AEO Reports Record Third Quarter Sales of $1 Billion, Adjusted EPS Grows 30%

Comparable Sales Rose 8%, Marking 15 Straight Quarters of Positive Comp Growth

American Eagle Comps Rose 5%, Aerie Up 32%

PITTSBURGH — (BUSINESS WIRE) – American Eagle Outfitters, Inc. (NYSE: AEO) today reported EPS of $0.48 for the quarter ended November 3, 2018, compared to $0.36 for the quarter ended October 28, 2017, an increase of 33%.  EPS of $0.48 increased 30% compared to adjusted EPS of $0.37 last year.

 

Jay Schottenstein, AEO’s Chief Executive Officer commented, “I am proud to announce another outstanding performance this period for AEO, marking record sales and our first $1 billion third quarter.  American Eagle and Aerie had extremely well-executed back-to-school and fall seasons, fueling strong sales across stores and double-digit growth in digital, on lower promotional activity across channels.  The holiday season is off to a positive start and I’d like to thank our teams for the exceptional effort and enthusiasm they are bringing to this holiday season.  Looking forward, we will leverage our momentum and brand strength as we continue to drive growth and deliver returns to our shareholders.”

 

Adjusted amounts are based on Non-GAAP results, as presented in the accompanying GAAP to Non-GAAP reconciliation.

 

Third Quarter 2018 Results

 

  • Total net revenue increased $43 million, or 5% to $1.004 billion compared to $960 million last year. As a result of the shifted 2018 retail calendar, approximately $40 million of total net revenue shifted out of the third quarter and was recorded in the second quarter.  The shift of revenue adversely affected third quarter operating income.
  • Consolidated comparable sales increased 8% over the comparable period ending November 4, 2017, following a 3% increase last year.
  • By brand, American Eagle comparable sales increased 5%, building on a 1% increase last year. Aerie’s comparable sales increased 32%, following a 19% increase last year, marking the 16th consecutive quarter of double-digit comp growth.
  • Gross profit increased 7% to $399 million from gross profit of $375 million last year. The gross margin rate increased 80 basis points to 39.8% of revenue compared to 39.0% last year.  Lower markdowns and rent leverage were slightly offset by increased delivery costs.
  • Selling, general and administrative expense of $248 million increased 14% from $217 million last year. As a rate to revenue, SG&A rose 220 basis points to 24.8%.  The dollar increase primarily supported key investments in our brands, the customer experience and our associates with increases in store payroll, higher wages, and incremental advertising and incentive expense.
  • Depreciation and amortization expense decreased 2% to $42 million, improving 30 basis points to 4.2%.
  • Operating income of $109 million compared to $111 million last year, a decrease of $2 million, or 2%. Operating income decreased 5% to $109 million from adjusted operating income of $115 million last year.  As a rate to revenue operating income was 10.8%.
  • Third quarter operating income declined due to the shifted retail calendar as noted above. Year-to-date adjusted operating income increased 14% to $237 million and the adjusted operating margin increased 40 basis points to 8.5% as a rate to revenue compared to the same period last year.
  • Other income of $4 million includes a benefit from a vendor settlement and interest income. This compares to other expense of $13 million last year due to a discrete charge of $14 million to reserve against a receivable.
  • The effective tax rate decreased to 24.3% compared to an adjusted rate of 35.1% last year, primarily due to the impact of the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The company continues to analyze the impact of the Tax Act and provisional amounts will be finalized in the fourth quarter of 2018.
  • EPS of $0.48 compared to EPS of $0.36 last year. EPS increased 30% compared to adjusted EPS of $0.37 last year.

 

Inventory

Total ending inventories at cost increased 11% to $592 million.  This is primarily due to strong customer demand, the timing of holiday receipts and our clearance store strategy. Looking forward, we expect fourth quarter ending inventory to be up in the mid- to high- single digits.

 

 

Capital Expenditures

In the third quarter, capital expenditures totaled $43 million, with more than half related to store remodeling projects and new openings, and the balance to support the digital business, omni-channel tools and general corporate maintenance.  We continue to expect capital expenditures to be in the range of $180 million to $190 million this year.

 

Shareholder Returns, Cash and Investments

During the third quarter, the company repurchased one million shares for approximately $25 million.       Through the third quarter share repurchase and cash dividends, the company returned a total of $50 million to shareholders.  As a result of strong free cash flow, we ended the quarter with total cash and investments of $360 million compared to $258 million last year.

 

Store Information

During the quarter, the company opened 5 American Eagle stores and closed 3, ending with 941 stores, including 142 Aerie side-by-side locations. The company opened 2 Aerie stand-alone stores and closed 1, ending with 110 Aerie stand-alone stores.  Internationally, the company ended the quarter with 223 licensed stores.  For additional store information, see the accompanying table.

 

Fourth Quarter Outlook

The company expects fourth quarter EPS of $0.40 to $0.42, based on comparable sales in the positive mid- single digits and total revenue growth in the low single digits.  This guidance reflects approximately $60 million of lost revenue and $0.07 of reduced EPS due to operating with one less week in the fourth quarter than last year as a result of the 53rd week in fiscal 2017.  The guidance assumes a tax rate of approximately 27% due to the impact of recently updated tax reform transition tax legislation and other discrete items.  Guidance excludes potential asset impairment and restructuring charges.  Last year the company reported fourth quarter EPS of $0.52, which included approximately $0.08 per share of tax benefit.  Excluding these items, last year’s fourth quarter adjusted EPS was $0.44.  See the accompanying table for the GAAP to Non-GAAP reconciliation.

 

Conference Call and Supplemental Financial Information

Today, management will host a conference call and real time webcast at 4:15 p.m. Eastern Time. To listen to the call, dial 1-877-407-0789 or internationally dial 1-201-689-8562 or go to www.aeo-inc.com to access the webcast and audio replay. Additionally, a financial results presentation is posted on the company’s website.

 

Non-GAAP Measures

This press release includes information on non-GAAP financial measures (“non-GAAP” or “adjusted”), including earnings per share information and the consolidated results of operations excluding non-GAAP items.  These financial measures are not based on any standardized methodology prescribed by U.S. generally accepted accounting principles (“GAAP”) and are not necessarily comparable to similar measures presented by other companies.  Management believes that this non-GAAP information is useful for an alternate presentation of the company’s performance, when reviewed in conjunction with the company’s GAAP financial statements.  These amounts are not determined in accordance with GAAP and therefore, should not be used exclusively in evaluating the company’s business and operations.