American Eagle sees lacklustre holiday quarter on increased markdowns

American Eagle Outfitters forecast holiday-quarter profit and comparable sales below market expectations on Wednesday, as the apparel retailer ramps up promotions to counter sluggish demand for its flagship AE brand.

Shares of the Pittsburgh-based company fell about 7%, having lost about 22% so far this year.

Stiff competition in the retail space has forced U.S. apparel makers, slower in offering latest fashion, to spend heavily on promotions to compete with fashion-forward brands from Target Corp and European players Zara and H&M.

Spain-based Zara said on Wednesday it expects like-for-like sales to rise 4% to 6% for the year, while Target last month posted a 10% growth in quarterly comparable sales in its apparel business.

“After back-to-school, we experienced softer demand in certain apparel categories, primarily in men’s and women’s tops, which led to higher markdowns,” American Eagle Chief Executive Officer Jay Schottenstein said in a post-earnings call, adding that some of those pressures continue into the fourth quarter.

“The team is working harder to strengthen the areas of underperformance,” Schottenstein said.

Fewer days in the holiday shopping season this year will further hit American Eagle, along with other retailers, with the gap between Thanksgiving and Christmas being shorter by six days than last year.

American Eagle expects to earn between 34 cents and 36 cents per share in the fourth quarter, well below analysts’ expectation of 46 cents. It said the outlook assumed greater gross margin pressure than in the reported quarter.

Comparable sales are expected to be about flat, the company said, much lower than the 4.34% growth analysts had projected, according to IBES data from Refinitiv.

The retailer in the third quarter had new discounts on its Aerie bralettes, AE tops and sweatshirts to entice shoppers, but that came at the cost of lower gross margins.

Gross margin took a hit, falling to 38.2% from 39.8% a year earlier, as a result of the higher markdowns.

For the quarter ended Nov 2., the retailer earned 48 cents per share, meeting market expectations.

Net income fell nearly 6% to $80.76 million.