Here Come the Downgrades

 | Aug 06, 2013 | 8:00 AM EDT  | Comments
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Stock quotes in this article:

aeo

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aro

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anf

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gps

Shares of teen retailer American Eagle (AEO) are getting sent to detention Tuesday after the company slashed second-quarter earnings guidance to $0.10 per share. The previous target had been $0.19 to $0.21.

The teen-earnings-revision rollercoaster is nothing new, of course. Aeropostale (ARO), for example, makes American Eagle look consistent. However, this slash-and-burn comes on top of guide-downs in the previous two quarters.

Comparable-store sales are now expected to decline 7% vs. company and Street forecasts for flat comps. Unlike last quarter, American Eagle did not blame that old standby, the weather. Instead, management took some blame this time around, pointing to poor performance in the women's assortment.

However, the company did point fingers at the tough consumer environment and those pesky promotions at the competition -- yes, you, Aeropostale and Abercrombie & Fitch (ANF). It turns out teens are not so brand-loyal and can be highly fickle, particularly when the competition offers a bigger, better deal. Then again, Gap (GPS) is looking less promotional these days, and yet its numbers are moving in the right direction. Product matters, too.

When we review the teen space over the past year, we see American Eagle has been the best of the lot in terms of getting the mix correct when it comes to basic apparel and fashion-focused products. Meanwhile, Aeropostale in particular can't seem to get out of its own way. As a result, the Street has stood by American Eagle as the best of a tough lot, even despite an unrealistic margin-recovery story and a 2x ramp in capital expenditures this year.

Monday's announcement will likely send the remaining cheerleading analysts for the exits, much like a fickle teenager. 

Here come the downgrades.

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