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Teen clothing retailer American Eagle Outfitters has forecast a lacklustre second quarter. (Carolyn Chappro/Associated Press/Carolyn Chappro/Associated Press)
Teen clothing retailer American Eagle Outfitters has forecast a lacklustre second quarter. (Carolyn Chappro/Associated Press/Carolyn Chappro/Associated Press)

Apparel companies squeezed by higher costs Add to ...

High raw material costs continued to hit clothing companies, leading Polo Ralph Lauren Corp. to forecast weak margins for the year, sending its shares down as much as 9 per cent.

Rising costs of raw materials like cotton, used extensively for making clothes like jeans and T-shirts, have dented margins at most apparel companies, including at American Eagle Outfitters Inc., which also reported results earlier in the day.

The disaster in Japan took a toll on Polo Ralph Lauren's results, as it shipped fewer goods to the Asian country and the company, whose brands include Polo, Club Monaco and Chaps, said it was banking on Chinese customers to boost sales.

"The Chinese are poised to become the world's largest consumers of luxury goods, and they are already driving a substantial portion of the industry growth outside of China as they travel around the world," Roger Farah, chief operating officer, said on a call with analysts.

Chinese consumers are expected to fuel global luxury spending and account for about 25 per cent in worldwide sales within 10 to 15 years, spending much of that abroad.

On Tuesday, Saks Inc. chief executive officer Steve Sadove said his chain of department stores is at a disadvantage compared with its European counterparts as tough visa rules were keeping international tourists at bay.

At Polo Ralph Lauren, fourth-quarter profit for the period ended April 2 fell to $73.2-million, or 74 cents a share, from $114.1-million, or $1.13 a share last year.

The clothing maker said higher raw material costs and business interruptions in Japan would hurt full-year margins.

"Investors are viewing the fourth-quarter earnings shortfall and cautious margin commentary as indicative of a shift in the mid-term fundamentals of the business," Wall Street Strategies analyst Brian Sozzi said in a note. "Hard to dispute that notion."

The expected margin hit offset strong sales expectations - Polo expects revenue to rise at a mid-20-per-cent range in the first quarter.

Teen clothes retailer American Eagle Outfitters, which has seen sales falter as it loses ground to rivals such as Abercrombie & Fitch and Zumiez, said sales trends have improved from the first quarter as it works on its merchandise.

However, the company saw sales fall 6 per cent in the first quarter and forecast a lacklustre second quarter.

Teen retailers have often been criticized for the sameness of their products, which makes it difficult to retain a loyal customer base. Most of them resort to discounting to get more traffic, which in turn eats into margins.

With stronger rival Abercrombie deciding to discount to get more sales, rivals Aeropostale Inc. and American Eagle have struggled to win over shoppers.

Nomura analyst Paul Lejuez said that with product costs up and rival Aeropostale discounting heavily to clear out merchandise, American Eagle will not likely be able to raise prices as hoped, pressuring margins and profit.

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