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Press release from Business Wire

American Eagle Outfitters Reports Second Quarter 2010 Results

<p class=' bwtextaligncenter'> <b>Initiates Third Quarter Guidance</b> </p>

Wednesday, August 25, 2010

American Eagle Outfitters Reports Second Quarter 2010 Results08:00 EDT Wednesday, August 25, 2010 PITTSBURGH (Business Wire) -- American Eagle Outfitters, Inc. (NYSE:AEO) today announced net income for the second quarter ended July 31, 2010 of $0.05 per diluted share, compared to $0.14 per diluted share last year. Due to the closure of the MARTIN+OSA business, its results of operations are presented as discontinued operations for all periods and are further discussed below. Income from continuing operations for the second quarter ended July 31, 2010 was $0.13 per diluted share compared to income from continuing operations for the second quarter ended August 1, 2009 of $0.18 per diluted share. “The second quarter was a challenging period, resulting in a miss to our sales and profit plans,” said Jim O'Donnell, chief executive officer. “Given the inconsistencies in business trends and unpredictable consumer behavior, we have intensified our actions to improve efficiencies, streamline our process and strengthen profitability. We are committed to driving change across the organization and delivering sustainable long-term growth.” Second Quarter Results – Continuing OperationsTotal sales for the 2010 second quarter increased to $652 million, compared to $647 million last year. Comparable store sales decreased 1%. Gross profit decreased 6% to $240 million, or 36.8% as a rate to sales, compared to $254 million or 39.3% last year. The merchandise margin decreased 210 basis points due to higher markdowns as a result of weaker sales performance within key categories of our summer assortment. As a rate to sales, buying, occupancy and warehousing costs increased 40 basis points primarily due to the opening of new stores and negative comparable store sales. Selling, general and administrative expense was $165 million compared to $161 million last year, a 3% increase. The increase was due to the timing of contract-based equity grants and severance payments. Excluding these items, SG&A was down slightly to last year. Operating income was $38 million, compared to $60 million last year. The second quarter operating margin was 5.9%, compared to 9.2% last year. The company's quarterly tax rate from continuing operations for the second quarter was 30.3%. This includes the favorable impact of tax incentives related to the company's distribution center in Ottawa, Kansas. The company generated income from continuing operations of $26 million, compared to $37 million last year. MARTIN+OSA Update – Discontinued OperationsOn March 9, 2010, the company announced plans to close its MARTIN+OSA concept, including all 28 stores and the online business. The company completed the closure of MARTIN+OSA during the second quarter of fiscal 2010. The loss from discontinued operations for each period presented includes the operating results and closure charges for MARTIN+OSA. Total cash outflow for the closure charges of MARTIN+OSA, net of associated tax benefits, is expected to be $14 million, which is at the low end of the company's initial range of $10 million to $40 million. The total year-to-date pre-tax closure charges were $44 million, of which $18 million were recorded in the second quarter of fiscal 2010. Included in the year-to-date pre-tax charges are lease-related items of $16 million, severance and other employee-related charges of $8 million, inventory charges of $2 million and a non-cash asset impairment charge of $18 million. AEO DirectThe company's direct business includes ae.com, aerie.com and 77kids.com. In the second quarter, sales decreased 9%. This compares to a 17% sales increase last year which was promotionally driven. Corporate Profit InitiativeThe company's corporate profit initiative, aimed at strengthening profitability, is comprehensive and affects every function and discipline across the organization. Key elements of the plan are as follows: Sales and merchandise margin optimization—includes strengthening merchandising strategies, a reduction in inventories, implementation of new merchandise allocation technology and refinement of store presentation models. Organizational streamlining—involves workforce reductions and process improvements to increase efficiencies and create a more productive environment. Expense reductions—entails the elimination of projects which were low-value to our customers and continued improvement of non-merchandise buying practices. Evaluation of stores and facilities—targets 50 to 100 closures of underperforming stores over the next two to five years. InventoryTotal merchandise inventory at the end of the second quarter was $349 million compared to $353 million last year. Second quarter ending inventory per foot increased 1%, with clearance inventory down at the end of the quarter. Looking forward, third quarter average weekly inventory per square foot is planned down in the mid single-digits. Capital ExpendituresFor the second quarter, capital expenditures were $20 million compared to $38 million last year. The company continues to expect capital expenditures to be in the range of $90 to $110 million. Real EstateIn the second quarter, the company opened one AE store, five aerie and five 77kids stores. In addition, 10 AE store remodels were completed. Store closings in the quarter included five AE stores and 28 MARTIN+OSA stores. For additional year-to-date and fiscal 2010 information, please refer to the accompanying real estate table. Cash and Cash Equivalents, Short-term Investments and Long-term InvestmentsThe company ended the second quarter with total cash and cash equivalents of $426 million, as well as $172 million of investments in auction rate securities, net of impairment. Share RepurchaseDuring the second quarter, the company repurchased 10 million shares, bringing the year-to-date total to 14 million shares for a total of $192 million. Third Quarter 2010 OutlookMonth-to-date August comparable store sales are up approximately 1%, which is consistent with our plan for the back-to-school selling period. For the third quarter, the company expects comparable store sales to be flat to down in the low single-digits. This assumes a more conservative view of traffic following peak back-to-school shopping. Based upon this view, our third quarter 2010 earnings from continuing operations guidance is $0.23 to $0.26 per diluted share. This compares to earnings from continuing operations for the third quarter 2009 of $0.32 per diluted share, which included a tax benefit of $0.07 per diluted share associated with the repatriation of earnings from Canada. The third quarter 2010 guidance excludes potential investment security charges. Conference Call InformationAt 9:00 a.m. Eastern Time on August 25, 2010, the company's management team will host a conference call to review the financial results. To listen to the call, dial 1-877-407-0789 or internationally dial 1-201-689-8562 five to seven minutes prior to the scheduled start time. The conference call will also be simultaneously broadcast over the Internet at www.ae.com. Anyone unable to listen to the call can access a replay beginning August 26, 2010 at 12:00 p.m. Eastern Time through September 16, 2010. To listen to the replay, dial 1-877-660-6853, or internationally dial 1-201-612-7415, and reference account 3055 and confirmation code 348836. An audio replay of the conference call will also be available at www.ae.com. American Eagle Outfitters, Inc., through its subsidiaries, (“AEO, Inc.”)offers high-quality, on-trend clothing, accessories and personal care products at affordable prices. The American Eagle Outfitters® brand targets 15 to 25 year old girls and guys, with 934 stores in the U.S. and Canada and online at www.ae.com. aerie® by american eagle offers Dormwear® and intimates collections for the AE® girl, with 144 standalone stores in the U.S. and Canada and online at www.aerie.com. The latest brand, 77kids® by american eagle®, is available online at www.77kids.com, as well as at five stores across the nation. The 77kids brand offers “kid cool,” durable clothing and accessories for kids ages two to 10. AE.COM®, the online home of the brands of AEO, Inc. ships to 76 countries worldwide. “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, specifically regarding third quarter sales and earnings. 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 31,January 30,August 1,201020102009(unaudited)(unaudited)ASSETS Cash and cash equivalents $ 425,523 $ 693,960 $ 500,263 Short-term investments 5,800 4,675 29,525 Merchandise inventory 349,091 326,454 352,819 Accounts receivable 41,793 34,746 40,799 Prepaid expenses and other 99,475 47,039 62,432 Deferred income taxes 41,129   60,156   45,605   Total current assets 962,811   1,167,030   1,031,443   Property and equipment, net 657,131 713,142 745,086 Goodwill 11,364 11,210 11,181 Long-term investments 166,717 197,773 198,559 Non-current deferred income taxes 28,724 27,305 1,981 Other assets, net 22,956   21,688   22,064   Total Assets $ 1,849,703   $ 2,138,148   $ 2,010,314     LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 144,929 $ 158,526 $ 151,978 Notes payable - 30,000 75,000 Accrued compensation and payroll taxes 31,356 55,144 29,970 Accrued rent 83,617 68,866 66,637 Accrued income and other taxes 13,801 20,585 16,093 Unredeemed gift cards and gift certificates 21,201 39,389 20,920 Current portion of deferred lease credits 16,909 17,388 17,639 Other current liabilities and accrued expenses 19,413   19,057   18,845   Total current liabilities 331,226   408,955   397,082   Deferred lease credits 83,709 89,591 98,067 Non-current accrued income taxes 35,748 38,618 25,036 Other non-current liabilities 21,030   22,467   20,272   Total non-current liabilities 140,487   150,676   143,375   Commitments and contingencies - - - Preferred stock - - - Common stock 2,496 2,486 2,486 Contributed capital 540,326 554,399 526,487 Accumulated other comprehensive income 19,250 16,838 15,567 Retained earnings 1,735,503 1,764,049 1,692,990 Treasury stock (919,585 ) (759,255 ) (767,673 ) Total stockholders' equity 1,377,990   1,578,517   1,469,857   Total Liabilities and Stockholders' Equity $ 1,849,703   $ 2,138,148   $ 2,010,314     Current Ratio 2.91 2.85 2.60                     AMERICAN EAGLE OUTFITTERS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars and shares in thousands, except per share amounts) (unaudited)     13 Weeks EndedJuly 31,% ofAugust 1,% of2010   Sales2009   Sales   Net sales $ 651,502 100.0 % $ 646,798 100.0 % Cost of sales, including certain buying, occupancy and warehousing expenses 411,794       63.2 % 392,900       60.7 % Gross profit 239,708 36.8 % 253,898 39.3 % Selling, general and administrative expenses 165,493 25.4 % 160,858 24.9 % Depreciation and amortization 36,049       5.5 % 33,431       5.2 % Operating income 38,166 5.9 % 59,609 9.2 % Other income (expense) 138 0.0 % (3,926 ) -0.6 % Other-than-temporary impairment charge (1,248 )     -0.2 % (225 )     0.0 % Income before income taxes 37,056 5.7 % 55,458 8.6 % Provision for income taxes 11,213       1.7 % 18,701       2.9 % Income from continuing operations 25,843 4.0 % 36,757 5.7 % Loss from discontinued operations, net of tax (16,180 )     -2.5 % (8,185 )     -1.3 % Net income $ 9,663       1.5 % $ 28,572       4.4 %   Basic income per common share: Income from continuing operations $ 0.13 $ 0.18 Loss from discontinued operations (0.08 ) (0.04 ) Net income per basic share $ 0.05   $ 0.14     Diluted income per common share: Income from continuing operations $ 0.13 $ 0.18 Loss from discontinued operations (0.08 ) (0.04 ) Net income per diluted share $ 0.05   $ 0.14     Weighted average common shares outstanding - basic 201,764 206,010 Weighted average common shares outstanding - diluted 203,153 209,015       26 Weeks EndedJuly 31,% ofAugust 1,% of2010   Sales2009   Sales   Net sales $ 1,299,964 100.0 % $ 1,248,477 100.0 % Cost of sales, including certain buying, occupancy and warehousing expenses 802,560       61.7 % 770,976       61.8 % Gross profit 497,404 38.3 % 477,501 38.2 % Selling, general and administrative expenses 334,138 25.7 % 312,646 25.0 % Depreciation and amortization 71,574       5.5 % 66,419       5.3 % Operating income 91,692 7.1 % 98,436 7.9 % Other income (expense) 259 0.0 % (6,237 ) -0.5 % Other-than-temporary impairment charge (1,248 )     -0.1 % (225 )     0.0 % Income before income taxes 90,703 7.0 % 91,974 7.4 % Provision for income taxes 28,998       2.2 % 26,141       2.1 % Income from continuing operations $ 61,705 4.8 % $ 65,833 5.3 % Loss from discontinued operations, net of tax (41,120 )     -3.2 % (15,294 )     -1.2 % Net income $ 20,585       1.6 % $ 50,539       4.1 %   Basic income per common share: Income from continuing operations $ 0.30 $ 0.32 Loss from discontinued operations (0.20 ) (0.07 ) Net income per basic share $ 0.10   $ 0.25     Diluted income per common share: Income from continuing operations $ 0.30 $ 0.31 Loss from discontinued operations (0.20 ) (0.07 ) Net income per diluted share $ 0.10   $ 0.24     Weighted average common shares outstanding - basic 204,238 205,742 Weighted average common shares outstanding - diluted 206,430 207,974             AMERICAN EAGLE OUTFITTERS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (unaudited)   For the 26 Weeks EndedJuly 31,August 1,20102009 Operating activities: Net income $ 20,585 $ 50,539 Loss from discontinued operations 41,120   15,294   Income from continuing operations 61,705 65,833 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 73,660 67,452 Share-based compensation 18,380 9,224 Provision for deferred income taxes 17,933 5,980 Tax benefit from share-based payments 13,039 7,258 Excess tax benefit from share-based payments (4,100 ) (1,405 ) Foreign currency transaction loss 1,159 5,685 Net impairment loss recognized in earnings 1,248 225 Realized loss on sale of investment securities 225 2,749 Changes in assets and liabilities: Merchandise inventory (29,870 ) (56,716 ) Accounts receivable (8,690 ) (279 ) Prepaid expenses and other (53,574 ) (1,442 ) Other assets, net 180 (187 ) Accounts payable (11,134 ) 2,887 Unredeemed gift cards and gift certificates (17,964 ) (21,693 ) Deferred lease credits (2,805 ) 13,095 Accrued compensation and payroll taxes (26,183 ) 473 Accrued income and other taxes (10,117 ) (5,353 ) Accrued liabilities (1,187 ) (2,949 ) Total adjustments (39,800 ) 25,004   Net cash provided by operating activities from continuing operations$21,905$90,837 Investing activities: Capital expenditures (39,344 ) (72,674 ) Sale of investments 27,875 49,914 Other investing activities (1,530 ) (685 ) Net cash used for investing activities from continuing operations$(12,999)$(23,445) Financing activities: Payments on capital leases (1,145 ) (971 ) Repayment of notes payable (30,000 ) - Repurchase of common stock from employees (17,986 ) (195 ) Repurchase of common stock as part of publicly announced programs (192,268 ) - Net proceeds from stock options exercised 4,475 4,763 Excess tax benefit from share-based payments 4,100 1,405 Cash used to net settle equity awards (6,434 ) - Cash dividends paid (43,148 ) (41,360 ) Net cash used for financing activities from continuing operations$(282,406)$(36,358) Effect of exchange rates on cash 88   6,111     Cash flows of discontinued operations Net cash provided by (used for) operating activities 4,981 (9,931 ) Net cash used for investing activities (6 ) (293 ) Net cash provided by financing activities - - Effect of exchange rate on cash -   -   Net cash provided by (used for) discontinued operations$4,975   (10,224)   Net (decrease) increase in cash and cash equivalents$(268,437)$26,921 Cash and cash equivalents - beginning of period 693,960   473,342   Cash and cash equivalents - end of period $425,523   $500,263                   AMERICAN EAGLE OUTFITTERS, INC.REAL ESTATE INFORMATION(unaudited)   Second QuarterYear-to-dateFiscal 2010Fiscal 2010Fiscal 2010Guidance Consolidated stores at beginning of period 1,105 1,103 1,103 Consolidated stores opened during the period AE Brand 1 6 14 aerie 5 7 11 77kids 5 5 9 Consolidated stores closed during the period AE Brand (5) (10) (15) - (25) MARTIN+OSA     (28)     (28)     (28) Total consolidated stores at end of period1,0831,0831084 - 1094   Stores remodeled during the period 10 13 25 - 35 Total gross square footage at end of period 6,279,510 6,279,510