American Eagle Q2 Earnings Boosted by Tariff Refunds

American Eagle Outfitters, Inc. (AEO) reported second-quarter fiscal 2026 earnings of 79 cents per share, a substantial increase from 45 cents in the prior year period. The result significantly exceeded the Zacks Consensus Estimate of 21 cents. Net revenues rose 8% year over year to $1.38 billion, with comparable sales increasing 6%. According to GN markets/earnings (en-US), this performance was heavily influenced by nonrecurring benefits from IEEPA tariff refunds, which boosted both gross and operating margins despite softness in the core American Eagle brand.

Profitability metrics showed sharp improvements, though the underlying drivers were mixed. Gross profit increased 34% to $672 million, resulting in a gross margin expansion of 980 basis points to 48.7%. This expansion included a $179 million net tariff-refund benefit, contributing 1,300 basis points to the margin increase. Excluding this benefit, merchandise margin actually deleveraged by 330 basis points as markdowns at the American Eagle brand outpaced improvements at Aerie. Operating income doubled to $211 million from $103 million a year ago, expanding operating margin to 15.3% from 8%, largely due to a $161 million net operating income benefit from the same tariff refunds.

Aerie Drives Growth Amid Core Weakness

The Aerie brand emerged as the primary growth engine, with revenues increasing 25% to $536 million and comparable sales rising 19%. This growth was broad-based across stores, digital channels, and categories including apparel, intimates, and activewear. In contrast, comparable sales for the core American Eagle brand declined by 1%. Management attributes the Aerie strength to expanding customer engagement and brand awareness, noting that its Advocate program nearly doubled during the quarter. The company is leveraging digital marketing and in-store events to further expand Aerie's customer base, capitalizing on its lower current brand awareness compared to the parent brand.

Inventory levels increased 14% year over year at cost, with unit counts up 9%, partly reflecting incremental tariffs. AEO plans to continue rebalancing inventory between brands and categories for the remainder of the year. SG&A expenses rose 19% to $408 million, driven by planned advertising investments and tariff-refund-related incentive compensation. Despite these costs, the company is investing in digital capabilities, supply-chain initiatives, and marketing to strengthen its brands and improve long-term operating efficiency.

Fiscal 2026 Outlook Projects Margin Expansion

Management expects fiscal 2026 comparable sales to increase in the mid-single digits, with gross margin projected to expand year over year. Operating income is expected to fall in the range of $540 million to $550 million, inclusive of the net tariff-refund benefit. For the third quarter specifically, comparable sales are projected to increase in the mid-to-high single digits, while operating income is targeted at $110 million to $115 million. Third-quarter gross margin is expected to be roughly flat year over year, and SG&A is projected to rise in the high-single digits.

Brand-level expectations for the third quarter show continued divergence. Aerie and OFFLINE are expected to remain the strongest contributors, with comparable sales projected in the high-teens to 20% range. Conversely, American Eagle comparable sales are expected to be approximately flat. The company’s strategy focuses on sustaining Aerie’s momentum while stabilizing the core brand through inventory management and targeted marketing efforts.