American Eagle’s jeans business and continued growth at Aerie helped American Eagle Outfitters Inc. post a first-quarter earnings beat, but the company’s chief financial officer cautioned that financial results would be impacted if tariffs on goods from China are expanded to include apparel.
In a Nutshell: During on conference call to Wall Street analysts, AEO chief financial officer, Roger Madore, said the first quarter “started slow, with a cold start to spring,” followed by a pickup in sales during the spring break and Easter holiday. Digital sales rose in the low double digits, reaching 30 percent of total revenue.
With regard to tariffs announced to date, Madore said they have been “immaterial,” but added that if the tariffs were to expanded to include apparel, “there would be an adverse effect on our financial results. With that said, we are actively collaborating with our sourcing partners and believe we can significantly mitigate any potential impact from additional tariffs.”
The CFO also told analysts, “I love this disruption. I’ll take it all day long because we continue to grab more and more market share every day. Everyday, you’re hearing something something about a different retailer struggling going bankrupt, having huge restructuring charges, store closings. We’re not in that tradition at all…”
As for the quarter’s results, Jay Schottenstein, the specialty chain’s chairman and chief executive officer, said that “2019 is off to a positive start,” citing first-quarter sales and earnings per share growth ahead of company expectations. He said that American Eagle and Aerie brands’ ability to leverage their brand equity, product lines and customer engagement across stores and digital resulted in the company’s “17th consecutive quarter of positive comparable sales.”
He also said that American Eagle’s market share gains were led by its “dominant jeans business,” while Aerie‘s “consistent double-digit growth” was fueled by the brand’s appeal to both existing and new customers.
Schottenstein told analysts the results are essentially a “positive report card from customers.” In addition to a comparable sales gain, the CEO noted that comparable store sales “delivered positive comps for the sixth consecutive quarter.”
American Eagle brand president Chad Kessler said that “American Eagle jeans continue to show incredible strength and consistency with positive comps and record performance across genders. this was the 23rd straight quarter of record jean sales. AE is the number one women’s jeans brand in America. We are the number two jeans brand overall.” He said the brand is also looking to increase market share in its men’s business, a category where it is “number one in our core 15-to-25-year-old age group.”
Aerie brand president Jennifer Foyle said the brand saw “positive traffic and improve conversion rates in the standalone stores.” And she noted that the Aerie customer is partial to the brand’s focus on “cozy, casual, comfortable and active.” Two strategic growth categories for the brand have been swim and bralettes. The brand is opening a total of 60 to 75 locations this year.
The company said it also completed $20 million of share repurchases in the quarter, or 911,000 shares. There is still 10.8 million shares available for repurchase under the current authorization program.
Net Sales: Net revenues for the quarter ended May 4 rose 7.7 percent to $886.3 million from $823 million. Comparable sales rose 6 percent, on top of the 9 percent comp gain in the year-ago quarter. By brand, American Eagle posted a comp gain of 4 percent on top of its 4 percent increase last year, while Aerie’s comp rose 14 percent on top of its 38 percent rise a year ago. The Aerie comp gain also marked its 18th consecutive quarter of double-digit comps.
The chain said gross profit rose 7 percent to $325 million, although the gross margin rate slipped to 36.7 percent from 37 percent. Even though the company had the benefit from rent leverage and improved product costs. they were offset by increases in markdowns and delivery expense.
Earnings: Net income rose 2.1 percent to $40.8 million, or 23 cents a diluted share, from $39.9 million, or 22 cents, in the year-ago quarter. The quarter also saw restructuring charges connected to severance and closing costs for company-owned and operated stores in China. Excluding those charges, the company posted 24 cents in adjusted earnings per share.
That easily bested Wall Street’s consensus estimates of 21 cents on revenue of $854.9 million.
The company also noted that total inventories at cost rose 13 percent to $456 million, while ending inventory units were up 10 percent. That was due to expanded collections for American Eagle jeans, new store growth for Aerie and an increase to 12 clearance stores in the quarter, up from 5 stores last year.
American Eagle ended the quarter with total cash and investments of $350 million, up from $310 million a year ago due to strong free cash flow. The company ended the first quarter with seven new American Eagle stores, closed five, and opened four Aerie standalone locations. As for total store count, it now operates 936 American Eagle stores, included 151 Aerie side-by-side doors, 119 Aerie free-standing locations. On the international front, the company now has 235 licensed stores.
The company provided second-quarter guidance, which projects EPS in the range of 30 cents to 32 cents, below the current consensus estimate for 35 cents.
CEO’s Take: According to Schottenstein: “Looking ahead, we see significant runway for each of our brands. We are committed to improved profit flow through as we begin to lap our 2018 investments, to support continued earnings growth and attractive shareholder returns.”