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AEO CEO: ‘We’re Going to See a Boom in This Country’

Still hindered by Covid-related diminished demand, American Eagle Outfitters saw revenue and income declines in the fourth quarter.

In a Nutshell: American Eagle Outfitters (AEO) Inc. ended its 2020 fiscal year in a substantially improved financial position than a year earlier.

AEO generated $213 million in operating cash flow during the fourth quarter and $202 million for the full year ended Jan. 30. The company ended the period with cash and short-term investments of $850 million, an increase from $417 million last year. The quarter-end cash balance included $406 million in proceeds from the April convertible notes offering.

In the fourth quarter, capital expenditures totaled $35 million. For the full year, capital expenditures were $128 million. For fiscal 2021, the company expects capital expenditures to be in the range of $250 million to $275 million, prioritizing strategic customer-facing and supply-chain investments.

Selling, general and administrative (SG&A) expenses of $292 million increased $5 million from last year, reflecting higher performance-based incentive compensation, partly offset by reductions in store payroll.

Total ending inventory at cost decreased $41 million or 9 percent to $405 million. The decline reflected a 21 percent reduction in American Eagle, due to inventory optimization initiatives and lower clearance levels. Aerie’s inventory increased 10 percent to support strong demand.

Michael Mathias, executive vice president and chief financial officer, told analysts on a conference call that AEO closed 57 total store locations in 2020, including 50 American Eagle stores.

“We expect to continue to negotiate material rent savings and plan to open approximately 60 area locations,” Mathias said.

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Sales: Net revenue for the fourth quarter ended Jan. 30 decreased 2 percent to $1.29 billion compared to $1.31 billion last year. Comparable sales declined 1 percent. AEO said the change in revenue reflected mall traffic declines and store closures related to Covid-19, amid strong online sales.

Aerie revenue increased 25 percent to $337 million and comparable sales rose 29 percent. American Eagle revenue fell 9 percent to $943 million and comparable sales declined 8 percent.

AEO’s digital revenue increased 35 percent, as store revenue declined 20 percent. Aerie digital revenue rose 75 percent and American Eagle gained 20 percent.

Jay Schottenstein, AEO’s executive chairman and CEO, said on the conference call that American Eagle jeans were a standout in the quarter, gaining share even as holiday promotions were reduced.

“AE continues to introduce product-focused marketing campaign that showcase our relatable and positive spirit,” Schottenstein said. “Last week, we announced our Jeans are Forever Spring 2021 campaign, featuring stars of the hit Netflix show ‘Outer Banks.’ We also launched a new innovative shopping experience in partnership with Snapchat.”

For the year, net revenue declined 12.8 percent to $3.76 billion compared to $4.31 billion the previous year.

Earnings: Net income in the quarter declined 25.6 percent to $3.54 million from income of $4.76 million in the year-ago period.

Operating income jumped to $4 million in the period excluded $103 million of impairment and Covid-19 related charges compared to $500,000 for the quarter ended Feb. 1, 2020. Adjusted operating income of $106 million compared to $77 million in last year’s fourth quarter, which excluded $76 million of impairment and restructuring charges. Adjusted operating margin of 8.2 percent expanded from 5.8 percent last year, reflecting higher full-priced sales and lower promotions.

Aerie’s operating income increased 17 percent to $13 million. Aerie’s adjusted operating income increased 52 percent to $48 million and excluded the impact of impairment charges. American Eagle operating income increased 29 percent to $92 million. American Eagle adjusted operating income rose 29 percent to $145 million and excluded the impact of impairment charges.

Gross profit rose 8 percent to $440 million from $408 million a year earlier. Gross margin of 34 percent expanded from 31 percent last year. The increase reflected significantly higher merchandise margins across brands, primarily due to higher full-priced sales, lower promotions and inventory optimization initiatives. Lower rent expense also benefited the gross margin. This was partly offset by higher delivery and distribution center costs, due to increased digital mix and higher shipment costs, as well as increased performance-based incentive compensation.

Fourth quarter earnings per share (EPS) was 2 cents compared to 3 cents last year. Adjusted fourth quarter EPS of 39 cents this year compared to 37 cents last year.

For the year, AEO posted a net loss of $209.27 million compared to net income of $191.26 million the prior year.

CEO’s Take: Schottenstein said: “After an unprecedented year, we ended 2020 on a positive note, with fourth quarter adjusted operating income up 38 percent, driven by strong margins across brands…We ended the year in a healthy cash position and took bold actions to ensure AEO is well positioned for future success, including steps to right-size and strengthen our store fleet, while also continuing to fuel our robust digital platform. We entered 2021 with momentum and…we see significant opportunity to drive Aerie’s growth and deliver strong profit margins in the coming years. The fourth quarter results reflect progress on our ‘Real Power. Real Growth.’ plan and provide confidence in our value creation opportunity and multi-year financial targets.”

‘My feeling is that the next 60 days, this country is going to be vaccinated at a very rapid case and that will give people a lot of confidence to go out,” Schottesten added on the call. “And we’re very excited about the malls. I could tell you that…this is probably the best opportunity for us to pick up new locations that were being offered in some new great locations at affordable rents for us…I believe that the next few months, things will start getting back to normal. And then I think going into next year, we’re going to see a boom in this country…Our challenge…is to get people good enough experiences that they want to shop with us. At the same time, people [are] getting more and more use of digital. It’s part of life today.”