American Eagle Outfitters, Inc. Form 10-Q Summary
Reporting period: 13 and 26 weeks ended August 2, 2014, compared with the corresponding periods ended August 3, 2013. The supplied metadata labels this as “2013 Q2,” but the filing is for the second quarter of fiscal 2014. Results are unaudited and seasonally affected.
Business Context
American Eagle Outfitters operates American Eagle and aerie retail stores and AEO Direct e-commerce operations, aggregated into one reportable segment. At quarter-end, the company operated 966 American Eagle stores, 106 stand-alone aerie stores, and had 84 international franchise stores in 13 countries.
Key Financial Metrics
| Metric | 13 Weeks Ended August 2, 2014 | 13 Weeks Ended August 3, 2013 | 26 Weeks Ended August 2, 2014 | 26 Weeks Ended August 3, 2013 |
|---|---|---|---|---|
| Net revenue | $710.6 million | $727.3 million | $1.357 billion | $1.407 billion |
| Gross profit | $237.5 million | $245.5 million | $463.4 million | $509.1 million |
| Gross margin | 33.4% | 33.8% | 34.2% | 36.2% |
| Operating income | $12.0 million | $29.4 million | $20.5 million | $75.2 million |
| Net income | $5.8 million | $19.6 million | $9.7 million | $47.6 million |
| Diluted earnings per share | $0.03 | $0.10 | $0.05 | $0.24 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $29.6 million | $(9.5) million |
- Second-quarter consolidated comparable sales declined 7%; American Eagle comparable sales declined 8%, while aerie comparable sales increased 9%.
- Six-month comparable sales declined 9%; American Eagle declined 9% and aerie increased 2%.
- Second-quarter SG&A increased 2% to $190.1 million, or 26.7% of revenue, versus 25.6% previously. Depreciation and amortization increased to $35.4 million from $29.7 million.
- At August 2, 2014, cash and cash equivalents were $262.6 million, merchandise inventory was $393.3 million, working capital was $390.9 million, and the current ratio was 1.89.
- The company had no borrowings under its $150.0 million unsecured revolving credit facility, $8.2 million of outstanding letters of credit, and $54.7 million of trade letters of credit.
- Capital expenditures were $146.3 million for the first 26 weeks, including investments in stores, distribution centers, information technology, and e-commerce.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue decreased 2%, while first-half revenue decreased 4%, primarily because of negative comparable sales.
- Second-quarter gross profit declined 3% and gross margin contracted 40 basis points. Product costs and markdown performance improved, but buying, occupancy, and warehousing costs deleveraged because of lower sales and higher delivery costs.
- First-half gross profit declined 9% and gross margin decreased 200 basis points, primarily due to higher markdown expense and cost deleverage.
- Second-quarter operating income fell approximately 59%, and first-half operating income fell approximately 73%.
- Net income declined approximately 70% in the quarter and approximately 80% for the first half. The first-half prior-year results included $0.04 per diluted share of asset write-offs and corporate charges.
- Inventory decreased 15% in dollars year over year to $393.3 million and decreased 18% on a cost-per-foot basis. Excluding a change in inventory ownership terms, inventory at cost per foot increased in the mid-single digits.
- Cash decreased from $345.2 million at August 3, 2013, and from $418.9 million at February 1, 2014, primarily reflecting capital expenditures, dividends, and other financing uses.
Cash Flow, Capital Allocation, and Outlook
- First-half operating cash flow was $29.6 million, compared with cash used of $9.5 million in the prior year.
- First-half investing cash use was $137.2 million, principally due to $146.3 million of capital expenditures. Financing cash use was $51.1 million, principally due to $48.6 million of dividends and $7.4 million of employee share repurchases for tax withholding.
- Fiscal 2014 capital expenditures were expected to be approximately $230 million, including distribution-center construction, stores, information technology, and e-commerce. Fiscal 2015 capital expenditures were expected to be approximately $150 million.
- Management planned approximately 25 new AEO Factory stores, approximately 45 store remodels, continued international expansion, and potentially approximately 150 North American store closures through fiscal 2016.
- The board declared and paid a quarterly dividend of $0.125 per share. Future dividends remain subject to board discretion and business conditions.
- Management stated that current cash and expected operating cash flow should fund anticipated North American capital expenditures and working-capital requirements, although additional financing could be required for acquisitions or other expansion opportunities.
Risks, Contingencies, and Unusual Items
- Retail seasonality means current-period results may not indicate future results.
- Key risks include weak comparable sales, markdowns, inventory excesses, store impairment charges, rising input costs, international expansion, credit-facility availability, and execution of omni-channel and growth initiatives.
- The effective tax rate increased to 54.9% for the quarter and 56.0% for the first half, primarily because of valuation allowances on foreign losses and lower earnings.
- Management estimated that unrecognized tax benefits could decrease by approximately $7.5 million over the next twelve months through settlements, statute expirations, or other changes.
- No material changes to previously disclosed risk factors or market-risk exposures were reported. Management stated that pending legal proceedings were adequately reserved and were not expected to materially affect financial position or results.
- The company adopted new income-tax presentation guidance with no significant impact and was evaluating the future impact of the new revenue-recognition standard, scheduled for adoption on January 29, 2017.
Facts Investors Should Verify
- Whether comparable-sales trends, particularly the American Eagle brand’s negative performance, improve during the back-to-school and holiday periods.
- Whether markdown rates, inventory productivity, and gross margin stabilize as management indicated.
- Execution and returns from the planned $230 million fiscal 2014 capital program, including the new distribution center and store expansion.
- The pace and financial impact of planned store openings, remodels, and potential North American closures.
- Future dividend decisions, share repurchases, and the effect of continued cash outflows on liquidity.
- Potential tax benefits, store impairment charges, inventory markdown exposure, and any changes in credit-facility availability or letter-of-credit requirements.