American Eagle Wrecked in the Crossfire

 | Aug 06, 2013 | 7:30 AM EDT
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American Eagle: Endangered Species

American Eagle: The Eagle Has Landed

American Eagle: Clipped Wings

Last year, I had unkind things to say about American Eagle (AEO).

I thought the company had problems getting traffic into its stores, and that this was creating inventory and margin nightmares. The stock was underperforming the sector, as well as the S&P 500. On Monday night after the close, American Eagle landed with a thud after the company warned about a disappointing second quarter. From the tone of the press release, management is clearly not happy with the results.

The company has told investors that it is lowering its second-quarter profit forecast to $0.10 per share -- essentially half of May's guidance range of $0.19 to $0.21. Total net revenue, meanwhile, dropped 2% to $725 million vs. consensus expectation of $760 million. The stock fell 17% in after-hours trading.

But what really freaked out investors were the dismal same-store sales. The company said comps fell 7%, as compared with an 8% rise last year. Management blamed the highly promotional environment in July for weakness in the women's assortment. In an effort to keep up with the competition, American Eagle aggressively slashed prices in order to move the merchandise.

I believe American Eagle, as well as a number of other specialty retailers, are victims in an all-out war against J.C. Penney (JCP) by Macy's (M). Specialty retailers like American Eagle are simply getting caught in the crossfire as Macy's goes for the jugular. If revenue fell only 2%, then margins must have been totally wrecked. It's gotta be ugly! We'll find out how ugly those July margins were when the company reports its second quarter next month. 

There had been early indications the back-to-school season was sloppy and that July would be tough, but I didn't think it would be this tough. To drive store traffic, retailers have to aggressively mark down their remaining inventory, since there are just three weeks left in back-to-school season and the fall clothing is piling up.

Consumer discretionary has been one of the best-performing sectors of the market year to date, with shares up 28% since the start of 2013. A no-holds-barred price war between the majors looks to demolish the stock performance of the entire group.

After this report, I would be very afraid to hold any retail apparel names. It's just too dangerous. The Eagle has landed and promises to take down the rest of the sector!

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