Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
AEO > SEC Filings for AEO > Form 10-Q on 29-Aug-2013All Recent SEC Filings

Show all filings for AMERICAN EAGLE OUTFITTERS INC

Form 10-Q for AMERICAN EAGLE OUTFITTERS INC


29-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our Fiscal 2012 Management's Discussion and Analysis of Financial Condition and Results of Operations which can be found in our Fiscal 2012 Annual Report on Form 10-K.

In addition, the following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements and should be read in conjunction with these statements and notes thereto.

This report contains various "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events, including the following:

the planned opening of approximately 55 to 60 new American Eagle Outfitters stores in North America and internationally during Fiscal 2013;

the planned opening of approximately 20 new franchised American Eagle Outfitters stores during Fiscal 2013;

the selection of approximately 50 to 65 American Eagle Outfitters stores in the United States and Canada for remodeling and refurbishing during Fiscal 2013;

the potential closure of approximately 20 to 30 American Eagle Outfitters and 15 to 20 aerie stores in the United States and Canada during Fiscal 2013;

the success of our efforts to expand internationally, engage in future franchise/license agreements, and/or grow through acquisitions or joint ventures;

the success of our core American Eagle Outfitters and aerie brands through our omni-channel outlets within North America and internationally;

the possibility that economic pressures and other business factors will have a significant negative impact on our continued growth and results of operations;

the expected payment of a dividend in future periods;

the possibility that our credit facilities may not be available for future borrowings;

the possibility that rising prices of raw materials, labor, energy and other inputs to our manufacturing process, if unmitigated, will have a significant impact to our profitability; and

the possibility that we may be required to take additional store impairment charges related to underperforming stores.

We caution that these forward-looking statements, and those described elsewhere in this report, involve material risks and uncertainties and are subject to change based on factors beyond our control as discussed within Item 1A of this Quarterly Report on Form 10-Q and Item 1A of our Fiscal 2012 Annual Report on Form 10-K. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements.

Key Performance Indicators

Our management evaluates the following items, which are considered key performance indicators, in assessing our performance:

Comparable sales - Comparable sales provide a measure of sales growth for stores and channels open at least one year over the comparable prior year period. In fiscal years following those with 53 weeks, including Fiscal 2013, the prior year period is shifted by one week to compare similar calendar weeks. A store is included in comparable sales in the thirteenth month of operation. However, stores that have a gross square footage increase of 25% or greater due to a remodel are removed from the comparable sales base, but are included in total sales. These stores are returned to the comparable sales base in the thirteenth month following the remodel. Sales from American Eagle Outfitters and aerie stores, as well as sales from AEO Direct, are included in total comparable sales. Sales from franchise stores are not included in comparable sales. Individual American Eagle Outfitters and aerie brand comparable sales disclosures represent sales from stores and AEO Direct.

We began to include AEO Direct sales in the individual American Eagle Outfitters and aerie brand comparable sales metric in Fiscal 2013 for the following reasons:

our approach to customer engagement continues to evolve as "omni-channel", which provides a seamless customer experience through both traditional and non-traditional channels, including four wall store locations, web, mobile/tablet devices, social networks, email, in-store displays and kiosks;

shopping behavior has continued to evolve across multiple channels that work in tandem to meet all customer needs. Management believes that presenting a brand level performance metric that includes all channels (i.e., stores and AEO Direct) to be the most appropriate, given customer behavior.


Table of Contents

Our management considers comparable sales to be an important indicator of our current performance. Comparable sales results are important to achieve leveraging of our costs, including store payroll, store supplies, rent, etc. Comparable sales also have a direct impact on our total net revenue, cash and working capital.

Gross profit - Gross profit measures whether we are optimizing the price and inventory levels of our merchandise and achieving an optimal level of sales. Gross profit is the difference between total net revenue and cost of sales. Cost of sales consists of: merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage, certain promotional costs and buying, occupancy and warehousing costs. Buying, occupancy and warehousing costs consist of compensation, employee benefit expenses and travel for our buyers and certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operation. The inability to obtain acceptable levels of sales, initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross profit and results of operations.

Operating income - Our management views operating income as a key indicator of our success. The key drivers of operating income are comparable sales, gross profit, our ability to control selling, general and administrative expenses, and our level of capital expenditures. Management also uses earnings before interest and taxes ("EBIT") as an indicator of successful operating results.

Return on invested capital - Our management uses return on invested capital ("ROIC") as a key measure to assess our efficiency at allocating capital to profitable investments. This measure is critical in determining which strategic alternatives to pursue.

Store productivity - Store productivity, including total net revenue per average square foot, sales per productive hour, average unit retail price ("AUR"), conversion rate, the number of transactions per store, the number of units sold per store, the number of units per transaction and four wall profit, is evaluated by our management in assessing our operational performance.

Inventory turnover - Our management evaluates inventory turnover as a measure of how productively inventory is bought and sold. Inventory turnover is important as it can signal slow moving inventory. This can be critical in determining the need to take markdowns on merchandise.

Cash flow and liquidity - Our management evaluates cash flow from operations, investing and financing in determining the sufficiency of our liquidity. Cash flow from operations has historically been sufficient to cover our uses of cash. Our management believes that cash flow from operations will be sufficient to fund anticipated capital expenditures and working capital requirements.

Our management's goals are to drive improvements to our gross profit performance, bring greater consistency to our results and to deliver profitable growth over the long term. Specifically, our targets are to deliver a total net revenue compounded annual growth rate ("CAGR") of 7% to 9%, an EBIT CAGR of 12% to 15% and a ROIC in the range of 14% to 17%.

Results of Operations

Overview

Our performance in the second quarter of Fiscal 2013 was negatively impacted by a disappointing women's assortment, primarily within the core and core fashion businesses, and a highly competitive and promotional retail environment. Store traffic in North America was uneven throughout the quarter and further decelerated in July. These factors led to deeper and broader promotions, directly resulting in increased markdowns, which pressured second quarter earnings.

Our second quarter total net revenue decreased 2% to $727.3 million and comparable sales, including AEO Direct, decreased 7%, compared to an 8% increase last year. By brand, American Eagle Outfitters brand comparable sales decreased 8% and aerie brand decreased 2%. Comparable sales for AEO Direct, which is included in the consolidated brand comparable sales, increased 11%.


Table of Contents

Gross profit decreased 11% to $245.5 million compared to $276.6 million last year and declined 360 basis points to 33.8% as a rate to total net revenue. The decline is the result of higher markdowns, increased delivery costs and the deleverage of rent on negative comparable sales.

Operating income for the second quarter was $29.4 million compared to $61.8 million a year ago, which includes $5.1 million of pre-tax restructuring costs and asset impairments. Net income this year was $19.6 million, or $0.10 per diluted share. This compares to adjusted income from continuing operations last year of $0.21 per diluted share, which excludes $0.02 per diluted share of tax benefits from audit settlements, fully offset by $0.02 of pre-tax restructuring costs and asset impairments.

The preceding paragraph contains non-GAAP financial measures ("non-GAAP" or "adjusted"), comprised of earnings per share information excluding non-GAAP items. This financial measure is not based on any standardized methodology prescribed by U.S. generally accepted accounting principles ("GAAP") and is not necessarily comparable to similar measures presented by other companies. We believe that this non-GAAP information is useful as an additional means for investors to evaluate our operating performance, when reviewed in conjunction with our GAAP financial statements. These amounts are not determined in accordance with GAAP and therefore, should not be used exclusively in evaluating our business and operations. The table below reconciles the GAAP financial measure to the non-GAAP financial measure discussed above.

                                                                             26 Weeks
                                                                              Ended
                                                                             July 28,
                                                                               2012
Income from continuing operations per diluted share - GAAP Basis            $     0.21

Add back: Corporate charges and asset write-offs (1)                              0.02
Less: Tax Benefits (1)                                                           (0.02 )


Income from continuing operations per diluted share - Non-GAAP Basis        $     0.21

(1) Non-GAAP Items consist of $4.4 million of tax benefits from audit settlements, offset by $3.9 million of pre-tax restructuring costs and $1.2 million of pre-tax asset impairments and asset write offs.

We had $404.9 million in cash and cash equivalents and short-term investments as of August 3, 2013. Merchandise inventory at the end of the second quarter was $461.1 million, compared to $462.0 million last year, a decrease of 1% on a cost per foot basis. The decrease is due to a 7% decrease in ending units per foot, partially offset by a 6% increase in ending average cost per unit as a result of product mix.

Our business is affected by the pattern of seasonality common to most retail apparel businesses. The results for the current and prior periods are not necessarily indicative of future financial results.


Table of Contents

The following table shows the percentage relationship to total net revenue of the listed line items included in our Consolidated Statements of Operations.

                                                   13 Weeks Ended                     26 Weeks Ended
                                             August 3,         July 28,         August 3,         July 28,
                                               2013              2012             2013              2012
Total net revenue                                 100.0 %          100.0 %           100.0 %          100.0 %
Cost of sales, including certain buying,
occupancy and warehousing expenses                 66.2             62.6              63.8             61.9

Gross profit                                       33.8             37.4              36.2             38.1
Selling, general and administrative
expenses                                           25.6             24.6              26.2             24.9
Depreciation and amortization expense               4.1              4.4               4.6              4.5

Operating income                                    4.1              8.4               5.4              8.7
Other (expense) income, net                         0.1             (0.1 )              -               0.2

Income before income taxes                          4.2              8.3               5.4              8.9
Provision for income taxes                          1.5              2.5               2.0              2.9

Income from continuing operations                   2.7              5.8               3.4              6.0
Loss from discontinued operations, net
of tax                                               -              (3.2 )              -              (1.9 )

Net income                                          2.7 %            2.6 %             3.4 %            4.1 %

The following table shows our adjusted consolidated store data, which excludes 77kids stores:

                                                13 Weeks Ended                      26 Weeks Ended
                                          August 3,         July 28,          August 3,         July 28,
                                            2013              2012              2013              2012
Number of stores:
Beginning of period                            1,037             1,068             1,044             1,069
Opened                                            26                 3                33                 9
Closed                                            (7 )              (8 )             (21 )             (15 )

End of period                                  1,056             1,063             1,056             1,063


Total gross square feet at end of
period                                     6,373,055         6,283,028         6,373,055         6,283,028


International franchise stores at end
of period (1)                                     57                39                57                39

(1) International franchise stores are not included in the consolidated store data or the total gross square feet calculation. International franchise stores at July 28, 2012 include the six stores in Hong Kong and China which were acquired in 2013. Refer to Note 12 to the Consolidated Financial Statements for additional information on the Company's acquisition of its Hong Kong and China operations.

Our operations are conducted in one reportable segment, which includes 921 American Eagle Outfitters retail stores, 135 aerie stand-alone retail stores and AEO Direct.

Comparison of the 13 weeks ended August 3, 2013 to the 13 weeks ended July 28, 2012

Total net revenue

Total net revenue decreased 2% to $727.3 million compared to $739.7 million last year. The change in total net revenue resulted primarily from a comparable sales decrease of 7% for the period. By brand, including the respective AEO Direct sales, American Eagle Outfitters brand comparable sales decreased 8%, or $51.2 million, and aerie brand comparable sales decreased 2%, or $1.2 million. Second quarter 2013 comparable sales are compared to the 13 weeks ended August 4, 2012.


Table of Contents

AE women's and men's comparable sales decreased 9% and 4%, respectively. For the second quarter, weak traffic led to a 3% decrease in transactions per store on flat conversion. The average transaction value was down 4% on a 1% decline in AUR.

Gross Profit

Gross profit decreased 11% to $245.5 million compared to $276.6 million last year. As a rate to total net revenue, gross profit was 33.8% compared to 37.4% in the same quarter last year. The 360 basis point decline in gross margin was due to increased markdowns, partially offset by product cost improvement, which led to 250 basis points of the decline. Buying, occupancy and warehousing costs increased 110 basis points from the deleverage of rent on negative comparable sales and higher delivery costs.

There was $1.7 million and $3.6 million of share-based payment expense included in gross profit for the periods ended August 3, 2013 and July 28, 2012, respectively, comprised of both time and performance-based awards.

Our gross profit may not be comparable to that of other retailers, as some retailers include all costs related to their distribution network as well as design costs in cost of sales and others may exclude a portion of these costs from cost of sales, including them in a line item such as selling, general and administrative expenses. Refer to Note 2 to the Consolidated Financial Statements for a description of our accounting policy regarding cost of sales, including certain buying, occupancy and warehousing expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $186.3 million from $182.1 million last year and increased 100 basis points, as a rate to total net revenue, to 25.6% from 24.6% last year. The dollar increase this year was driven primarily by hiring of open positions at the corporate office and incremental expense relating to the opening of factory stores, international expansion and omni-channel initiatives. Additionally, restructuring costs and asset impairments of $4.4 million, or 60 basis points, were included last year.

There was $2.7 million and $3.6 million of share-based payment expense included in selling, general and administrative expenses for the periods ended August 3, 2013 and July 28, 2012, respectively, comprised of both time and performance-based awards.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased to $29.7 million, compared to $32.6 million last year due to the impact of prior year store impairment and the maturing of assets. Additionally, depreciation and amortization expense includes $0.7 million of restructuring asset write-offs in the second quarter of 2012.

Other (Expense) Income, Net

Other income was $1.1 million, which primarily consisted of interest income and foreign currency translation, compared to expense of $0.3 million last year.

Provision for Income Taxes

The provision for income taxes from continuing operations is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The effective income tax rate from continuing operations based on actual operating results for the 13 weeks ended August 3, 2013 was 35.9% compared to 30.3% for the 13 weeks ended July 28, 2012. The lower effective income tax rate for the 13 weeks ended July 28, 2012 was primarily due to income tax settlements and other changes in income tax reserves.

Income from Continuing Operations

Income from continuing operations for the second quarter was $19.6 million, or $0.10 per diluted share, compared to $42.8 million, or $0.21 per diluted share, last year. The decline is attributable to the factors noted above.

Loss from Discontinued Operations

Due to the completion of the sale of the 77kids business to a third party in Fiscal 2012, the results of 77kids are presented as a discontinued operation. Loss from discontinued operations, net of tax, was $23.8 million, or a $0.12 loss per diluted share, for the period ended July 28, 2012. There were no losses from discontinued operations this year.


Table of Contents

Refer to Note 13 to the Consolidated Financial Statements for additional information regarding the discontinued operations of 77kids.

Net Income

Net income increased to $19.6 million, or 2.7% as a percent to total net revenue, from $19.0 million, or 2.6% as a percent to total net revenue last year. Net income per diluted share increased to $0.10 per diluted share from $0.09 per diluted share in the prior year. The change in net income is attributable to the factors noted above, including the impact of the discontinued operations of 77kids last year.

Comparison of the 26 weeks ended August 3, 2013 to the 26 weeks ended July 28, 2012

Total net revenue

Total net revenue decreased 3% to $1.407 billion compared to $1.448 billion last year. The change in total net revenue resulted primarily from a comparable sales decrease of 6% for the period. By brand, including the respective AEO Direct sales, American Eagle Outfitters brand comparable sales decreased 7%, or $88.7 million, and aerie brand comparable sales increased 1%, or $0.7 million. Year-to-date 2013 comparable sales are compared to the 26 weeks ended August 4, 2012.

AE women's and men's comparable sales decreased 8% and 3%, respectively. For the 26 week period, traffic, transactions and average transaction value decreased. AUR decreased in the low single-digits, primarily due to greater promotional activity.

Gross Profit

Gross profit decreased 8% to $509.1 million compared to $551.5 million last year. As a rate to total net revenue, gross profit was 36.2%, compared to 38.1% last year. Included in gross profit were $2.4 million of corporate charges this year. Favorable product costs provided 150 basis points of improvement, offset by 200 basis points of decline due to higher markdowns. Buying, occupancy and warehousing costs deleveraged 140 basis points from higher delivery costs and deleverage of rent on negative comparable sales.

There was $4.0 million and $14.4 million of share-based payment expense included in gross profit for the periods ended August 3, 2013 and July 28, 2012, respectively, comprised of both time and performance-based awards.

Our gross profit may not be comparable to that of other retailers, as some retailers include all costs related to their distribution network as well as design costs in cost of sales and others may exclude a portion of these costs from cost of sales, including them in a line item such as selling, general and administrative expenses. Refer to Note 2 to the Consolidated Financial Statements for a description of our accounting policy regarding cost of sales, including certain buying, occupancy and warehousing expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $368.6 million from $360.7 million last year and increased 130 basis points, as a rate to total net revenue, to 26.2% from 24.9% last year. Corporate charges of $1.5 million this year and $4.4 million last year, were included in selling, general and administrative expense. The dollar increase this year was driven primarily by fortifying our corporate team and incremental expense relating to the opening of factory stores, international expansion and omni-channel initiatives, offset by lower incentive compensation costs.

There was $5.7 million and $13.6 million of share-based payment expense included in selling, general and administrative expenses for the periods ended August 3, 2013 and July 28, 2012, respectively, comprised of both time and performance-based awards.


Table of Contents

Depreciation and Amortization Expense

Depreciation and amortization expense increased to $65.3 million, compared to $64.7 million last year. Depreciation and amortization expense includes $7.6 million of restructuring asset write-offs this year and $0.7 million last year.

Other Income, Net

Other income was $0.5 million this year, compared to $3.2 million last year, primarily as a result of proceeds received from the ARS Call Option last year.

Provision for Income Taxes

The provision for income taxes from continuing operations is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The effective income tax rate from continuing operations based on actual operating results for the 26 weeks ended August 3, 2013 was 37.2% compared to 32.8% for the 26 weeks ended July 28, 2012. The lower effective income tax rate for the 26 weeks ended July 28, 2012 was primarily due to income tax settlements and other changes in income tax reserves.

Income from Continuing Operations

Income from continuing operations for the 26 week period ended August 3, 2013 was $47.6 million, or $0.24 per diluted share, compared to $86.9 million, or $0.44 per diluted share, last year. The change in income from continuing operations is attributable to the factors noted above.

Loss from Discontinued Operations

Due to the completion of the sale of the 77kids business to a third party in Fiscal 2012, the results of 77kids are presented as a discontinued operation. Loss from discontinued operations, net of tax, was $28.2 million, or a $0.14 loss per diluted share, for the period ended July 28, 2012. There were no losses from discontinued operations this year.

Refer to Note 13 to the Consolidated Financial Statements for additional information regarding the discontinued operations of 77kids.

Net Income

Net income decreased to $47.6 million, or 3.4% as a percent to total net revenue, from $58.7 million, or 4.1% as a percent to total net revenue last year. Net income per diluted share decreased to $0.24 per diluted share from $0.30 per diluted share in the prior year. The change in net income is attributable to the factors noted above, including the impact of the discontinued operations of 77kids last year.

International Operations

We have entered into franchise agreements with multiple partners to expand our brands internationally. Through these franchise agreements, we plan to open a series of American Eagle Outfitters stores in Eastern Europe, Northern Africa and various parts of Asia. As of August 3, 2013, we had 57 franchised stores operated by our franchise partners in 12 countries. These franchise agreements do not involve a significant capital investment or operational involvement from AEO and require minimal operational involvement. International franchise stores are not included in the consolidated store data or the total gross square feet calculation.

. . .

  Add AEO to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for AEO - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.