Retail beats, investors retreat

You probably know American Eagle Outfitters from the mall, back-to-school shopping, or Sydney Sweeney and her famously “great jeans.”

Yesterday, the retailer reported earnings of $0.79 a share, way above the $0.22 Wall Street expected, while revenue rose 8% year-over-year to a record high. Operating profit more than doubled to $211 million from $103 million, and American Eagle raised its full-year operating income target by around $145 million at the midpoint.

Those headline numbers looked great—so why did the stock tumble 14.03% this afternoon?

A big reason behind the selloff is that tariffs are masking a lot of weakness below the surface. American Eagle received a $196 million tariff refund, which added $161 million to operating profit after related compensation expenses. In other words, roughly 76% of the company’s operating profit came from that one-time benefit.

Margins tell the same story: American Eagle’s gross margin rose nearly 10 percentage points, but strip out the tariff boost and the company’s underlying merchandise margin actually fell 3.3 points.

The underlying numbers help explain AEO’s softening core business. Comparable sales rose 6%, short of Wall Street’s 6.7% estimate, as a 1% decline in sales at the namesake American Eagle brand offset a 19% jump at Aerie. Executives said they misjudged fashion trends, leaving the company stuck with older inventory that had to be marked down.

Macy’s mixed message

Like American Eagle, fellow retailer Macy’s also topped Wall Street’s sales and earnings estimates. And, like American Eagle, its stock still fell 4.77% today.

The difference is that Macy’s results held up better after the tariff boost. The company received $116 million in refunds, but still beat Q2 earnings estimates even without them.

Macy’s is putting $96 million of that windfall toward longer-term improvements rather than temporary price cuts, including closing weaker stores, upgrading stronger ones, and leaning further into premium merchandise. There are signs that the turnaround is gaining traction: Bloomingdale’s comparable sales rose 11.3% year-over-year, while Bluemercury revenue climbed 6.2%.

But investors were unimpressed with the outlook: Macy’s expects an adjusted loss of $0.19 to $0.23 per share in the third quarter, far worse than the $0.06 loss Wall Street expected, as spending on the turnaround weighs on near-term profits.

Zoom out: For all the mixed signals coming from retailers, the consumer is still “kicking along,” according to Bank of America CEO Brian Moynihan. He said the bank’s data shows that spending rose about 4% in August from a year ago, following 5% growth last quarter, even as gas prices climbed.

For retailers, a healthy consumer comes with an uncomfortable downside: fewer places to hide when your own numbers disappoint. Sometimes, the jeans just aren’t so great.—SY