American Eagle Outfitters (AEO), Abercrombie & Fitch Co. (ANF): A Bust in Back-to-School Season Could Paralyze These Retailers

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Teen apparel retailer American Eagle Outfitters (NYSE:AEO)’s disappointing guidance  for its second-quarter financial results has set the stage for an eventful back-to-school season for all the players in the space, potentially having a major negative effect on your money.

This eagle plummets

In May 2013, American Eagle Outfitters (NYSE:AEO) forecasted second-quarter earnings coming in between $0.19 and $0.21. After trading closed on Aug. 5, American Eagle surprisingly announced  that it anticipates earnings of only $0.10 per share when the company reports on August 21.

In response, shares plummeted 12% the next trading day.

A disappointing back-to-school season in store

American Eagle Outfitters (NYSE:AEO)’s CEO Robert Hanson cited “weak traffic” and “a highly promotional retail environment” as factors for the poor performance. As a result, the company “increased the depth and breadth of markdowns.”

Market analysts expect American Eagle Outfitters (NYSE:AEO)’s issues to spill over to competitors Abercrombie & Fitch Co. (NYSE:ANF) and Aeropostale, Inc. (NYSE:ARO), setting the stage for a highly promotional back-to-school season.

Why? For one, spending is likely to be hampered by a high teen unemployment rate — 23.7% in June. The lack of a broad and sweeping new fashion trend like 2012’s colored and patterned demin craze could further hinder excitement and sales.

Bullish options trade on American Eagle looks for shares to extend runIn addition, the big three players in the teen retail industry, American Eagle Outfitters (NYSE:AEO), Abercrombie & Fitch, and Aeropostale, Inc. (NYSE:ARO), have returned to indigo denim as their cornerstone product. Teenagers “already have that in their closets, so there isn’t a lot that’s compelling for that teen consumer ,” noted SunTrust Robinson Humphrey specialty retail analyst Pamela Quintiliano.

Dealing with flimsy traffic and subpar demand could force these retailers to discount merchandise in order to clear their inventories.

Quintiliano further said that when American Eagle Outfitters (NYSE:AEO) begins to deeply discount, “Abercrombie & Fitch Co. (NYSE:ANF) and Aeropostale, Inc. (NYSE:ARO) will be forced to follow.”

What hangs in the balance

After the December holiday season, teen retailers consider back-to-school season their most important time frame. But while a disappointing back-to-school season will undeniably hurt these teen retailers, their businesses don’t completely rely on this select period for the majority of their annual sales.

Back-to-school sales show up in these retailers’ third-quarter results. In 2012, third-quarter revenue accounted for 26.18% of overall revenue for American Eagle Outfitters (NYSE:AEO), 25.92% for Abercrombie & Fitch Co. (NYSE:ANF), and 25.35% for Aeropostale, Inc. (NYSE:ARO). While all these marks are marginally higher than the 25% level, none reveal an unhealthy reliance on the third quarter.

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