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Aerie Remains a Bright Spot at American Eagle

American Eagle Outfitters, Inc. is continuing to be buoyed by its Aerie intimates brand, which posted its 24th consecutive quarter of double-digit sales growth in the third quarter. Overall, American Eagle Outfitters Inc. saw a 3 percent revenue decline to $1.03 billion, with American Eagle revenue decreasing 11 percent and Aerie’s revenue increasing 34 percent.

In a Nutshell: The retailer attributes the overall sales dip to the shift in back-to-school demand, which left American Eagle down in August where they would typically have their peak sales.

In recent weeks, American Eagle Outfitters has begun testing same-day delivery for online orders and self-checkout in stores, Michael Rempell, the company’s executive vice president and chief operating officer said in an earnings call.

The company built four new distribution hubs in second and third quarters ahead of the holiday season, with Rempell estimating that the decentralized fulfillment network will help the retailer fulfill approximately 400 store locations within one day, and 900 within two days.

Total inventory at cost decreased $87 million or 13 percent to $560 million. The decline reflected American Eagle’s inventory optimization initiatives, which reduced online SKU count in an aim to streamline assortments and better align to sales plans. The decline was partly offset by higher inventory at Aerie to support strong demand.

“Our go-forward thinking on inventory continues to be that we want sales to outpace inventory,” said Rempell. “It gives us the best margin results and opens up inventory for us to chase. Q3 was definitely a little more out of balance than we would want to plan going forward.”

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At the store level, AEO’s total inventory was down more than 30 percent, according to executive chairman and CEO Jay Schottenstein.

The company’s gross margin increased 200 basis points (two percentage points), expanding to 40.2 percent from 38.2 percent last year.

The increase in margins reflected significantly higher merchandise margins, primarily due to higher full-priced sales, lower promotions and the aforementioned inventory optimization initiatives. Lower product costs and improved rent expense also benefited the gross margin. This was partly offset by higher delivery and distribution center costs, due to a strong digital business and higher cost per shipment.

AEO expects another improvement in gross margin in the fourth quarter, although not to the same level as the third quarter due to the increase in costs related to e-commerce.

In the call, chief financial officer Michael Mathias reiterated that American Eagle will close 50 stores this year based on their lease tenure, mall profile, proximity to other stores and customer engagement levels.

Schottenstein pointed out that 60 percent of the company’s store leases our up in the next 12 to 24 months, giving the company a lot of flexibility in its store strategy.

As AEO pivots more toward digital, seeing double-digit traffic, conversion and transaction growth, the company is continuing to expand the e-commerce business into Brazil, Israel, Russia, South Korea and Turkey.

American Eagle Outfitters generated positive operating cash flow during the third quarter and ended the period with total cash and short-term investments of $692 million, an increase from $265 million last year. During the third quarter, the company repaid the remaining $200 million balance on its revolving credit facility.

In the third quarter, capital expenditures totaled $31 million. On a year-to-date basis, capital expenditures were $93 million. For fiscal 2020, the company continues to expect capital expenditures to be in the range of $100 million to $125 million, prioritizing strategic customer-facing and supply chain investments.

American Eagle will host a virtual Investor Meeting on Thursday, Jan. 21 to share more news related to the company’s multiyear plan, upcoming store strategy and long-term financial targets.

Net Sales: Total net revenue at American Eagle Outfitters, Inc. decreased $35 million, or 3 percent, to $1.03 billion, compared with $1.07 billion in the year-ago period. The decline largely reflected mall traffic shortfalls related to Covid-19, offset by strong online sales.

By brand, American Eagle revenue decreased 11 percent, following a 2 percent increase last year. On the brighter side, Aerie’s revenue increased 34 percent, an even bigger jump from the brand’s 26 percent increase last year.

Aerie is also powering the digital side of American Eagle Outfitters in a big way. While the whole company saw e-commerce sales increase 29 percent, Aerie boosted digital sales a whopping 83 percent while American Eagle increased a more reserved 11 percent.

In total, online sales represented 37 percent of total sales in the quarter, and 45 percent for the year to date.

Store revenue decreased 16 percent, as positive increases in conversions were offset by traffic declines.

Net Earnings: American Eagle posted $58.1 million in net income in the third quarter on earnings of 32 cents per share, compared with $80.7 million on 48 cents per share last year. Adjusted earnings of 35 per share this year excluded 2 cents of expenses primarily related to Covid-19 protocols and 1 cent of non-cash interest expense on the company’s convertible notes.

Gross profit increased slightly to $415 million, compared with $407 million in the third quarter last year.

The retailer reported operating income of $95.5 million for the quarter. Adjusted operating income of $103 million this year, which was flat compared to last year, excluded $7 million of expenses primarily related to Covid-19 protocols.

CEO’s Take: “We have items that are blowing off the shelves right now,” Schottenstein said in the call. “We wish we had more of certain items that are really hot right now…I’m very proud of my team and we haven’t stopped. Our store operations people, our store designers, we’re challenging them to say what the stores will look like in the springtime.”