American Eagle Outfitters, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended August 3, 2019, with comparisons to August 4, 2018. Although the request metadata identifies “2018 Q2,” the filing itself is for the second quarter of fiscal 2019. American Eagle Outfitters operates the American Eagle and Aerie brands, AEO Direct e-commerce, and smaller Tailgate and Todd Snyder businesses in one reportable segment.
Financial Highlights
| Metric | 13 weeks ended August 3, 2019 | 13 weeks ended August 4, 2018 | Change |
|---|
| Total net revenue | $1.041 billion | $964.9 million | +8% |
| Gross profit | $382.6 million | $353.1 million | +8% |
| Gross margin | 36.7% | 36.6% | +10 basis points |
| Operating income | $81.9 million | $76.4 million | +7% |
| Net income | $65.0 million | $60.3 million | +8% |
| Diluted EPS | $0.38 | $0.34 | +12% |
| Metric | 26 weeks ended August 3, 2019 | 26 weeks ended August 4, 2018 | Change |
|---|
| Total net revenue | $1.927 billion | $1.788 billion | +8% |
| Gross profit | $707.5 million | $657.5 million | +8% |
| Gross margin | 36.7% | 36.8% | -10 basis points |
| Operating income | $129.8 million | $127.1 million | +2% |
| Net income | $105.7 million | $100.3 million | +5% |
| Diluted EPS | $0.61 | $0.56 | +9% |
- Second-quarter comparable sales increased 2%, following a 9% increase in the prior-year quarter. American Eagle comparable sales declined 1%, while Aerie comparable sales increased 16%. Digital sales increased at a double-digit rate.
- Year-to-date comparable sales increased 3%; American Eagle increased 1% and Aerie increased 15%.
- Second-quarter SG&A increased 8% to $253.1 million and remained 24.3% of revenue. Year-to-date SG&A increased 9% to $483.8 million and rose to 25.1% of revenue.
- Second-quarter restructuring charges were $2.7 million, primarily corporate severance. Year-to-date charges were $4.3 million and also included closure costs for company-operated stores in China.
- The company reported $40.0 million of license royalties from a third-party operator of American Eagle stores in Japan. Management stated that this royalty income was the primary driver of the gross-profit increase and helped offset higher markdowns and delivery expense.
Cash Flow, Liquidity and Capital Structure
| Balance or cash-flow item | August 3, 2019 | August 4, 2018 |
|---|
| Cash and cash equivalents | $267.2 million | $323.3 million |
| Short-term investments | $50.0 million | $40.0 million |
| Cash and short-term investments | $317.2 million | $363.3 million |
| Merchandise inventory | $534.8 million | $466.1 million |
| Working capital | $256.4 million | $489.1 million |
| Current ratio | 1.33 | 1.96 |
- Year-to-date operating cash flow was $117.6 million, down from $152.4 million in the prior-year period, primarily reflecting greater inventory investment and other working-capital changes.
- Capital expenditures were $91.8 million, compared with $101.4 million in the prior-year period. Fiscal 2019 capital expenditures are expected to be $200 million to $215 million.
- Year-to-date financing cash outflows included $80.0 million of share repurchases, $46.9 million of dividends, and $7.9 million of employee share withholding repurchases. Total shareholder returns were $126.9 million.
- The company had no borrowings under its $400 million asset-based revolving credit facilities and $8.1 million of standby letters of credit outstanding at August 3, 2019. The facilities expire in January 2024 and are subject to borrowing-base limitations.
- Adoption of ASC 842 resulted in recognition of $1.6 billion of operating lease liabilities and right-of-use assets at adoption, with $1.4 billion of operating lease right-of-use assets and $1.6 billion of lease liabilities reported at quarter-end. The adoption reduced working capital by approximately $226.5 million.
Material Changes, Outlook and Risks
- Management described the quarter as a record-revenue period and the eighteenth consecutive quarter of positive consolidated comparable sales, but noted that an unusually cool May and delayed back-to-school shopping pressured American Eagle demand, sales and margins.
- Aerie delivered its nineteenth consecutive quarter of double-digit sales growth. AE jeans also achieved record sales.
- Fiscal 2019 plans include opening 15 to 20 American Eagle stores, 35 to 40 standalone Aerie stores, and 25 to 35 Aerie side-by-side locations; remodeling approximately 40 to 50 American Eagle stores; and potentially closing approximately 10 to 15 American Eagle and 5 to 10 Aerie stores.
- The company planned approximately 15 to 20 new international third-party-operated American Eagle stores and had 236 such stores in 24 countries at quarter-end. Management planned to terminate its Japan license agreement and was evaluating future operating models in Japan.
- Key risks include inventory forecasting and markdown exposure, consumer discretionary spending, seasonal and holiday performance, tariffs and other trade restrictions, raw-material and product-cost inflation, foreign-exchange movements, international execution, store impairment, legal matters, and the availability of cash flow or credit facilities.
- Management stated that cash on hand and operating cash flow are expected to fund capital expenditures, dividends and working-capital needs. Future dividends remain subject to Board discretion.
- The company reported no material changes in market-risk exposure, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. Management concluded that disclosure controls were effective.
Investor Verification Items
- Verify the sustainability and comparability of the $40.0 million Japan license royalty contribution, particularly because the agreement was expected to terminate.
- Assess whether the 15% year-over-year inventory increase can be converted at planned margins or will require additional markdowns.
- Reconcile GAAP diluted EPS of $0.38 with adjusted diluted EPS of $0.39, which excludes approximately $2.7 million of pre-tax restructuring charges.
- Monitor the effect of ASC 842 lease liabilities on leverage, working capital and future fixed cash commitments; undiscounted operating lease payments totaled $1.924 billion.
- Evaluate the pace and returns of store expansion, Aerie growth, digital investments, remodels and planned store closures against the $200 million to $215 million capital-expenditure outlook.
- Confirm the effect of share repurchases and dividends on cash balances, shares outstanding and future capital allocation.
