American Eagle Outfitters, Inc. — Form 10-Q Summary
Reporting period: 13 weeks ended May 2, 2020. The supplied request metadata identifies “2019 Q1,” but the filing is the first quarter of Fiscal 2020 and compares results with the 13 weeks ended May 4, 2019. The company operates American Eagle, Aerie, Tailgate and Todd Snyder brands through more than 1,000 company-operated stores, digital channels and 215 international licensed/franchise stores.
Financial performance and liquidity
| Metric | Q1 Fiscal 2020 | Comparable period | Change |
|---|---|---|---|
| Net revenue | $551.7 million | $886.3 million | Down 38% |
| Gross profit | $28.3 million | $324.9 million | Down 91% |
| Gross margin | 5.1% | 36.7% | Down 31.6 percentage points |
| SG&A | $188.2 million | $230.7 million | Down 18% |
| Impairment and restructuring | $155.6 million | $1.5 million | Significant increase |
| Operating income/(loss) | $(358.2) million | $47.8 million | Turned to loss |
| Net income/(loss) | $(257.2) million | $40.8 million | Turned to loss |
| Diluted EPS | $(1.54) | $0.23 | Down $1.77 |
| Cash flow from operations | $(209.9) million | $7.7 million | Declined |
Balance sheet and liquidity: At May 2, 2020, cash and cash equivalents were $855.8 million and short-term investments were $30.0 million, for total cash and short-term investments of approximately $885.7 million. Working capital was $896.7 million and the current ratio was 2.35.
Total debt was $643.0 million, consisting of $313.0 million net convertible notes and $330.0 million of revolving-credit borrowings. The company issued $415.0 million of 3.75% convertible senior notes due 2025 and drew $330.0 million under its $400.0 million asset-based revolving credit facilities. The revolving facilities mature January 30, 2024; borrowings carried a weighted-average interest rate of 2.5% at quarter-end. The company was in compliance with the credit agreement.
Operating lease liabilities totaled approximately $1.63 billion, including $328.4 million current and $1.30 billion non-current. Total stockholders’ equity was $997.0 million.
Material changes versus the prior comparable period
- COVID-19 store closures beginning after March 17, 2020 materially reduced traffic and demand. Comparable sales were not disclosed because the periods were not considered comparable.
- American Eagle brand revenue, including related digital sales, declined 45%; Aerie revenue declined 2%. Aerie represented approximately 30% of revenue versus 18% in the prior-year quarter.
- Gross margin contracted sharply because of store closures, increased markdowns and promotions, inventory provisions and fixed occupancy and warehousing costs spread over lower revenue.
- SG&A declined in dollars due primarily to furloughs and cost controls, but increased to 34.1% of revenue from 26.0%.
- The company recorded $153.6 million of impairment charges, including $84.1 million for operating lease right-of-use assets and $51.5 million for store and corporate property and equipment. The charges affected 272 stores and certain corporate assets; an additional $18.0 million impairment related to certain cost and equity-method investments.
- Cash from operations declined to an outflow of $209.9 million, while financing cash inflow of $714.6 million reflected the convertible notes and revolving-credit borrowings.
- The company repurchased $20.0 million of common stock in early March before suspending the repurchase program. It also deferred the first-quarter cash dividend and temporarily furloughed store, field and corporate associates.
Outlook, commentary and risks
- Management reduced Fiscal 2020 capital expenditure expectations to $100 million–$125 million and implemented hiring freezes, delayed merit increases, expense reductions, lower inventory receipts and vendor and landlord payment-term discussions.
- Digital sales accelerated after store closures and the company continued using buy-online/ship-from-store capabilities, but management cautioned that digital growth may not continue and stores historically generated most revenue.
- Stores began reopening after May 2, 2020 as governmental restrictions were lifted, with enhanced sanitation, masks, Plexiglas partitions and cleaning protocols.
- Management stated that available liquidity was expected to fund medium-term requirements and support operations beyond Fiscal 2020 even if most stores remained closed. However, the company could not reliably predict the pandemic’s duration or its effects on consumer demand, store traffic, distribution-center staffing, fulfillment, supply chains or government restrictions.
- Further impairment and restructuring charges may be required because of uncertainty in retail real estate assumptions and COVID-19-related disruption.
- Key risks include discretionary consumer spending, store leases and occupancy costs, indebtedness and covenant compliance, access to capital, supply-chain disruption, tariffs, foreign exchange, inventory markdowns, cybersecurity and legal or regulatory matters.
- The effective tax rate was 28.8%, compared with 21.7%, influenced by CARES Act net operating loss carryback provisions, deferred-tax remeasurement and an increased valuation allowance.
Important facts for investors to verify
- Whether store reopenings, traffic and digital sales trends support recovery from the 38% revenue decline.
- The sustainability of approximately $885.7 million of cash and short-term investments after considering operating cash burn, debt service, lease obligations and deferred payments.
- Terms, covenants, collateral and maturity risks associated with the $330.0 million revolving-credit borrowing and $415.0 million convertible notes.
- Potential additional impairment, restructuring, inventory markdown and lease-related charges.
- Whether the deferred $0.1375-per-share dividend is paid as scheduled and whether future dividends or repurchases remain suspended.
- Actual Fiscal 2020 capital expenditures relative to the $100 million–$125 million plan and the effect of cost reductions on operations and customer service.
- The filing states that pending legal matters are not expected to be material, but outcomes could change with newly discovered facts or adverse rulings.