American Eagle Outfitters (AEO): 1 Big Problem for This Popular Retailer

Yesterday, teen apparel retailer American Eagle Outfitters (NYSE:AEO) posted its first-quarter results. The company has struggled over the last year as it tries to find its niche. Recently, management has tried to shift from supplying just basics to a wider range of fashion items. Apparently, it hasn’t caught on just yet.

Total sales in the reported quarter were down 4%, with comparable sales falling 5%. Along the way down the balance sheet, margins dropped and resulted in a drop in earnings per share, which came in at $0.18 compared to $0.22 last year. The company has a well-known brand and good store footprint, so what’s the missing piece?

Subpar results from American Eagle Outfitters (NYSE:AEO)
If there’s a recurring theme with apparel retailers this year, it’s how much the weather has affected the business. It’s no surprise that American Eagle Outfitters (NYSE:AEO) cited the long, cold winter as one of the main problems it faced this quarter. Target Corporation (NYSE:TGT) rolled out the same reasoning when it announced a less-then-stellar performance yesterday, citing weakness in weather-related apparel sales.

The difference at Target was that the company had other products to fall back on, so comparable sales only fell slightly, while they dove at American Eagle. Even with that fall, the market rewarded American Eagle yesterday. The stock rose slightly, though it gave up those gains in early trading today.

The problem American Eagle Outfitters (NYSE:AEO) has is that it fails to keep up any of the momentum that it gains. Case in point: Last year at this time, American Eagle managed a 17% increase in comparable sales. A 22-percentage-point drop in comparable sales isn’t just weather-related. American Eagle is losing out to trendier brands like Urban Outfitters, Inc. (NASDAQ:URBN). Urban managed a 9% increase in comparable sales last quarter. Sales rose because teens like the brand, and they’re turning away from American Eagle.

Where’s the shortfall?
If it’s not weather, then where’s the problem at American Eagle Outfitters (NYSE:AEO)? I’d argue that it’s at the management level. The company has failed to capture the trendy fashion market-share that it’s been planning to attack for some time now. Core items still make up 40% to 45% of the company’s sales, which means that the company is still relying heavily on those items.