American Eagle Outfitters (NYSE:AEO) watched its stock sink in Thursday premarket trading, and the reason is a classic case of a headline number that looks great until you read the fine print. The apparel retailer beat Wall Street's earnings and revenue expectations for the second quarter, but a hefty tariff refund did a lot of the heavy lifting.

The Earnings Beat, By the Numbers

American Eagle reported earnings of 79 cents per share, well above the 21-cent consensus estimate. Quarterly revenue rose 8% year over year to $1.38 billion, slightly topping the $1.37 billion analyst estimate. Comparable sales increased 6%, reaching the high end of the company's expectations.

So far, so good. But here's where it gets interesting. The company received $196 million in International Emergency Economic Powers Act tariff refunds, including interest, during the quarter. That's not a small number, and it flowed straight into the gross margin line.

The Margin Story Behind the Headline

American Eagle's gross margin expanded 980 basis points, which sounds spectacular. But a $179 million net tariff refund benefit contributed 1,300 basis points of that expansion. Strip that out, and the picture changes dramatically.

Merchandise margins actually fell 330 basis points, as higher markdowns at the American Eagle brand offset improvement at Aerie. The retailer also ended the quarter with inventory costs up 14%, which adds to concerns about further promotional pressure down the road.

Gross profit jumped 34% to $672 million. Operating income reached $211 million, including about $161 million in net tariff refund benefits. American Eagle ended the quarter with about $148 million in cash and investments, and total liquidity stood at $783 million, including its revolving credit facility.

Aerie Keeps Carrying the Team

Aerie and Offline remained the key growth drivers. Revenue jumped 25% to $536 million, while comparable sales increased 19%. Growth was broad-based across channels and categories, including apparel, intimates and activewear. Aerie also continued to expand its customer base, while its Advocate program nearly doubled in size during the quarter.

American Eagle revenue increased 1%, while comparable sales declined 1%. Still, that marked an improvement from the first quarter. AE Men's posted its fourth straight quarter of positive comparable sales, supported by strength across bottoms categories. Women's performance benefited from outfitting, cargo and fashion-bottoms trends, as well as new denim fits.

The company plans to shift more marketing spending toward conversion-focused initiatives after four quarters of investment in brand awareness. It will also remain focused on product, inventory management and margin improvement.

What's Next for American Eagle

For the third quarter, American Eagle expects comparable sales to rise in the mid-to-high single digits. The company expects Aerie and Offline comparable sales to increase in the high-teens to 20% range. American Eagle comparable sales are expected to be roughly flat.

For fiscal 2026, the company expects comparable sales growth in the mid-single digits. It also expects gross margin to increase year over year.

AEO Price Action: American Eagle Outfitters shares were down 14.45% at $14.45 during premarket trading on Thursday. The stock is trading near its 52-week low of $14.05, according to market data.