American Eagle Outfitters, Inc. — Form 10-Q Summary
Reporting period: The supplied filing is for the 13 and 26 weeks ended July 29, 2017, not 2016 Q2 as indicated in the request metadata. The prior comparable periods ended July 30, 2016. The filing was dated August 24, 2017. American Eagle operated one reportable segment encompassing the American Eagle and Aerie brands, AEO Direct, Tailgate and Todd Snyder.
Financial performance and position
| Metric | 13 weeks ended July 29, 2017 | 13 weeks ended July 30, 2016 | Change |
|---|
| Net revenue | $844.6 million | $822.6 million | +3% |
| Gross profit | $292.6 million | $307.1 million | -5% |
| Gross margin | 34.7% | 37.3% | -260 bps |
| Operating income | $38.9 million | $68.7 million | -43% |
| Operating margin | 4.6% | 8.3% | -370 bps |
| Net income | $21.2 million | $41.6 million | -49% |
| Diluted EPS | $0.12 | $0.23 | -$0.11 |
| Metric | 26 weeks ended July 29, 2017 | 26 weeks ended July 30, 2016 | Change |
|---|
| Net revenue | $1.606 billion | $1.572 billion | +2% |
| Gross profit | $570.5 million | $600.5 million | -5% |
| Gross margin | 35.5% | 38.2% | -270 bps |
| Operating income | $75.9 million | $127.3 million | -40% |
| Net income | $46.5 million | $82.1 million | -43% |
| Diluted EPS | $0.26 | $0.45 | -$0.19 |
- Second-quarter consolidated comparable sales increased 2%; American Eagle comparable sales were flat and Aerie comparable sales increased 26%. E-commerce represented approximately 23% of revenue and experienced strong traffic and sales growth.
- Gross margin pressure primarily reflected increased promotions to support sales and conversion, higher delivery costs from increased AEO Direct penetration, and $1.7 million of restructuring-related inventory charges.
- SG&A increased 2% in the quarter to $203.7 million but improved to 24.1% of revenue from 24.3%, reflecting advertising investments partly offset by lower incentive compensation.
- Second-quarter restructuring charges were $9.7 million in operating expenses. Total restructuring-related charges were $20.7 million, including $9.3 million related to the planned exit of a joint business venture and $1.7 million of inventory charges.
- Management presented adjusted diluted EPS of $0.19 for the quarter, excluding $0.04 of restructuring-related charges and $0.03 of joint-venture exit costs. This is a non-GAAP measure.
Cash flow, liquidity and capital allocation
- Cash provided by operating activities for the first half was $53.2 million, compared with $101.4 million in the prior-year period.
- Capital expenditures were $86.5 million, versus $60.5 million in the prior year. Fiscal 2017 capital expenditures were expected to range from $160 million to $170 million.
- Cash used in financing activities was $150.9 million, including $87.7 million of public share repurchases, $44.3 million of dividends, $12.0 million of employee share repurchases for tax withholding and $7.2 million of capital lease payments.
- Cash and cash equivalents were $192.6 million at July 29, 2017, compared with $247.9 million at July 30, 2016 and $378.6 million at January 28, 2017.
- Working capital was $345.2 million and the current ratio was 1.73. Merchandise inventory was $433.5 million, up 3% year over year.
- The company had no borrowings under its $400 million asset-based revolving credit facilities and $8.1 million of standby letters of credit outstanding. It was in compliance with the credit agreement. The facilities were scheduled to expire in December 2019.
- The quarterly dividend remained $0.125 per share. The company repurchased 6.0 million shares for $87.7 million during the first half, with 19.0 million shares remaining under the authorization at quarter-end.
Material changes, outlook and risks
- The company completed the closure of its United Kingdom stores during the quarter and continued evaluating the closure or conversion of company-operated stores in Hong Kong, China and other international markets to licensed partnerships.
- Management expected additional corporate and international restructuring charges during Fiscal 2017; timing and amount depended on third-party negotiations, notification requirements and local laws.
- Fiscal 2017 plans included approximately 15 to 20 new AEO stores, 15 Aerie stand-alone stores, 15 to 20 Aerie side-by-side conversions or remodels, approximately 50 AE store remodels and potential closure of approximately 20 to 30 AE stores and 5 to 10 Aerie stores, primarily in North America.
- Management expected cash on hand and operating cash flow to fund anticipated capital expenditures, dividends and working-capital needs, but noted that acquisitions, expansion or other strategic transactions could require additional debt or equity financing.
- Key risks include mall traffic and consumer demand, promotional intensity and markdowns, inventory levels, potential store impairment charges, rising raw-material and labor costs, international restructuring and execution, availability of credit facilities, foreign currency exposure and the seasonality of retail sales.
- The company was piloting a combined loyalty program expected to launch late in 2017. It also expected to adopt the new revenue-recognition standard on February 4, 2018 and the new lease standard in Fiscal 2019; the latter was expected to significantly increase reported long-term assets and liabilities.
- Management stated that no material changes had occurred in market-risk exposure or risk-factor disclosures from the Fiscal 2016 Form 10-K. Disclosure controls were considered effective, and the interim financial statements received a review, not an audit, from Ernst & Young LLP.
Investor verification points
- Verify the filing period: the document reports July 29, 2017 results despite the request identifying 2016 Q2.
- Assess whether promotional activity, markdowns and higher e-commerce fulfillment costs continue to pressure gross margin.
- Track inventory growth relative to sales and the potential for additional markdowns or impairment charges.
- Separate recurring operating performance from the $26.2 million of first-half restructuring-related charges and the company’s non-GAAP adjusted EPS presentation.
- Evaluate cash generation after capital expenditures, dividends and share repurchases, particularly as cash declined to $192.6 million.
- Monitor execution of store openings, remodels, closures, international exits and the Aerie expansion strategy.
- Review the future dividend and repurchase capacity, credit-facility availability and upcoming effects of lease and revenue-recognition accounting changes.
