In a Nutshell: The teen retailer on Thursday reported mixed second-quarter earnings results that included a beat on Wall Street’s consensus for earnings per share and a miss on revenue expectations. But perhaps what’s more interesting is how the company placed having the right product on an equal footing with its internal logistics operations.
Company executives on the conference call to Wall Street analysts spoke about investments in logistics over the past two years. They also noted that the costs of getting goods to stores have been less than a year ago, even with the current cost increases in freight.
Chief operating officer Michael Rempell told analysts that product arrived during the second quarter without major delays, and that the retailer was able to “chase into high demand.”
“I believe our supply chain platform truly is a competitive advantage. The investments we’ve made to date are paying off, and mobile supply chains continue to be disrupted. This is creating opportunities for us to become even faster, more agile and more efficient,” Rempell said. “As we focused on innovation, quality and value, we have collectively raised prices with very little resistance from our customers. In conjunction with strong inventory management, we’re confident in our ability to sustain a high margin and offset inflationary pressures.”
Executive chairman and CEO Jay Schottenstein said he couldn’t provide much detail yet, but did note that another acquisition could happen over the next few months. The indication on the call by company executives was that it would likely be in the area of logistics.
The company last month acquired AirTerra, a Seattle-based logistics startup founded by Nordstrom’s former supply chain chief, Brent Beabout. He is also a Walmart alum who created the startup to offer a shipping alternative to mid-tier retailers and allow them to compete with the retail giants. American Eagle executives said that having the right product is no longer enough to be a successful company, and that one now also needs “fast, agile operations” and that AirTerra “fits that mold.”
During the call, Schottenstein also said the company has bought air freight passages that are in reserve, and could be sold if the retailer determines that they would no longer be needed. He said that despite the supply chain disruptions, there’s a lot that the company can control.
The executive chairman also said the company is working on a new denim concept, one that should be unveiled over the next week or two.
“We’re gaining new customers, and the relaunch of our loyalty program has been a success across operations. We are creating efficiencies, increasing our speed and agility,” Schottenstein said on the call. He called the growth in market recovery “incredible,” and noted that the company’s cash flow and balance sheet are “healthy.”
Another focus is how the company runs its day-to-day business in keeping with its values to build a better world. “To that end, we’re making progress on creating more sustainable products. This year we have more than doubled the number of our most sustainable yoga styles across all merchandise categories,” he said.
Schottenstein said that the company is confident that it can “achieve operating income of $600 million this year.”
While Schottenstein acknowledged that there are shortages of goods for every category, not just apparel, he believes the company won’t have that problem. In fact, he emphasized that the company has been working on moving deliveries up, and that it will have “a lot of great, new merchandise to choose from. We believe that there are going to be problems out there for other retailers.”
As for its key core denim category, Schottenstein said, “We have plenty of denim to sell.” He added that he didn’t foresee any problems with getting the merchandise into the stores in time for holiday, citing the work done by the logistics and operations team in getting shipments on a regular basis, including buying air capacity. “We believe that this will be an earlier Christmas holiday shopping [season],” the executive chairman said.
“We are attracting new customers, and they’re spending more than ever,” Jennifer Foyle, chief merchandising officer, noted. She added that those trends are carrying into the third quarter.
Foyle also noted that the quarter marked Aerie’s 27th consecutive quarter of double-digit growth in sales, as well as a meaningful gain in market share for swimwear. The brand is expanding with 16 new stores across the U.S. and Mexico, and just opened its first store in Hong Kong.
As for the American Eagle nameplate, Foyle said the brand’s team has had a “laser focus on inventory optimization and promotional disciplines.”
“AE’s position as the denim destination could not be stronger. Our jean collections continue to deliver great results across genders. We believe the current trends and shifts in silhouette will be a tremendous win for the AE business,” she said.
The women’s business saw strength in bottoms across both fashion and comfortable categories, while the men’s business was focused on outfitting, with AE the number-one jeans brand within its teen demographic.
Net Sales: Total net revenue for the quarter ended July 31 rose 35 percent to $1.19 billion from $883.5 million. Comparable sales were up 19 percent when compared with pre-pandemic 2019 results for the same quarter.
The company said higher full-priced sales and reduced promotions, along with controlled costs, fueled gross margin expansion to 42.1 percent. It’s intimates brand Aerie saw net revenue rise 34 percent, with operating income up 132 percent, reflecting a 21 percent operating margin. At the core American Eagle brand, net revenue rose 35 percent, with operating income up 234 percent, reflecting a 23.5 percent operating margin.
Digital revenue fell 5 percent from a year ago, reflecting the shift to improved store traffic across the U.S.
For the six months, total net revenue was up 55 percent to $2.23 billion from $1.44 billion.
Earnings: The company reported net income of $121.5 million, or 58 cents a diluted share, against a net loss of $13.8 million, or 8 cents a diluted share, a year ago.
Wall Street was expecting adjusted diluted EPS of 55 cents on revenue of $1.23 billion.
For the six months, net income was $217 million, or $1.04 a diluted share, against a net loss of $270.9 million, or $1.63, in the year-ago period.
CEO’s Take: “The strength of real power, real growth is our guiding light. I’m very pleased how we’re making progress on our pillars, putting us ahead of schedule on our financial targets,” Schottenstein told analysts.