American Eagle slumps after investors focus on Q3 margin miss

American Eagle Outfitters (NYSE:AEO) slumped in early trading after the retailer's guidance rattled investors.

The mall stalwart reported Q3 sales were up 5% year-over-year during the quarter to $1.3B, with store revenue 3% higher and digital revenue up 10%.

The Aerie brand saw a 12% jump in comparable sales during the quarter, while comparable sales were 2% higher for the American Eagle brand. Gross margin rate was up 310 basis points from a year ago to 41.8% of sales. Margin expansion was driven by strong demand, lower product and freight costs and continued benefits from the retailer's profit improvement work including lower markdowns and leverage on rent, distribution and warehousing and delivery. However, the Q3 margin rate was below the consensus expectation of 42.5% of sales.

Looking ahead, AEO management was confident on the outlook for the holiday quarter. "Momentum has continued across the business into the fourth quarter, driven by strong holiday assortments, engaging marketing campaigns and solid execution, supporting our improved outlook for the rest of the year.," noted CEO Jay Schottenstein. Looking ahead, we remain focused on advancing our long-term strategic priorities, as we seek to create consistent growth across our portfolio of brands and generate efficiencies for improved profit flow-through,' he added.

Shares of American Eagle Outfitters (AEO) fell 17.87% in opening trading on Tuesday and was swapping hands at a seven-week low. Analysts think that expectations for AEO were running too high into the report, with the stock up more than 37% year-to-date.