• Q1 net profit drops to $3.9m
  • Gross margin narrows to 35%
  • Total sales fall 5%

Visibility for the turnaround of American Eagle Outfitters is hazy, analysts have said, after the teen apparel retailer revealed an 89% decline in first-quarter earnings.

For the period ended 3 May, the company reported a profit of US$3.9m, or $0.02 per share, down from $28m, or $0.18 per share, a year earlier.

Earnings were consistent with analyst and company expectations and reflect poor customer response to the firm's core fashion merchandise, weak traffic and a highly promotional retail environment.

Gross margin narrowed to 35% from 38.8% in the prior year.

Total sales dropped 5% to $646m, while consolidated comparable sales decreased 10%, following a 5% decrease last year.

In addition, the company also announced a review of its store fleet, and the decision to close 150 stores in North America over the next three years, including around 100 American Eagle stores. 

The group is anticipating annualised after-tax savings of araound $10-$15m.

Stifel analyst Richard Jaffe said: "Looking forward, we believe visibility for the turnaround of the business is hazy. We believe there is uncertainty surrounding both the merchandise turnaround and the CEO search. Finding a qualified CEO replacement will take time and once a replacement is found, impact by the new CEO will take time to materialize."

This was a sentiment echoed by FBR analyst Susan Anderson. "While we like AEO's omnichannel/supply chain initiatives and now its more aggressive stance on store closures and cost cutting, we believe the business will continue be under pressure in the near term given the competitive and promotional teen environment. We remain on the sidelines until we see an inflection point in the business or a more attractive valuation."