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American Eagle Outfitters Report Second Quarter Results, Comp Sales Increased 2%, Sales and EPS Above Expectations

AEO | August 23, 2017

American Eagle Outfitters Report Second Quarter Results, Comp Sales Increased 2%, Sales and EPS Above Expectations

American Eagle Outfitters, Inc. (NYSE:AEO) today reported EPS of $0.12 for the second quarter ended July 29, 2017. Excluding restructuring and related charges of $0.07 per diluted share, the company’s adjusted EPS was $0.19 for the second quarter.

Jay Schottenstein, Chief Executive Officer commented, “In the second quarter, we achieved sales and earnings above our expectations in a challenging retail environment. Sales trends improved and I’m proud of the continued growth in jeans, bottoms, women’s apparel and Aerie, with encouraging signs in men’s tops beginning to emerge. Our brands are strong and we have significant opportunity for further growth. I’m optimistic as we enter the second half of the year, and we remain focused on delivering product innovation, strengthening customer engagement and improving profit flow-through.”

Second Quarter 2017 Results

Total net revenue increased 3% to $845 million from $823 million last year.
Consolidated comparable sales were up 2%, following a 3% increase last year.
Gross profit* of $294 million compared to $307 million last year with a gross margin rate of 34.9% to revenue compared to 37.3% last year, a 240 basis point decline. The margin declined primarily due to increased promotional activity. Additionally, shipping costs and rent deleveraged.
Selling, general and administrative expense rose 2% to $204 million compared to $200 million last year, and leveraged 20 basis points to a rate of 24.1% to revenue. Higher advertising expense was offset by lower compensation expense.
Operating income of $39 million, which includes $11 million of restructuring charges, compared to $69 million last year. Adjusted operating income* of $50 million compared to $69 million last year with a rate of 6.0% to revenue compared to 8.3% last year.
Other expense of $6.7 million includes $9.3 million of pre-tax charges related to the planned exit of a joint business venture. This was partially offset by $2.6 million of other income, compared to other expense of $3.1 million last year.
The effective tax rate decreased to 34.7% compared to 36.5% last year.
EPS of $0.12 compared to EPS of $0.23 last year. Adjusted EPS* of $0.19 compared to EPS of $0.23 last year.

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

Restructuring and Related Charges

In the second quarter, the company had charges totaling $21 million, approximately $0.07 per share. This consisted of restructuring charges corresponding to the previously announced initiative to explore the closure or conversion of company owned and operated stores in the United Kingdom, Hong Kong and China to licensed partnerships. Additionally, the company incurred charges related to the planned exit of a joint business venture.

Shareholder Returns, Cash

The company ended the quarter with total cash of $193 million compared to $248 million last year. Over the past 12 months, we returned $88 million in share buybacks, $90 million in dividends and invested $187 million in capital expenditures, resulting in a lower cash balance.

Inventory

Total ending inventories at cost increased 3% to $433 million. Ending units were flat compared to last year, while the average unit cost was up 2% to last year.

Capital Expenditures

In the second quarter, capital expenditures totaled $46 million. We continue to expect fiscal year 2017 capital expenditures in the range of $160 million to $170 million, with roughly half of the spend related to store remodeling projects and new openings, and the balance to support the e-commerce business, omni-channel tools and general corporate maintenance.

Store Information

Consistent with our strategy, this quarter we opened 9 new Aerie locations, of which 7 were in new markets. Additionally, we opened 6 new AE stores, with 2 in Mexico and 4 in the U.S. to better position our brand in select markets. The company also opened 9 international licensed stores and closed 3. For the remainder of the year, the company plans to open another 5 AE stores and 5 Aerie stores in the U.S., Canada and Mexico, as well as 32 international licensed stores to support the company’s global growth strategy. The company is on track to close a total of 25 to 40 stores this year. For additional store information, see the accompanying table.

Third Quarter Outlook

Based on anticipated comparable store sales in the range of flat to up low single digit, management expects third quarter 2017 EPS to be approximately $0.36 to $0.38. This guidance excludes potential asset impairment and restructuring charges, and compares to EPS of $0.41 last year.

Conference Call and Supplemental Financial Information

Today, management will host a conference call and real time webcast at 9:00 a.m. Eastern Time. To listen to the call, dial 1-877-407-0789 or internationally dial 1-201-689-8562 or go to http://investors.ae.com to access the webcast and audio replay. Also, 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. The company believes that this non-GAAP information is useful as an additional means for investors to evaluate the company’s operating 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.

About American Eagle Outfitters, Inc.

American Eagle Outfitters, Inc. (NYSE: AEO) is a leading global specialty retailer offering high-quality, on-trend clothing, accessories and personal care products at affordable prices under its American Eagle Outfitters® and Aerie® brands. The company operates more than 1,000 stores in the United States, Canada, Mexico, China and Hong Kong, and ships to 82 countries worldwide through its websites. American Eagle Outfitters and Aerie merchandise also is available at more than 190 international locations operated by licensees. For more information, please visit www.ae.com.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: This release contains forward-looking statements, which represent our expectations or beliefs concerning future events, including third quarter 2017 results. All forward-looking statements made by the company involve material risks and uncertainties and are subject to change based on factors beyond the company's control. Such factors include, but are not limited to the risk that the company’s operating, financial and capital plans may not be achieved and the risks described in the Risk Factor Section of the company's Form 10-K and Form 10-Q filed with the Securities and Exchange Commission. Accordingly, the company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. The company does not undertake to publicly update or revise its forward-looking statements even if future changes make it clear that projected results expressed or implied will not be realized.

AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)


			July 29,			January 28,			July 30,
			2017			2017			2016
			(unaudited)						(unaudited)

ASSETS
	Cash and cash equivalents	$	192,558		$	378,613		$	247,934
	Merchandise inventory		433,458			358,446			422,151
	Accounts receivable		80,673			86,634			65,282
	Prepaid expenses and other		110,496			77,536			90,852
	Total current assets		817,185			901,229			826,219
	Property and equipment, net		719,127			707,797			700,270
	Intangible assets, net		47,520			49,373			50,761
	Goodwill		15,069			14,887			17,399
	Non-current deferred income taxes		28,761			49,250			44,370
	Other assets		58,661			60,124			54,169
	Total Assets	$	1,686,323		$	1,782,660		$	1,693,188

LIABILITIES AND STOCKHOLDERS' EQUITY
	Accounts payable	$	275,479		$	246,204		$	286,691
	Accrued compensation and payroll taxes		22,708			54,184			35,908
	Accrued rent		78,697			78,619			78,621
	Accrued income and other taxes		13,289			12,220			10,250
	Unredeemed gift cards and gift certificates		32,573			52,966			31,532
	Current portion of deferred lease credits		12,838			12,780			12,810
	Other current liabilities and accrued expenses		36,398			36,810			42,719
	Total current liabilities		471,982			493,783			498,531
	Deferred lease credits		53,620			45,114			51,100
	Non-current accrued income taxes		4,786			4,537			4,795
	Other non-current liabilities		31,636			34,657			38,365
	Total non-current liabilities		90,042			84,308			94,260
	Commitments and contingencies		-			-			-
	Preferred stock		-			-			-
	Common stock		2,496			2,496			2,496
	Contributed capital		586,844			603,890			591,532
	Accumulated other comprehensive income		(30,121	)		(36,462	)		(29,356	)
	Retained earnings		1,772,233			1,775,775			1,693,371
	Treasury stock		(1,207,153	)		(1,141,130	)		(1,157,646	)
	Total stockholders' equity		1,124,299			1,204,569			1,100,397
	Total Liabilities and Stockholders' Equity	$	1,686,323		$	1,782,660		$	1,693,188

	Current Ratio		1.73			1.83			1.66

AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars and shares in thousands, except per share amounts)
(unaudited)


		GAAP Basis
		13 Weeks Ended
		July 29,		% of			July 30,		% of
		2017		Revenue			2016		Revenue

Total net revenue	$	844,557		100.0	%	$	822,594		100.0	%
Cost of sales, including certain buying, occupancy and warehousing expenses		551,908		65.3	%		515,499		62.7	%
Gross profit		292,649		34.7	%		307,095		37.3	%
Selling, general and administrative expenses		203,717		24.1	%		199,536		24.3	%
Restructuring charges		9,746		1.2	%		-		0.0	%
Depreciation and amortization		40,283		4.8	%		38,900		4.7	%
Operating income		38,903		4.6	%		68,659		8.3	%
Other expense, net		(6,734	)	-0.8	%		(3,134	)	-0.3	%
Income before income taxes		32,169		3.8	%		65,525		8.0	%
Provision for income taxes		10,933		1.3	%		23,933		2.9	%
Net income	$	21,236		2.5	%	$	41,592		5.1	%

Net income per basic share	$	0.12				$	0.23
Net income per diluted share	$	0.12				$	0.23

Weighted average common shares outstanding - basic		177,228					181,048
Weighted average common shares outstanding - diluted		178,788					183,413

		26 Weeks Ended
		July 29,		% of			July 30,		% of
		2017		Revenue			2016		Revenue

Total net revenue	$	1,606,393		100.0	%	$	1,572,010		100.0	%
Cost of sales, including certain buying, occupancy and warehousing expenses		1,035,922		64.5	%		971,463		61.8	%
Gross profit		570,471		35.5	%		600,547		38.2	%
Selling, general and administrative expenses		398,696		24.8	%		395,529		25.2	%
Restructuring charges		15,193		1.0	%
Depreciation and amortization		80,730		5.0	%		77,683		4.9	%
Operating income		75,852		4.7	%		127,335		8.1	%
Other (expense) income, net		(6,330	)	-0.4	%		1,801		0.1	%
Income before income taxes		69,522		4.3	%		129,136		8.2	%
Provision for income taxes		23,050		1.4	%		47,068		3.0	%
Net income	$	46,472		2.9	%	$	82,068		5.2	%

Net income per basic share	$	0.26				$	0.45
Net income per diluted share	$	0.26				$	0.45

Weighted average common shares outstanding - basic		178,475					180,872
Weighted average common shares outstanding - diluted		180,473					182,922

AMERICAN EAGLE OUTFITTERS, INC.
GAAP TO NON-GAAP RECONCILIATION
(Dollars in thousands, except per share amounts)
(unaudited)

	13 Weeks Ended
	July 29, 2017
	Gross profit		Operating income		Other (expense) income		Net income		Diluted income per common share
GAAP Basis	$	292,649	$	38,903	$	(6,734)	$	21,236	$	0.12
% of Revenue		34.7%		4.6%		-0.8%		2.5%

Add: Restructuring Related Charges^(1):		1,669		11,415		-		7,340		0.04
Add: Joint Business Venture Charges^(2):		-		-		9,311		5,988		0.03
		1,669		11,415		9,311		13,328

Non-GAAP Basis	$	294,318	$	50,318	$	2,577	$	34,564	$	0.19
% of Revenue		34.9%		6.0%		0.3%		4.1%

(1) - $11.4 million pre-tax restructuring related charges, consisting of:

• Inventory charges related to the restructuring of the United Kingdom, Hong Kong, and China ($1.7M), recorded as a reduction of Gross Profit

• Lease buyouts, store closure charges and severance and related charges ($9.7M), which includes charges for the United Kingdom, Hong Kong, and China and corporate overhead reductions, recorded within Restructuring Charges.

(2) - $9.3 million pre-tax charges for the charges related to the planned exit of a joint business venture, recorded within Other (expense) income, net.

AMERICAN EAGLE OUTFITTERS, INC.
GAAP TO NON-GAAP RECONCILIATION
(Dollars in thousands, except per share amounts)
(unaudited)

	26 Weeks Ended
	July 29, 2017
	Gross profit		Operating income		Other (expense) income		Net income		Diluted income per common share
GAAP Basis	$	570,471	$	75,852	$	(6,330)	$	46,472	$	0.26
% of Revenue		35.5%		4.7%		-0.4%		2.9%

Add: Restructuring Related Charges^(1):		1,669		16,862		-		10,801		0.06
Add: Joint Business Venture Charges^(2):		-		-		9,311		5,964		0.03
		1,669		16,862		9,311		16,765

Non-GAAP Basis	$	572,140	$	92,714	$	2,981	$	63,237	$	0.35
% of Revenue		35.6%		5.8%		0.2%		3.9%

(1) - $16.9 million pre-tax restructuring related charges, consisting of:

• Inventory charges related to the restructuring of the United Kingdom, Hong Kong, and China ($1.7M), recorded as a reduction of Gross Profit

• Lease buyouts, store closure charges and severance and related charges ($15.2M), which includes charges for the United Kingdom, Hong Kong, and China and corporate overhead reductions, recorded within Restructuring Charges.

(2) - $9.3 million pre-tax charges for the charges related to the planned exit of a joint business venture, recorded within Other (expense) income, net.

AMERICAN EAGLE OUTFITTERS, INC.
COMPARABLE SALES RESULTS BY BRAND
(unaudited)

	Second Quarter Comparable Sales
	2017	2016
American Eagle Outfitters, Inc. ⁽¹⁾	2%	3%

AE Total Brand ⁽¹⁾	0%	1%
aerie Total Brand ⁽¹⁾	26%	24%


	YTD Second Quarter Comparable Sales
	2017	2016
American Eagle Outfitters, Inc. ⁽¹⁾	2%	5%

AE Total Brand ⁽¹⁾	-1%	3%
aerie Total Brand ⁽¹⁾	26%	28%

(1) AEO Direct is included in consolidated and total brand comparable sales.

AMERICAN EAGLE OUTFITTERS, INC.
STORE INFORMATION
(unaudited)

			Second Quarter	YTD Second Quarter	Fiscal 2017
			2017	2017	Guidance
Consolidated stores at beginning of period			1,053	1,050	1,050
	Consolidated stores opened during the period
		AE Brand	6	9	15-20
		aerie	9	11	15
		Tailgate Clothing Co.	0	0	1
		Todd Snyder	0	1	1
	Consolidated stores closed during the period
		AE Brand	(8)	(10)	(20) - (30)
		aerie	(3)	(4)	(5) - (10)
Total consolidated stores at end of period			1,057	1,057	1,042 - 1,062

Stores remodeled and refurbished during the period			15	29	50
Total gross square footage at end of period			6,642,276	6,642,276	Not Provided

International license locations at end of period ⁽¹⁾			195	195	227