(Teen retail report card updated with Pacific Sunwear of California and American Eagle Outfitters earnings results.)

NEW YORK ( TheStreet) -- Teen retailers were in the spotlight this week, as investors looked to second-quarter earnings reports to shed light on the all-important back-to-school season.

The market, however, was disappointed with the sector, as outlooks for the second-half of the year were muted -- with deep discounting across the board and rising sourcing and labor costs expected to weigh on teen retailers' margins for the remainder of the year.

"It is becoming glaringly obvious to us that the short-sighted inventory buying binge and subsequent 'planned' deep discounting of Abercrombie & Fitch ( ANF) and American Eagle Outfitters ( AEO), in the face of one of the most economically affected sectors in the economy, has managed to destroy any potential for even the better-run teen players, who maintained inventory and expense discipline, to register strong results," Brean Murray analyst Eric Beder, wrote in a note.

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For back-to-school we have already seen a high level of promotional activity. Denim, which most teen retailers put a big bet out, isn't moving, Wall Street Strategies analyst Brian Sozzi, noted. As a result, it has become a price-driven item whose margins have most likely been hampered.

Still, it's not all bad news. While the second-quarter warnings were definitely frightening, much of the back-to-school season is still ahead, Sozzi noted. No one is immune to the current lackluster consumer environment, but there are several retailers that stand a better chance of winning the back-to-school season.

Here's how the teen retailers stacked up in the second quarter...

American Eagle Outfitters

American Eagle Outfitters ( AEO) was weighed down by higher inventories in its second-quarter, reporting a 66% plunge in profit.

During the quarter the teen retailer earned $9.7 million, or 5 cents per share, compared with $28.6 million, or 14 cents, in the year-ago period. Excluding costs related to the shuttering of its Martin + Osa chain, American Eagle actually earned 13 cents per share, in-line with analysts' forecast.

Sales slipped less than 1% to $651.5 million, missing estimates of $654.6 million, as comparable sales dropped 1%.

Looking ahead, American Eagle predicts third-quarter earnings in the range of 23 cents to 26 cents per share. Wall Street is looking for a profit of 27 cents per share.

"While back-to-school is the potential catalyst for American Eagle Outfitters given it is the first collection under the new general merchandising managers, the comparable sales outlook is muted given the highly promotional environment and we don't have better visibility on top-line or merchandise margin progression," UBS analyst Roxanne Meyer, wrote in a note.

Pacific Sunwear of California

Skate and surf inspired retailer Pacific Sunwear of California wiped out in the second-quarter, reporting a wider loss as sales tumbled.

The retailer also issued a lackluster third-quarter forecast that fell partially below forecasts.

During the quarter Pacific Sunwear lost $23.5 million, or 36 cents per share, compared with a loss of $14.2 million, or 22 cents, in the year-ago period. Excluding a tax-related charge, the company actually lost 22 cents, a penny better than Wall Street's outlook.

Revenue dropped 10% to $218.3 million from $242.8 million, while same-store sales tanked 10%.

Pacific Sunwear is calling for a loss between 9 cents and 16 cents in its third-quarter, while analysts are looking for a loss of 12 cents a share. Same-store sales are forecast to drop between 4% and 9%.


Is Aeropostale ( ARO)losing its luster? As its competitors entrench on its promotional positioning, Aeropostale may be forced to increase its discounting, which could put pressure on its margins.

While the teen retailer beat expectations, which second-quarter earnings growing 13% to $43.6 million, or 47 cents a share, its third-quarter forecast disappointed investors.

Looking ahead, Aeropostale expects third-quarter earnings in the range of 61 cents to 63 cents a share, which includes a 4-cent charge related to the retirement of its former chief executive and chairman. Wall Street is predicting a profit of 72 cents a share.

Aeropostale sales grew 9% $494.7 million from $453 million, while same-store sales grew 4%.

Analysts were calling for a profit of 46 cents a share on revenue of $503.1 million.

Despite deep discounts from rivals, analysts still believe Aeropostale plays the promotional game best. "Given that value has always been at the core of Aeropostale's operating strategy, management has build a flexible and responsive business model that enables them to measure the elasticity of demand and react quickly to change," Stifel Nicolaus analyst Richard Jaffe, wrote in a note.

It is also unlikely that its competitors Abercrombie & Fitch and American Eagle Outfitters will be able to sustain their currently pricing situation, Beder said.

Abercrombie & Fitch

Abercrombie & Fitch ( ANF) reversed its second-quarter loss, as price cuts, no doubt, bolstered sales. But these drastic discounts weighed on margins, and leave investors wondering how much leverage the brand has at full-price.

"While we believe the merchandise has improved, there is still work to be done, as we believe a significant portion of merchandise remains uninspiring and lackluster," Jaffe wrote. "It appears the consumer agrees with us, as it required deep markdowns to entice the consumer to buy the product."

As Abercrombie & Fitch continues to focus on its international expansion, the teen retailer also said it will shutter 60 U.S. stores.

During the quarter, Abercrombie & Fitch earned $19.5 million, or 22 cents a share, compared with a loss of $26.7 million, or 9 cents, in the year-ago period. Analysts forecast a smaller profit of 16 cents a share.

Sales for Abercrombie jumped 17% to $745.8 million, better than the $727.7 million Wall Street predicted. Same-store sales grew 5%.

Gross margins were hit by a 15% drop in average ticket prices. Inventory levels remain high, up 41% from last year, significantly more than analysts' estimates. This buildup will most likely result in more markdowns.

"Despite our belief that previous inventory levels were too light and ultimately held back sales, we believe the current inventory buildup may prove too high given the consumer weakness evident in today's economy," Jaffe wrote.

Abercrombie & Fitch also projects lower capital spending for the year, down to $200 million from prior outlook in the range of $200 million to $225 million.

Hot Topic

Hot Topic ( HOTT) doubled its loss in the second quarter, slightly missing estimates.

During the quarter, the teen retailer lost $6.3 million, or 14 cents a share, compared with a loss of $3.2 million, or 7 cents, in the year-ago period.

Hot Topic's sales dropped 5% to $150 million from $157.8 million, while same-store sales sank 6.4%.

Analysts were looking for a loss of 13 cents for Hot Topic on revenue of $150.4 million.

"Despite favorable fashion trends such as '80s flashback, the emergence of Victorian/Goth and Grunge styles, Hot Topic has failed to attract the female customer," Needham analyst Christine Chen wrote in a note.

Looking ahead, Hot Topic expects third-quarter earnings in the range of 5 cents to 8 cents a share, significantly below Wall Street's forecast of 11 cents a share.

The lack of Twilight saga merchandise should also continue to hurt the company, and as a result Chen said to remain on the sidelines. She expects negative same-store sales trends will continue.


Denim retailer Buckle ( BKE) reported lower-than-expected second-quarter earnings, as sales slowed and higher costs weighed on its bottom line.

During the quarter, the Kearney, Neb.-based retailer earned $20.7 million, or 44 cents a share, a 17% drop from $25 million, or 54 cents, in the year-ago period.

Buckle's revenue slipped 2% to $188.6 million, while same-store sales tumbled 7.3%.

Analysts were called for a profit of 49 cents on revenue of $192.4 million.

Buckle said costs during the quarter rose to $113.3 million from $110.6 million a year ago.


Skate and snowboarding inspired retailer Zumiez ( ZUMZ) swung back to the black in the second quarter, but issued guidance that fell at the low-end of Wall Street's forecast.

Zumiez predicts third-quarter earnings between 21 cents and 24 cents a share, while analysts are looking for a profit of 24 cents.

This outlook is overshadowing what was a solid second-quarter. During the quarter Zumiez earned $114,000, or break-even per share, compared with a loss of $3.1 million, or 10 cents, last year. Excluding one-time items the company actually earned 2 cents a share, better than the loss of a penny analysts expected.

Sales rose 15% to $97.7 million from $85.2 million, while same-store sales spiked 9.3%.

"We believe Zumiez is a standout amongst other retailers as a result of their quality customer service, coupled with its unique and exclusive product offering," analyst Jennifer Black, of the firm bearing her name, wrote in a note. "We believe the company is well positioned to gain market share over the longer-term and although it has had a nice run, we would add to positions opportunistically."

Wet Seal

Wet Seal ( WTSLA) saw its second-quarter profit slashed by nearly half due to a "competitive promotional environment."

As a result of deep discounts within the sector, the teen retailer is forecasting third-quarter earnings below estimates, calling for a profit in the range of a penny to 3 cents a share on revenue of $139 million to $144 million. This compares with Wall Street's outlook of 5 cents a share on revenue of $148.4 million.

"While we believe in management's expansion plan and that its discipline and fast-fashion model will drive superior results, it's hard to determine when the suicidal tendencies of its competitors will end," Beder wrote. "As such, we have assumed the insanity will continue into fiscal 2012 and have cut out expectations."

During the second quarter, Wet Seal earned $1.6 million, or 2 cents a share, compared with $3.1 million, or 3 cents, in the year-ago period.

Sales dropped 3.5% to $131.5 million from $136.4 million, while same-store sales declined 4.3%.

Analysts were forecasting a profit of 2 cents a share on revenue of $133.6 million.

Despite this dreary outlook, Roth Capital Partners analyst Elizabeth Pierce still thinks Wet Seal stock is a buy. "Wet Seal remains a compelling growth story due to several top and bottom line growth opportunities, including merchandise improvements, new store openings, new concepts, online and further productivity improvements stemming from markdown and size optimization software," she wrote in a note.

-- Reported by Jeanine Poggi in New York.

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