American Eagle Outfitters (NYSE: AEO), whose competitors at the mall include Abercrombie & Fitch (NYSE: ANF) and Gap (NYSE: GPS), is part of a sector I'm not much of a fan of currently: retail. Just saying the word aloud makes it sound repulsive these days. Don't get me wrong, retail will come back (someday). For now, though, it's difficult to look at the numbers associated with the industry, especially the same-store sales.
Looking at American Eagle, I can see that its third quarter was, as expected, not too inspiring. Adjusted earnings per share dropped 33% to $0.30. Worse, comps plunged 7%. Last year at this time, comps increased 2%.
It's tough out there, folks, and it probably will get tougher. American Eagle, like every retailer out there, is facing a perplexing problem. What's the best way to get traffic through the door? Marketing and promotions. What do retailers have to focus on this Christmas season? Containment of costs. Margins are important, and management doesn't want them to deteriorate too badly. You can see the challenge. Plus, American Eagle can't really count on its target shopper. Young people are oftentimes fickle and ready to jump to some other business near the food court. Not a great position to be in.
Unless we're talking about Wal-Mart (NYSE: WMT) or Target (NYSE: TGT), I don't want to consider any retailer in this climate. I know things will turn around at some point and that the retail sector will fly high yet again, but I wouldn't want to be too early to the party. Why tie up the capital in a risky situation? American Eagle is only looking to keep its performance from totally falling off a cliff. It really can't take advantage of opportunities; it just wants to be defensive. The stock may have risen over 8% on good volume on Tuesday, but I just don't see what the buyers are seeing. I anticipate American Eagle's shares to go lower from here. As such, I won't be putting this one on my list of ideas.
Disclosure: I don't own any company mentioned here; positions can change at any time.
Will Rich Ross really have a positive impact on Disney's movie operations?
Consumers sick of recession, may spend extra on holidays
Corrections, seasonality and Santa Claus
