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AEO Scrambles to Cut Costs After $42 Million Loss

The pullback in consumer discretionary spending and return to markdowns drove American Eagle Outfitters’ (AEO) $42.5 million second-quarter net loss.

The Pittsburgh company is now expanding cost-cutting plans to save $100 million this year instead of the $60 million it originally targeted. Store payroll, corporate expenses, professional services and advertising are subject to cost-saving measures.

AEO also paused its quarterly cash dividend as part of the cost-reduction scheme.

The retailer reported flat second-quarter net revenue at $1.2 billion, sending stock down more than 14 percent in after-hours trading Wednesday.

In a Nutshell: AEO didn’t offer full guidance for the third quarter, but said it expects brand revenue generated from American Eagle, Aerie and Offline by Aerie to decline in the high-single digits after the year-ago quarter saw “exceptional growth and a record back-to-school season.”

The company said in May that it expected total full-year revenue to grow in the low single digits compared to fiscal 2021.

The American Eagle brand’s best-performing categories included men’s wear, women’s dresses, shirts, fleece and accessories.

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Total ending inventory increased 36 percent to $687 million, compared to $504 million last year. From a brand standpoint, American Eagle and Aerie each drove roughly half of the increase. Total units were up 22 percent, reflecting better in-stocks and earlier receipts as supply chain congestion cleared up.

Aerie and Offline by Aerie store openings over the past year drove much of the inventory increase. Ending second-quarter inventory consisted of current back-to-school and fall merchandise.

The company is working to align inventories according to demand trends. Third-quarter ending inventory is projected to be up in the mid-single digits, with fourth quarter inventory expected to be down year-on-year.

“As we make the transition into new denim silhouettes and fashion trends and bottoms, we see an opportunity to better allocate our investments,” said Jennifer Foyle, president and executive director for AE and Aerie, in an earnings call. “Additionally, we are beginning to see pockets of improvements in tops as our focus on outfitting yields results. We are also pleased to see the supply chain begin to normalize. This is creating better inventory flows, shorter lead times and enables us to reestablish our best-in-class ‘test and chase’ practice.”

Gross margin of 30.9 percent plummeted 1120 basis points (11.2 percentage points) compared to 42.1 percent last year. Higher markdowns drove 750 basis points (7.5 percentage points) of the rate decline, with roughly a third reflecting $30 million in end-of-season selloffs to fully clear excess spring and summer goods.

Higher freight costs impacted the gross margin by approximately 200 basis points (2 percentage points) and Quiet Platforms had a 60-basis-point (0.6-percentage-point) impact amid continued integration of the platform. Delivery, warehousing costs and rent also increased, offset slightly by lower incentive compensation accruals.

Assuming current trends continue, third quarter gross margin percentage would be in the mid-30s before dipping further in the fourth quarter to the low-30s, the company said in its outlook. This reflects higher markdowns in anticipation of a more promotional retail environment and the company’s seasonal clearance cadence weighted to the holiday season.

“On the inbound freight side, we expect to see markup relief in the back half of the year as we anniversary $70 million in higher air freight related to factory disruptions in Vietnam last fall,” said Michael Rempell, executive vice president and chief operating officer at American Eagle Outfitters. 

Rempell said Quiet Platforms’ localized fulfillment model now handles one-third of direct orders across both the American Eagle and Aerie brands. Up to 75 percent of online orders in the second quarter reached shoppers within three days of checkout, he added.

As of July 30, AEO ended the quarter with more than $98.2 million in cash and cash equivalents, $453 million in total available liquidity, $376.5 million in long-term debt and 1,160 stores across the American Eagle, Aerie, Unsubscribed and Todd Snyder brands. Nineteen net stores closed in the second quarter.

Net Revenue: Total net revenue at American Eagle Outfitters was $1.2 billion, flat to $1.19 billion in revenue generated during the second quarter of 2021.

Brand revenue declined 2 percent, while supply chain wing Quiet Platforms contributed approximately 2 percentage points to AEO’s total revenue growth.

American Eagle revenue came in at $777.8 million, declining 8 percent from the year-ago quarter’s $845.9 million, reflecting a 3 percent three-year revenue dip in compound annual growth rate (CAGR). Comp sales declined 10 percent versus the 2021 quarter.

Aerie revenue of $371.6 million rose 11 percent versus the $335.8 million in the second quarter of 2021, reflecting a 25 percent three-year revenue CAGR. Comp sales declined 6 percent versus second quarter 2021.

Consolidated store revenue across all brands declined 2 percent, while digital revenue dipped 6 percent.

Net Earnings: Net losses totaled $42.5 million in the second quarter from net income of $121.5 million a year ago.

The retailer saw a 24-cent net loss per diluted share, down from the comparable quarter’s diluted earnings per share of 58 cents.

On an adjusted basis, diluted EPS of 4 cents excludes $60 million of debt-related charges.

Operating income of $14 million included an approximately $30 million impact from higher end-of-season selloffs, $25 million from higher freight costs and a $9 million loss from Quiet Platforms. In the 2021 second quarter, operating income was $168 million.

CEO’s Take: “We combined store and digital operations to enable a more holistic and cohesive view of the customer,” Jay Schottenstein, American Eagle Outfitters executive chairman and CEO, said. “The new structure will create efficiencies and strengthen the brand experience as we execute seamlessly across channels. This includes more focus on our international business, where I see tremendous opportunity with our brands. This change will facilitate a more strategic approach as we further optimize key markets including Canada and Mexico, while fueling our licensed partners for continued expansion over the long term.”