Despite beating Wall Street’s consensus estimates for second-quarter results, investors were concerned about American Eagle Outfitters Inc.’s apparel comps, which missed estimates of up 1 percent.
In a Nutshell: In a conference call to Wall Street analysts after the company posted second-quarter results Wednesday, chief financial officer Bob Madore spoke about the company’s sourcing in connection with tariffs.
“As discussed in the past, we have actively collaborated with our sourcing partners to meaningfully mitigate the potential impact. In addition, we continue to make progress in further reducing our exposure to China tariffs through a combination of partnering with vendors and diversifying our geographic production capabilities. Based on recently enforced tariffs List 4, we do not expect a material impact this year. At present, we expect the impact to be manageable in 2020,” Madore said.
For now, the company isn’t planning any price increases in reaction to the tariff increases.
The company’s production team has been able to “mitigate over two-thirds of the tariff exposure” through partnerships and negotiating with manufacturers in China, Madore said. American Eagle has, however, also migrated production to other geographies. So far, China represents roughly 30 percent of production, and over the next 12 to 18 months, Madore expects that to decline to the 20 percent range or below.
American Eagle will have to be very careful with pricing to maintain its value proposition, according to brand president Chad Kessler, even in the face of possibly tariffs that could eventually go to 25 percent.
Related Stories
“We’ve always been a brand that priced our apparel [for] what we built into it and what we think the customer will perceive as a fair ticket,” Kessler said. “I think if tariffs do go to 25 percent and we’re still making a percentage of our goods in China, we need to look at some of [the tween] styles where, maybe, there’s an opportunity for a few dollars here or there.”
The retail environment will continue to be competitive, so, Kessler said, “I don’t think that we can look at any sort of across the board increases in ticket.”
As for overall results, Jay Schottenstein, chairman and chief executive officer, said the quarter marked the company’s 18th consecutive quarter of positive comps. And while the core American Eagle brand faced some challenges, Schottenstein owed most of that to certain warm weather apparel categories. Business picked up in August, he said, noting that there have been some positive trends quarter-to-date.
American Eagle Jeans, Schottenstein said, continues to post “record sales, marking six consecutive years of all-time highs in each and every quarter. This period we recorded strong double-digit growth across genders, capturing market share and further strengthening our number one market position.”
Knits carrying a lower [average unit retail] was a high percentage of the business in the second quarter, though that has changed with the shift in seasonal categories to fleece, sweaters and outerwear plus knits, which carry a higher AUR.
As for the intimates brand Aerie, Schottenstein said its 16 percent comp gain represented the 19th consecutive quarter of double-digit sales increases.
“Aerie‘s consistent industry leading growth continues to demonstrate the power of this emerging brand and the significant opportunity ahead of us,” he said.
For its digital component, Schottenstein said the business posted double-digit growth, and that across channel and brands, the company saw positive traffic and “stores outpaced the malls.” American Eagle’s entry into the beauty business, still in its early stages, according to Schottenstein, is a “big opportunity” for the firm.
Based on positive trends and strength in the fall categories, Schottenstein said he was optimistic about the company’s prospects for the second half of the year.
Net Sales: For the three months ended Aug. 3, net revenue rose 7.9 percent to $1.04 billion from $964.9 million. Consolidated comparable sales rose 2 percent on top of a 9 percent gain a year ago. By brand, American Eagle was down 1 percent, versus a 7 percent gain a year ago, representing the first second-quarter comps miss in two years. Wall Street was expecting a comps gain of 1 percent. Aerie jumped 16 percent on top of the 27 percent increase in the year-ago quarter.
“A cool May hurt demand for warm weather apparel. Shorts missed our expectations and our product mix in women’s top skewed to lower AUR styles,” Kessler said. The trend was right and unit demand was strong, but AUR pressure caused comps to decline. The issues are now behind the brand, and Kessler said he is seeing consistently positive comps quarter-to-date, led by strength in jeans and fall apparel.
American Eagle also continued to consolidate its leadership in jeans, remaining the No. 1 women’s jeans brand in America in its core 15 to 25 year old age group, and No. 2 jeans brand overall in men’s. A change in the women’s silhouettes, with a shift into high rises and other jean silhouettes, according to Kessler, resulted in tops shifting to “boxier silhouettes or longer silhouettes.” And while dresses and skirts did well, Kessler also gave a shoutout to its accessories offerings, which the brand president said were a “standout this quarter.”
Aerie continues to be a success story for the company.
Jen Foyle, brand president for Aerie, said, “Sales metrics reflected a healthy, growing brand. Traffic was positive across all channels, with stores outpacing mall averages…Bras were one of the strongest areas in the quarter. We saw healthy demand for core bras and renewed excitement for bralette, one of Aerie’s signature categories.” The brand’s bottoms business remains robust, too.
Aerie opened 20 stores in the quarter, with Texas and California as priority states for store. Foyle also said the back-to-school season “has been a terrific success. I’m very encouraged by sales trends in key seasonal apparel categories, as well as strength in intimates.”
“We have visibility to exceeding $1 billion in short order and see great potential for Aerie over the longer term,” Foyle said.
Earnings: Net income rose 7.7 percent to $65 million, or 38 cents a diluted share, from $60.3 million, or 34 cents, a year ago. On an adjusted basis, earnings per share was 39 cents for the quarter.
Wall Street was expecting adjusted diluted earnings per share of 32 cents on revenue of $1 billion.
CEO’s Take: “As I said last quarter, we are better positioned than ever to capitalize on the continued disruption across the retail industry. That view has not changed,” Schottenstein said. “Our brand keeps getting stronger and we intend to continue to capture market share and grow our merchandise assortments, our customer base and our profitability.”