AEO Delivers Third Quarter Results Ahead of Expectations with Meaningful Margin Improvement from First Half

By: American Eagle Outfitters, Inc. via Business Wire

November 22, 2022 at 08:00 AM EST

Aerie achieves all-time high third quarter revenue and operating profit
Actions to right size inventory and expenses fuel sequential profit improvement
Operating profit of $118 million exceeded pre-pandemic 2019 levels
Continuing to prioritize profit recovery and cash generation

American Eagle Outfitters, Inc. (NYSE: AEO) today announced financial results for the third quarter ended October 29, 2022.

“I’m pleased to deliver a third quarter that exceeded our expectations, with profit margins meaningfully improved from the first half of the year. Bold actions to rationalize inventory and reduce expenses are paying off. Our inventory is in good shape, up 8% to last year, with progress continuing into the fourth quarter. We are staying disciplined and focused on improving profitability and cash flow, while maintaining a healthy balance sheet,” commented Jay Schottenstein, AEO’s Executive Chairman of the Board and Chief Executive Officer.

“As we navigate the current macro environment, we remain focused on our strategic initiatives — leading with innovation and judiciously investing in capabilities that will differentiate us in the long-run. Our organization is strong and I have tremendous confidence in the resilience of our brands. We are excited about upcoming merchandise collections and look forward to delivering an exceptional customer experience across brands and channels this holiday season,” Jay continued.

Third Quarter 2022 Results:

Total net revenue of $1.2 billion was down 3% to the third quarter of 2021. Our supply chain business, Quiet Platforms, contributed approximately 2 percentage points to revenue growth. Brand revenue declined 5%, better than the company’s expectation for a high single digit decline.
Aerie revenue of $350 million rose 11% versus third quarter 2021, reflecting a 24% 3-year revenue CAGR. Comp sales declined 3% versus third quarter 2021 and was up 59% to third quarter 2019.
American Eagle revenue of $838 million declined 11% versus third quarter 2021 reflecting a negative 1% 3-year revenue CAGR. Comp sales declined 10% versus third quarter 2021 and was flat to third quarter 2019.
Consolidated store revenue declined 4%. Total digital revenue declined 5%. Compared to pre-pandemic third quarter 2019, store revenue increased 3% and digital revenue increased 35%.
Gross profit of $480 million compared to $565 million in the third quarter of 2021 and reflected a gross margin rate of 38.7% compared to 44.3% last year. Higher markdowns and increased product costs drove approximately 400 basis points of the rate decline and Quiet Platforms had a 70 basis point impact as that business continues to scale. Rent and warehousing also deleveraged, partially offset by lower incentive compensation.
Selling, general and administrative expense of $311 million decreased 1% due to lower incentive compensation. SG&A increased 50 basis points as a rate to sales versus third quarter 2021.
Operating income of $118 million reflected a 9.5% margin. This included an approximately $10 million loss from Quiet Platforms.
GAAP diluted EPS of $0.42 includes an approximately $1 million addback to net income of interest expense associated with the company’s convertible notes.
GAAP average diluted shares outstanding were 196 million including 8 million shares of unrealized dilution associated with the company’s convertible notes

Inventory

Total ending inventory at cost increased 8% to $798 million compared to $740 million last year, with units up 7%. This reflects a meaningful improvement from last quarter’s increase of 36%, reflecting actions to bring receipts more in line with demand. Inventory is current for the holiday season. The company continues to expect fourth quarter ending inventory to be down to last year.

Capital Expenditures

Capital expenditures totaled $71 million in the third quarter and $199 million year-to-date. Management continues to expect full-year spend to approximate $250 million.

Quiet Platforms

The logistics subsidiary is providing significant operational efficiencies and needed capacity for our brands. The third party customer base is ramping up as other brands look to upgrade their supply chain operations and drive efficiencies across their business to better compete in the current retail environment. As we evaluate our plans for Quiet, we are exploring different options to support future growth.

Shareholder Returns

The quarterly cash dividend remains paused to support financial flexibility, while navigating the near-term macro environment. Year-to-date, the company has returned $265 million in cash to shareholders through dividends and share repurchases, reflecting its highest level of returns since 2015.

Outlook

For the fourth quarter, the company is guiding brand revenue down in the mid single digits, and expects brand comps to be consistent with the third quarter. The company is also guiding fourth quarter gross margin in the range of 32% to 33%, at the higher end of previous guidance. While significant progress has been made in right-sizing inventory, management is taking a cautious view given what is likely to be a highly promotional Holiday season.

Management continues to drive expense reductions across store payroll, corporate expense, professional services and advertising. The company remains on track to deliver $100 million in reductions to the original plan and expects SG&A dollars in the fourth quarter to be approximately flat to last year.

Conference Call and Supplemental Financial Information

Management will host a conference call and real time webcast today at 11:00 a.m. Eastern Time. To listen to the call, dial 1-877-407-0789 or internationally dial 1-201-689-8562 or go to www.aeo-inc.com to access the webcast and audio replay. Additionally, a financial results presentation is posted on the company’s website.

* * * *

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® and Aerie® brands. Our purpose is to show the world that there’s REAL power in the optimism of youth. The company operates stores in the United States, Canada, Mexico, Hong Kong and Japan, and ships to 81 countries worldwide through its websites. American Eagle and Aerie merchandise also is available at more than 260 international locations operated by licensees in 26 countries. In 2022, AEO released its first annual Building a Better World report, which outlines two decades of ESG achievements through the company’s Planet, People and Practices initiatives. For more information, please visit www.aeo-inc.com.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This release and related statements by management contain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), which represent our expectations or beliefs concerning future events, including fourth quarter and annual fiscal 2022 results. All forward-looking statements made by the company involve material risks and uncertainties and are subject to change based on many important factors, some of which may be beyond the company’s control. Words such as "estimate," "project," "plan," "believe," "expect," "anticipate," "intend," “potential,” and similar expressions may identify forward-looking statements. Except as may be required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise and even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. The following factors, in addition to the risks disclosed in Item 1A., Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022 and in any other filings that we may make with the Securities and Exchange Commission in some cases have affected, and in the future could affect, the company's financial performance and could cause actual results for fiscal 2022 and beyond to differ materially from those expressed or implied in any of the forward-looking statements included in this release or otherwise made by management: the negative impacts of the COVID-19 pandemic and related operational disruptions; the risk that the company’s operating, financial and capital plans may not be achieved; our inability to anticipate customer demand and changing fashion trends and to manage our inventory commensurately; seasonality of our business; our inability to achieve planned store financial performance; our inability to react to raw material cost, labor and energy cost increases; our inability to gain market share in the face of declining shopping center traffic; our inability to respond to changes in e-commerce and leverage omni-channel demands; our inability to expand internationally; difficulty with our international merchandise sourcing strategies; challenges with information technology systems, including safeguarding against security breaches; and global economic, public health, social, political and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits, which could have a material adverse effect on our business, results of operations and liquidity.

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

		October 29, 2022			January 29, 2022			October 30, 2021
Assets
Current assets:
Cash and cash equivalents	$	82,133		$	434,770		$	740,668
Merchandise inventory		797,731			553,458			739,808
Accounts receivable, net		250,879			286,683			228,461
Prepaid expenses and other		146,362			122,013			66,593
Total current assets		1,277,105			1,396,924			1,775,530
Operating lease right-of-use assets		1,148,832			1,193,021			1,148,108
Property and equipment, at cost, net of accumulated depreciation		789,809			728,272			665,408
Goodwill, net		271,209			271,416			16,389
Intangible assets, net		96,530			102,701			52,943
Non-current deferred income taxes		34,135			44,167			57,753
Other assets		54,857			50,142			33,884
Total assets	$	3,672,477		$	3,786,643		$	3,750,015
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	188,448		$	231,782		$	314,561
Current portion of operating lease liabilities		332,160			311,005			299,693
Unredeemed gift cards and gift certificates		47,531			71,365			42,070
Accrued compensation and payroll taxes		36,436			141,817			123,588
Accrued income taxes and other		13,056			16,274			33,570
Other current liabilities and accrued expenses		67,799			70,628			56,090
Total current liabilities		685,430			842,871			869,572
Non-current liabilities:
Non-current operating lease liabilities		1,089,710			1,154,481			1,123,681
Long-term debt, net		411,911			341,002			336,249
Other non-current liabilities		22,894			24,617			23,816
Total non-current liabilities		1,524,515			1,520,100			1,483,746
Commitments and contingencies		-			-			-
Stockholders' equity:
Preferred stock		-			-			-
Common stock		2,496			2,496			2,496
Contributed capital		389,726			636,355			627,264
Accumulated other comprehensive loss		(41,267	)		(40,845	)		(39,049	)
Retained earnings		2,080,852			2,203,772			2,185,393
Treasury stock		(969,275	)		(1,378,106	)		(1,379,407	)
Total stockholders' equity		1,462,532			1,423,672			1,396,697
Total liabilities and stockholders' equity	$	3,672,477		$	3,786,643		$	3,750,015

Current ratio		1.86			1.66			2.04

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

		GAAP Basis
		13 Weeks Ended
		October 29, 2022		% of Revenue			October 30, 2021		% of Revenue
Total net revenue	$	1,240,583		100.0	%	$	1,274,078		100.0	%
Cost of sales, including certain buying, occupancy and warehousing expenses		760,810		61.3	%		709,554		55.7	%
Gross profit		479,773		38.7	%		564,524		44.3	%
Selling, general and administrative expenses		311,101		25.1	%		313,890		24.6	%
Depreciation and amortization expense		51,124		4.1	%		40,947		3.2	%
Operating income		117,548		9.5	%		209,687		16.5	%
Interest expense, net		3,878		0.3	%		8,612		0.7	%
Other expense (income), net		782		0.1	%		(3,130	)	-0.2	%
Income before income taxes		112,888		9.1	%		204,205		16.0	%
Provision for income taxes		31,616		2.5	%		51,981		4.1	%
Net income	$	81,272		6.6	%	$	152,224		11.9	%

Net income per basic share	$	0.44				$	0.91
Net income per diluted share	$	0.42				$	0.74

Weighted average common shares outstanding - basic		186,305					167,637
Weighted average common shares outstanding - diluted		195,776					205,013

		GAAP Basis
		39 Weeks Ended
		October 29, 2022		% of Revenue			October 30, 2021		% of Revenue
Total net revenue	$	3,493,745		100.0	%	$	3,502,848		100.0	%
Cost of sales, including certain buying, occupancy and warehousing expenses		2,255,929		64.5	%		1,999,743		57.1	%
Gross profit		1,237,816		35.5	%		1,503,105		42.9	%
Selling, general and administrative expenses		917,687		26.3	%		872,320		24.9	%
Depreciation and amortization expense		146,664		4.2	%		119,674		3.4	%
Operating income		173,465		5.0	%		511,111		14.6	%
Debt related charges		60,066		1.7	%		-		0.0	%
Interest expense, net		11,887		0.3	%		26,038		0.7	%
Other income, net		(5,501	)	-0.2	%		(6,354	)	-0.2	%
Income before income taxes		107,013		3.2	%		491,427		14.1	%
Provision for income taxes		36,466		1.2	%		122,226		3.6	%
Net income	$	70,547		2.0	%	$	369,201		10.5	%

Net income per basic share	$	0.39				$	2.20
Net income per diluted share	$	0.36				$	1.78

Weighted average common shares outstanding - basic		178,637					168,062
Weighted average common shares outstanding - diluted		207,499					207,032

AMERICAN EAGLE OUTFITTERS, INC.
BASIC AND DILUTED EARNINGS PER SHARE RECONCILIATION
(Dollars and shares in thousands)
(unaudited)

	13 Weeks Ended				39 Weeks Ended
Numerator:	October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021
Net income and numerator for basic EPS	$	81,272	$	152,224	$	70,547	$	369,201
Add: Interest expense, net of tax, related to the 2025 Notes ⁽¹⁾		529		-		4,897		-
Numerator for diluted EPS	$	81,801	$	152,224	$	75,444	$	369,201

Denominator:
Denominator for basic EPS - weighted average shares		186,305		167,637		178,637		168,062
Add: Dilutive effect of the 2025 Notes⁽¹⁾		8,418		33,687		27,280		34,616
Add: Dilutive effect of stock options and non-vested restricted stock		1,053		3,689		1,582		4,354
Denominator for diluted EPS - adjusted weighted average shares		195,776		205,013		207,499		207,032


⁽¹⁾ During the 39 weeks ended October 29, 2022, the Company adopted ASU 2020-06 under the modified retrospective method, which requires the Company to utilize the "if-converted" method of calculated diluted EPS.

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

		13 Weeks Ended
	October 30, 2021
		Interest expense, net			Net income			Diluted earnings per common share
GAAP Basis		$	8,612		$	152,224		$	0.74
% of Revenue			0.7	%		11.9	%

Less: Convertible debt ⁽¹⁾			4,569			3,330			0.02
Non-GAAP Basis		$	4,043		$	155,554		$	0.76
% of Revenue			0.3	%		12.2	%

⁽¹⁾ Amortization of the non-cash discount on the Company's convertible notes

AMERICAN EAGLE OUTFITTERS, INC.
RESULTS BY SEGMENT
(Dollars in thousands)
(unaudited)

	American Eagle			Aerie			Corporate and Other ⁽¹⁾			Total
13 weeks ended October 29, 2022
Total net revenue	$	837,575		$	349,712		$	53,296		$	1,240,583
Operating income (loss)	$	174,129		$	56,487		$	(113,068	)	$	117,548
% of revenue		20.8	%		16.2	%					9.5	%
Capital expenditures	$	20,477		$	24,404		$	26,626		$	71,507

13 weeks ended October 30, 2021
Total net revenue	$	940,992		$	315,049		$	18,037		$	1,274,078
Operating income (loss)	$	261,225		$	52,021		$	(103,559	)	$	209,687
% of revenue		27.8	%		16.5	%					16.5	%
Capital expenditures	$	13,298		$	24,867		$	20,036		$	58,201

	American Eagle			Aerie			Corporate and Other ⁽¹⁾			Total
39 Weeks Ended October 29, 2022
Total net revenue	$	2,301,051		$	1,043,129		$	149,565		$	3,493,745
Operating income (loss)	$	387,213		$	111,414		$	(325,162	)	$	173,465
% of revenue		16.8	%		10.7	%					5.0	%
Capital expenditures	$	55,000		$	85,663		$	58,701		$	199,364

39 Weeks Ended October 30, 2021
Total net revenue	$	2,513,700		$	947,851		$	41,297		$	3,502,848
Operating income (loss)	$	611,650		$	191,341		$	(291,880	)	$	511,111
% of revenue		24.3	%		20.2	%					14.6	%
Capital expenditures	$	36,093		$	48,164		$	60,148		$	144,405

⁽¹⁾ Corporate and Other includes revenue and operating results of the Todd Snyder and Unsubscribed brands, and Quiet Platforms (net of intersegment eliminations), which have been identified as operating segments but are not material to disclose as separate reportable segments. Corporate operating costs represents certain costs that are not directly attributable to another reportable segment.

AMERICAN EAGLE OUTFITTERS, INC.
STORE INFORMATION
(unaudited)

	Third Quarter		YTD Third Quarter
	2022		2022
Consolidated stores at beginning of period	1,160		1,133
Consolidated stores opened during the period
AE Brand⁽²⁾	8		19
Aerie (incl. OFFL/NE) ⁽³⁾	16		51
Todd Snyder	-		1
Unsubscribed	-		1
Consolidated stores closed during the period
AE Brand ⁽²⁾	(5	)	(23	)
Aerie (incl. OFFL/NE)⁽³⁾	-		(3	)
Total consolidated stores at end of period	1,179		1,179

AE Brand⁽²⁾	876
Aerie (incl. OFFL/NE) ⁽³⁾	292
Todd Snyder	6
Unsubscribed	5

Total gross square footage at end of period (in '000)	7,309		7,309

International license locations at end of period ⁽¹⁾	261		261

⁽¹⁾ International license locations (retail stores and concessions) are not included in the consolidated store data or the total gross square footage calculation.
⁽²⁾ AE Brand includes AE stand alone locations, AE/Aerie side-by side locations, AE/OFFL/NE side-by-side locations, and AE/Aerie/OFFL/NE side-by-side locations.
⁽³⁾ Aerie (incl. OFFL/NE) includes Aerie stand alone locations, OFFL/NE stand alone locations, and Aerie/OFFL/NE side-by-side locations.

View source version on businesswire.com: https://www.businesswire.com/news/home/20221121005868/en/

Contacts

Olivia Messina

412-432-3300

LineMedia@ae.com

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AEO Delivers Third Quarter Results Ahead of Expectations with Meaningful Margin Improvement from First Half

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