American Eagle Outfitters Inc. bested Wall Street’s second-quarter consensus estimates for revenue and reported a narrower loss per share than expected, but changes are ahead as it considers optimizing its store network.
In a Nutshell: Jennifer Foyle, who will continue as Aerie’s global brand president, adds new oversight over merchandising, design and marketing for the American Eagle brand in her new role as chief creative officer. Chad Kessler, American Eagle’s global brand president, will report to Foyle.
“Jen is a strategic brand visionary, with a proven ability to drive consistent profitable growth. She has led Aerie to incredible success, resulting in the quadrupling of sales and profits over the past five years…. In Aerie, we have one of the best brands in retail today, and I know Jen’s influence will be instrumental as we continue to drive our momentum and shape the future of American Eagle,” Jay Schottenstein, executive chairman and CEO, said on Wednesday.
As for the quarter’s results, Schottenstein said: “In the midst of an unprecedented crisis, we delivered a significant improvement from the first quarter throughout our business – a true testament to the agility, talent and commitment of our team. Aerie was simply outstanding, fueled by strong demand, with revenue rising 32% and record margins, demonstrating the power of the brand and signaling the vast opportunity ahead. Across brands, digital sales accelerated and we successfully reopened stores during the quarter.”
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During a conference call to Wall Street analysts, Schottenstein said the company’s online strength in the quarter was “fueled by new customer acquisition, robust traffic and strong conversions.” Meanwhile, the company’s investments in omnichannel and supply chain have supported the increase in digital sales.
While its core American Eagle business was healthier due to lower promotions versus a year ago as well as product innovation and “leadership in jeans and bottoms,” the momentum at its intimates and active brand Aerie has been “truly incredible,” Schottenstein said.
“Sales growth has accelerated despite store closures. Seventy percent of the business is done online,” he added, noting that Aerie recently launched a new activewear line. Explaining that the product has been a year in the making, “The timing of our launch is perfect,” he said. With the line capturing the current demand for leggings and fleece, Schottenstein said he sees “significant runway for growth.”
Chief financial officer Mike Mathias said the company plans to close 40 to 50 locations for the year, with about 250 leases set to expire this year and another 250 next year. The leases have an average term of about three years and the lease expirations indicate more store closures beyond the 40 to 50 are ahead.
Net Sales: For the three months ended Aug. 1, total revenue fell 15.1 percent to $883.5 million from $1.04 billion. The company said the decline largely reflected store closures during the second quarter. Digital sales rose 48 percent in the quarter.
By brand, American Eagle revenue declined 26 percent in the quarter, following a 1 percent slip in the year-ago quarter. Digital revenue rose 47 percent in the quarter.
Aerie’s revenue rose 32 percent on top of a 22 percent gain a year ago. Digital revenue rose 142 percent in the quarter. The company plans to open 25 new Aerie locations in the year.
The company said total ending inventory at cost for the quarter decreased $114 million, or 21 percent, to $421 million. Inventory for its American Eagle brand was “significantly lower, as inventories were cut due to Covid-19-related store closures and inventory optimization strategies, the company said. Inventory at the company’s intimates brand Aerie increased to support strong demand.
“In the fall, the company plans to continue inventory optimization initiatives to streamline assortments, provide greater alignment of inventory to sales plans and better utilize supply chain strengths to chase product demand,” the company said.
Gross margin for the period was 30.0 percent, down from 36.7 percent last year.
For the six months, revenue slipped 25.5 percent to $1.44 billion from $1.93 billion.
Earnings: The company reported a net loss of $13.8 million for the quarter, or 8 cents a diluted share, against net income of $65.0 million, or 38 cents, in the same year-ago period. On an adjusted basis, excluding COVID-19 related expenses and restructuring costs, the loss per share was 3 cents.
Wall Street was expecting an adjusted diluted loss of 16 cents a share on revenue of $847.8 million.
The company said it incurred incremental Covid-19 expenses and restructuring charges of $15 million pre-tax, or 5 cents a share on an after-tax basis. For the second quarter, capital expenditures were $61 million. “For fiscal 2020, the company continues to expect capital expenditures to be in the range of $100 to $125 million, prioritizing strategic customer-facing and supply chain investments. This compares to $210 million for the full-year fiscal 2019,” American Eagle said.
Aerie opened 12 net new stores in the period, and American Eagle had seven net store closures. The company ended the quarter with 1.098 stores, including 160 stand-along Aerie stores, according to Susan Anderson, analyst at B. Riley FBR Inc. The company also has 220 international licensed stores.
For the six months, the net loss was $270.9 million, o r $1.63 a diluted share, against net income of $105.7 million, or 61 cents, a year ago.
CEO’s Take: “Throughout this event, we operated with strong disciplines, reduced expenses, cut inventories and carefully managed liquidity. We controlled what we could, and generated positive free cash flow, strengthening our balance sheet. Inventories are in good shape and I believe we are very well-positioned for the second half of the year. We will remain focused on managing through the near term and preparing for a new future as we accelerate strategies to transform our business and emerge with strength,” Schottenstein said.