AMERICAN EAGLE OUTFITTERS INC quarterly report, Q3 FY2020

American Eagle Outfitters, Inc. — Form 10-Q Summary

Reporting period: The provided filing covers the 13 and 39 weeks ended October 31, 2020, compared with November 2, 2019. The request metadata identifies “2019 Q3,” but the filing itself is a third-quarter Fiscal 2020 Form 10-Q, filed December 3, 2020.

Business Context and Reporting Period

American Eagle Outfitters operates the American Eagle, Aerie, Tailgate and Todd Snyder brands through more than 1,000 company-operated retail stores, e-commerce channels and international licensed or franchised locations. The company reports one segment and is subject to significant retail seasonality, with substantial revenue and operating income typically generated in the third and fourth fiscal quarters.

Results were materially affected by the COVID-19 pandemic, including store closures, reduced store traffic, operating restrictions and changes in consumer behavior. Nearly all stores had reopened by October 31, 2020, while digital sales continued to grow.

Key Financial Metrics

Metric	13 Weeks Ended October 31, 2020	13 Weeks Ended November 2, 2019	39 Weeks Ended October 31, 2020	39 Weeks Ended November 2, 2019
Net revenue	$1.032 billion	$1.066 billion	$2.467 billion	$2.994 billion
Gross profit	$414.8 million	$407.1 million	$708.3 million	$1.115 billion
Gross margin	40.2%	38.2%	28.7%	37.2%
Operating income (loss)	$95.6 million	$103.1 million	$(274.9) million	$232.9 million
Net income (loss)	$58.1 million	$80.8 million	$(212.8) million	$186.5 million
Diluted EPS	$0.32	$0.48	$(1.28)	$1.09
Operating cash flow	Not separately provided	Not separately provided	$(10.4) million	$178.2 million

Third-quarter revenue declined 3%, while gross profit increased 2% and gross margin expanded 200 basis points.
American Eagle brand revenue declined 11% in the quarter; Aerie revenue increased 34%. For the year-to-date period, American Eagle declined 24% and Aerie increased 23%, including related digital sales.
Third-quarter SG&A increased 6% to $273.3 million, or 26.5% of revenue, compared with 24.3% in the prior-year quarter.
Year-to-date impairment, restructuring and COVID-19-related charges were $177.2 million, including $153.6 million of impairment charges, $19.8 million of incremental COVID-19 costs and $3.7 million of severance costs.
Cash and cash equivalents were $692.4 million at October 31, 2020, compared with $214.5 million at November 2, 2019 and $361.9 million at February 1, 2020.
Working capital was $613.5 million and the current ratio was 1.69 at October 31, 2020.
Capital expenditures were $92.6 million year to date, compared with $149.9 million in the prior-year period.

Debt, Liquidity and Capital Allocation

In April 2020, the company issued $415.0 million of 3.75% convertible senior notes due 2025. The notes were recorded at $321.1 million net of an unamortized discount at October 31, 2020.
The company repaid all $330.0 million borrowed under its asset-based revolving credit facilities. The facilities provide up to $400.0 million, subject to borrowing-base limitations, and expire in January 2024. Standby letters of credit totaled $7.9 million.
Net cash provided by financing activities was $379.9 million, primarily reflecting convertible-note proceeds, compared with $188.1 million of cash used in the prior-year period.
The company suspended its share repurchase program and repurchased $20.0 million of shares early in Fiscal 2020. It also repurchased $5.4 million of shares from employees for tax withholding.
The first-quarter dividend was deferred and subsequently scheduled for payment on December 30, 2020. Second- and third-quarter dividends were suspended, and management did not anticipate declaring additional dividends for the remainder of Fiscal 2020.
Management stated that current cash holdings and available liquidity were expected to fund anticipated capital expenditures, dividends and working capital requirements, including under a scenario involving renewed store closures.

Material Changes Versus the Prior Comparable Period

COVID-19 caused a significant year-to-date revenue decline, a shift from operating income to an operating loss and a shift from net income to net loss.
Year-to-date gross margin fell 850 basis points because store closures reduced revenue while fixed buying, occupancy and warehousing costs continued.
Third-quarter gross margin improved because of higher full-price sales, lower promotions, inventory optimization, lower product costs and rent concessions, partly offset by higher delivery and distribution costs.
Year-to-date operating cash flow deteriorated to a $10.4 million use, primarily reflecting the operating downturn and working-capital effects.
The company added substantial liquidity through the convertible-note issuance and temporary credit-facility borrowings, while reducing capital expenditures, inventory receipts and operating expenses.
Store count increased to 1,105 from 1,094 at the end of the prior-year comparable period. International licensed and franchised stores declined to 225 from 241.

Guidance, Outlook, Risks and Unusual Items

Fiscal 2020 capital expenditures were planned at $100 million to $125 million, below prior-year levels, with priority given to omni-channel, store and supply-chain investments.
Management did not provide comparable-sales guidance and stated that comparable sales were not disclosed because COVID-19 disruptions made the periods non-comparable.
Management reported strong digital sales growth and sequential improvement in third-quarter operating earnings and cash flow, but cautioned that digital performance might not continue and that the business historically depends heavily on stores.
Key risks include additional COVID-19 outbreaks, renewed store or distribution-center closures, reduced discretionary spending, holiday-season disruption, supply-chain constraints, inventory markdowns, higher product costs, tariffs, foreign-exchange fluctuations, lease obligations and potential additional impairment or restructuring charges.
The company recorded impairment on 272 stores and certain corporate assets. Impaired assets included $84.1 million of operating lease right-of-use assets, $51.5 million of property and equipment and $18.0 million of investments.
The company stated that pending legal matters were not expected to have a material adverse effect, although outcomes could change based on subsequently discovered facts or legal determinations.
Management concluded that disclosure controls and procedures were effective and reported no material change in internal control over financial reporting. No off-balance-sheet arrangements were reported.

Important Facts for Investors to Verify

Confirm the applicable period: the supplied filing is for Fiscal 2020 third quarter, not 2019 third quarter.
Assess the sustainability of the third-quarter gross-margin improvement and the extent to which it reflects temporary rent concessions, impairments, lower promotions or inventory actions.
Review the company’s ability to generate positive operating cash flow after the COVID-19-related financing benefit is excluded.
Evaluate the $415 million convertible notes, including the 3.75% coupon, 2025 maturity, approximately $8.75 conversion price and potential dilution.
Monitor store traffic, digital-sales growth, inventory levels and markdown exposure during the holiday period.
Assess the possibility of further store impairments, restructuring charges and COVID-19-related costs.
Verify future dividend decisions and the company’s continued suspension of share repurchases.