AMERICAN EAGLE OUTFITTERS INC quarterly report, Q3 FY2018

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

Reporting period: The supplied filing covers the 13 and 39 weeks ended November 3, 2018, compared with October 28, 2017. The request metadata identifies “2017 Q3,” but the filing is for Fiscal 2018 third quarter. Fiscal 2018 ends February 2, 2019. American Eagle Outfitters operates American Eagle, Aerie, AEO Direct, Tailgate and Todd Snyder businesses in one reportable segment.

Financial Performance and Position

Metric	13 weeks ended November 3, 2018	13 weeks ended October 28, 2017	39 weeks ended November 3, 2018	39 weeks ended October 28, 2017
Net revenue	$1,003.7 million	$960.4 million	$2,791.5 million	$2,566.8 million
Gross profit	$399.5 million	$374.9 million	$1,057.0 million	$945.4 million
Gross margin	39.8%	39.0%	37.9%	36.8%
Operating income	$108.6 million	$110.9 million	$235.7 million	$186.8 million
Operating margin	10.8%	11.5%	8.4%	7.3%
Net income	$85.5 million	$63.7 million	$185.7 million	$110.2 million
Diluted EPS	$0.48	$0.36	$1.04	$0.61

Third-quarter consolidated comparable sales increased 8%; American Eagle comparable sales increased 5% and Aerie comparable sales increased 32%. Aerie achieved its 16th consecutive quarter of double-digit comparable-sales growth.
Year-to-date comparable sales increased 9%, with American Eagle up 5% and Aerie up 32%.
Third-quarter gross profit increased 7%, while gross margin expanded 80 basis points because of lower markdowns and rent costs as a percentage of sales, partly offset by higher delivery costs.
SG&A increased 14% to $248.4 million and rose to 24.8% of revenue from 22.6%, reflecting investments in customer experience, brands, store payroll, wages, advertising and incentives.
Year-to-date net income benefited from lower restructuring costs, improved operating performance, favorable other income and a lower effective tax rate.
Effective tax rates were 24.3% for the quarter and 23.1% year to date, compared with 34.8% and 34.1%, respectively, primarily because of the Tax Cuts and Jobs Act and, year to date, excess tax benefits from share-based payments.

Cash Flow, Liquidity and Capital Structure

Cash provided by operating activities was $243.6 million for the 39 weeks ended November 3, 2018, compared with $188.1 million in the prior-year period.
Capital expenditures were $143.9 million, including $84.4 million for stores, $22.1 million for information technology, $23.6 million for e-commerce and $12.5 million for distribution centers.
Investing cash outflows included net purchases of available-for-sale short-term investments of approximately $79.9 million.
Cash and cash equivalents were $279.9 million, and short-term investments were $79.9 million, for total cash and short-term investments of $359.7 million at November 3, 2018, compared with $257.5 million of cash and equivalents at October 28, 2017.
Working capital was $516.3 million and the current ratio was 1.85 at November 3, 2018.
No borrowings were outstanding under the $400 million asset-based revolving credit facility; $8.1 million of standby letters of credit were outstanding. The facility expires in December 2019, and the company was in compliance with its terms.
Financing cash outflows included $70.3 million of share repurchases under the public program, $19.1 million of employee share repurchases for tax withholding and $71.3 million of dividends. The quarterly dividend was $0.1375 per share.
The company repurchased 3.3 million shares under its public program during the first 39 weeks and had authorization remaining for 15.7 million shares at November 3, 2018.

Material Changes Versus the Prior Comparable Period

Revenue increased 5% in the quarter and 9% year to date. Management noted that approximately $40 million of quarterly revenue shifted into the second quarter because of the retail calendar, while approximately $15 million shifted into the year-to-date comparison.
Gross margin improved, but quarterly operating margin declined because SG&A growth outpaced revenue growth.
Other income was $4.3 million in the quarter versus other expense of $13.2 million in the prior year. The change primarily reflected increased interest income and a vendor settlement; the prior-year period included a $13.9 million discrete receivable reserve charge.
Restructuring charges were zero in the quarter and $1.6 million year to date, versus $3.7 million and $18.9 million, respectively, in the prior-year periods. The prior year also included $9.3 million of joint-venture exit costs and $1.7 million of restructuring-related inventory charges.
Inventory increased 11% to $591.7 million, attributed primarily to strong demand, the clearance-store strategy and the timing of holiday receipts.
The company operated 1,057 consolidated stores at period end, including 941 American Eagle locations, 110 stand-alone Aerie locations and six Tailgate/Todd Snyder locations. It also had 223 international licensed or franchised stores in 25 countries.

Guidance, Outlook, Risks and Unusual Items

Fiscal 2018 capital expenditures were expected to be approximately $180 million to $190 million.
Management’s stated Fiscal 2018 plans included opening approximately 15 to 20 American Eagle stores, 10 to 15 Aerie stores and 20 to 25 Aerie side-by-side locations; remodeling approximately 60 to 70 stores; and potentially closing approximately 10 to 15 American Eagle and 5 to 10 Aerie stores, primarily in North America.
The company expected to open approximately 45 to 50 new international third-party-operated American Eagle stores.
Management believed operating cash flow and existing cash would fund anticipated capital expenditures, dividends and working capital requirements.
Key risks include seasonal retail demand, holiday performance, inventory turnover and markdown exposure, store impairment, foreign exchange, import tariffs and other trade restrictions, raw-material costs, political instability, international expansion, and the availability of credit facilities.
The company had approximately $1.6 billion of undiscounted future minimum operating-lease commitments. It expected adoption of the new lease accounting standard in Fiscal 2019 to materially increase reported long-term assets and liabilities.
The company had not completed its accounting for the Tax Cuts and Jobs Act and continued refining provisional estimates.
Management stated that pending legal proceedings were not expected to materially affect financial position, results of operations or cash flows, although outcomes could differ from current assessments.

Investor Verification Checklist

Verify the reporting-period discrepancy: the filing is for the quarter ended November 3, 2018, not 2017 Q3.
Assess whether Aerie’s 32% comparable-sales growth is sustainable and whether American Eagle’s 5% growth can offset cost pressures.
Monitor SG&A leverage, delivery costs, markdown rates and the effect of elevated inventory on future gross margins.
Reconcile cash generation with capital expenditures, dividends, share repurchases and short-term investment activity.
Review the December 2019 revolving-credit-facility expiration and renewal or refinancing requirements.
Evaluate the impact of lease capitalization, approximately $1.6 billion of operating-lease commitments and related future balance-sheet changes.
Confirm final Tax Act accounting, unrecognized tax-benefit developments and any additional restructuring or store-impairment charges.