American Eagle Outfitters, Inc. 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended August 1, 2020, compared with August 3, 2019. The supplied metadata identifies “2019 Q2,” but the filing itself is a fiscal 2020 second-quarter report. The business operates American Eagle, Aerie, Tailgate and Todd Snyder brands through company-owned stores, digital channels and international licensees. COVID-19 materially affected the period.
Financial Performance and Position
| Metric | 13 weeks ended Aug. 1, 2020 | 13 weeks ended Aug. 3, 2019 | 26 weeks ended Aug. 1, 2020 | 26 weeks ended Aug. 3, 2019 |
|---|---|---|---|---|
| Net revenue | $883.5 million | $1,040.9 million | $1,435.2 million | $1,927.2 million |
| Gross profit | $265.2 million | $382.6 million | $293.5 million | $707.5 million |
| Gross margin | 30.0% | 36.7% | 20.5% | 36.7% |
| Operating income/(loss) | $(12.2) million | $81.9 million | $(370.5) million | $129.8 million |
| Net income/(loss) | $(13.8) million | $65.0 million | $(270.9) million | $105.7 million |
| Diluted EPS | $(0.08) | $0.38 | $(1.63) | $0.61 |
- Second-quarter revenue declined 15%; first-half revenue declined 26%.
- Second-quarter SG&A decreased 12% to $223.7 million, but increased to 25.3% of revenue from 24.3%. First-half SG&A decreased 15% to $411.9 million and represented 28.7% of revenue.
- First-half impairment, restructuring and COVID-19-related charges were $170.2 million, including $153.6 million of impairment, $13.9 million of COVID-19 expenses and $2.7 million of severance.
- Cash and cash equivalents were $898.8 million at August 1, 2020, versus $361.9 million at February 1, 2020 and $267.2 million at August 3, 2019.
- Working capital was $742.0 million and the current ratio was 1.88 at August 1, 2020.
- Net cash used in operating activities was $36.4 million for the first half, compared with $117.6 million provided in the prior-year period. Capital expenditures were $61.4 million versus $91.8 million.
- Cash provided by financing activities was $580.2 million, primarily reflecting convertible-note and revolving-credit borrowings.
Debt, Liquidity and Capital Allocation
- At August 1, 2020, long-term debt consisted of $415.0 million principal of 3.75% convertible senior notes due 2025, recorded net of a $98.1 million discount, and $200.0 million of revolving-credit borrowings. Reported long-term debt net was $517.0 million.
- The asset-based revolving facilities provide up to $400 million, subject to borrowing-base limits, and expire January 30, 2024. The company was in compliance with the credit agreement and had $7.9 million of standby letters of credit outstanding.
- Subsequent to August 1, 2020, the company repaid the remaining $200 million revolving-credit balance.
- Fiscal 2020 capital expenditures were reduced to an expected range of $100 million to $125 million.
- The share-repurchase program was suspended. The company does not anticipate declaring dividends for the remainder of Fiscal 2020; the delayed first-quarter dividend is scheduled for April 23, 2021.
Material Changes Versus the Prior Comparable Period
- Stores were closed to the public beginning March 17, 2020 and largely reopened by August 1, 2020, but traffic remained depressed. Digital sales accelerated and exceeded management expectations, while Aerie continued to grow strongly.
- Second-quarter American Eagle brand revenue declined 26%, while Aerie brand revenue increased 32%. For the first half, American Eagle declined 32% and Aerie increased 16%, including respective digital channels.
- Gross margin contracted because of store closures, higher markdowns and promotions, inventory provisions, fixed occupancy and warehousing costs, and higher delivery and distribution-center costs.
- The prior-year quarter included approximately $40 million of Japanese license royalties, which contributed approximately $38 million to gross profit; this benefit did not recur.
- Impairments affected 272 stores and certain corporate assets. Of the $153.6 million impairment charge, $84.1 million related to operating lease right-of-use assets, $51.5 million to property and equipment, and $18.0 million to certain investments.
- The company adopted a highly digitized Real Rewards loyalty program in June 2020.
Outlook, Commentary and Risks
Management stated that sequential operating performance improved in the second quarter as stores reopened, digital sales strengthened, inventory was optimized and spending was reduced. Management believes current cash and available liquidity can fund operations, capital expenditures, dividends and working capital beyond Fiscal 2020, even if most stores were forced to close during that period.
- Management did not provide conventional earnings or revenue guidance. Planned actions include approximately 20 Aerie store openings during Fiscal 2020, potential store closures and reduced capital spending.
- COVID-19 creates substantial uncertainty regarding store closures, customer traffic, consumer discretionary spending, distribution-center staffing, merchandise availability, supply chains, delivery providers and government restrictions.
- Further impairment, restructuring and COVID-19-related charges may be required. The company also faces risks from markdowns, occupancy obligations, debt service, covenants, tariffs, foreign exchange, litigation, cybersecurity and changing consumer preferences.
- The company has substantial operating lease obligations. Operating lease liabilities totaled approximately $1.60 billion at August 1, 2020.
- Legal proceedings were not expected by management to have a material adverse effect, although outcomes could change as additional facts emerge.
Investor Verification Checklist
- Verify the filing period, because the supplied “2019 Q2” metadata conflicts with the filing’s August 1, 2020 reporting date.
- Reconcile liquidity after the subsequent repayment of the $200 million revolving-credit balance and assess remaining borrowing availability.
- Assess whether digital-sales growth can offset weaker store traffic and whether Aerie momentum is sustainable.
- Review the assumptions supporting the $153.6 million impairment charge and monitor for additional impairments or restructuring costs.
- Evaluate the effect of suspended repurchases and dividends, convertible-note dilution, and the company’s ability to service debt and lease obligations.
- Monitor COVID-19 developments, store reopening status, inventory levels, markdown rates, gross margin recovery and future capital expenditures.