American Eagle Outfitters, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the 13 weeks ended April 30, 2022, the first quarter of Fiscal 2022. The company operates the American Eagle, Aerie, Todd Snyder, and Unsubscribed brands through more than 1,000 company-operated stores, digital channels, and international licensees. The company had 1,141 consolidated stores and 258 international licensed/franchise stores at quarter-end. Reportable segments are American Eagle and Aerie.
Financial performance and liquidity
| Metric | Q1 Fiscal 2022 | Q1 Fiscal 2021 | Change |
|---|---|---|---|
| Total net revenue | $1.055 billion | $1.035 billion | +2% |
| Gross profit | $388.0 million | $436.2 million | -$48.2 million |
| Gross margin | 36.8% | 42.2% | -540 basis points |
| Operating income | $41.9 million | $133.4 million | -$91.5 million |
| Operating margin | 4.0% | 12.9% | -890 basis points |
| Net income | $31.7 million | $95.5 million | -$63.7 million |
| Diluted EPS | $0.16 | $0.46 | -$0.30 |
| Cash flow from operations | $(108.2) million | $0.4 million | -$108.7 million |
American Eagle revenue declined to $685.6 million from $727.7 million, while Aerie revenue increased to $321.7 million from $297.5 million. Gross margin was pressured by approximately 340 basis points from higher freight costs and approximately 120 basis points from the Supply Chain Platform during its integration and ramp-up. SG&A increased 13% to $298.8 million, driven primarily by higher store wages and hours, corporate compensation, professional services, and advertising.
Cash and cash equivalents were $228.8 million at April 30, 2022, down from $434.8 million at January 29, 2022 and $716.7 million at May 1, 2021. Working capital was $543.1 million and the current ratio was 1.74. Inventory increased to $682.1 million from $553.5 million at January 29, 2022 and $466.7 million a year earlier.
Capital expenditures were $58.4 million, including $44.0 million for stores, $12.5 million for information technology, and $1.0 million for the Supply Chain Platform. Financing cash uses included $30.4 million of dividends and $8.2 million of employee share repurchases for payroll-tax withholding.
Long-term debt was $405.8 million, consisting primarily of convertible notes due 2025. The company had no borrowings under its $400 million asset-based revolving credit facilities, although $7.9 million of standby letters of credit was outstanding. Total operating lease liabilities were approximately $1.469 billion.
Material changes versus the prior comparable period
- Revenue increased modestly, but profitability declined substantially because of lower gross margin and higher operating expenses.
- American Eagle revenue decreased approximately 6%, while Aerie revenue increased approximately 8%.
- Operating income fell 69% and net income fell 67% year over year.
- Operating cash flow turned negative, primarily reflecting the $128.9 million increase in merchandise inventory and a $107.4 million decrease in accrued compensation and payroll taxes.
- Capital expenditures increased from $36.8 million to $58.4 million.
- The company adopted ASU 2020-06 for convertible debt accounting. The adoption increased retained earnings by $18.8 million, reduced contributed capital by $67.7 million, reduced first-quarter interest expense by approximately $4.3 million, and added approximately 21 million incremental shares to diluted EPS.
- There were no impairment, restructuring, or COVID-19-related charges in either comparable period.
Guidance, outlook, commentary, and risks
Management described the quarter as challenging because of comparisons with stimulus-supported and pent-up demand in the prior year, inflation, higher gasoline prices, and a shift toward other discretionary categories. Management stated that the brands continued to show structural improvement relative to 2019.
For Fiscal 2022, management planned approximately 10 to 20 American Eagle store openings, approximately 40 Aerie locations, and more than 40 OFFLINE stores. The company also expected to remodel approximately 15 to 30 stores and potentially close approximately 30 to 50 American Eagle stores as leases expire. Planned capital expenditures were approximately $275 million.
Management expects available cash and operating cash flow to fund anticipated capital expenditures, dividends, working capital requirements, and other cash needs for the next twelve months and beyond. Future dividends remain subject to board discretion and may be deferred based on business performance, liquidity, COVID-19 developments, and macroeconomic conditions.
Key risks include COVID-19-related disruptions, inflation and reduced discretionary spending, freight and supply-chain costs, inventory markdowns, international sourcing and tariffs, foreign-exchange volatility, substantial lease obligations, competitive pressures, cybersecurity and privacy matters, integration of Quiet Logistics and AirTerra, potential impairment, and litigation. All stores were open at April 30, 2022, but residual traffic and in-store revenue impacts remained.
The company stated that currently pending legal matters are not expected to have a material adverse effect, that it had no off-balance-sheet arrangements, and that its disclosure controls were effective.
Important facts for investors to verify
- Whether elevated inventory levels lead to additional markdowns, margin pressure, or working-capital needs.
- Whether freight, delivery, occupancy, wage, and Supply Chain Platform costs moderate as Fiscal 2022 progresses.
- The pace and profitability of Aerie, OFFLINE, American Eagle, Todd Snyder, and Unsubscribed expansion.
- The integration costs, operating benefits, and cash requirements associated with Quiet Logistics and AirTerra.
- Liquidity relative to planned capital expenditures of approximately $275 million, dividends, lease obligations, and the 2025 convertible notes.
- Whether inflation, consumer trade-down, renewed COVID-19 disruption, geopolitical events, tariffs, or supply-chain interruptions affect demand and product availability.
- The dilutive impact of the 2025 convertible notes, which represented approximately 49.1 million potentially issuable shares at quarter-end.