American Eagle shares dropped 15% on Thursday after the company issued a grim forecast for the current quarter, overshadowing a high-profile jeans campaign featuring actress Sydney Sweeney.
The retailer reported second-quarter revenue of $1.4 billion, an increase, but maintained its annual same-store sales forecast and projected flat gross margins for the third quarter. This outlook suggests that anticipated discounts on excess denim inventory and softer sales for its namesake brand are expected to impact profits.
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Growth in the company has largely been driven by its Aerie intimates and loungewear brand and its activewear line, Offline. Earlier this year, American Eagle extended its partnership with Sweeney, known for her roles in "Euphoria" and "White Lotus," for a denim shorts campaign aimed at boosting sales. The initial campaign, launched in 2025, marked a departure from the brand's previous more conservative "body-positive" advertising.
Despite some controversy and unsubstantiated online criticism of the initial campaign, it garnered attention and contributed to sales, attracting nearly a million new customers. Chief Executive Jay Schottenstein opted to continue with the provocative ad strategy as the "Sydney Jean" sold out within a week.
However, American Eagle has struggled to keep pace with rivals such as Abercrombie & Fitch and Gap, both of which have recently raised their annual profit forecasts. Analyst Rick Patel of Raymond James noted that while Aerie continues to see steady demand, it is insufficient to counteract the weakness in the American Eagle brand, particularly as consumers move away from the brand's signature jeans.
Company executives acknowledged difficulties in clearing out older inventory, especially with the fluctuating trends in denim styles. American Eagle's inventory costs increased by 14% in the second quarter.
Analyst Tom Nikic of Needham described the company as "a tale of two brands," with Aerie performing strongly while the larger American Eagle brand remains inconsistent. Nikic anticipates a more challenging retail environment in the latter half of the year due to economic volatility.
Broader retail sector demand has been inconsistent, with inflation-conscious consumers reducing spending on non-essential items. American Eagle shares have fallen 45% year-to-date.
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Prior to the Sweeney campaign, American Eagle had already begun shifting towards more daring styles to regain customers, a move previously reported. A decade ago, its Aerie brand successfully surpassed Victoria's Secret in popularity among millennial shoppers who favored its diverse and relatable advertising. However, that momentum eventually slowed.
Retail analyst Gabriella Santaniello suggested that the brand may have been hindered by its prior emphasis on "body positivity" to the point of being hesitant to embrace more overtly "sexy" marketing. Following a political shift, American Eagle began introducing items like string bikinis and "cheeky bottoms" in stores, previously exclusive to online sales, and adopted edgier looks for its models, featuring more fitted cropped camisoles instead of loose t-shirts.