American Eagle Outfitters Inc.'s (AEO) fiscal second-quarter earnings fell 52% on weak sales and margins, and the retailer offered a disappointing forecast as it heads into the thick of the back-to-school season.

American Eagle, like many other teen and young adult retailers, is trying to strike a balance between offering low cost merchandise and keeping it appealing for trend-following teens who have been made budget-conscious by the recession.

While the company's big push in denim - which is shaping up as a key back-to-school item this year - appears to be doing well, American Eagle executives say other areas, like knit tops and handbags, are slow movers.

The company wants to focus on driving sales as it moves out of a second quarter in which many retailers relied heavily on cost cuts to improve bottom lines. "We are optimistic about delivering steady improvements throughout our entire business and across each brand," said Chief Executive James O'Donnell in a conference call.

Still, American Eagle appears off to a soft start. Guidance for the current quarter is below Wall Street's expectations and comparable-store sales for the period aren't expected to pick up much from the second quarter's 10% drop.

Gross margin remains a problem, with American Eagle seeing little, if any, improvement in the third quarter because of big markdowns and categories that aren't doing well. Gross margin fell to 37.8% from 42% in the second quarter. Better gross margin is more likely to occur in the fourth quarter, O'Donnell indicated.

"Efforts are underway to increase newness and merchandise flows," said Marie Driscoll, retail analyst at Standard & Poor's Equity Research. "But we see continued struggles" given the economy and the promotional atmosphere that still permeates retailing.

American Eagle has been making some inroads with its relatively low prices against competitors like Abercrombie & Fitch Co. (ANF). But American Eagle hasn't escaped the overall struggles by retailers to elevate store traffic as the recession keeps customers out of shopping malls.

The company gave a third-quarter operating earnings estimate of 17 cents to 20 cents a share, while analysts were looking for 24 cents a share.

The outlook followed a second quarter in which American Eagle posted a profit of $28.6 million, or 14 cents a share, compared with $59.8 million, or 29 cents a share, a year earlier. The results were in line with the company's earnings view earlier this month, and Wall Street's expectations.

Earlier this month, American Eagle said net sales fell 4.5% to $657.6 million.

Inventory fell 5% on a per-square-foot basis, excluding the direct-to-consumer business. A big area of growth, the Internet, saw sales jump 17% on increased traffic.

American Eagle shares were recently down 2% to $14.29.

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@wsj.com

(Joan E. Solsman contributed to this article.)