American Eagle Outfitters, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 29, 2022, compared with October 30, 2021, and balance-sheet information as of October 29, 2022. Although the request metadata states “2021 Q3,” the filing itself is the third-quarter Fiscal 2022 Form 10-Q, filed November 23, 2022.
Business Context
American Eagle Outfitters operates the American Eagle, Aerie, Todd Snyder and Unsubscribed brands through more than 1,000 company-operated stores, digital channels and international licensed locations. The company reports two segments: American Eagle and Aerie. Quiet Platforms, including the acquired Quiet Logistics and AirTerra businesses, supports the company’s supply-chain strategy and serves third-party customers.
As of October 29, 2022, the company operated 1,179 consolidated stores and had 261 international licensed or franchise stores. Operations are seasonal, with significant revenue and operating income typically generated during the back-to-school and holiday periods.
Financial Performance
| Metric | 13 Weeks Ended October 29, 2022 | 13 Weeks Ended October 30, 2021 | 39 Weeks Ended October 29, 2022 | 39 Weeks Ended October 30, 2021 |
|---|---|---|---|---|
| Net revenue | $1.241 billion | $1.274 billion | $3.494 billion | $3.503 billion |
| Gross profit | $479.8 million | $564.5 million | $1.238 billion | $1.503 billion |
| Gross margin | 38.7% | 44.3% | 35.5% | 42.9% |
| Operating income | $117.5 million | $209.7 million | $173.5 million | $511.1 million |
| Net income | $81.3 million | $152.2 million | $70.5 million | $369.2 million |
| Diluted EPS | $0.42 | $0.74 | $0.36 | $1.78 |
- Third-quarter revenue declined 2.6%; year-to-date revenue declined 0.3%.
- Third-quarter gross profit declined 15%, while gross margin contracted 560 basis points. Management attributed the decline primarily to higher markdowns and product costs, with additional pressure from rent and warehousing costs.
- Year-to-date gross profit declined 18%, and gross margin decreased 740 basis points, principally because of higher markdowns to clear excess inventory and increased delivery, warehousing and rent costs.
- Third-quarter SG&A decreased 1% to $311.1 million, but increased to 25.1% of revenue from 24.6%. Year-to-date SG&A increased 5% to $917.7 million and represented 26.3% of revenue.
- Depreciation and amortization increased 25% in the quarter and 23% year to date, reflecting higher capital spending and the Quiet Logistics acquisition.
Segment Revenue
| Segment | Q3 2022 | Q3 2021 | Change | 39 Weeks 2022 | 39 Weeks 2021 |
|---|---|---|---|---|---|
| American Eagle | $837.6 million | $941.0 million | Down $103.4 million | $2.301 billion | $2.514 billion |
| Aerie | $349.7 million | $315.0 million | Up $34.7 million | $1.043 billion | $947.9 million |
| Corporate and Other | $53.3 million | $18.0 million | Up $35.3 million | $149.6 million | $41.3 million |
Cash Flow, Liquidity and Debt
- Cash used in operating activities was $86.7 million for the first 39 weeks of Fiscal 2022, compared with $133.7 million of operating cash flow in the prior-year period. The change was driven in part by inventory growth and reductions in accrued compensation and payables.
- Cash used in investing activities was $200.1 million, including $199.4 million of capital expenditures, compared with $148.8 million used in the prior-year period.
- Cash used in financing activities was $64.1 million. Major uses included $200.0 million of accelerated share repurchases, $136.1 million paid in the convertible-note exchange, and $64.8 million of dividends; these were partially offset by $343.0 million of revolving-credit borrowings.
- Cash and cash equivalents were $82.1 million at October 29, 2022, down from $740.7 million a year earlier and $434.8 million at January 29, 2022.
- Working capital was $591.7 million and the current ratio was 1.86 at October 29, 2022.
- Total long-term debt, net, was $411.9 million, consisting of $343.0 million drawn under the revolving credit facility and $68.9 million of net 2025 convertible notes. The credit facility provides up to $700 million, subject to borrowing-base limitations, and expires June 24, 2027. The company was in compliance with its credit agreement.
- The company had $7.9 million of outstanding standby letters of credit. The filing does not provide a clear amount of remaining borrowing availability after borrowing-base limitations.
Material Changes Versus the Prior Comparable Period
- Profitability deteriorated materially despite relatively stable year-to-date revenue, primarily because of excess inventory, higher markdowns, inflationary product costs and higher supply-chain and occupancy expenses.
- American Eagle revenue declined while Aerie revenue increased in both the quarter and year-to-date period.
- The company completed a June 2022 exchange of approximately $342.4 million principal amount of convertible notes for cash and approximately 34.7 million common shares. The transaction generated a $55.7 million pre-tax induced-conversion charge and contributed to total year-to-date debt-related charges of $60.1 million.
- The company adopted ASU 2020-06, reducing non-cash interest expense associated with the convertible notes and changing diluted EPS to the if-converted method.
- The company paid $200.0 million under an accelerated share-repurchase agreement and received 17.0 million shares at an average price of $11.75. Approximately 13.0 million shares remained authorized for repurchase at quarter-end.
- The quarterly cash dividend was temporarily suspended during the third quarter to increase financial flexibility.
- Capital expenditures increased to $199.4 million from $144.4 million, including investments in stores, information technology and Quiet Platforms.
Guidance, Outlook, Risks and Unusual Items
- Management described third-quarter demand as soft because of inflationary pressure and changes in consumer spending. The company expanded expense and capital-expenditure reductions and reset inventory plans for the second half of the year.
- Fiscal 2022 capital expenditures were expected to be approximately $250 million. Management stated that current cash holdings and available liquidity should fund expected capital expenditures and working-capital requirements for the next twelve months and beyond.
- Earlier Fiscal 2022 plans included approximately 10 to 20 American Eagle stores, approximately 40 Aerie locations, more than 40 OFFLINE stores, 15 to 30 remodels and potential closure of approximately 30 to 50 American Eagle stores at lease expiration. The filing does not provide a revised full-year store outlook.
- Key risks include inflation, weaker discretionary consumer spending, excess inventory and markdown exposure, supply-chain disruptions, freight and labor costs, COVID-19-related volatility, foreign-exchange movements, interest-rate increases, substantial lease obligations, cybersecurity and privacy risks, international sourcing and geopolitical events including the war in Ukraine.
- The company recorded no asset impairment charges in the quarter or year-to-date period and reported no material changes to the risk factors in its Fiscal 2021 Form 10-K.
- Management stated that pending legal matters are not expected to have a material adverse effect, although outcomes could change as additional facts become known.
Investor Verification Points
- Verify inventory aging, markdown reserves and the pace at which excess spring and summer inventory is cleared.
- Assess whether gross-margin pressure from markdowns, product costs, freight, rent and warehousing is temporary or structural.
- Reconcile the $82.1 million cash balance with $343.0 million of revolver borrowings, the $68.9 million net convertible-note balance and available borrowing capacity.
- Evaluate the effect of the dividend suspension, share repurchases and reduced cash generation on capital allocation and liquidity.
- Monitor the performance and integration costs of Quiet Platforms, including its ability to generate third-party revenue and operating efficiencies.
- Confirm the updated Fiscal 2022 revenue, margin, store-opening and capital-expenditure outlook, which is not clearly provided in the filing beyond the approximately $250 million capital-expenditure expectation.