AMERICAN EAGLE OUTFITTERS INC quarterly report, Q2 FY2022

American Eagle Outfitters, Inc. 10-Q Summary

Reporting period: Quarter and six months ended July 30, 2022, compared with the periods ended July 31, 2021. The request metadata identifies “2021 Q2,” but the filing is for Fiscal 2022 second quarter. American Eagle operates the American Eagle, Aerie, Todd Snyder, Unsubscribed and Quiet Platforms businesses through more than 1,000 company-operated stores, digital channels and international licensees.

Financial Performance

Metric	13 weeks ended July 30, 2022	13 weeks ended July 31, 2021	26 weeks ended July 30, 2022	26 weeks ended July 31, 2021
Net revenue	$1.198 billion	$1.194 billion	$2.253 billion	$2.229 billion
Gross profit	$370.0 million	$502.4 million	$758.0 million	$938.6 million
Gross margin	30.9%	42.1%	33.6%	42.1%
Operating income	$14.0 million	$168.0 million	$55.9 million	$301.4 million
Net income (loss)	$(42.5) million	$121.5 million	$(10.7) million	$217.0 million
Diluted EPS	$(0.24)	$0.58	$(0.06)	$1.04

Revenue was broadly flat in the quarter and increased 1% for the first six months. American Eagle revenue declined to $777.8 million in the quarter from $845.9 million, while Aerie revenue increased to $371.7 million from $335.8 million.
Gross margin declined primarily because of higher markdowns to clear excess spring and summer inventory, higher freight costs, and increased delivery, warehousing and rent costs. Management quantified the quarterly impact of markdowns at approximately 750 basis points and freight at approximately 200 basis points.
SG&A increased 5% in the quarter and 9% year to date. SG&A was 25.7% of revenue in the quarter and 26.9% year to date, compared with 24.6% and 25.1%, respectively, in the prior-year periods.
Depreciation and amortization increased 19% in the quarter and 21% year to date, reflecting higher capital spending and the Quiet Logistics acquisition.
The quarter and year-to-date periods included $60.1 million of debt-related charges, primarily a $55.7 million induced-conversion expense related to the exchange of convertible notes. Excluding debt-related charges, adjusted diluted EPS was $0.04 for the quarter and $0.20 year to date; these are non-GAAP measures.

Cash Flow, Liquidity and Capital Structure

Cash used in operating activities was $105.3 million for the first six months, compared with $121.9 million of operating cash flow in the prior-year period. The change was driven substantially by the net loss and a $133.7 million increase in inventory investment.
Cash used in investing activities was $128.4 million, including $127.9 million of capital expenditures, compared with $140.4 million in the prior-year period.
Cash used in financing activities was $102.1 million, including $200.0 million for share repurchases, $136.1 million paid in the convertible-note exchange and $64.8 million of dividends, partially offset by $307.7 million of revolving-credit borrowings.
Cash and cash equivalents were $98.2 million at July 30, 2022, compared with $434.8 million at January 29, 2022 and $774.0 million at July 31, 2021. Working capital was $459.3 million and the current ratio was 1.64.
The amended revolving credit facility provides up to $700 million, subject to borrowing-base limitations, and expires June 24, 2027. Borrowings were $307.7 million, with $7.9 million of standby letters of credit outstanding; the Company reported compliance with the agreement.
Following the exchange of $342.4 million principal amount of 2025 convertible notes for cash and approximately 34.7 million shares, approximately $69.6 million principal remained outstanding. Total long-term debt, net, was $376.5 million at quarter-end.
The Company completed a $200.0 million accelerated share repurchase, receiving approximately 17.0 million shares at an average price of $11.75. Approximately 13.0 million shares remained authorized for repurchase at July 30, 2022.

Material Changes and Unusual Items

Consumer demand softened amid inflationary pressure and changed spending patterns. Excess inventory required broader markdown activity, materially reducing gross margin.
The Company adopted ASU 2020-06, changing the accounting for its convertible notes and reducing non-cash interest expense from discount amortization.
Quiet Logistics and AirTerra acquisitions continued to affect results through higher depreciation, warehousing and integration costs. Quiet Platforms had an approximately 60-basis-point quarterly and 90-basis-point year-to-date gross-margin impact.
The Company opened 48 stores during the first six months and had 1,160 consolidated stores at July 30, 2022, compared with 1,090 a year earlier. International licensed or franchise stores totaled 260.
Subsequent to quarter-end, management announced a temporary suspension of quarterly cash dividends to increase financial flexibility.

Guidance, Outlook and Risks

Management expects approximately $250 million of Fiscal 2022 capital expenditures and believes current cash holdings and available liquidity will fund anticipated requirements.
Planned Fiscal 2022 activity included approximately 10 to 20 American Eagle stores, approximately 40 Aerie locations, more than 40 OFFLINE stores, approximately 15 to 30 remodels and potential closure of approximately 30 to 50 American Eagle stores at lease expiration.
Management is resetting inventory plans for the second half and expanding expense and capital-expenditure reductions in response to weaker demand and margin pressure.
Key risks include inflation, reduced discretionary spending, markdown and inventory risk, freight and supply-chain disruption, labor shortages, COVID-19 volatility, foreign exchange, tariffs and raw-material costs, rising interest rates, substantial lease obligations, integration of Quiet Platforms, cybersecurity and privacy matters, impairment risk and litigation.
The business is seasonal, with a significant portion of revenue and operating income generally generated during the back-to-school and holiday periods. Management stated that future visibility remains limited because of macroeconomic and pandemic-related uncertainty.
The Company reported effective disclosure controls and no material change in internal control over financial reporting. Management stated that pending legal matters were not expected to have a material adverse effect, although outcomes could change.

Important Facts for Investors to Verify

Whether inventory levels and markdown rates normalize in the second half and whether gross margin recovers.
The availability under the asset-based credit facility after borrowing-base limitations, letters of credit and seasonal working-capital needs.
The effect of the temporary dividend suspension and any further changes to share repurchases or capital allocation.
Whether Aerie growth offsets continued weakness in the American Eagle brand.
The operating performance, integration costs and external customer traction of Quiet Platforms.
The maturity, conversion economics and potential dilution associated with the approximately $69.6 million of remaining 2025 Notes.
Whether management’s $250 million capital-expenditure expectation and planned store openings, remodels and closures remain achievable.