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Press release from Business Wire

American Eagle Outfitters Reports Third Quarter 2010 Results

<p class='bwalignc'> <b>Stronger Sales and Margin Contribute to Improvement</b> </p>

Thursday, November 18, 2010

American Eagle Outfitters Reports Third Quarter 2010 Results08:09 EST Thursday, November 18, 2010 PITTSBURGH (Business Wire) -- American Eagle Outfitters, Inc. (NYSE:AEO) today announced income from continuing operations for the third quarter ended October 30, 2010 of $0.17 per diluted share, compared to $0.32 per diluted share last year. Adjusted income from continuing operations for the third quarter ended October 30, 2010 was $0.29 per diluted share, which excludes a realized loss from the sale of investment securities of $0.12 per diluted share. This compares to adjusted earnings from continuing operations for the third quarter 2009 of $0.25 per diluted share, which excludes a tax benefit of $0.07 per diluted share associated with the repatriation of earnings from Canada as outlined in the table that follows. Jim O'Donnell, chief executive officer, commented, “Our third quarter results reflect meaningful progress toward our goals and demonstrate the positive impact of recent initiatives. We achieved sales growth with less reliance on promotional activity. Our operating income improvement stemmed from stronger merchandising, well positioned inventories and expense management. Looking ahead, I am confident that we can achieve further recovery in operating profits over the course of the next 12 to 18 months.” Third Quarter Results – Continuing OperationsTotal sales for the third quarter ended October 30, 2010 increased to $752 million, compared to $736 million last year. Comparable store sales increased 1%. Gross profit increased 3% to $312 million, or 41.6% as a rate to sales, compared to $304 million or 41.3% last year. The merchandise margin increased 90 basis points due to less promotional activity and stronger sales performance during the peak back-to-school selling period. As a rate to sales, buying, occupancy and warehousing costs increased 60 basis points primarily due the timing of new store openings, which included our new flagship store in the SoHo district of Manhattan. Selling, general and administrative expense for the third quarter ended October 30, 2010 was approximately flat to last year at $185 million. Third quarter 2010 SG&A expense includes approximately $2.5 million of severance and related charges. Excluding these charges, current year SG&A expense was down slightly to last year and reflects the company's continued focus on expense reductions. As a rate to sales, SG&A decreased 50 basis points to 24.6% from 25.1% last year. Operating income was $91 million, compared to $85 million last year. The 2010 third quarter operating margin was 12.2%, compared to 11.5% last year. MARTIN+OSA Update – Discontinued OperationsThe loss from discontinued operations for each period presented includes the operating results and closure charges for MARTIN+OSA. The total year-to-date, pre-tax closure charges were $43 million, which were primarily recorded in the first half of fiscal 2010. Included in the year-to-date, pre-tax charges are lease-related items of $15 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. The company has completed the closure of MARTIN+OSA and expects no further charges to be incurred. AEO DirectThe company's direct business includes ae.com, aerie.com and 77kids.com. In the third quarter, sales decreased 2%. This compares to a 9% sales increase last year driven by increased traffic and higher conversion due to promotional activity. Decreased promotional activity in the third quarter of 2010 resulted in higher margins and profitability for AEO Direct as compared to the prior year. InventoryTotal merchandise inventory at the end of the third quarter was down 4% to $410 million compared to $425 million last year. Third quarter ending inventory per foot decreased 2%, with clearance inventory down at the end of the quarter. Looking forward, fourth quarter average weekly inventory per square foot is planned down in the high single-digits. Capital ExpendituresFor the third quarter, capital expenditures were $26 million compared to $33 million last year. The company now expects total 2010 capital expenditures to be in the range of $90 million to $100 million. Of this amount, approximately half relates to investments in our store fleet. Real EstateIn the third quarter, the company opened five AE, three aerie and two 77kids stores. In addition, the company remodeled six AE stores and one aerie store. Store closings in the third quarter included four AE 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 third quarter with total cash and cash equivalents of $631 million, as well as $9 million of investments in auction rate securities with a weighted average maturity of less than two years. During the third quarter, the company liquidated 95% of its investment portfolio for cash proceeds of $150 million and a realized loss of $24 million, or $0.12 per diluted share. The company's investment portfolio was originally purchased as highly liquid short-term instruments; however, due to the deterioration of the ARS market, the company's ARS investment portfolio was subsequently classified as long-term, with a weighted average contractual maturity of approximately 26 years. This liquidation allowed the company to convert substantially its entire investment portfolio to short-term liquid assets. Fourth Quarter GuidanceDue to the importance of Thanksgiving weekend, the company will provide fourth quarter earnings guidance on Thursday, December 2, 2010 along with its November sales announcement. Discontinuation of Monthly Sales ReportingBeginning in fiscal 2011, the company will discontinue monthly sales reporting. Sales and earnings will be reported together in the quarterly earnings announcement. Conference Call InformationAt 10:00 a.m. Eastern Time on November 18, 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 November 18, 2010 at 1:00 p.m. Eastern Time through December 9, 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 348837. An audio replay of the conference call will also be available at www.ae.com. Non-GAAP MeasuresThis press release includes information on non-GAAP earnings per diluted share (“non-GAAP” or “adjusted”). This 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. 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. This amount is not determined in accordance with GAAP and therefore, should not be used exclusively in evaluating the company's business and operations. 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 937 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 147 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 seven 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 fourth quarter 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)       October 30,January 30,October 31,201020102009(unaudited)(unaudited)   ASSETS Cash and cash equivalents $ 630,775 $ 693,960 $ 512,603 Short-term investments 3,700 4,675 3,300 Merchandise inventory 409,509 326,454 425,415 Accounts receivable 40,346 34,746 46,584 Prepaid expenses and other 52,757 47,039 52,188 Deferred income taxes 50,910   60,156   54,362   Total current assets 1,187,997   1,167,030   1,094,452   Property and equipment, net 652,361 713,142 741,019 Goodwill 11,395 11,210 11,165 Long-term investments 5,915 197,773 203,152 Non-current deferred income taxes 27,475 27,305 22,719 Other assets, net 23,981   21,688   23,401   Total Assets $ 1,909,124   $ 2,138,148   $ 2,095,908     LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 196,504 $ 158,526 $ 198,978 Notes payable - 30,000 50,000 Accrued compensation and payroll taxes 30,289 55,144 23,932 Accrued rent 71,133 68,866 67,983 Accrued income and other taxes 11,620 20,585 22,574 Unredeemed gift cards and gift certificates 20,266 39,389 19,632 Current portion of deferred lease credits 16,465 17,388 17,605 Other current liabilities and accrued expenses 21,285   19,057   20,293   Total current liabilities 367,562   408,955   420,997   Deferred lease credits 81,730 89,591 93,607 Non-current accrued income taxes 36,302 38,618 36,265 Other non-current liabilities 22,246   22,467   21,734   Total non-current liabilities 140,278   150,676   151,606   Commitments and contingencies - - - Preferred stock - - - Common stock 2,496 2,486 2,486 Contributed capital 543,265 554,399 538,007 Accumulated other comprehensive income 26,751 16,838 16,478 Retained earnings 1,745,912 1,764,049 1,726,531 Treasury stock (917,140 ) (759,255 ) (760,197 ) Total stockholders' equity 1,401,284   1,578,517   1,523,305   Total Liabilities and Stockholders' Equity $ 1,909,124   $ 2,138,148   $ 2,095,908     Current Ratio 3.23 2.85 2.60                         AMERICAN EAGLE OUTFITTERS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars and shares in thousands, except per share amounts) (unaudited)       13 Weeks EndedOctober 30,% ofOctober 31,% of2010     Sales2009     Sales   Net sales $ 751,507 100.0 % $ 736,011 100.0 % Cost of sales, including certain buying, occupancy and warehousing expenses 439,198       58.4 % 431,836       58.7 % Gross profit 312,309 41.6 % 304,175 41.3 % Selling, general and administrative expenses 185,050 24.6 % 184,948 25.1 % Depreciation and amortization 35,804       4.8 % 34,653       4.7 % Operating income 91,455 12.2 % 84,574 11.5 % Other income (expense) 1,986 0.2 % (451 ) -0.1 % Realized loss on sale of investment securities (24,201 )     -3.2 % -       0.0 % Income before income taxes 69,240 9.2 % 84,123 11.4 % Provision for income taxes 36,049       4.8 % 16,175       2.2 % Income from continuing operations 33,191 4.4 % 67,948 9.2 % Loss from discontinued operations, net of tax (167 )     0.0 % (8,789 )     -1.2 % Net income $ 33,024       4.4 % $ 59,159       8.0 %   Basic income per common share: Income from continuing operations $ 0.17 $ 0.33 Loss from discontinued operations 0.00     (0.04 )   Net income per basic share $ 0.17     $ 0.29       Diluted income per common share: Income from continuing operations $ 0.17 $ 0.32 Loss from discontinued operations 0.00     (0.04 )   Net income per diluted share $ 0.17     $ 0.28       Weighted average common shares outstanding - basic 195,590 206,517 Weighted average common shares outstanding - diluted 197,323 209,393     39 Weeks EndedOctober 30,% ofOctober 31,% of2010     Sales2009     Sales   Net sales $ 2,051,471 100.0 % $ 1,984,488 100.0 % Cost of sales, including certain buying, occupancy and warehousing expenses 1,241,758       60.5 % 1,202,812       60.6 % Gross profit 809,713 39.5 % 781,676 39.4 % Selling, general and administrative expenses 519,188 25.3 % 497,594 25.1 % Depreciation and amortization 107,378       5.3 % 101,072       5.1 % Operating income 183,147 8.9 % 183,010 9.2 % Other income (expense) 2,470 0.1 % (3,939 ) -0.2 % Realized loss on sale of investment securities (24,426 ) -1.2 % (2,749 ) -0.1 % Other-than-temporary impairment charge (1,248 )     0.0 % (225 )     0.0 % Income before income taxes 159,943 7.8 % 176,097 8.9 % Provision for income taxes 65,047       3.2 % 42,316       2.2 % Income from continuing operations 94,896 4.6 % 133,781 6.7 % Loss from discontinued operations, net of tax (41,287 )     -2.0 % (24,083 )     -1.2 % Net income $ 53,609       2.6 % $ 109,698       5.5 %   Basic income per common share: Income from continuing operations $ 0.47 $ 0.65 Loss from discontinued operations (0.20 )   (0.12 )   Net income per basic share $ 0.27     $ 0.53       Diluted income per common share: Income from continuing operations $ 0.46 $ 0.64 Loss from discontinued operations (0.20 )   (0.11 )   Net income per diluted share $ 0.26     $ 0.53       Weighted average common shares outstanding - basic 201,678 206,169 Weighted average common shares outstanding - diluted 203,539 208,663                 AMERICAN EAGLE OUTFITTERS, INC.GAAP TO NON-GAAP EPS RECONCILIATION (unaudited)     13 Weeks EndedOctober 30, 2010October 31, 2009   GAAP Diluted EPS from Continuing Operations $0.17 $0.32 Add back: Realized loss on sale of investment securities 0.12 - Deduct: Impact of tax benefit related to the repatriation of earnings from Canada - (0.07) Non-GAAP Diluted EPS from Continuing Operations $0.29 $0.25                 AMERICAN EAGLE OUTFITTERS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (unaudited)     For the 39 Weeks EndedOctober 30,October 31,20102009 Operating activities: Net income $ 53,609 $ 109,698 Loss from discontinued operations 41,287   24,083   Income from continuing operations 94,896 133,781 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 110,247 102,616 Share-based compensation 21,929 18,985 Provision for deferred income taxes 5,222 (24,765 ) Tax benefit from share-based payments 12,848 8,880 Excess tax benefit from share-based payments (4,265 ) (2,729 ) Foreign currency transaction loss 44 6,537 Net impairment loss recognized in earnings 1,248 225 Realized loss on sale of investment securities 24,426 2,749 Changes in assets and liabilities: Merchandise inventory (89,988 ) (128,156 ) Accounts receivable (7,454 ) (5,080 ) Prepaid expenses and other (4,879 ) 8,580 Other assets, net (677 ) (1,317 ) Accounts payable 40,326 50,025 Unredeemed gift cards and gift certificates (18,916 ) (23,028 ) Deferred lease credits (2,868 ) 8,748 Accrued compensation and payroll taxes (24,379 ) (5,161 ) Accrued income and other taxes (13,647 ) 12,342 Accrued liabilities 2,336   1,622   Total adjustments 51,553   31,073   Net cash provided by operating activities from continuing operations$146,449$164,854 Investing activities: Capital expenditures (65,363 ) (105,955 ) Sale of investments 177,472 77,014 Other investing activities (1,849 ) (1,108 ) Net cash provided by (used for) investing activities from continuing operations$110,260$(30,049) Financing activities: Payments on capital leases (1,774 ) (1,337 ) Repayment of notes payable (30,000 ) (25,000 ) Repurchase of common stock as part of publicly announced programs (192,268 ) - Repurchase of common stock from employees (18,024 ) (230 ) Net proceeds from stock options exercised 5,762 8,736 Excess tax benefit from share-based payments 4,265 2,729 Cash used to net settle equity awards (6,434 ) (1,414 ) Cash dividends paid (64,659 ) (62,117 ) Net cash used for financing activities from continuing operations$(303,132)$(78,633) Effect of exchange rates on cash 1,553   2,846     Cash flows of discontinued operations Net cash used for operating activities (18,309 ) (19,458 ) Net cash used for investing activities (6 ) (299 ) Net cash used for financing activities - - Effect of exchange rate on cash -   -   Net cash used for discontinued operations$(18,315)(19,757)   Net (decrease) increase in cash and cash equivalents$(63,185)$39,261 Cash and cash equivalents - beginning of period 693,960   473,342   Cash and cash equivalents - end of period $630,775   $512,603                       AMERICAN EAGLE OUTFITTERS, INC.REAL ESTATE INFORMATION (unaudited)     Third QuarterYear-to-dateFiscal 2010Fiscal 2010Fiscal 2010Guidance Consolidated stores at beginning of period 1,083 1,103 1,103 Consolidated stores opened during the period AE Brand 5 11 14 aerie 3 10 11 77kids 2 7 9 Consolidated stores closed during the period AE Brand (4) (14) (15) - (25) MARTIN+OSA -     (28)     (28) Total consolidated stores at end of period1,0891,0891084 - 1094   Stores remodeled during the period 7 20 25 - 30 Total gross square footage at end of period 6,323,099 6,323,099   American Eagle Outfitters, Inc.Judy Meehan, 412-432-3300