American Eagle Outfitters Reports Record Second Quarter Revenue - American Eagle Outfitters (NYSE:AEO)

Comparable Sales Rise 2%, Marking 18 Consecutive Quarters of Comparable Sales Growth
$60 Million of Share Repurchases Completed

American Eagle Outfitters, Inc. AEO today reported EPS of $0.38 for the quarter ended August 3, 2019, compared to $0.34 for the quarter ended August 4, 2018. Excluding restructuring charges of $0.01, the company's adjusted EPS was $0.39. Second quarter total net revenue included $40 million recognized for license royalties from a third-party operator of AE stores in Japan, which contributed $0.15 of EPS in the second quarter.

Jay Schottenstein, AEO's Chairman and Chief Executive Officer commented, "We had a number of wins and accomplishments in the second quarter, yet we were disappointed to report operating results below our expectations. We faced challenges largely stemming from underperformance in certain seasonal categories and a delayed start to back-to-school. Despite this, we delivered our 18th consecutive quarter of positive consolidated comparable sales growth. We were also encouraged to see many areas of the business perform well, including continued strong momentum in AE Jeans, Aerie and our digital channel — all major growth priorities. The AE team has taken quick action to strengthen the business and we are pleased to see an improvement in third quarter-to-date sales. Our brands remain strong and we are well-positioned to continue to grow and gain market share."

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

Second Quarter 2019 Results

Total net revenue increased $76 million, or 8% to a record $1.04 billion compared to $965 million last year. Included in total net revenue this year was $40 million for Japan license royalties.
Consolidated comparable sales increased 2%, following a 9% comparable sales increase last year.
By brand, American Eagle's comparable sales decreased 1%, following a 7% increase last year. Aerie's comparable sales increased 16%, building on a 27% increase last year and marking the 19th consecutive quarter of double-digit growth.
Gross profit rose 8% to $383 million from $353 million. The gross margin rate of 36.7% compared to 36.6% last year. Flow through from the Japan license royalties drove the increase in margin rate and dollars, which was offset by increased markdowns and delivery expense.
Selling, general and administrative expense of $253 million increased 8% from $234 million last year. The dollar increase reflects compensation expense, primarily due to strategic investments in the stores organization that began midway through 2018, as well as professional services. As a rate to revenue, SG&A was 24.3%, flat to last year.
Depreciation expense increased 5% to $45 million from $43 million last year and decreased 10 basis points as a rate to revenue to 4.3%.
Operating income of $82 million, which included approximately $3 million of restructuring charges, compared to $76 million last year. Excluding the restructuring charges, adjusted operating income was $85 million and the adjusted operating margin of 8.1% compared to 7.9% last year. Both operating income and adjusted operating income included approximately $34 million from the Japan license royalties.
Other income of $4 million compared to $1 million last year. The increase primarily consisted of interest income, as well as foreign currency fluctuations.
EPS of $0.38 compared to $0.34 last year. Excluding restructuring charges of $0.01, the company's adjusted EPS increased to $0.39. EPS included $0.15 related to the Japan license royalties.

Japan License Royalties

In the quarter, we recognized license royalties from a third party operator in Japan. We plan to terminate the agreement with our license partner and are currently exploring options for our future business model to best serve customers and continue AEO's growth in Japan.

Restructuring Charges

In the second quarter of 2019, the company incurred corporate restructuring charges, primarily severance, of approximately $3 million, or approximately $0.01 per share.

Inventory

Total ending inventories at cost increased 15% to $535 million. Ending inventory units were up 10%. The increase largely reflects inventory to support strong demand for AE Jeans, including new styles and expanded sizes. New store openings, primarily for Aerie, also contributed to the increase.

Capital Expenditures

In the second quarter, capital expenditures totaled $55 million, primarily related to store remodeling projects and new openings, with the balance primarily in support of the digital business and corporate IT. We continue to expect annual capital expenditures to be in the range of $200 to $215 million.

Shareholder Returns, Cash and Investments

During the second quarter, the company returned $83 million to shareholders through cash dividends and share repurchases. We paid cash dividends of $23 million and repurchased approximately 3.4 million shares for $60 million. Year to date, we have repurchased a total of 4.3 million shares for a total of $80 million. On July 10, 2019, we announced an additional 30 million shares authorized for repurchase, leaving 37.4 million shares under current authorization. We ended the second quarter with total cash and investments of $317 million.

Store Information

During the quarter, the company opened 6 American Eagle stores and closed 3, ending with 939 American Eagle stores, including 158 Aerie side-by-side locations. Additionally, the company opened 13 Aerie stand-alone stores and closed 1, ending with 131 Aerie stand-alone stores. Internationally, the company ended the quarter with 236 licensed stores compared to 223 last year. For additional store information, see the accompanying table.

Third Quarter Outlook

Based on an anticipated comparable sales increase in the low to mid single digits, management expects third quarter 2019 EPS to be approximately $0.47 to $0.49. This guidance excludes potential asset impairment and restructuring charges. Last year the company reported EPS of $0.48 for the third quarter.

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 1-201-689-8562 (international) and provide the Conference ID 13692447 or go to http://investors.ae.com to access the webcast and audio replay. Additionally, 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. Management believes that this non-GAAP information is useful for an alternate presentation of the company's 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. 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. The company operates more than 1,000 stores in the United States, Canada, Mexico and Hong Kong, and ships to 81 countries worldwide through its websites. American Eagle and Aerie merchandise also is available at more than 200 international locations operated by licensees in 24 countries. 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 third quarter 2019 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 the company's Annual Report on Form 10-K for the fiscal year ended February 2, 2019 and in any subsequently-filed Quarterly Reports on Form 10-Q filed 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 third quarter 2019 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 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 changes in global economic 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)

		August 3,		February 2,		August 4,
		2019		2019		2018


ASSETS
Cash and cash equivalents	$	267,166	$	333,330	$	323,322
Short-term investments		50,000		92,135		40,000
Merchandise inventory		534,762		424,404		466,112
Accounts receivable		98,604		93,477		74,153
Prepaid expenses and other		69,541		102,907		93,493
Total current assets		1,020,073		1,046,253		997,080
Property and equipment, net		754,031		742,149		732,350
Operating lease right-of-use assets		1,462,544		-		-
Intangible assets, including goodwill		56,326		58,167		59,990
Non-current deferred income taxes		16,759		14,062		8,558
Other assets		49,426		42,747		52,771
Total Assets	$	3,359,159	$	1,903,378	$	1,850,749

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable	$	316,995	$	240,671	$	264,247
Current portion of operating lease liabilities		279,207		-		-
Accrued income and other taxes		17,754		20,064		18,332
Accrued compensation and payroll taxes		54,683		82,173		51,903
Unredeemed gift cards and gift certificates		34,742		53,997		33,185
Other current liabilities and accrued expenses		60,265		145,740		140,353
Total current liabilities		763,646		542,645		508,020
Non-current operating lease liabilities		1,338,634		-		-
Other non-current liabilities		28,302		73,178		82,152
Total non-current liabilities		1,366,936		73,178		82,152
Commitments and contingencies		-		-		-
Preferred stock		-		-		-
Common stock		2,496		2,496		2,496
Contributed capital		568,413		574,929		560,349
Accumulated other comprehensive income		(36,630)		(34,832)		(32,646)
Retained earnings		2,070,077		2,054,654		1,941,536
Treasury stock		(1,375,779)		(1,309,692)		(1,211,158)
Total stockholders' equity		1,228,577		1,287,555		1,260,577
Total Liabilities and Stockholders' Equity	$	3,359,159	$	1,903,378	$	1,850,749

Current Ratio		1.33		1.93		1.96

The Company adopted ASC 842, Leases as of February 3, 2019 under the modified retrospective approach and has not revised comparative periods.

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

		GAAP Basis
		13 Weeks Ended
		August 3,	% of			August 4,	% of
		2019	Revenue			2018	Revenue

Total net revenue	$	1,040,879	100.0	%	$	964,853	100.0	%
Cost of sales, including certain buying, occupancy and warehousing expenses		658,308	63.3	%		611,752	63.4	%
Gross profit		382,571	36.7	%		353,101	36.6	%
Selling, general and administrative expenses		253,051	24.3	%		233,971	24.3	%
Restructuring charges		2,728	0.3	%		-	0.0	%
Depreciation and amortization		44,870	4.3	%		42,739	4.4	%
Operating income		81,922	7.8	%		76,391	7.9	%
Other income, net		3,990	0.4	%		860	0.1	%
Income before income taxes		85,912	8.2	%		77,251	8.0	%
Provision for income taxes		20,931	2.0	%		16,918	1.8	%
Net income	$	64,981	6.2	%	$	60,333	6.2	%

Net income per basic share	$	0.38			$	0.34
Net income per diluted share	$	0.38			$	0.34

Weighted average common shares outstanding - basic		170,756				177,249
Weighted average common shares outstanding - diluted		171,781				178,505

		GAAP Basis
		26 Weeks Ended
		August 3,	% of			August 4,	% of
		2019	Revenue			2018	Revenue

Total net revenue	$	1,927,169	100.0	%	$	1,787,814	100.0	%
Cost of sales, including certain buying, occupancy and warehousing expenses		1,219,677	63.3	%		1,130,271	63.2	%
Gross profit		707,492	36.7	%		657,543	36.8	%
Selling, general and administrative expenses		483,791	25.1	%		444,205	24.9	%
Restructuring charges		4,272	0.2	%		1,568	0.1	%
Depreciation and amortization		89,661	4.7	%		84,674	4.7	%
Operating income		129,768	6.7	%		127,096	7.1	%
Other income, net		8,172	0.4	%		1,362	0.1	%
Income before income taxes		137,940	7.1	%		128,458	7.2	%
Provision for income taxes		32,206	1.7	%		28,196	1.6	%
Net income	$	105,734	5.4	%	$	100,262	5.6	%

Net income per basic share	$	0.61			$	0.57
Net income per diluted share	$	0.61			$	0.56

Weighted average common shares outstanding - basic		172,291				177,329
Weighted average common shares outstanding - diluted		173,701				178,730

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

	13 Weeks Ended
	August 3, 2019
	Operating income		Diluted income per common share
GAAP Basis	$	81,922	$	0.38
% of Revenue		7.8%

Add:Restructuring Charges^(1):		2,728		0.01

Non-GAAP Basis	$	84,650	$	0.39
% of Revenue		8.1%

(1) - $2.7 million for pre-tax corporate restructuring charges, primarily severance

COMPARABLE SALES RESULTS BY BRAND
(unaudited)

	Second Quarter Comparable Sales
	2019	2018
American Eagle Outfitters, Inc. ⁽¹⁾	2%	9%

AE Total Brand ⁽¹⁾	-1%	7%
aerie Total Brand ⁽¹⁾	16%	27%

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

	YTD Second Quarter Comparable Sales
	2019	2018
American Eagle Outfitters, Inc. ⁽¹⁾	3%	9%

AE Total Brand ⁽¹⁾	1%	6%
aerie Total Brand ⁽¹⁾	15%	32%

(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 2019
	2019	2019	Guidance
Consolidated stores at beginning of period	1,061	1,055	1,055
Consolidated stores opened during the period
AE Brand	6	13	15 - 20
Aerie stand-alone	13	17	35 - 40
Tailgate Clothing Co.	0	0	0
Todd Snyder	0	0	0
Consolidated stores closed during the period
AE Brand	(3)	(8)	(10) - (15)
Aerie stand-alone	(1)	(1)	(5) - (10)
Tailgate Clothing Co.	(1)	(1)
Total consolidated stores at end of period	1,075	1,075	1,080 - 1,100
AE Brand	939
Aerie stand-alone	131
Aerie side-by-side⁽²⁾	158
Tailgate Clothing Co.	4
Todd Snyder	1

Stores remodeled and refurbished during the period	24	47	40 - 50
Total gross square footage at end of period (in '000)	6,741	6,741	Not Provided

International license locations at end of period ⁽¹⁾	236	236	261

Aerie Openings
Aerie stand-alone	13	17	35 - 40
Aerie side-by-side stores ⁽²⁾
New AE store	3	5	10 - 15
Remodeled AE store	4	6	15 - 20
Total side-by-side	7	11	25 - 35
Total Aerie Openings	20	28	60 - 75

(1) International license locations are not included in the consolidated store data or the total gross square footage calculation.
(2) Aerie side-by-side stores are included in the AE Brand store count as they are considered part of the AE Brand store to which they are attached.

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