Business Context and Reporting Period
Company: American Eagle Outfitters, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 1, 2009 (13 weeks) and 26 weeks
Business Overview: The Company operates retail apparel stores under the American Eagle Outfitters, aerie, and MARTIN + OSA brands, along with e-commerce operations (AEO Direct). Operations are conducted in one reportable segment. As of August 1, 2009, the Company operated 1,114 stores globally.
Key Financial Metrics
| Financial Metric (in thousands) | 13 Weeks Ended Aug 1, 2009 |
13 Weeks Ended Aug 2, 2008 |
26 Weeks Ended Aug 1, 2009 |
26 Weeks Ended Aug 2, 2008 |
|---|---|---|---|---|
| Net Sales | $657,596 | $688,815 | $1,269,582 | $1,329,117 |
| Gross Profit | $248,833 | $289,384 | $469,758 | $553,052 |
| Gross Margin % | 37.8% | 42.0% | 37.0% | 41.6% |
| Operating Income | $46,317 | $89,427 | $73,656 | $153,906 |
| Operating Margin % | 7.0% | 13.0% | 5.8% | 11.6% |
| Net Income | $28,572 | $59,831 | $50,539 | $103,726 |
| Diluted EPS | $0.14 | $0.29 | $0.24 | $0.50 |
| Cash & Equivalents | $500,263 | $353,390 | $500,263 | $353,390 |
| Total Investments | $228,084 | $335,635 | $228,084 | $335,635 |
| Working Capital | $634,361 | $473,619 | $634,361 | $473,619 |
| Current Ratio | 2.60 | 2.23 | 2.60 | 2.23 |
Debt & Liquidity: The Company has $75.0 million in outstanding demand line borrowings and $70.2 million in outstanding letters of credit against a total credit facility of $325.0 million. Cash flow from operating activities for the 26 weeks ended August 1, 2009, was $80.9 million.
Material Changes vs. Prior Period
- Sales Decline: Net sales decreased 5% year-over-year for both the 13 and 26-week periods. This was driven by a 10% decline in comparable store sales, primarily due to lower traffic and transactions in the American Eagle Brand.
- Margin Compression: Gross margin declined 420 basis points (13 weeks) and 460 basis points (26 weeks) due to increased markdowns and higher promotional costs. Operating income dropped 48% (13 weeks) and 52% (26 weeks) compared to the prior year.
- Profitability: Net income decreased 52% for the 13-week period and 51% for the 26-week period. Diluted EPS fell from $0.29 to $0.14 (13 weeks) and $0.50 to $0.24 (26 weeks).
- Expense Management: Selling, general, and administrative (SG&A) expenses decreased slightly in absolute dollars but increased as a percentage of net sales due to the sales decline and higher store payroll costs.
- Investment Portfolio: The Company liquidated certain long-term investments, resulting in a net increase in cash and cash equivalents. However, the Company recorded a $0.2 million other-than-temporary impairment (OTTI) charge in earnings related to auction rate preferred securities.
Guidance, Outlook, and Risks
- Capital Expenditures: Management lowered capital spending plans for Fiscal 2009, expecting expenditures between $110 million and $135 million. This includes approximately 8 new American Eagle stores, 21 new aerie stores, and 25 remodeled stores.
- International Expansion: The Company entered a franchise agreement with Alshaya Trading Co. to open American Eagle stores in the Middle East, with the first store expected in 2010. This requires no capital investment from the Company.
- Investment Risks: The Company holds approximately $228 million in auction rate securities (ARS) and auction rate preferred securities (ARPS). While management believes the current illiquidity is temporary, further market deterioration could require additional impairment charges.
- Subsequent Events: On August 18, 2009, the Company repatriated approximately $92 million from Canadian subsidiaries, anticipating an income tax benefit of $0.05 per diluted share in the third quarter. Additionally, the Company received notice of redemptions at par for approximately $27 million of ARS.
- Dividends: A quarterly cash dividend of $0.10 per share was declared for the third quarter, payable October 9, 2009.
Investor Verification Checklist
- Comparable Store Sales: Verify the sustainability of the 10% decline in comparable store sales and the effectiveness of cost control initiatives in offsetting margin pressure.
- Investment Portfolio Valuation: Monitor the status of the $228 million in ARS/ARPS holdings for potential further impairment charges or liquidity constraints.
- Inventory Levels: Review merchandise inventory levels ($352.8 million) relative to sales trends to assess the risk of future markdowns.
- Capital Allocation: Confirm the execution of the reduced capital expenditure plan and the impact on store growth versus renovation.
- Tax Implications: Track the realization of the anticipated $0.05 per share tax benefit from the repatriation of Canadian earnings.