American Eagle Soars Above Estimates, But Comps Slow

Revenue grew 3% to a record $823 million from $797 million in the year-ago quarter

a1Leading teen and young adult retailer American Eagle Outfitters Inc. (NYSE: AEO) announced its Q2 FY16 financial results on August 17th, 2016.

The Pittsburgh, Pennsylvania-headquartered Company offers on-trend clothing, accessories, and personal care products under the American Eagle Outfitters and Aerie brands. In addition, it offers sports apparel under the Tailgate brand; and menswear products under the Todd Snyder New York brand name.

The company operates approximately 1,000 stores in the U.S., Canada, Mexico, China, Hong Kong, and the U.K., and ships to 81 countries through its websites. It also offers its merchandise at 151 stores operated by licensees in 22 countries, as well as through its websites at ae.com, aerie.com, TailgateClothing.com, and ToddSnyder.com. Read more about American Eagle’s financial results below.

Q2 FY16 financial highlights

a2American Eagle Outfitters’ Q2 FY16 revenue increased 3% to a record $823 million from $797 million in the year-ago quarter, marking the company’s seventh consecutive positive earnings delivery. The Company’s comparable sales grew 3% versus an 11% increase last year. Brand-wise, comps increased 24% at the aerie stores and 1% at AE Total Brand outlets. This marked the aerie brand’s fifth straight quarter of over 20% comps growth.

The Company’s Q2 FY16 gross profit jumped 8% to $307 million, and expanded 160 basis points to 37.3% as a percentage of revenue. Gross profits rose due to improved merchandise margins as a result of lower cost and higher realized selling prices, partially offset by increased delivery expense related to growth in online sales.

During the reporting quarter, selling, general, and administrative expenses rose 2% Y-o-Y to $200 million and improved 20 basis points as a percentage of revenue to 24.3%. Expenses rose due to investments in brand advertising and variable selling expense were partially offset by cost management initiatives. Operating income jumped 29% to $69 million from $53 million last year, and the operating margin expanded by 160 basis points to 8.3% as a rate to revenue. Other expenses of $3 million related to currency loss on cash held in Canadian dollars, versus other expenses of $2 million last year.

Source: Company's Data
Source: Company’s Data

Boosted by lower production costs and higher prices, the Company reported a 35% jump in diluted EPS of $0.23 for Q2 FY16, from diluted EPS of $0.17 for the comparable quarter last year. The company ended Q2 FY16 with total cash of $248 million compared to $327 million last year.

American Eagle Outfitters’ results gained from the Company’s constant efforts to enhance brands via innovations, technological advancements, and efforts aimed at enriching consumer experience. Bucking the ongoing trend of dismal earnings results from other major US-based apparel retailers, the Company posted better-than-expected results on the back of attractive assortments, strategic investments, and effective execution in each department.

Other highlights

Inventory: The Company’s total merchandise inventories at the end of Q2 FY16 increased 3% to $422 million, due in part to accelerated receipts to support its marketing programs. The company expects inventory at cost to increase in the low-single digits at the end of Q3 FY16.

Capital expenditures: In Q2 FY16, capital expenditures totaled $36 million and $61 million for the year-to-date period. The Company expects FY16 capital expenditures to be approximately $160 million, on the low end of the prior guidance of $160 to $170 million. The Company invested $135 million in capital expenditures, resulting in a lower cash balance.

a4Store update: In Q2 FY16, American Eagle inaugurated four new AE Brand stores and one Tailgate Clothing Co. store (acquired at the end of 2015), while it closed three AE stores and four aerie stores. Globally, the Company opened 13 international licensed stores. As of July 30th, 2016, American Eagle operated 1,044 company stores and 158 international licensed outlets. By the end of FY16, the Company expects to operate 181 international licensed stores. Its total store count at the end of FY16 is expected in the range of 1,045−1,050.

a5Share repurchase and dividend

Over the past 12 months, the Company spent $227 million in share buybacks and returned $94 million in dividends to shareholders.

Guidance for Q3 FY16 and full year FY16

Based on an anticipated low single digit increase in comparable sales, management expects Q3 FY16 EPS to be approximately $0.40 to $0.41. This guidance excludes potential asset impairment and restructuring charges and compares to EPS of $0.35 last year.

Stock Performance

a6American Eagle’s stock ended the day at $18.58, gaining 0.27%, at the close on Tuesday, August 23rd, 2016, having vacillated between an intraday high of $18.83 and a low of $18.56 during the session. The stock’s trading volume was at 6,225,293 for the day. The Company’s market cap was at $3.31 billion as of Tuesday’s close.

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