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Strong Jeans Demand Leads to Record Revenue at AEO, But Costs Sting Profit

While American Eagle Outfitters saw revenue rise to a record $4.3 billion in fiscal 2019, higher markdowns and operating costs cut into the bottom line.

In a Nutshell: American Eagle Outfitters (AEO) said Wednesday that ending inventory at cost increased 5 percent to $446 million for fiscal 2019, largely reflecting inventory to support strong demand for AE Jeans, including new styles and expanded sizes, and Aerie store openings.

For fiscal 2020, the company expects capital expenditures to be in the range of $225 million to $275 million, with the increase primarily driven by investments in its distribution network, as well as Aerie store openings.

AEO also said comparable sales were up for the 20th consecutive quarter, as the company ended the year with 1,095 stores. During the year, AEO opened 27 AE stores and closed 21, ending the year with 940 AE stores. Included in the AE store count are 174 Aerie side-by-side locations, of which 28 opened and one closed in 2019. Additionally, the company opened 37 Aerie standalone stores and closed four, ending the year with 148 Aerie standalone locations and 322 total Aerie stores.

AEO said based on an anticipated comparable sales increase in the low single digits, management expects first quarter 2020 earnings per share (EPS) to be approximately 20 cents to 22 cents. This compares to last year’s first quarter reported EPS of 23 cents.

Sales: Net revenue for the fourth quarter ended Feb. 1 increased 6 percent to $1.31 billion compared to $1.24 billion in the year-ago period. Consolidated comparable sales increased 2 percent, following a 6 percent increase a year earlier.

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By brand, American Eagle comparable sales decreased 3 percent compared to a 3 percent increase in the year-ago period. Aerie’s comparable sales increased 26 percent, following a 23 percent gain a year earlier and marking the 21st consecutive quarter of double-digit sales growth in the division.

For fiscal 2019, net revenue increased 7 percent to a record $4.3 billion compared to $4 billion in the prior year. Consolidated comparable sales increased 3 percent year over year, following an 8 percent increase last year.

By brand, American Eagle comparable sales were up slightly, compared to a 5 percent gain last year. Aerie’s comparable sales increased 20 percent, following a 29 percent increase in fiscal 2018.

Earnings: Net income in the quarter fell to $4.76 million compared to $76.17 million in the year-ago period. For the year, net income fell 27 percent to $191.26 million from $261.9 million in fiscal 2018.

AEO reported EPS of 3 cents for the fourth quarter compared to 43 cents for the 13 weeks ended Feb. 2, 2019. For the year, the company reported EPS of $1.12 compared to $1.47 for the previous year.

Gross profit in the 13 weeks decreased 5 percent to $408 million from $431 million last year. The gross margin rate of 31 percent declined from 34.6 percent a year earlier. Higher markdowns were the primary cause of the reduction, while increased distribution center and delivery costs were offset by lower incentives and slight rent leverage.

Operating income dropped in the quarter to $500,000 compared to $101 million last year. Adjusted operating income of $77 million excluded $76 million of impairment and restructuring charges.

Gross profit for fiscal 2019 increased 2 percent to $1.52 billion. The gross margin rate decreased 160 basis points to 35.3 percent of revenue compared to 36.9 percent the prior year. Higher markdowns were the primary cause of the reduction to last year. Rent leverage and lower incentives were offset by increased distribution center and delivery costs.

For the year, operating income fell 30.9 percent to $233 million from $337 million last year.

CEO’s Take: Jay Schottenstein, AEO’s chairman and CEO, said: “Although we faced some challenges in 2019, we made good progress on our strategic growth pillars, posting record revenues. We saw strong customer engagement and positive traffic across brands and channels. Aerie delivered exceptional growth, led by its unique brand positioning and strong customer connection, and has significant runway ahead. American Eagle saw growth in its signature jeans and bottoms categories, where we continue to gain meaningful market share. I’m also pleased that we successfully cleared through excess holiday inventory, ending the year well-positioned.

“Looking ahead, we are laser focused on areas of underperformance and strengthening profit margins,” Schottenstein added. “Product improvements, inventory management and gaining efficiencies are top priorities.”