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AEO CEO on Bloated Inventory: ‘We Are Taking Swift Measures to Reset’

American Eagle Outfitters Inc. ended up overshooting demand after aggressively planning first-quarter merchandise, leaving the specialty retailer with a pile of inventory it’ll need to mark down during the second quarter.

In a Nutshell: Total ending inventory at cost rose 46 percent to $682 million versus $467 million in the year-ago quarter. Higher costs drove half of the increase, with American Eagle and Aerie each driving half of the increase. Total units were up 24 percent due to high-in transit and on-hand inventory.

“In hindsight, our buys and overall plans were too optimistic for the current environment. We are taking swift measures to reset,” CEO Jay Schottenstein told Wall Street investors in a call last week. “We will clear through spring goods in the second quarter and be in better position for the second half of the year. We have adjusted our forward inventory plans to reflect a more measured demand outlook.”

Despite the results, both brands remain on solid footing, Schottenstein said. “Aerie revenue increased 8 percent in the quarter and has more than doubled since 2019…. Aerie continues to present incredible growth prospects for the future and highly desirable product categories.” he added. “The AE brand remains highly profitable and [has] extraordinary cash flow.”

Quiet Platforms, formerly Quiet Logistics, has been actively signing up new customers, including Fanatics and Saks Off Fifth. The logistics business represents an “exciting growth vehicle,” Schottenstein said. Quiet, acquired along with AirTerra last year, is partnering with Pitney Bowes to speed up customer delivery times.

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Jen Foyle, president and executive creative director for both company brands, said first-quarter swimwear performance lagged at Aerie, where intimates, leggings, apparel and accessories sales supported 15 percent revenue growth. Dresses, accessories, jeans and men’s overall, were the American Eagle brand’s top performers, but demand underperformed company expectations.

“In addition to rightsizing the inventory, we also see an opportunity to strike a better balance across our key styles,” Foyle said, adding that the American Eagle’s jeans business was up double-digits across both genders over the first quarter of 2019.

“We do currently expect that freight costs for the fall and holiday seasons will benefit from lower ocean and air freight rates,” chief operating officer Mike Rempell said. “Regarding product costs, we’ve been successful at keeping costs in check through a number of mitigation measures, including platforming fabrics, diversifying production facilities and leveraging our scale to find efficiencies.”

Rempell said he expects to see some pressure from product input costs in the fourth quarter, specifically higher cotton costs that the company hopes to offset by using less air freight.

A week after the earnings report, the company disclosed a series of actions to bolster its capital structure. The actions include a $342 million exchange of its 3.75 percent Convertible Senior Notes due 2025 for cash and share of the company’s common stock, leaving just $70 million in aggregate principal amount outstanding; an accelerated share repurchase agreement with JPMorgan Chase Bank N.A. for $200 million of the company’s common stock, or 16.7 million shares, and a plan to upsize and extend its asset base loan facility to $600 million for a term of five years to unlock additional liquidity.

Net Sales: Total revenue for the three months ended April 30 rose 2 percent to $1.06 billion from $1.03 billion a year ago.

Aerie revenue rose 8 percent to $322 million, while sales at the core American Eagle brand fell 6 percent to $686 million. Consolidated store revenue rose 2 percent, but digital sales were down 6 percent.

Earnings: Net income dropped 67 percent to $31.7 million, or 16 cents a diluted share, from $95.5 million, or 46 cents, in the same year-ago quarter.

The company missed adjusted diluted earnings per share by 9 cents and revenue by $85.3 million.

For the second quarter, the company said it expects top-line growth to trend similarly to the first quarter, reflecting higher markdowns to clear through spring inventory, higher freight costs and the impact of supply chain acquisitions.

For the year, the company lowered guidance, with total revenue up in the low single digits compared with Fiscal 2021. The company expects to enter the second half better aligned with demand, with a more balanced inventory position and leaner expense base.

CEO’s Take: “The near-term environment will remain volatile. I believe that every challenge creates an opportunity. That’s what has enabled tis company to endure for the long term,” Schottenstein said. “We have been through challenging periods in the past. We’ve always come through a strong company.”