American Eagle Outfitters, Inc. — Form 10-Q Summary
Reporting period: 13 weeks ended May 3, 2014, compared with 13 weeks ended May 4, 2013. The supplied metadata identifies “2013 Q1,” but the filing is for the first quarter of fiscal 2014. The interim financial statements are unaudited and were reviewed by Ernst & Young LLP.
Business Context
American Eagle Outfitters operates American Eagle and aerie retail stores and AEO Direct e-commerce operations, which are aggregated into one reportable segment. At quarter-end, the Company operated 1,057 consolidated stores, including 949 American Eagle Outfitters stores and 108 aerie stores, plus 77 international franchise stores in 13 countries.
Key Financial Metrics
| Metric | 13 Weeks Ended May 3, 2014 | 13 Weeks Ended May 4, 2013 | Change |
|---|---|---|---|
| Total net revenue | $646.1 million | $679.5 million | Down 5% |
| Gross profit | $225.8 million | $263.6 million | Down 14% |
| Gross margin | 34.9% | 38.8% | Down 390 basis points |
| Operating income | $8.4 million | $45.8 million | Down $37.4 million |
| Net income | $3.9 million | $28.0 million | Down 86% |
| Diluted EPS | $0.02 | $0.14 | Down $0.12 |
| Net cash used in operating activities | $4.3 million | $38.7 million | Improved by $34.3 million |
| Capital expenditures | $72.0 million | $45.7 million | Increased by $26.4 million |
Consolidated comparable sales, including AEO Direct, decreased 10%; American Eagle Outfitters brand comparable sales decreased 11% and aerie comparable sales decreased 4%. Management attributed the sales decline to weak traffic, lower transactions and lower transaction values. AUR declined approximately 5% and average dollar sale declined approximately 3%.
SG&A increased 2% to $185.1 million and rose to 28.6% of revenue from 26.8%. Depreciation and amortization declined to $32.4 million from $35.5 million. The effective income tax rate increased to 57.6% from 38.0%, primarily because of valuation allowances on foreign losses.
At May 3, 2014, cash and cash equivalents were $327.7 million, merchandise inventory was $329.2 million, total assets were $1.652 billion and stockholders’ equity was $1.149 billion. Working capital was $461.8 million and the current ratio was 2.17.
Debt, Liquidity and Capital Allocation
The Company had no borrowings under its $150.0 million unsecured revolving credit facility and was in compliance with its covenants. Outstanding letters of credit totaled $8.2 million under the facility and $32.7 million under separate trade-letter-of-credit arrangements. The filing does not report traditional funded debt balances apart from capital lease obligations.
Cash decreased by $91.2 million during the quarter to $327.7 million. Cash uses included $72.0 million of capital expenditures, $24.3 million of dividends and $7.4 million of employee share repurchases for tax withholding. No shares were repurchased under the publicly announced repurchase program during the quarter. The Board declared and paid a quarterly dividend of $0.125 per share.
Fiscal 2014 capital expenditures were expected to be approximately $230 million, including distribution-center construction, store investments, information technology and e-commerce. Management stated that cash on hand and operating cash flow were expected to fund anticipated North American requirements.
Material Changes Versus Prior Comparable Period
- Revenue declined 5% and comparable sales declined 10%, reflecting weak demand and traffic.
- Gross margin contracted 390 basis points because of competitive pricing, increased promotional activity and markdowns, along with rent and delivery-cost deleverage.
- Operating income fell to $8.4 million from $45.8 million. The prior-year period included $11.5 million of asset write-offs and corporate charges; prior-year adjusted diluted EPS was $0.18 versus reported GAAP EPS of $0.14.
- Net income fell to $3.9 million from $28.0 million, while diluted EPS declined to $0.02 from $0.14.
- Operating cash outflow improved year over year, but the Company remained cash-flow negative from operations due in part to inventory investment and lower earnings.
- Capital expenditures increased substantially, primarily for stores, distribution-center expansion, information technology and e-commerce.
- Cash and investments declined from $496.2 million at May 4, 2013 to $327.7 million at May 3, 2014; the Company held no short-term investments at quarter-end.
Guidance, Outlook, Risks and Unusual Items
Management planned approximately 25 new AEO Factory stores, approximately 45 American Eagle Outfitters store remodels and continued international expansion during Fiscal 2014. The Company also described a potential closure of approximately 150 North American stores through Fiscal 2016 and planned approximately 40 new international third-party-operated stores during Fiscal 2014.
Key risks include weak comparable sales, elevated markdowns, inventory execution, store impairment charges, rising raw-material, labor and energy costs, international expansion, reliance on third-party franchise and license arrangements, and potential limitations on credit-facility availability. Retail seasonality means quarterly results are not necessarily indicative of full-year performance.
The filing identifies no material changes in market-risk exposure or risk-factor disclosures from the prior annual report. Legal proceedings were not expected to materially affect financial position or results of operations. No investment-security impairment losses or intangible-asset impairment charges were recorded during either comparable quarter. The Company adopted ASU 2013-11 regarding presentation of unrecognized tax benefits with no significant impact.
Important Facts for Investors to Verify
- Confirm the reporting-period classification: the filing covers the quarter ended May 3, 2014, despite the supplied “2013 Q1” metadata.
- Assess whether comparable-sales weakness and gross-margin pressure persist, particularly the 10% consolidated comparable-sales decline and increased markdowns.
- Monitor inventory per square foot, promotional activity and future markdown reserves.
- Reconcile the planned approximately $230 million of Fiscal 2014 capital expenditures with operating cash generation and ending liquidity.
- Review the sustainability of the $0.125 quarterly dividend given negative operating cash flow in the quarter.
- Evaluate store closures, remodels, new Factory stores and international expansion for potential impairment or execution risks.
- Review the $8.2 million of revolving-facility letters of credit, $32.7 million of trade letters of credit and compliance with credit covenants.
- Consider the elevated 57.6% effective tax rate and potential changes in foreign-loss valuation allowances.