Dive Brief:

• Shares of teen apparel retailer American Eagle Outfitters fell 11% in pre-market trading Wednesday as third quarter same-store sales and profits missed expectations.

• American Eagle reported Q3 net income of $75.8 million, or 41 cents per share, up from $74.1 million or 38 cents per share in the same quarter last year, while Q3 revenue rose 2.3% to $940.6 million. Thomson Reuters analysts had anticipated 41 cents per share on revenue of $940.9 million.

• American Eagle's Q3 same-store sales rose 2%, missing Thomson Reuters analyst expectations for a 2.9% rise. By brand, namesake American Eagle Q3 same-store sales rose 0.4% and Aerie lingerie Q3 same-store sales rose 21%. The company expects fourth quarter earnings of between 37 cents and 39 cents per share, based on expectations for a flat to low single-digit increase in same-store sales.

Dive Insight:

American Eagle's turnaround has been a rare ray of light in the teen apparel market, thanks in large part to its successful Aerie brand. Aerie’s marketing strategy eschews photoshopping models, a differentiation that has resonated with younger consumers.

Retailers like American Eagle, Abercrombie & Fitch, American Apparel and Aeropostale were hit hard in recent years by increased competition from fast-fashion brands like Forever 21 and H&M, which provided trendy pieces at low prices. Abercrombie has seen some success in backing away from its highly sexualized, label-heavy promotional plan of past, but has confused customers with its new marketing campaign, which may be too ambitious in trying to reach an older, post-college consumer, and the company is contemplating store closures. While Aeropostale has been rescued out of bankruptcy by its mall landlords, American Apparel has filed for Chapter 11 for the second time in a little over a year.

By contrast, American Eagle — despite this fairly weak showing — is protecting its margins and holding its own in a tough market, according to Neil Saunders, CEO of retail research agency and consulting firm Conlumino.

“Overall, we remain positive about AEO,” he said in a note emailed to Retail Dive. “Out of all the teen retailers it is best positioned to drive growth. However, in a turbulent market it is unrealistic to expect that the course it has set will all be plain sailing. In the current environment, there are likely to be some downs along with the ups.”

American Eagle CEO Jay Schottenstein sought similar acknowledgment in his statement released Wednesday, and noted that the retailer’s holiday season was off to a good start: “I’m pleased that we continued to deliver strong results in a tough retail climate, with the third quarter reaching record sales and marking the ninth consecutive quarter of profit improvement,” he said.

Though Wall Street Wednesday morning perceived the retailer’s report as a sign of weakness, Saunders called the report a “solid set of results,” noting “[T]here are two mitigating factors behind the weaker growth. The first of these is the more sluggish demand for clothing over the third quarter, which seems to have affected many retailers — including many in the teen apparel space. The second is the very tough comparatives from the prior year, when same store sales across the group rose by 9%.”

Still, American Eagle’s weakness at established stores demonstrates that it has more work to do in appealing to its core customer base, an effort made all the more difficult considering signs of continued soft apparel sales and a tough overall retail environment, Saunders said. 

“[I]t … puts the brand in dangerously soft territory and suggests that same store sales could turn negative next quarter,” Saunders warned. “In the context of the various range and marketing improvements this is a disappointing outcome that underscores both the fact that American Eagle has more work to do in connecting with customers, and the challenges of a tough apparel market … While the worst-case forecast of flat comparable sales is most certainly a conservative estimate, it nonetheless signals that the business is now entering tougher times and that growth will be more difficult to come by.”

Saunders hailed Aerie’s performance, and said the unit has even more potential. “This forms a smaller part of the business and is still a relatively immature concept. However, both things mean that Aerie has a lot of runway for further growth, despite its recent run of stellar performances. We expect the momentum within this part of the business to continue into the final quarter and beyond.”