American Eagle Outfitters (NYSE:AEO) announced Wednesday that second quarter net profits more than doubled, but adjusted profits dropped as higher costs of raw materials hurt margins, leading the retailer to cut it its full year earnings outlook.
The company had originally anticipated full year earnings in line with last year's $1.02 results. However, the teen apparel retailer now expects earnings in the range of 85 to 95 cents per share, while for the third quarter, earnings are anticipated between 22 and 27 cents per share.
Analysts have estimated 27 cents for the current quarter, and 94 cents for the full year.
Despite its expectations for stronger sales in the back half of the year, largely on back-to-school trends, American Eagle said it continues to expect "tempered" sales, and pressured merchandise margins on the back of higher cotton costs.
For the three months ending July 30, the company posted net income of $19.7 million, or $0.10 per share, up from the $9.7 million, or $0.05 per share, in the year-ago period.
However, excluding a year-earlier loss from discontinued operations, profits actually dropped from 13 cents per share a year ago. Analysts expected earnings of 11 cents for the latest quarter.
Total sales rose 4% to $675.7 million, while comparable sales, or those of stores open at least a year, came in flat, compared to a 1% drop a year ago.
Gross profit margins slipped 250 basis points as higher product costs caused a 1.5% hike in merchandise margins, and real estate costs rose one percent.
"During the quarter, we achieved improved performance on the top line and EPS within our range of expectations," said CEO Jim O'Donnell, who announced his retirement earlier this year.
"Importantly, a renewed focus on our key item businesses and improved merchandising are delivering positive results, with the back-to-school season off to an encouraging start."
American Eagle's namesake brand, and its AE Brand each posted flat comparable sales, while the company's aerie brand - a line of sleepwear and lingerie - saw same store sales drop one percent.
The company's direct-to-consumer business, AEO Direct, which includes web sites like ae.com, aerie.com, and 77kids.com, posted a 16% increase in comparable sales, helped by greater transactions and more traffic.
American Eagle's stock dropped 6.63% in morning trading on Wednesday, to $10.85 per share.