American Eagle earnings disappoint as inflation hits apparel demand

(Reuters) -American Eagle Outfitters Inc on Wednesday missed second-quarter profit estimates and said it would pause quarterly dividend as it fortifies its finances against a hit from inflation, sending its shares down over 14% after market.

The apparel maker would also freeze hiring, cut non-critical expenses and lower capital spending, Chief Executive Officer Jay Schottenstein said in an earnings call, as the company looks to minimize damages from rising costs and slowing demand.

With the United States on the edge of a recession, and prices of food and everyday essentials exceptionally high, consumers are limiting expenditure on discretionary items like apparel, hurting major U.S. retailers including Walmart Inc, Target Corp and Kohl’s.

American Eagle’s gross margins for the reported quarter declined due to higher freight costs, steeper discounts and increased promotional activity to get rid of excess spring and summer goods.

The company’s total ending inventory at cost rose to $687 million compared to $504 million a year earlier.

Schottenstein said the company entered third quarter with better inventory levels with fresh back-to-school and fall merchandise.

The company’s Aerie division, a pandemic beneficiary that makes activewear, swimsuits and bralettes, recorded an 11% jump in revenue in the second quarter ended July 30, while namesake division American Eagle posted an 8% decline.

Net revenue stood at $1.20 billion, in-line with analysts’ expectation, according to IBES data from Refinitiv.

Excluding items, American Eagle earned 4 cents per share, largely below estimates of 13 cents.

The company had paid shareholders a dividend of 18 cents in the previous quarter.

(Reporting by Ananya Mariam Rajesh in Bengaluru; Editing by Shinjini Ganguli)