Nearly 60% growth in profits for American Eagle as expenses decrease

• Wall Street's profits expectations were exceeded by American Eagle's mixed quarterly results, but its sales targets were not met.
• The Aerie intimates line, which is a longtime mall brand, experienced a nearly 60% increase in profits as costs began to decrease for the company.
• The second half of the year may be uncertain, according to American Eagle's mixed outlook.

Despite missing Wall Street's sales targets for the second consecutive quarter on Thursday, the company's profits grew by nearly 60% due to lower product costs.

Shares fell more than 5% in premarket trading Thursday.

Based on a survey of analysts by LSEG, how did the apparel company perform in its second fiscal quarter compared to Wall Street's expectations?

• Earnings per share: 39 cents vs. 38 cents expected
• Revenue: $1.29 billion vs. $1.31 billion expected

In the three-month period ending August 3, the company's net income was $77.3 million, or 39 cents per share, which is higher than the $48.6 million, or 25 cents per share, recorded in the previous year.

Sales increased by 8% to $1.29 billion from $1.2 billion the previous year, thanks to a calendar shift that boosted second-quarter sales by $55 million.

In the quarter, Aerie, the intimates line of American Eagle, experienced a 9% increase in revenue, while the namesake brand also saw a 8% growth.

American Eagle's gross margin increased by 0.9 percentage points to 38.6%, matching analysts' expectations. The increase in gross margin was due to "favorable product costs," meaning American Eagle spent less to produce its products during the quarter. It is uncertain if the company lowered prices as a result.

Although the mall brand forecasted better-than-expected results for the current quarter, its full-year outlook was lower than anticipated, indicating that the company is still preparing for a challenging second half.

According to StreetAccount, American Eagle anticipates sales growth of between 3% and 4% for the current quarter, surpassing the 2.8% growth that analysts had predicted.

According to LSEG, the retailer anticipates total revenue to remain flat or increase slightly in the third quarter, in line with expectations.

The company anticipates a 2% to 3% increase in total revenue, which is below the 4.2% increase in full-year comparable sales that analysts had predicted, according to StreetAccount and LSEG.

American Eagle is adopting a "cautious" stance for the second half of the year, as it anticipates interest rate decisions from the Federal Reserve and prepares for potential uncertainties surrounding the upcoming presidential election.

To protect profits amidst declining demand for discretionary items, American Eagle has implemented cost-cutting measures and aimed to increase efficiency. The company has set a goal to boost sales by 3% to 5% annually over the next three years and achieve an operating margin of approximately 10%.

In the quarter, American Eagle made significant progress towards its goal. Its operating income increased by 55% to $101 million, and its operating margin grew by 2.4 percentage points to 7.8%. However, the calendar shift positively impacted the metric by $20 million, resulting in a lower operating income.