American Eagle Outfitters, Inc. 10-Q Summary
Reporting period: Fiscal first quarter ended May 5, 2018, covering 13 weeks. The comparable prior period ended April 29, 2017. The filing is for fiscal 2018, not 2017 Q1. American Eagle operated one reportable segment, encompassing the American Eagle and Aerie brands, AEO Direct, Tailgate and Todd Snyder. Results are seasonal, with greater revenue and operating income generally generated in the third and fourth quarters.
Financial Performance and Position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total net revenue | $823.0 million | $761.8 million | +8% |
| Gross profit | $304.4 million | $277.8 million | +10% |
| Gross margin | 37.0% | 36.5% | +50 basis points |
| Operating income | $50.7 million | $36.9 million | +37% |
| Net income | $39.9 million | $25.2 million | +58% |
| Diluted EPS | $0.22 | $0.14 | +57% |
| Adjusted diluted EPS | $0.23 | $0.16 | +44% |
| Cash flow from operations | $28.0 million | $10.7 million | +161% |
- Consolidated comparable sales, including AEO Direct, increased 9%; American Eagle comparable sales increased 4% and Aerie comparable sales increased 38%.
- Net income margin improved to 4.8% from 3.3%; operating margin improved to 6.2% from 4.9%.
- SG&A increased 8% to $210.2 million, but declined slightly as a percentage of revenue to 25.5% from 25.6%.
- Restructuring charges declined to $1.6 million from $5.4 million, primarily reflecting corporate severance in 2018 versus broader corporate and international restructuring in 2017.
- The effective tax rate decreased to 22.0% from 32.4%, primarily because of the Tax Cuts and Jobs Act reduction in the U.S. federal corporate tax rate.
- Merchandise inventory increased 11% to $404.3 million from $364.3 million at the comparable prior-year quarter-end.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $289.7 million, with an additional $20.0 million in short-term certificates of deposit, for total cash and short-term investments of $309.7 million versus $225.2 million a year earlier.
- Operating cash flow was $28.0 million. Investing cash outflows were $67.2 million, including $46.9 million of capital expenditures and $20.0 million of short-term investment purchases.
- Financing cash outflows were $84.3 million, including $44.9 million of share repurchases, $24.2 million of dividends, $14.2 million of employee share repurchases for tax withholding and $3.3 million of capital lease payments.
- Working capital was $439.8 million and the current ratio was 2.01 at May 5, 2018.
- No loans were outstanding under the $400 million asset-based revolving credit facility; $8.1 million of standby letters of credit were outstanding. The company was in compliance with the facility. No trade letters of credit were outstanding.
- The revolving credit facility expires in December 2019 and is subject to borrowing-base limitations and secured by specified assets and real property.
- The company had no off-balance-sheet arrangements and reported no material changes in market-risk exposure.
Material Changes and Unusual Items
- Revenue growth was driven by positive comparable sales, particularly Aerie, and by increased traffic and transactions. Units per transaction declined slightly, while average unit retail price increased in the low-single digits.
- Gross-margin expansion reflected lower markdowns and rent leverage, partly offset by higher digital delivery expense.
- The company adopted the new revenue-recognition standard on February 4, 2018 using the modified retrospective method, increasing opening retained earnings by approximately $0.2 million. The primary effect related to customer loyalty-program accounting.
- The new lease standard will be adopted in fiscal 2019. Management expects a significant increase in long-term assets and liabilities when adopted, but the filing does not provide a quantified impact.
- The quarterly dividend increased 10% to $0.1375 per share. The company returned $69.1 million to shareholders through dividends and share repurchases during the quarter.
- At quarter-end, the company operated 1,049 consolidated stores, including 935 American Eagle retail stores, 109 stand-alone Aerie stores, 4 Tailgate stores and 1 Todd Snyder store. Third-party operators operated 217 international licensed or franchised stores in 24 countries.
Outlook, Risks and Contingencies
- Fiscal 2018 plans included opening approximately 15 to 20 American Eagle stores and 10 to 15 Aerie stores, converting 20 to 25 Aerie side-by-side locations, remodeling approximately 60 to 70 stores, and potentially closing approximately 10 to 15 American Eagle and 5 to 10 Aerie stores.
- The company expected approximately $180 million to $190 million of fiscal 2018 capital expenditures.
- Management expected cash holdings and operating cash flow to fund anticipated capital expenditures, dividends and working-capital requirements.
- Management cautioned that future results may be affected by consumer demand, comparable sales, markdowns, inventory levels, rising labor and input costs, international expansion, store performance, foreign currency movements, availability of credit facilities and potential store-impairment charges.
- Additional corporate and international restructuring charges may be incurred during fiscal 2018; the amount depends on third-party negotiations, notification requirements and local laws.
- Pending legal matters were not expected to have a material adverse effect, although management noted that its assessment could change as facts develop.
- Future dividends remain subject to board discretion and the company’s future earnings, cash flow, financial condition, capital requirements and tax considerations.
Investor Verification Items
- Verify that the reporting period is fiscal Q1 2018, ended May 5, 2018, despite the request metadata identifying 2017 Q1.
- Assess whether the 11% inventory increase is supported by comparable sales and future demand without requiring additional markdowns.
- Review the sustainability of Aerie’s 38% comparable-sales growth and the company’s ability to maintain gross-margin improvement amid higher digital delivery costs.
- Evaluate cash deployment among capital expenditures, dividends and share repurchases, including the remaining 16.7 million share repurchase authorization.
- Assess the future balance-sheet impact of adopting the new lease standard in fiscal 2019.
- Monitor restructuring costs, potential store closures, store impairment risk and the December 2019 expiration of the revolving credit facility.