American Eagle Outfitters, Inc. Form 10-Q Summary
Reporting period: Second quarter and first 26 weeks of Fiscal 2016 ended July 30, 2016, compared with the periods ended August 1, 2015. The request metadata identifies “2015 Q2,” but the filing itself is for the 2016 second quarter.
Business Context
American Eagle Outfitters operates American Eagle and Aerie retail stores and AEO Direct e-commerce operations. The company reports one segment, comprising 951 American Eagle stores, 91 Aerie stand-alone stores, two Tailgate Clothing Co. stores and its direct business. It also had 158 third-party operated international stores in 23 countries. Retail results are seasonal and may not be indicative of full-year performance.
Financial Performance
| Metric | 13 Weeks Ended July 30, 2016 | 13 Weeks Ended August 1, 2015 | Change |
|---|---|---|---|
| Net revenue | $822.6 million | $797.4 million | +3% |
| Gross profit | $307.1 million | $285.0 million | +8% |
| Gross margin | 37.3% | 35.7% | +160 basis points |
| Operating income | $68.7 million | $53.1 million | +29% |
| Operating margin | 8.3% | 6.7% | +160 basis points |
| Net income | $41.6 million | $33.3 million | +25% |
| Diluted EPS | $0.23 | $0.17 | +35% |
| Metric | 26 Weeks Ended July 30, 2016 | 26 Weeks Ended August 1, 2015 | Change |
|---|---|---|---|
| Net revenue | $1.572 billion | $1.497 billion | +5% |
| Gross profit | $600.5 million | $547.3 million | +10% |
| Gross margin | 38.2% | 36.6% | +160 basis points |
| Operating income | $127.3 million | $95.1 million | +34% |
| Net income | $82.1 million | $62.3 million | +32% |
| Diluted EPS | $0.45 | $0.32 | +41% |
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $247.9 million at July 30, 2016, compared with $327.3 million a year earlier.
- Working capital was $327.7 million and the current ratio was 1.66.
- Operating cash flow for the first 26 weeks was $101.4 million, compared with $47.5 million in the prior-year period.
- Capital expenditures were $60.5 million, primarily for stores, remodeling, information technology, distribution centers and e-commerce. The company expects approximately $160 million of Fiscal 2016 capital expenditures.
- Cash used in financing activities was $53.6 million, including $45.2 million of dividends, $6.9 million of employee-tax-related share repurchases and $3.9 million of capital-lease payments.
- No loans were outstanding under the $400 million asset-based revolving credit facilities. Standby letters of credit totaled $8.1 million, and the company was in compliance with the credit agreement.
- The company declared and paid a quarterly dividend of $0.125 per share. Future dividends remain subject to board approval and financial conditions.
Material Changes Versus the Prior Comparable Period
- Comparable sales increased 3% in the second quarter and 5% for the first half, including AEO Direct. American Eagle comparable sales increased 1% in the quarter and 3% year to date; Aerie increased 24% and 28%, respectively.
- Gross margin improved primarily because of lower product costs and higher realized selling prices. Second-quarter improvement was partly offset by higher delivery costs associated with digital growth.
- SG&A increased 2% in the quarter and 4% year to date, but declined as a percentage of revenue by 20 basis points in both comparisons due to expense management and revenue leverage.
- Depreciation and amortization increased because of omni-channel and information-technology investments.
- Inventory was $422.2 million, approximately 3% above the prior year, primarily due to the timing of new inventory receipts.
- Weighted-average diluted shares declined to 183.4 million from 196.9 million in the quarter, supporting the increase in diluted EPS.
- The board authorized an additional 25 million shares for repurchase, bringing total remaining authorization to approximately 27.8 million shares. No purchases were made under the publicly announced program during the period.
Guidance, Outlook, Risks and Unusual Items
- Fiscal 2016 plans called for approximately 15 to 20 new American Eagle stores, 10 to 15 new Aerie stores, 20 to 25 Aerie side-by-side conversions, approximately 55 to 65 American Eagle remodels and potential closures of approximately 20 to 25 American Eagle stores and 10 Aerie stores in the United States and Canada.
- The company expected approximately 40 new international third-party-operated American Eagle stores during Fiscal 2016.
- Management cited positive brand momentum, strong merchandise profitability, controlled expenses and continued softness in mall traffic.
- Key risks include fashion and customer-demand changes, excess inventory and markdowns, commodity, labor and energy cost inflation, foreign currency exposure, store impairment, international expansion, availability of credit facilities and the success of omni-channel investments.
- No long-lived asset or intangible-asset impairment charges were recorded in either comparable period. Management stated that pending legal matters were adequately reserved and were not expected to materially affect financial position or results of operations.
- The effective tax rate was 36.5% for the quarter and 36.4% for the first half. The filing states that unrecognized tax benefits could decrease by approximately $3.3 million over the next twelve months.
- The interim financial statements were reviewed, not audited, by Ernst & Young LLP. Management concluded that disclosure controls were effective, and reported no material changes in internal control over financial reporting.
Investor Verification Checklist
- Verify that second-quarter and year-to-date comparable-sales trends, particularly Aerie growth, continued after July 30, 2016.
- Assess whether inventory growth remained aligned with sales and whether markdowns affected future gross margins.
- Compare actual Fiscal 2016 capital expenditures with the approximately $160 million plan.
- Monitor store openings, remodels, closures and international third-party expansion against the stated plans.
- Review cash generation, dividend sustainability and any subsequent use of the share-repurchase authorization.
- Evaluate the impact of foreign exchange, delivery costs, labor and input-cost inflation on margins.
- Review subsequent filings for changes in tax contingencies, legal matters, impairment indicators, credit availability or lease-accounting effects.