American Eagle Outfitters, Inc. (NYSE:AEO) today reported earnings of $0.03 per diluted share for the second quarter ended August 2, 2014, compared to earnings of $0.10 per diluted share for the comparable quarter last year.
Jay Schottenstein, Interim CEO, commented, “Although the second quarter results were slightly ahead of our expectations, they do not reflect our potential. We did, however make significant progress on our priorities to build a sustainable path to higher profitability. We successfully cleared through spring and summer merchandise and entered the second half of the year in a good inventory position. We made progress on merchandise improvements, which will ramp up through the holiday season. The teams also continued to implement omni-channel initiatives and strengthen the customer experience. We remain vigilant on expense management, while pursuing strategic initiatives crucial to our future success. We are confident that these efforts will position AEO to achieve stronger operating results and deliver increasing shareholder value.”
Second Quarter 2014 Results
- Total net revenue decreased 2% to $711 million from $727 million last year. Revenue from new store growth nearly offset the decline in comparable sales.
- Consolidated comparable sales decreased 7%, following a 7% decrease last year.
- Gross profit decreased 3% to $238 million and declined 40 basis points to 33.4% as a rate to revenue. Gross margin reflected the de-leverage of buying, occupancy and warehousing costs on negative comparable sales, which was largely offset by favorability in merchandise and design costs and a slight improvement in the markdown rate.
- Selling, general and administrative expense of $190 million increased 2% or $3.7 million. As a rate to revenue, SG&A increased 110 basis points to 26.7%. Investments in advertising, international growth, factory stores and omni-channel initiatives drove the increase, and were partially offset by reductions in overhead and variable expenses.
- Operating income decreased 59% to $12 million. The operating margin decreased 240 basis points to 1.7%.
- EPS of $0.03 compares to EPS of $0.10 last year.
Total merchandise inventories at the end of the second quarter declined 15% to $393 million compared to $461 million last year. At cost per foot, inventory decreased 18%. Inventories reflect a change to ownership terms completed late last year, as we began taking ownership of inventory at the receiving port rather than the port of departure. Excluding the change in terms, inventory at cost per foot decreased in the mid single-digits. Clearance units were well below last year. Third quarter 2014 ending inventory at cost per foot is expected to decline in the low double-digits, or mid single-digits excluding the change in ownership terms.
In the second quarter, capital expenditures totaled $74 million. For fiscal 2014, the company continues to expect capital expenditures of approximately $230 million, primarily related to new and remodeled stores, the Hazleton distribution center and information technology. In 2015, capital spending is expected to be approximately $150 million.
In the quarter, the company opened 20 new stores consisting of the following:
- 5 new North American mainline stores opened in underpenetrated markets,
- 10 Factory stores, and
- 3 stores in Mexico and 2 stores in China.
The company closed 5 locations, including 2 aerie stores. Additionally, the company added 7 international licensed stores and ended the quarter with 84 licensed stores in 13 countries. For 2014, the company is planning to close approximately 50 AE and 25 aerie stores in North America. For additional second quarter 2014 actual and fiscal 2014 projected real estate information, see the accompanying table.
Cash and Investments
The company ended the quarter with total cash and investments of $263 million compared to $405 million last year.
Third Quarter Outlook
Based on a mid single-digit decline in comparable sales, management expects third quarter EPS to be approximately $0.17 to $0.19 compared to adjusted earnings of $0.19 per diluted share last year. The guidance excludes potential asset impairment and restructuring charges.
Conference Call and Supplemental Financial Information
Today, management will host a conference call and real time webcast 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 http://investors.ae.com to access the webcast and audio replay. Also, a financial results presentation is posted on the company’s website.
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.