Dive Brief:

• American Eagle Outfitters will permanently close 40 to 50 stores this year and is scrutinizing another 500 for possible closure in the next two years as leases expire, executives told analysts on Wednesday, according to a Seeking Alpha transcript.

• The plans are influenced in part by digital sales growth, they said. Digital demand (or “ordered sales”) in the second quarter rose 48%. Net revenue fell 15% to $884 million, mostly due to pandemic-related store closures; Aerie revenue rose 32% and American Eagle fell 26%, according to a company press release.

• The retailer swung to a $270.9 million loss, 18.9% down from $105.7 million in net income a year ago. Gross profit fell 30.8% to $265 million, reflecting lower store sales plus higher e-commerce fulfillment costs. Gross margin contracted to 30% from 36.7% last year.

Dive Insight:

American Eagle did slightly better than its relatively strong numbers show, in light of one-time revenue from Japanese royalties last year that affected revenue and profit comparisons. The clothing retailer joined rivals Abercrombie & Fitch Co. and Urban Outfitters in surprising analysts in a quarter when many stores were allowed to reopen after closing to ward off the COVID-19 contagion.

"Our view is that AEO is winning in the teen apparel space," Cowen & Co. analysts led by Oliver Chen said in a Sept. 9 client note, though they also noted challenges, both "macro headwinds" like declining mall traffic and its own recent merchandising missteps.

But American Eagle apparently learned that it can do without many of those stores, as executives take a close look at their mostly mall-based fleet. The 40 to 50 stores already on the chopping block were "chosen based on lease tenure, mall profile, proximity to other stores, and customer engagement levels," Chief Financial Officer Mike Mathias said, noting that nearly 250 leases are set to expire this year, and again next year, and that the store portfolio has an average lease term under 3.5 years. 

"Our flexible lease portfolio will allow us to quickly exit locations that no longer make sense," Mathias said.

Those closures will hit the American Eagle brand, which is not enjoying the same robust growth as the Aerie lingerie business. Aerie brand chief Jennifer Foyle said the brand's five-year plan to get to $1 billion is "pretty much" on course.

"AEO continues to prove a tale of two concepts, with AE relatively in line with other mall-based peers and Aerie putting up the best growth of the group," BMO Capital Markets Managing Director Simeon Siegel said in emailed comments.

The company aims to replicate Aerie's trajectory with a new activewear brand, dubbed Offline. The line has arrived just when that already hot market gains further momentum as people work and study from home clad more casually than ever. The brand, which was developed over the last year, is being sold through a third of the company's stores and will get two stores of its own in the next few weeks, Foyle said.

Foyle was promoted to chief creative officer, reporting to CEO Jay Schottenstein, effective immediately, the company also announced. Her expanded role includes oversight of merchandising, design and marketing for the American Eagle brand, in addition to her duties at Aerie. American Eagle Global Brand President Chad Kessler now reports to her.