American Eagle Outfitters, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 30, 2021, compared with October 31, 2020. The request metadata identifies “2020 Q3,” but the filing is for the third quarter of Fiscal 2021. Fiscal 2021 ends January 29, 2022.
Business Context
American Eagle Outfitters is a global specialty retailer operating the American Eagle, Aerie, OFFLINE, Todd Snyder and Unsubscribed brands. It operates more than 1,000 company-owned retail stores, e-commerce channels and 256 internationally licensed or franchised stores. The company reports two segments: American Eagle and Aerie.
As of October 30, 2021, all stores had reopened, although operating restrictions, reduced traffic and ongoing COVID-19-related volatility remained. The company also acquired AirTerra during Fiscal 2021 as part of its supply-chain transformation strategy.
Key Financial Metrics
| Metric | 13 Weeks Ended October 30, 2021 | 13 Weeks Ended October 31, 2020 | 39 Weeks Ended October 30, 2021 | 39 Weeks Ended October 31, 2020 |
|---|---|---|---|---|
| Net revenue | $1.274 billion | $1.032 billion | $3.503 billion | $2.467 billion |
| Gross profit | $564.5 million | $414.8 million | $1.503 billion | $708.3 million |
| Gross margin | 44.3% | 40.2% | 42.9% | 28.7% |
| Operating income (loss) | $209.7 million | $95.6 million | $511.1 million | $(274.9) million |
| Operating margin | 16.5% | 9.3% | 14.6% | (11.1)% |
| Net income (loss) | $152.2 million | $58.1 million | $369.2 million | $(212.8) million |
| Diluted earnings per share | $0.74 | $0.32 | $1.78 | $(1.28) |
| Cash flow from operations | Not separately provided | Not separately provided | $133.7 million | $(10.4) million |
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $740.7 million at October 30, 2021, compared with $692.4 million at October 31, 2020 and $850.5 million at January 30, 2021.
- Working capital was $906.0 million and the current ratio was 2.04, compared with $613.5 million and 1.69, respectively, at October 31, 2020.
- Merchandise inventory was $739.8 million, up from $560.0 million at October 31, 2020, reflecting preparation for demand and supply-chain conditions.
- Long-term debt, net, was $336.2 million, consisting primarily of convertible senior notes. The notes had $412.0 million of principal outstanding and mature in 2025.
- No loans were outstanding under the $400 million asset-based revolving credit facilities; $7.9 million of standby letters of credit were outstanding. The facilities expire January 30, 2024.
- Operating lease liabilities totaled approximately $1.423 billion, including current and non-current portions.
- Capital expenditures were $144.4 million for the first 39 weeks, compared with $92.6 million in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 24%, driven by higher store traffic, transactions and transaction value following store reopenings. Store revenue increased 29% and AEO Direct revenue increased 10%.
- American Eagle third-quarter revenue increased 21% to $941.0 million; Aerie revenue increased 28% to $315.0 million.
- Gross margin expanded 410 basis points in the quarter, primarily due to higher merchandise margins, increased full-price selling, lower markdowns, and improved rent and delivery expense, partially offset by higher freight costs.
- SG&A increased 15% in the quarter but declined to 24.6% of revenue from 26.5%. The increase in absolute expense primarily reflected higher store payroll and advertising.
- No impairment, restructuring or COVID-19-related charges were recorded in the current-year quarter or year-to-date period. In the prior-year comparable periods, the company recorded $7.0 million and $177.2 million, respectively, including $153.6 million of asset impairment charges for the first 39 weeks.
- Year-to-date operating cash flow improved to $133.7 million from a use of $10.4 million, while investing cash outflows increased to $148.8 million due primarily to higher capital expenditures.
- The company paid $83.6 million in dividends during the first 39 weeks. The quarterly dividend was increased from $0.1375 to $0.18 per share during Fiscal 2021.
Guidance, Outlook and Management Commentary
- Fiscal 2021 capital expenditures were expected to be approximately $250 million to $275 million, supporting store expansion, remodels, information technology and e-commerce investments.
- Management expected cash holdings and operating cash flow to fund anticipated capital expenditures, dividends and working-capital requirements for the next twelve months.
- Management planned approximately 20 to 30 American Eagle store openings and 75 Aerie and OFFLINE locations during Fiscal 2021, along with approximately 25 to 35 store remodels. It also anticipated potential lease-expiration closures of approximately 30 to 50 American Eagle stores and five to 10 Aerie stores.
- Subsequent to quarter-end, the company agreed to acquire Quiet Logistics and certain equity interests in Locus Robotics and Axlehire for $350 million in cash, subject to adjustments. The transaction was expected to close in the fourth quarter of Fiscal 2021 and was expected to be funded with cash on hand.
- Management stated that COVID-19 continued to reduce visibility and could cause further store, distribution-center or corporate-facility disruptions. The company could also incur additional impairment or restructuring charges.
Principal Risks and Contingencies
- COVID-19 resurgence, store or distribution-center closures, vaccination or testing mandates, labor attrition and related operating costs.
- Supply-chain disruption, port congestion, shipping delays, rising freight costs, raw-material inflation, tariffs and foreign-exchange fluctuations.
- Discretionary consumer spending, changing fashion preferences, competition, seasonality and the risk of increased markdowns.
- Inventory levels were substantially higher year over year; failure to sell inventory at planned prices could pressure gross margin and earnings.
- Convertible notes could create significant future dilution. The filing disclosed approximately 48.3 million shares potentially convertible as of October 30, 2021.
- Impairment risk related to stores, operating lease right-of-use assets, goodwill, intangible assets and other long-lived assets.
- The company is subject to ordinary-course legal proceedings and claims; management did not expect currently pending matters to have a material adverse effect, but outcomes could differ from current estimates.
Investor Verification Checklist
- Verify the reporting-period discrepancy between the request metadata and the actual filing period of October 30, 2021.
- Assess the sustainability of gross-margin improvement after excluding favorable comparisons against COVID-19-affected 2020 results.
- Monitor inventory growth, markdown activity, freight costs and supply-chain execution.
- Review the $350 million Quiet Logistics transaction, its closing status, purchase-price adjustments and effect on cash liquidity.
- Evaluate potential dilution from the convertible notes and the planned adoption of ASU 2020-06 in Fiscal 2022.
- Confirm the company’s ability to fund capital expenditures, dividends and lease obligations while maintaining adequate liquidity.
- Track COVID-19 restrictions, labor availability, vaccine or testing mandates and any resulting store or fulfillment disruptions.