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American Eagle CEO Says Company ‘Plays by the Rules’

Despite a small slip in revenue and decreasing gross margins, American Eagle Outfitters Inc. posted a solid bottom-line profit in the third quarter.

In a Nutshell: Along with improvement in inventory levels, American Eagle’s sales on a three-year stacked basis were up 16 percent versus pre-Covid levels.

Moreover, while gross margin was 38.7 percent versus 44.3 percent a year ago due to higher markdowns and increased product costs, that was still above Wall Street’s estimates of 34.6 percent.

In addition, chairman and CEO Jay Schottenstein took time to note to investors during a conference call that American Eagle “plays by the rules.”

“We’re very careful what cotton we use, we’re very careful where we manufacture our goods. And we expect our competition to follow the same way, too. And I think in fairness to the retailers in America, it should be a level playing field,” Schottenstein said. He added that companies that get advantages of not paying tariffs, who ship their goods in and who are not responsible in where they do their sourcing and in not following the rules “should be punished for it.”

He also said that the company’s “aggressive actions to reset inventory and reduce expenses are paying off. We continue to make progress and entered the fourth quarter very well positioned.”

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Jen Foyle, president and executive creative director for both AE and Aerie said that Aerie hit a milestone of 10 million customers in the quarter. Core intimates, fleece and apparel did well. The intimates concept also expended its Real Me legging franchise.

She said the American Eagle brand is working on rationalizing excess inventory. Foyle added that the brand is in the process of launching a new subbrand in men’s to bring innovation and newness to the business. And it continues to leverage social commerce, such as TikTok and the Metaverse, to engage in new ways with its customers.

For the current fiscal year, there will be 85 new Aerie and Aerie Offline stores, with the pace of Aerie store openings to slow in Fiscal Year 2023 from 100 to about 30 doors, according to CFO Mike Mathias, who said the company added more than 130 Aerie stores since 2021. Aerie Offline is the brand’s activewear line.

Michael Rempell, chief operating officer, said the holiday season will see the brands offer virtual shopping sessions through Shop Live, a new platform to connect customers with store associates for one-on-one style advice as well as provide live stream shopping experiences.

The company said its logistics subsidiary—the Quiet platforms—is providing “significant operational efficiencies and needed capacity for our brands. It also said that the platforms’ third party customer base continues to ramp up as other brands upgrade their supply chain operations. The supply chain business provided 2 percentage points to revenue growth.

While there were concerns about holiday and expectations of extensive promotions, analysts recognized the ability of the retailer’s management to execute on plans to drive continued growth ahead.

“With management clearly executing on the controllables (right-sizing inventory, expenses and strategically positioning promotions), we remain Market Perform on macro concerns and industry promotions/inventory builds,” wrote BMO Capital Markets Corp. retail and services analyst Daniel Stroller in a research note.

Telsey Advisory Group’s chief investment officer Dana Telsey also has a Market Perform rating on shares of the teen retailer. She said that while American Eagle delivered a better-than-expected performance, tough macro conditions weigh on consumers’ discretionary dollars.

American Eagle continues to target annualized expense reductions of $100 million for the full year, and it is focused on innovations to drive growth and profitability, as well as better address emerging fashion trends, Telsey said, adding that the company recently modified its assortment mix to include cargo pants and wider silhouettes.

Its competitor down the mall, Abercrombie & Fitch Co., noted in its third-quarter conference call that customers at its teen Hollister and core adult Abercrombie brands also have been seeking out non-denim bottoms.

Net Sales: For the three months ended Oct. 29, net revenue fell 3 percent to $1.24 billion from $1.27 billion in the same year-ago quarter. Consolidated store revenue decreased 4 percent, while total digital revenue was down 5 percent.

The company’s intimates concept Aerie posted an 11 percent gain in revenue to $350 million—reflecting an all-time third-quarter high—although comparable sales slipped 3 percent versus last year’s quarter. Its core American Eagle brand posted an 11 percent decline in revenue to $838 million, while comparable sales fell 10 percent versus the year-ago quarter.

American Eagle said it ended the quarter with inventory up 8 percent to $798 million versus $740 million last year. “This reflects a meaningful improvement from last quarter’s increase of 36 percent, reflecting actions to bring receipts more in line with demand. Inventory is current for the holiday season,” it said, adding that it expects fourth quarter ending inventory to be “down to last year.”

For the nine months, total revenue slipped slightly to $3.49 billion from $3.50 billion in the year-ago period.

Earnings: Net income was $81.3 million, or 42 cents a diluted share, from $152.2 million, or 74 cents, in the year-ago quarter.

For the fourth quarter, the company guided revenue down in the mid-single digits, with comps similar to the third quarter. It also expects fourth-quarter gross margin in the range of 32 percent to 33 percent.

“While significant progress has been made in rightsizing inventory, management is taking a cautious view given what is likely to be a highly promotional holiday season,” the company said.

Net income for the nine months was $70.5 million, or 36 cents a diluted share, from $369.2 million, or $1.78, in the year-ago period.

CEO’s Take: “As we navigate the current macro environment, we remain focused on our strategic initiatives—leading with innovation and judiciously investing in capabilities that will differentiate us in the long-run,” Schottenstein said. “Our organization is strong and I have tremendous confidence in the resilience of our brands.”