters.

During the quarter, the company deployed $78 million towards capital expenditure, primarily in store and e-Commerce enhancements as well as for the advancement of information technology systems.

American Eagle’s total inventory was $461.1 million at the quarter-end, compared with $462.0 million at the end of second-quarter fiscal 2012. Cost per foot fell 1% from the year-ago comparable quarter’s level.

Store Update

During the reported quarter, American Eagle opened 26 stores, including 18 factory outlets. It shut down 7 stores including 6 aerie stores. It also remodeled 20 stores. At the end of the quarter, the company was operating a total of 1,056 stores across the United States and 57 international franchise stores.

Fiscal 2013 Guidance

For 2013, total square footage is expected to rise in mid single digits. Moreover, the company has lowered its capital expenditure to $230–$250 million as against the earlier guidance of $250–$280 million. This was due to rescheduling of certain projects and investments.

For the third quarter of fiscal 2013, American Eagle projects earnings from 14–16 cents per share compared with 41 cents reported in the third quarter of fiscal 2012. The guidance is based on the company’s anticipation of mid to high single-digit decline in comps. The current Zacks Consensus Estimate is pegged at 36 cents per share, which may undergo revision in the near term.

Additionally, American Eagle anticipates a slight rise in inventory at cost per foot.

Other Stocks to Consider

Currently, American Eagle carries a Zacks Rank #4 (Sell). Better performing stocks in the apparel retail industry include The Gap, Inc. (GPS - Analyst Report), The Children (PLCE - Snapshot Report) and DSW Inc. (DSW - Snapshot Report). All of them carry a Zacks Rank #2 (Buy).

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