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.
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.
Nevertheless, a disappointing September could hobble the remainder of the year, said analyst Quintiliano. “Generally speaking, if back-to-school doesn’t work, it’s very hard to get holiday right.”
Looking towards tomorrow
American Eagle Outfitters (NYSE:AEO)’s downbeat second-quarter guidance appears to forecast a gloomy back-to-school season for teen retailers, likely riddled with weak traffic, lackluster demand, and inevitable discounting. If September fails, retailers could also find their all-important holiday season in the line of fire as well.
Investors should track the upcoming back-to-school season for the teen retailers, and see whether the anticipated discounts occur. Investors should also watch to see whether an exciting fashion item or trend emerges. American Eagle Outfitters (NYSE:AEO), Abercrombie & Fitch Co. (NYSE:ANF), and Aeropotstale are all tirelessly searching for a spark to energize September.
As overall investments, none of the teen retailers appears extremely attractive , as all have to deal with the ever-changing minds of teenagers. The best in breed would have to be Aeropostale, Inc. (NYSE:ARO), who is the only of the three which has increased its total store count since 2009.
Ryan Guenette has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article A Bust in Back-to-School Season Could Paralyze These Retailers originally appeared on Fool.com.
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