American Eagle Outfitters, Inc. — Form 10-K Summary
Reporting period: Fiscal 2019, the 52-week year ended February 1, 2020, compared primarily with Fiscal 2018, the 52-week year ended February 2, 2019. The request metadata identifies “2018 Q4,” but the provided filing is the Fiscal 2019 annual report and includes the quarter ended February 1, 2020.
Business Context
American Eagle Outfitters is a multi-brand specialty apparel retailer operating American Eagle, Aerie, Tailgate and Todd Snyder brands. At year-end, the Company operated 1,095 company-owned stores and had 217 licensed locations in 24 countries. AEO Direct served customers in 81 countries. The Company reports one reportable segment, aggregating the American Eagle and Aerie operating segments.
Fiscal 2019 priorities included growing Aerie, strengthening American Eagle’s jeans and bottoms categories, expanding digital and omni-channel capabilities, pursuing disciplined international growth, and investing in profitable customer and technology initiatives.
Financial Performance and Key Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Total net revenue | $4.308 billion | $4.036 billion | Up 7% |
| Comparable sales | Up 3% | Up 8% | Decelerated |
| Gross profit | $1.522 billion | $1.488 billion | Up 2% |
| Gross margin | 35.3% | 36.9% | Down 160 basis points |
| Operating income | $233.3 million | $337.1 million | Down 31% |
| Operating margin | 5.4% | 8.4% | Down 300 basis points |
| Net income | $191.3 million | $261.9 million | Down 27% |
| Net margin | 4.4% | 6.5% | Down 210 basis points |
| Diluted EPS | $1.12 | $1.47 | Down 24% |
| Adjusted diluted EPS | $1.48 | $1.48 | Flat |
American Eagle comparable sales were approximately flat, while Aerie comparable sales increased 20%, or $107.7 million. Consolidated comparable traffic increased in the high single digits and total transactions increased in the high single digits; units per transaction increased slightly, while average unit retail price declined in the low single digits.
Higher markdowns were the primary driver of the gross-margin decline, with increased distribution-center and delivery costs also contributing. Selling, general and administrative expense increased 5% to $1.029 billion, but declined to 23.9% of revenue from 24.3%.
Cash Flow, Liquidity, Debt and Capital Allocation
- Cash provided by operating activities was $415.4 million, compared with $456.6 million in Fiscal 2018.
- Capital expenditures were $210.4 million, compared with $189.0 million. Fiscal 2020 capital expenditures were expected to range from $225 million to $275 million.
- Cash and short-term investments totaled $416.9 million at year-end, compared with $425.5 million a year earlier.
- Merchandise inventory increased 5% to $446.3 million.
- The Company had no short-term or long-term debt and no borrowings under its $400 million asset-based revolving credit facilities. Standby letters of credit totaled $7.9 million.
- Working capital was $296.2 million and the current ratio was 1.39, compared with $503.6 million and 1.93, respectively. The decline was substantially related to recognizing operating lease liabilities under ASC 842.
- The Company repurchased 6.3 million shares for approximately $112.4 million and paid $92.8 million in dividends. Total shareholder returns through dividends and repurchases were $205.2 million.
- Quarterly dividends totaled $0.55 per share. Future dividends remain subject to Board approval and future earnings, cash flow, financial condition and capital requirements.
Material Changes Versus the Prior Comparable Period
- Revenue increased 7%, led principally by Aerie, but comparable-sales growth slowed from 8% to 3%.
- Gross margin contracted 160 basis points due primarily to higher markdowns and higher distribution and delivery costs.
- Operating income declined $103.8 million, and net income declined $70.6 million.
- Fiscal 2019 included $80.5 million of pre-tax impairment and restructuring charges, compared with $1.6 million in Fiscal 2018. The charges included $64.5 million of impairment for 20 retail stores, $1.7 million of goodwill impairment, $6.7 million of severance, $4.2 million related to exiting a joint business venture, $1.8 million of Japan transition costs and $1.5 million of China severance and closure costs.
- Excluding impairment, restructuring and related charges, adjusted diluted EPS was $1.48, unchanged from Fiscal 2018 adjusted diluted EPS.
- The Company adopted ASC 842, recognizing approximately $1.6 billion of operating lease assets and liabilities and recording a $44.4 million after-tax transition adjustment to beginning retained earnings.
- Company-owned stores increased from 1,055 to 1,095, including 66 openings and 26 closures. Aerie stand-alone stores increased from 115 to 148.
- Licensed locations decreased from 231 to 217, primarily because all licensed stores in Japan were closed following termination of the license agreement.
Guidance, Outlook, Commentary and Risks
Management described Fiscal 2019 as challenging but highlighted record revenue, positive traffic, strong customer engagement, continued Aerie growth and American Eagle growth in jeans and bottoms. Fiscal 2020 plans included opening approximately 10 to 15 American Eagle stores, 55 to 65 Aerie stand-alone stores, 5 to 10 Aerie side-by-side stores and approximately 30 to 35 international third-party-operated American Eagle stores. Management also planned to remodel approximately 30 to 40 American Eagle stores and potentially close approximately 10 to 20 American Eagle and 5 to 10 Aerie stores.
Key risks include changing fashion trends and discretionary consumer spending, promotional and competitive pricing pressure, declining shopping-center traffic, dependence on digital and omni-channel investments, inventory markdowns and shrinkage, international and foreign-currency exposure, tariffs and supply-chain disruption, raw-material and labor cost inflation, cybersecurity and privacy incidents, significant lease obligations, impairment of stores or goodwill, tax-rate volatility, legal proceedings and catastrophic events. The filing specifically identified the recent coronavirus outbreak as a potential public-health risk, but does not provide a quantified financial impact or specific forecast related to it.
Operating lease commitments totaled $1.896 billion on an undiscounted basis, and purchase obligations totaled $696.7 million, predominantly for merchandise inventory. Management stated that existing cash and operating cash flow were expected to fund capital expenditures, dividends and working-capital requirements.
Important Facts for Investors to Verify
- Whether Aerie’s 20% comparable-sales growth and planned store expansion can offset slowing American Eagle performance and higher promotional activity.
- Whether gross margin can recover from the 35.3% Fiscal 2019 level as markdowns, freight, delivery and occupancy costs evolve.
- The sustainability of earnings after the unusually high $80.5 million impairment and restructuring charge and the assumptions underlying the adjusted EPS presentation.
- Store-level performance, impairment sensitivity and the potential for additional closures, restructuring or goodwill charges.
- Cash conversion, inventory growth, capital expenditures and the Company’s ability to fund dividends and repurchases while maintaining liquidity.
- The effect of ASC 842 lease recognition on leverage, liquidity metrics and future cash commitments.
- Exposure to tariffs, sourcing concentration, foreign exchange movements, international operations and supply-chain disruptions.
- The timing and financial consequences of the planned Fiscal 2020 store openings, remodels and closures.
- The filing’s unqualified audit opinion and unqualified internal-control opinion, while noting that retail store impairment was identified as the critical audit matter.