Why American Eagle Shares Crashed

Why American Eagle Shares Crashed

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of teen-oriented apparel retailer American Eagle Outfitters plummeted 15% today after its second-quarter guidance disappointed Wall Street.

So what: The stock has been sluggish over the past year on concerns over slowing growth, and last evening's downbeat Q2 guidance only reinforces those worries. In fact, management blamed the warning on weak sales and lower margins due to deep markdowns, suggesting that American Eagle's competitive position is weakening rapidly.

Now what: Management now sees Q2 EPS of $0.10, well below its prior forecast of $0.19-$0.21 and Wall Street's forecast of $0.21. "The domestic retail environment remains challenging, however, we have a strong sense of urgency and believe we are focused on the right actions to regain traction, deliver strong returns and profitable growth," CEO Robert Hanson said in a statement. Given the increasingly intense competition and difficult teen market facing American Eagle, however, I'd wait for a wider margin of safety before buying that turnaround talk.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the "3 Companies Ready to Rule Retail" in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

The article Why American Eagle Shares Crashed originally appeared on Fool.com.

Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Originally published