NEW YORK ( TheStreet) -- Teen retailers are among the most volatile stocks in the sector following same-store sales results.

While there was some bright spots in the space, overall teen retailers remain a risky investment heading into the holiday season.


Aeropostale ( ARO) significantly boosted its third-quarter guidance, sending shares surging more than 18%, but this could just be a case of under-promise and over-deliver.

Sales and margins came in better than management's very conservative guidance, leading the company to raise its profit outlook to 27 cents to 28 cents per share for the October-ended quarter from a prior projection of 9 to 15 cents.

But while gross margins for the quarter were better than management originally anticipated. Stifel Nicolaus analyst Richard Jaffe expects margins will likely decrease 1,000 basis points from last year due to additional markdowns, which were necessary to clear merchandise.

"We believe that the teens' interest in their 'uniform' -- the hoodies, graphic tee and jeans -- has waned," Jaffe wrote in a note. "Fast fashion for girls and authentic lifestyle and extreme sport brands for guys have taken a more important role in the teen's wardrobe."

Aeropostale, which was one of the biggest winners amid the recession as the low-cost leader, is now being challenged.

"Aeropostale and its competitors are fighting for market share, with price as the primary weapon. However, the more expensively prices competitors have an advantage; greater room to discount. Aeropostale, as the low-cost provider, must cut prices to a margin-eroding level, just to keep up," Jaffe wrote.

American Eagle Outfitters

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American Eagle Outfitters ( AEO) shares saw a nice boost this morning after the company raised its third-quarter guidance. But this doesn't make up for what still was a lackluster quarter.

"While not the disaster the Street had foreseen, we believe the results are nothing for investors to be excited about and we still remain negative on the American Eagle story on a number of levels," Brean Murray analyst Eric Beder wrote in a note.

American Eagle reported an 11% increase in third-quarter revenue to $832 million, topping analysts' estimates of $780.2 million.

As a result, management raised the low-end of its guidance, saying it now expects third-quarter earnings of 26 to 27 cents a share vs. a previous view of 22 to 27 cents.

But inventory levels remain the biggest concern among analysts.

"We believe inventory levels remain bloated and will be a drag on fourth-quarter results," Beder wrote. "Frankly, we believe the company has pushed back the reckoning on bloated inventory levels until year-end. We would not be surprised if fourth-quarter guidance is conservative.

According to Janney Capital Markets analyst Adrienne Tennant, American Eagle ended the second quarter with inventories up 30% on a cost-per-square-foot basis.

"We are concerned over such high levels of inventory compared to sales growth, as sales increased 4% in the second quarter," Tennant wrote in a note. "We expect inventories to increase higher than the company's reported third-quarter sales growth of 11% as the company has planned for inventories at the end of the third quarter to be similar to the second quarter end. Although we believe the company is taking the right steps to improve merchandise, the inventory levels cause concern over potential merchandise margin pressure."

"Even factoring in cash of approximately $2.60 per share, we see no reason why investors would pay a premium for a low growth, margin and competitively challenged entity in the midst of a potential management change," Brean Murray's Beder wrote.

But the possibility of American Eagle appointing a new chief executive by the end of the year remains one potential catalyst for the stock.

"The search for a new CEO has been ongoing for almost a year. We believe American Eagle can find a competent replacement in the near future," Beder wrote. "As such, we can see the turnaround 'hype' on the company reach even higher levels. We do not want to be sellers into what should be a major American Eagle 'bull' event. That said, we see very limited fundamental positives at the company and believe operating results will remain weak in the near term."

Abercrombie & Fitch

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Abercrombie & Fitch ( ANF) pulled a switch in the third quarter, with trends improving domestically and slowing internationally.

While same-store sales for the quarter grew 7%, beating analysts' estimates of a 6.3% increase, the teen retailers provided a bleak picture of its overseas operations.

In Europe, same-store sales at flagship stores declined for first time and Japan and Canada continued to report negative comparable sales.

"Since the fall of 2010, our buy thesis has been predicated on the stronger comp and margin growth internationally, and it would appear that the basis of the thesis of international growth has been compromised, at least in the near term," Janney Capital's Tennant wrote in a note. "Today's comments about Japan, Canada, and a weakening European business, have caused us to rethink the strength and consistency of the international strategy. With five more new flagships opening in Europe over the next six months, and a weakening European macro environment, we choose to move to the sidelines until it is proven that the international growth strategy is as robust and promising as we had earlier believed."

Tennant downgraded her rating on Abercrombie from neutral to buy and removed it from Janney's "Best Idea" list.

As expected, Abercrombie & Fitch did not provide specific third-quarter guidance.

Hot Topic

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Hot Topic ( HOTT) revised its third-quarter forecast as its sales for the latest three-month period slowed.

During the quarter, comparable sales dropped 1.6%. The company now expects earnings at the low-end of its prior forecast of 7 to 9 cents per share. Wall Street is looking for a profit of 9 cents.

Hot Topic also said it foresees fourth-quarter earnings between 16 and 20 cents a share vs. the consensus estimate of 20 cents a share.

"We believe the macro backdrop and promotional environment is more challenging than we had expected at the beginning of the quarter," Janney Capital's Tennant wrote. "We also believe that the inventory is still a combination of both the new strategy and the old strategy (which targeted a much younger audience). With many new members of senior management on board in the last six months, we believe the full impact of the new team's merchandising and operational execution will be felt in spring 2012."

Tennant still sees Hot Topic as a small-cap turnaround play but just not for the remainder of 2011.

The Wet Seal

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Wet Seal ( WTSLA) cut its third-quarter outlook after October same-store sales came in significantly weaker than expectations.

For the month, the teen retailer reported a 9.7% plunge in comparable sales, compared with Wall Street's expectations of a 1% decline. Both divisions -- namesake stores and Arden B -- posted declines.

Wet Seal refrained from selling Halloween costumes this year in order to keep a "cohesive fashion assortment better aligned with our brand direction," CEO Susan McGalla said in a statement. But Halloween merchandise made up 6% of its sales last October and drove traffic to its stores.

Instead of offering Halloween merchandise, the company expanded its fall sportswear selection, which failed to meet expectations.

The company now expects third-quarter earnings of 4 cents per share from its previous forecast of 5 to 6 cents. Wall Street is calling for a profit of 5 cents.

Shares of Wet Seal tanked 16.4% to $3.57 in afternoon trading.

- Reported by Jeanine Poggi in New York.

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