American Eagle Outfitters, Inc. — Form 10-Q Summary
Reporting period: The supplied filing covers the 13 weeks ended May 2, 2015, compared with the 13 weeks ended May 3, 2014. Although the request identifies “2014 Q1,” the filing is for the first quarter of Fiscal 2015. The financial statements are unaudited and were reviewed, not audited, by Ernst & Young LLP.
Business context
American Eagle Outfitters operates American Eagle and aerie retail stores and AEO Direct e-commerce operations, presented as one reportable segment. At May 2, 2015, the company operated 1,054 consolidated stores, including 956 American Eagle and 98 aerie locations, plus 109 international licensed or franchised stores in 17 countries.
Key financial metrics
| Metric | 13 weeks ended May 2, 2015 | 13 weeks ended May 3, 2014 | Change |
|---|---|---|---|
| Net revenue | $699.5 million | $646.1 million | Up 8% |
| Gross profit | $262.2 million | $225.8 million | Up $36.4 million |
| Gross margin | 37.5% | 34.9% | Up 260 basis points |
| Operating income | $42.0 million | $8.4 million | Up $33.6 million |
| Operating margin | 6.0% | 1.3% | Up 470 basis points |
| Net income | $29.1 million | $3.9 million | Up $25.2 million |
| Diluted EPS | $0.15 | $0.02 | Up $0.13 |
| Net cash used in operating activities | $12.7 million | $4.3 million | Greater use of cash |
| Capital expenditures | $41.7 million | $72.0 million | Down $30.3 million |
Consolidated comparable sales increased 7%, including AEO Direct. American Eagle comparable sales increased 7% and aerie comparable sales increased 12%. Traffic was flat, while average transaction value increased in the low double digits. Average unit retail increased in the low single digits.
SG&A expense was essentially flat at $185.1 million, but declined to 26.5% of revenue from 28.6%. Depreciation and amortization increased to $35.1 million from $32.4 million. Other income increased to $6.0 million from $0.7 million, primarily due to foreign currency fluctuations. The effective tax rate declined to 39.4% from 57.6%.
Liquidity, capital resources, and debt
- Cash and cash equivalents were $326.9 million at May 2, 2015, compared with $327.7 million at May 3, 2014 and $410.7 million at January 31, 2015.
- Working capital was $430.9 million and the current ratio was 2.00.
- The company had no loans outstanding under its $400 million asset-based revolving credit facilities. It had $8.1 million of standby letters of credit outstanding.
- Separate trade-letter-of-credit arrangements provide aggregate borrowing capacity of $155.0 million, subject to lender acceptance; $17.5 million of trade letters of credit were outstanding.
- Net cash used in financing activities was $29.3 million, including $24.4 million of dividends and $5.0 million of employee share repurchases for tax withholding.
- The quarterly dividend was $0.125 per share. No shares were repurchased under the publicly announced repurchase program.
Material changes versus the prior comparable period
- Revenue grew 8%, driven primarily by a 7% comparable-sales increase, reversing the prior-year comparable-sales decline of 10%.
- Gross margin expanded 260 basis points, primarily because of lower markdowns and reduced promotional activity. Higher delivery costs associated with increased online orders partially offset the improvement.
- Operating income increased approximately fivefold, and net income increased more than sevenfold, reflecting stronger sales, improved merchandise margins, expense controls, and a lower effective tax rate.
- Cash flow from operations worsened to a $12.7 million use from a $4.3 million use, primarily because of inventory levels, incentive payouts, and changes in accrued taxes and other liabilities.
- Capital expenditures decreased to $41.7 million from $72.0 million. Inventory increased slightly to $332.6 million from $329.2 million and was flat on a cost-per-square-foot basis.
- Share-based compensation expense increased to $8.1 million from $3.2 million.
Guidance, outlook, risks, and unusual items
- Management stated that first-quarter performance was ahead of expectations, citing better-than-expected sales, higher average unit retail, lower markdowns, and expense-reduction benefits.
- Fiscal 2015 plans include approximately 20 primarily Factory-format AEO store openings, approximately 25 to 30 American Eagle remodels, and potential closures of approximately 45 to 50 American Eagle and 20 to 25 aerie stores in the United States and Canada. The company also expects approximately 30 new international third-party-operated stores.
- Fiscal 2015 capital expenditures are expected to be approximately $150 million, including distribution-center construction, stores, information technology, and e-commerce investments.
- Management expects existing cash and operating cash flow to fund anticipated North American capital expenditures and working-capital requirements, but notes that acquisitions, international expansion, or other strategic initiatives could require additional equity or debt financing.
- Key risks include fashion and consumer-demand changes, excess inventory and markdown exposure, rising raw-material, labor and energy costs, store impairment charges, international expansion execution, availability of credit facilities, and foreign-currency fluctuations.
- The company remains liable for certain lease obligations related to the discontinued 77kids business. The related accrued liability was $13.7 million at May 2, 2015 after $0.9 million of cash payments during the quarter.
- Restructuring liabilities declined to $6.2 million after $6.2 million of cash payments; no restructuring costs were incurred during the quarter.
- No material changes to previously disclosed risk factors or market-risk exposure were reported. Management concluded that disclosure controls and procedures were effective.
Important facts for investors to verify
- Confirm that comparable-sales growth and gross-margin improvement are sustainable after the reported reduction in markdowns and promotions.
- Monitor inventory levels, turnover, and future markdown activity, particularly given the seasonal nature of apparel retail.
- Reconcile planned fiscal-year capital expenditures of approximately $150 million with operating cash flow, dividends, and available liquidity.
- Assess the execution and financial effects of planned store openings, remodels, and closures.
- Review the potential cash costs and timing of the remaining 77kids lease obligations and restructuring liabilities.
- Track foreign-currency impacts, international expansion, and the availability and borrowing-base limitations of the credit facilities.