American Eagle Outfitters, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended July 31, 2021, compared with the 13 and 26 weeks ended August 1, 2020. Although the request identifies “2020 Q2,” the supplied filing is the second quarter of Fiscal 2021. Fiscal 2021 ends January 29, 2022.
Business Context
American Eagle Outfitters is a global specialty retailer operating primarily under the American Eagle and Aerie brands, with additional Todd Snyder and Unsubscribed businesses. It sells through company-operated stores, concession locations, e-commerce channels, and international licensees. As of July 31, 2021, the Company had 1,090 consolidated stores and 242 international licensed or franchised stores.
All stores had reopened by July 31, 2021, but operations continued to be affected by COVID-19 precautions, reduced traffic in some locations, supply-chain risks, and potential future restrictions.
Financial Metrics
| Metric | 13 Weeks Ended July 31, 2021 | 13 Weeks Ended August 1, 2020 | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 |
|---|---|---|---|---|
| Net revenue | $1,194.2 million | $883.5 million | $2,228.8 million | $1,435.2 million |
| Gross profit | $502.4 million | $265.2 million | $938.6 million | $293.5 million |
| Gross margin | 42.1% | 30.0% | 42.1% | 20.5% |
| Operating income (loss) | $168.0 million | $(12.2) million | $301.4 million | $(370.5) million |
| Operating margin | 14.1% | (1.4)% | 13.5% | (25.8)% |
| Net income (loss) | $121.5 million | $(13.8) million | $217.0 million | $(270.9) million |
| Diluted earnings (loss) per share | $0.58 | $(0.08) | $1.04 | $(1.63) |
| Cash flow from operations | Not separately provided | Not separately provided | $121.9 million | $(36.4) million |
Second-quarter revenue increased 35% year over year. American Eagle revenue increased 35% to $845.9 million, while Aerie revenue increased 34% to $335.8 million. Store revenue increased 73%, partly offset by a 5% decline in AEO Direct revenue as customer activity shifted back to stores and prior-year shipping backlogs affected the comparison.
Gross margin benefited from higher full-price sales, lower promotions, and inventory optimization. SG&A increased 31% in the quarter to $293.9 million but declined to 24.6% of revenue from 25.3%. No impairment, restructuring, or COVID-19-related charges were recorded in the current quarter or six-month period.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $774.0 million at July 31, 2021; short-term investments were $50.0 million, for total cash and short-term investments of $824.0 million.
- Working capital was $832.4 million and the current ratio was 2.08, compared with $664.2 million and 1.77 at January 30, 2021.
- Merchandise inventory was $503.5 million, up from $405.4 million at January 30, 2021 and $421.2 million at August 1, 2020.
- Long-term debt, net, was $331.7 million, consisting primarily of convertible senior notes. The notes had $412.0 million of principal outstanding, a 3.75% stated interest rate, and mature in 2025.
- No loans were outstanding under the $400 million asset-based revolving credit facilities; $7.9 million of standby letters of credit was outstanding. The facilities expire January 30, 2024.
- Operating lease liabilities totaled approximately $1.383 billion, including current and non-current portions.
Cash Flow and Capital Allocation
- Operating activities provided $121.9 million during the first 26 weeks of Fiscal 2021, compared with cash used of $36.4 million in the prior-year period.
- Investing activities used $140.4 million, including $86.2 million of capital expenditures and $50.0 million of net purchases of short-term investments.
- Financing activities used $58.1 million, including $53.2 million of dividends and $17.5 million of employee-related share repurchases, partially offset by $13.1 million from stock option exercises.
- Fiscal 2021 capital expenditures are expected to be $250 million to $275 million.
- The quarterly dividend was increased from $0.1375 to $0.18 per share, equivalent to an annualized rate of $0.72 per share. Future dividends remain subject to Board approval and business conditions.
Material Changes Versus the Prior Comparable Period
- Results improved sharply from the COVID-19-affected prior-year period, when stores were closed or operating with severe restrictions.
- Six-month revenue increased 55% to $2.229 billion, and the Company moved from a $270.9 million net loss to $217.0 million of net income.
- Prior-year six-month results included $170.2 million of impairment, restructuring, and COVID-19-related charges, including $153.6 million of asset impairments. No comparable charges were recorded in the current period.
- Prior-year financing included proceeds from the convertible notes and revolving credit borrowings; current-period financing had no new debt borrowings and no revolving facility loans outstanding.
- The Company’s diluted share count includes the conversion spread from the convertible notes. If fully converted at July 31, 2021, the notes represented approximately 47.9 million convertible shares.
Guidance, Outlook, Risks, and Unusual Items
- Management expects to open approximately 20 to 30 American Eagle stores and 75 Aerie and OFFLINE stores during Fiscal 2021, remodel approximately 25 to 35 stores, and potentially close approximately 30 to 50 American Eagle and five to 10 Aerie stores at lease expiration.
- Management expects existing cash and operating cash flow to fund capital expenditures, dividends, and working capital needs over the next twelve months.
- COVID-19 remains a material uncertainty, including possible store, distribution-center, or corporate-facility closures, reduced consumer spending, staffing constraints, supply-chain disruption, shipping delays, and higher freight costs.
- Other principal risks include changing consumer preferences, competition and pricing pressure, seasonal volatility, inventory markdowns, foreign exchange, tariffs and raw-material costs, lease obligations, impairment charges, cybersecurity, legal proceedings, and international operations.
- The Company states that no material changes occurred to the risk factors disclosed in its Fiscal 2020 Form 10-K.
- The Company expects to adopt ASU 2020-06 at the beginning of Fiscal 2022. The adoption is expected to reduce reported interest expense and increase diluted shares associated with the convertible notes, but management does not anticipate a material impact on diluted earnings per share.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The Company reported no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether the strong year-over-year comparisons normalize after the COVID-19-distorted prior-year base period.
- The sustainability of the 42.1% gross margin and the effect of inventory growth, markdowns, freight costs, and supply-chain conditions.
- The conversion, refinancing, and dilution implications of the 2025 convertible senior notes.
- Progress against the Fiscal 2021 store opening, remodeling, closure, and capital expenditure plans.
- Whether COVID-19 conditions, consumer traffic, or government restrictions cause renewed operating disruption or additional impairment charges.
- The Company’s ability to maintain dividends while funding capital expenditures, inventory, lease obligations, and other working-capital requirements.