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Teen angst: Outlook cut sparks widespread concern

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Wall Street braced for a possible ricochet effect on retailers after American Eagle Outfitters slashed its guidance and teen retail stocks plunged.

"You have to think the magnitude of the American Eagle miss, which was larger than even we expected, could be a canary in the teen coal mine," wrote BMO analysts in a note to investors.

Of particular concern to Lazard Capital Markets analysts is the decline in overall mall traffic, which the retailer said led to more promotions and markdowns to get rid of inventory. This trend of fewer shoppers at the mall could hit retailers more broadly, analysts said.

Lazard analysts speculated that they "believe the second-quarter sales miss and margin pressure is not unique to American Eagle."

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"We believe sales slowed meaningfully in July (after a weaker-than-anticipated June) for most apparel and accessories retailers," Lazard said.

Challenging environment: CEO

Citing weaker-than expected sales and margins, American Eagle said on Monday that its total net revenue and same-store sales both dropped. In a release, American Eagle CEO Robert Hanson said the retail environment remains challenging.

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"We are not at all happy with our second-quarter results, which were impacted primarily by a disappointing performance of our American Eagle women's assortment and weak traffic," he added. "Results were exacerbated by a highly promotional retail environment, which intensified over the course of July. Within this context, we increased the depth and breadth of markdowns; these actions have enabled us to achieve a clean inventory position moving into the third quarter."

On Tuesday, American Eagle shares plunged 16 percent while the stocks of competitors Abercrombie & Fitch and Aeropostale both fell 6 percent. Urban Outfitters shares were also down nearly 5 percent.

Retail 'red flag'

Brian Sozzi, chief equities strategist at Belus Capital Advisors, described American Eagle's warning as a "cause for concern" amid the market's dominant bullish theme.

"When something doesn't quite fit well with a dominant theme in the stock market, it's in your best interest to throw a mental red flag onto the field," he said.

Sozzi added that the negative sales growth trends teen retailers have compiled is of importance.

"This tells me all is not fine and dandy with the U.S. consumer and is a source of worry entering back-to-school and yes, the holiday shopping season," he added.

—By CNBC.com's Katie Little. Follow her on Twitter @KatieLittle.

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