American Eagle Outfitters, Inc. — Form 10-Q Summary
Reporting period: 13 weeks ended May 1, 2021. The filing is for the first quarter of Fiscal 2021, although the request metadata identifies “2020 Q1.” Fiscal 2021 ends January 29, 2022. Comparisons are primarily with the 13 weeks ended May 2, 2020, which were materially affected by COVID-19 store closures.
Business Context
American Eagle Outfitters operates the American Eagle, Aerie, OFFLINE, Todd Snyder, and Unsubscribed brands through company-owned and licensed stores and digital channels. The company had 1,074 company-operated stores and 236 international licensed or franchised stores at May 1, 2021. Aerie and American Eagle are the two reportable segments.
Key Financial Metrics
| Metric | Q1 Fiscal 2021 | Q1 Fiscal 2020 |
|---|---|---|
| Net revenue | $1,034.6 million | $551.7 million |
| Gross profit | $436.2 million | $28.3 million |
| Gross margin | 42.2% | 5.1% |
| Operating income (loss) | $133.4 million | $(358.2) million |
| Operating margin | 12.9% | (64.9)% |
| Net income (loss) | $95.5 million | $(257.2) million |
| Net margin | 9.2% | (46.6)% |
| Diluted earnings (loss) per share | $0.46 | $(1.54) |
| Cash flow from operations | $0.4 million | $(209.9) million |
| Capital expenditures | $36.8 million | $33.9 million |
- Revenue increased 88%, or $482.9 million. American Eagle revenue was $727.7 million and Aerie revenue was $297.5 million.
- Aerie revenue increased 89%, while Aerie operating income increased 747% compared with the prior-year quarter. American Eagle revenue increased modestly and operating income increased 39%, based on management’s comparison with the first quarter of Fiscal 2019.
- Digital sales represented 40% of revenue and increased 57% year over year. Traffic increased 51% for American Eagle and 83% for Aerie; average unit retail price increased 23% and 30%, respectively.
- Gross margin benefited from higher full-price sales, lower promotions, inventory optimization, and lower rent expense, partly offset by higher delivery, distribution, and incentive compensation costs.
- SG&A increased 41% to $264.5 million, but declined to 25.6% of revenue from 34.1%.
- No impairment or restructuring charges were recorded in Q1 Fiscal 2021. The prior-year quarter included $155.6 million of such charges, including $153.6 million of asset impairments and $2.0 million of severance costs.
Financial Position, Debt, and Liquidity
| Balance-sheet metric | May 1, 2021 | May 2, 2020 |
|---|---|---|
| Cash and cash equivalents | $716.7 million | $855.8 million |
| Short-term investments | $75.0 million | $30.0 million |
| Cash and short-term investments | $791.7 million | $885.7 million |
| Inventory | $466.7 million | $421.7 million |
| Working capital | $751.3 million | $896.7 million |
| Current ratio | 2.01 | 2.35 |
| Long-term debt, net | $329.7 million | $643.0 million |
- The company had $415.0 million principal amount of 3.75% convertible senior notes due 2025, recorded at $329.7 million net of discount. Interest expense was $8.5 million, including $4.4 million of non-cash discount amortization.
- No borrowings were outstanding under the $400 million asset-based revolving credit facility; $7.9 million of standby letters of credit were outstanding. The facility expires January 30, 2024, and the company was in compliance with its terms.
- Operating cash flow was approximately breakeven because inventory increased $59.8 million and cash payments reduced operating lease liabilities and accrued compensation.
- Investing cash outflows were $112.2 million, primarily from $75.0 million of short-term investment purchases and $36.8 million of capital expenditures.
- Financing cash outflows were $22.1 million, including $22.9 million of dividends and $10.9 million of employee-share-tax repurchases, partly offset by $12.1 million of stock-option exercise proceeds.
Material Changes Versus the Prior Comparable Period
- Results improved sharply from the prior-year quarter because most stores had reopened, digital demand remained strong, and the prior-year period included extensive COVID-19 closures, markdowns, inventory provisions, and impairment charges.
- The company shifted from a $358.2 million operating loss to $133.4 million of operating income and from a $257.2 million net loss to $95.5 million of net income.
- Interest expense increased substantially because of the convertible notes issued in April 2020 and lower interest income.
- Cash declined by $139.1 million from January 30, 2021, primarily because of investing and operating working-capital requirements.
- The company declared and paid a quarterly dividend of $0.1375 per share. Public share repurchases remained suspended in practice during the quarter; approximately 0.4 million shares were repurchased from employees for tax withholding upon equity vesting.
Outlook, Risks, and Unusual Items
- Management expects Fiscal 2021 capital expenditures of $250 million to $275 million and expects to fund them through cash holdings and operating cash flow.
- Planned Fiscal 2021 activity includes approximately 20 to 25 American Eagle store openings, approximately 60 Aerie locations, more than 30 OFFLINE stores, 35 to 45 store remodels, and potential closure of approximately 60 to 80 American Eagle and five to 10 Aerie stores at lease expiration.
- Management believes cash flow, current cash holdings, and available liquidity will fund expected capital expenditures, dividends, and working-capital requirements for the next 12 months.
- COVID-19 continued to reduce store traffic and create risks of renewed store, distribution-center, or corporate-facility closures, supply-chain disruption, shipping delays, increased freight costs, and weaker discretionary spending.
- Additional risks include changing consumer preferences, competitive pricing pressure, markdowns and inventory obsolescence, foreign exchange, tariffs and raw-material costs, lease obligations, impairment charges, cybersecurity, legal proceedings, and international operations.
- The company may record additional impairment or restructuring charges if pandemic-related or other operating conditions deteriorate. No such charges were recorded in the current quarter.
- Future dividend payments remain subject to Board discretion and may be deferred based on operating performance, liquidity, the pandemic, and macroeconomic conditions.
- The company is evaluating ASU 2020-06 on convertible debt accounting; the filing states that the eventual impact may be material.
- Management stated that no material changes occurred in previously disclosed risk factors, no off-balance-sheet arrangements existed, and disclosure controls were effective.
Facts Investors Should Verify
- Whether the strong revenue and margin performance persists after the unusually weak COVID-19 comparison period.
- The sustainability of Aerie growth and the relative contribution of digital sales, pricing, traffic, and full-price selling.
- Actual operating cash generation as inventory and working-capital needs normalize.
- Progress against the planned store openings, remodels, closures, and $250 million to $275 million capital-expenditure range.
- Potential dilution from the convertible notes, which represented approximately 48.0 million convertible shares at a conversion price of approximately $8.65 per share.
- Whether future COVID-19 restrictions, supply-chain issues, tariffs, freight costs, or consumer-spending weakness lead to additional markdowns, impairments, or restructuring charges.
- The Board’s continued ability and willingness to pay the stated quarterly dividend.