American Eagle Outfitters (AEO) Got Smashed! How Does It Stack Up to Aeropostale, Inc. (ARO) and Abercrombie & Fitch Co. (ANF)?

Friday wasn’t a great day to own shares of American Eagle Outfitters (NYSE:AEO) . After reporting earnings that fell short of analyst expectations, shares of the $2.86 billion retailer fell 9.45% to $14.85. When you consider that the S&P 500 rose 1.12%, it’s poor performance added salt to the wound. But, exactly how bad was the company’s quarter, and how is the company positioned for tomorrow’s challenges? To get a better understanding, I jumped into the company’s earnings release, so we can get a clear picture of its current condition.

American Eagle Outfitters (NYSE:AEO)

Earnings fell but revenue was encouraging
American Eagle Outfitters reported earnings per share of $0.13. This represents a 66.7% decrease from the $0.39 the company reported the same quarter last year, and a 31.6% miss from the $0.19 that Mr. Market expected. According to the release, the shortfall in earnings stemmed from two things; higher costs relative to sales and lower revenue.

Although the company booked a $19.3 million bottom line hit because of the loss related to closing its Warrendale, PA distribution facility, the primary problem was an increase in its cost of goods sold. Compared to the same quarter last year, American Eagle Outfitters (NYSE:AEO) saw its cost of goods sold rise from 58.4% to 65.1%.

This is largely due to an increase in the company’s cost of inventory, which jumped 6% per foot from last year. However, management explained that the timing of a 53rd week last year exacerbated this result by a few percentage points. Moving into the fourth quarter, management expects to earn between $0.26 and $0.30 a share, significantly below the $0.47 it earned last year.

Revenue, on the other hand, slightly outpaced analyst expectations. Sales declined 5.8% from $910.4 million to $857.3 million. Admittedly, this is a bad sign, but not as bad as the 7.3% drop analysts expected. The primary driver behind the company’s lower revenue was a 5% decline in comparable-store sales.

How the Eagle stacks up
As we can see, American Eagle Outfitters’ results are poor, but not horrendous. This is best demonstrated by comparing its results to some of its competitors. In fact, Aeropostale (NYSE:ARO) reported a more dismal quarter than American Eagle Outfitters. For its most recent quarter, the retailer posted earnings that fell short of expectations. Last year, earnings came in at $0.31, this year the company reported a loss of $0.33, significantly worse than the $0.24 loss analysts estimated.

Unlike American Eagle Outfitters (NYSE:AEO), revenue also took a larger-than-expected beating. For the quarter, Aeropostale, Inc. recorded revenue of $514.6 million, 15.1% lower than the same period a year ago, and 1% lower than the $520 million that Mr. Market expected.

In terms of costs of goods sold, Aeropostale, Inc. (NYSE:ARO) also experienced some unfavorable results.  Compared to the same quarter a year ago, Aeropostale, Inc.’s cost of goods sold rose from 72.1% of sales to 82.9%.  This increase is far more drastic (not to mention the metric just higher in general) than American Eagle Outfitters’, which implies that business might be less stable.

Sticking with the A’s, we come to another retailer that experienced a decline in profitability; Abercrombie & Fitch (NYSE:ANF) . During its most recent quarterly report, the company announced that its EPS came in at a negative $0.20 per share. This represents a significant departure from the $1.02 the company earned in the same quarter a year ago.

Revenue for Abercrombie & Fitch Co. (NYSE:ANF) also fell precipitously. While the company brought in revenue of $1.17 billion last year, it reported a decline of 11.7% to $1.03 billion. The primary driver behind the company’s lackluster revenue was a 14% drop in comparable-store sales as it appears to be having a tougher time appealing to its customer base.

Like American Eagle Outfitters (NYSE:AEO) and Aeropostale, Inc. (NYSE:ARO), I thought it might be valuable to analyze Abercrombie & Fitch Co. (NYSE:ANF)’s cost of goods sold as a percentage of sales.  Interestingly, Abercrombie & Fitch Co. actually saw the best performance both in terms of deterioration and overall cost.  Between 2012 and 2013, the company’s cost of goods sold rose from 35.7% to only 37%.  This is far below its peers and implies that business might be more stable in a difficult environment.

Perhaps one of the best ways to evaluate these companies when placed next to one another is to look at their sales per square foot over time.

Using the table above, we can see the sales per square foot at each of these three retailers.  Interestingly, American Eagle Outfitters’s sales per square foot stand higher than those of Aeropostale, Inc. (NYSE:ARO) or Abercrombie & Fitch Co. (NYSE:ANF).  If this weren’t attractive enough, then the change in their metrics over the past year should impress you.  From 2012′s third quarter to this years’ quarter, American Eagle Outfitters (NYSE:AEO)’s sales fell 8.1%.  Although this isn’t something to brag about, investors can take solace in knowing that its results outperformed the 12% drop experienced by Abercrombie & Fitch Co. and the tremendous 19.7% drop reported by Aeropostale, Inc.

Foolish takeaway
As you can see, the situation at American Eagle Outfitters is depressing. However, everything is relative. The fact is that most clothing retailers are hurting right now, and once we dig into the numbers, American Eagle Outfitters (NYSE:AEO) is hurting less than most. This doesn’t mean that it is an attractive investment, but it does imply that it may not be the worst clothing retailer in the industry.

Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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