American Eagle Outfitters, Inc. — Form 10-Q Summary
Reporting period: 13 weeks ended April 29, 2017, compared with the 13 weeks ended April 30, 2016. The filing metadata identifies “2016 Q1,” but the Form 10-Q is for the first quarter of Fiscal 2017. The company operated one reportable segment, encompassing American Eagle, Aerie, AEO Direct, Tailgate and Todd Snyder.
Business context
American Eagle operated 1,053 consolidated stores at quarter-end, including 944 American Eagle/Aerie locations, four Tailgate locations and two Todd Snyder locations, plus AEO Direct. It also had 189 licensed or franchised international stores in 24 countries. AEO Direct represented 26% of total revenue and reached record sales volumes.
Management cited soft mall traffic, a late Easter holiday and increased promotional activity. American Eagle jeans, pants and women’s apparel performed positively, Aerie delivered strong growth, and men’s tops remained weak.
Financial performance
| Metric | Q1 Fiscal 2017 | Q1 Fiscal 2016 | Change |
|---|---|---|---|
| Total net revenue | $761.8 million | $749.4 million | Up 2% |
| Gross profit | $277.8 million | $293.5 million | Down 5% |
| Gross margin | 36.5% | 39.2% | Down 270 basis points |
| Operating income | $36.9 million | $58.7 million | Down 37% |
| Net income | $25.2 million | $40.5 million | Down 38% |
| Diluted earnings per share | $0.14 | $0.22 | Down $0.08 |
| Net cash from operating activities | $10.7 million | $29.9 million | Down $19.2 million |
Consolidated comparable sales increased 2%, following a 6% increase in the prior-year quarter. American Eagle comparable sales decreased 1%, while Aerie comparable sales increased 25%. American Eagle women’s comparable sales increased 2% and men’s decreased 6%. Traffic and transactions increased in the mid-single digits, while units per transaction declined slightly and average unit retail decreased in the low single digits.
SG&A decreased 1% to $195.0 million and improved to 25.6% of revenue from 26.2%. Depreciation and amortization increased to $40.4 million, primarily due to omni-channel and information-technology investments. The effective tax rate declined to 32.4% from 36.4%, primarily due to changes in unrecognized tax benefits and excess tax benefits from share-based payments.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $225.2 million at April 29, 2017, compared with $239.0 million a year earlier and $378.6 million at January 28, 2017.
- The company reported no borrowings under its $400 million asset-based revolving credit facilities and had $8.1 million of standby letters of credit outstanding. It was in compliance with the credit agreement.
- Working capital was $343.1 million and the current ratio was 1.82.
- Operating cash flow was $10.7 million; capital expenditures were $40.1 million; and financing cash outflows were $123.6 million.
- The company repurchased 6.0 million shares for $87.7 million under its public program and repurchased approximately 0.8 million shares for employee tax withholding. It paid $22.1 million in dividends at $0.125 per share.
- Inventory increased 9% to $364.3 million from $334.3 million, reflecting a higher mix of American Eagle bottoms and Aerie apparel.
Material changes and unusual items
- Gross margin was pressured by markdowns and increased promotional activity, which reduced margin by approximately 200 basis points. Higher shipping costs associated with increased AEO Direct penetration reduced margin by an additional 70 basis points.
- The company recorded $5.4 million of restructuring charges, primarily for home-office severance and the planned closure or conversion of company-operated stores in Hong Kong, China and the United Kingdom. Management expects additional lease-related and severance charges during Fiscal 2017.
- Adjusted diluted EPS was $0.16, excluding $0.02 per share of restructuring charges. This is a non-GAAP measure.
- Revenue included $5.1 million received from termination of a third-party license agreement and $2.5 million of gift-card breakage revenue.
- Other income declined to $0.4 million from $4.9 million, principally due to foreign-currency fluctuations.
- The company adopted ASU 2016-09 on stock compensation prospectively without a material quarterly impact. It expects the future lease standard adoption to significantly increase long-term assets and liabilities.
Guidance, outlook and risks
- Fiscal 2017 plans include approximately 15 to 20 new American Eagle stores, 15 Aerie stand-alone stores, 15 to 20 Aerie side-by-side remodels, approximately 50 American Eagle remodels, and potential closures of approximately 20 to 30 American Eagle and five to 10 Aerie stores, primarily in North America.
- Fiscal 2017 capital expenditures are expected to be $160 million to $170 million.
- Management expects current cash and operating cash flow to fund anticipated North American capital expenditures, dividends and working-capital requirements.
- Management plans to launch a combined credit-card and AEREWARDS loyalty program late in 2017.
- Key risks include weak mall traffic, promotional and markdown pressure, inventory and fashion risk, higher raw-material and labor costs, foreign-currency volatility, potential store impairment charges, execution of international restructuring, availability of credit facilities, and the seasonality of retail results.
- Management stated that pending legal matters are not expected to materially affect the company, although outcomes could change as additional facts emerge. It also believes unrecognized tax benefits may decrease by approximately $3.7 million over the following 12 months.
Investor verification points
- Verify the period designation: the filing covers Q1 Fiscal 2017, not Q1 Fiscal 2016.
- Assess whether Aerie growth and AEO Direct expansion can offset weak American Eagle men’s performance and declining brick-and-mortar sales.
- Monitor gross margin, markdown levels, inventory growth and shipping costs as AEO Direct penetration increases.
- Track restructuring charges, store closures or conversions, and the effect on future operating expenses and cash flow.
- Compare the $160 million to $170 million capital-expenditure plan with operating cash generation and shareholder returns.
- Confirm the sustainability of dividends and share repurchases given the quarter’s low operating cash flow and significant financing outflows.
- Review future lease-accounting effects, potential store impairments, tax settlements and foreign-currency exposure.