Dive Brief:

• American Eagle Outfitters on Wednesday reported that total net revenue rose $76 million or 8% to a record $1.04 billion (from $965 million last year), including $40 million in one-time Japan license royalties. 

• Consolidated comps rose 2%, following a 9% comp sales increase last year. By brand, American Eagle's comparable sales fell 1%, (following a 7% increase last year) and Aerie's rose 16%, (following a 27% increase last year), the 19th consecutive quarter of double-digit growth, according to a company press release.

• Gross profit in the quarter rose 8% to $383 million from $353 million a year ago. The gross margin rate expanded slightly to 36.7% from 36.6% last year. The Japan license royalties drove the increase in margin rate and dollars, which was offset by increased markdowns and delivery expense. Net income rose to $65 million from $60.3 million a year ago.

Dive Insight:

In an era when several retailers are chasing digital sales, American Eagle's stores remain a key channel. Executives on Wednesday touted the company's profitability in brick and mortar, helped along by flexible leases. Shares slid in early trading, though, as some measures missed expectations and indicated weak apparel demand more broadly.

The company's Aerie brand has taken advantage of its stores and is excelling there. Many of the brand's stores are remodels that place those lingerie spaces right next to the namesake locations. Brand chief Jennifer Foyle said that footprint will continue to expand, particularly in Texas and California. The brand's sales rose more than 20%, its 19th straight run of increases and "basket is expanding at a very healthy clip," she noted. The brand continues to take meaningful share in lingerie but sales are growing across categories, she also said.

The company got a revenue injection from a royalty agreement in Japan, however, and without that its second quarter performance isn't so bright. Executives acknowledged headwinds in the period but expressed optimism about future growth. GlobalData Retail Managing Director Neil Saunders in comments emailed to Retail Dive suggested that their outlook is well placed.

"Without the royalty income, there is no denying that AEO's underlying performance has deteriorated," he said, noting that the namesake brand's comp decrease ended "a long run of respectable increases."

Denim is a good performer for that brand, although executives noted that margins in that category are tighter. But otherwise, its offering has grown somewhat stale at a time of soft demand for apparel, Saunders also said. "All of this resulted in more markdown activity to clear inventory, something that impacted on margins," he said. "Fortunately, we believe that sales strengthened as the quarter progressed and this bodes well for third-quarter performance. So too does the continued focus on denim where American Eagle has added more shapes and styles. We believe this area will be a winner over the important third and fourth quarters, including in menswear collections where American Eagle is attempting to replicate the success it has seen in women's denim."

Aerie is a standout, and Saunders noted that the brand is taking share even from market leader Victoria's Secret, thanks in large part to its less sexualized styles and message of empowerment. The brand has also introduced other clothing like leggings that are well designed and well priced, he said. Things should get easier in future quarters as the comparisons ease up, he also said.

"The company operates in a difficult and fickle part of the market and is subject to the vagaries of fashion demand as well as to softening mall traffic," he said. "However, it generally navigates these challenges well and at both Aerie and AEO it has carved out a distinct proposition that connects with consumers."