August 24 - American Eagle Outfitters Inc's quarterly profit missed market estimates and the teen clothes retailer forecast third-quarter earnings largely below expectations as rising raw material costs pressure margins.

American Eagle Outfitters

American Eagle's shares fell 10 percent to their lowest in over two years on Wednesday morning, as the company's weak quarterly profit and soft margin outlook worried investors.

Chief Executive Jim O'Donnell, who is slated to retire soon, said the "back-to-school season (is) off to an encouraging start."

But there appear to be few positives in the key selling season as the company promises more promotions, amid increased pressure on margins.

The company forecast third-quarter earnings 22-27 cents a share.

Analysts, on average, were expecting the company to earn 26 cents a share, as per Thomson Reuters I/B/E/S.

American Eagle has been losing market share to peers like Abercrombie & Fitch.

Abercrombie, which has outperformed the teen apparel segment in the recent past, has upped the ante in a highly competitive teen apparel market by advertising attractive discounts for back-to-school shoppers.

Pittsburgh-based American Eagle, already struggling with high costs of raw materials, is likely to find it much more difficult to guard margins if it takes to heavy promotions.

"American Eagle is competing in an over-stored, over-inventoried teen space," Jennifer Davis, an analyst with Lazard Capital, said.

The analyst reckons American Eagle will lose share to Abercrombie.

"It is stuck in the middle of Abercrombie and Aeropostale for basics, and can't compete with Forever 21 on fashion."

Inventory rose by $121 million in the second quarter, while margins slipped to 34.3 percent from 36.8 percent last year.

"We expect markdown pressure in the second-half," analyst Davis, who has a "sell" rating on the company's stocks, said.

For the second quarter, American Eagle earned $19.7 million from continuing operations, or 10 cents a share, while analysts were expecting earnings of 11 cents.

Sales rose 4 percent to $675.7 million, beating estimates.

American Eagle shares were down 8 percent on Wednesday morning, making it the second biggest loser on the New York Stock Exchange. They touched a low of $10.45 earlier in the session.

(Reporting by Nivedita Bhattacharjee in Bangalore; Editing by Viraj Nair)