American Eagle (AEO) Up on Narrower-Than-Expected Q2 Loss

American Eagle Outfitters, Inc. AEO reported better-than-expected second-quarter fiscal 2020 results wherein sales beat the Zacks Consensus Estimate and adjusted loss was narrower-than-expected. Despite weak store traffic and store closures, results gained from robust demand, improved margins and sturdy online sales. The company noted that more than 90% of stores have reopened. This along with solid online performance is likely to contribute to growth on a sequential basis.

Further, the company has undertaken measures including lowering costs, reducing inventory and strengthening cash position which have led to positive free cash flow and strong liquidity to help it stay afloat amid this  pandemic. Apart from these, it has launched a new activewear collection namely OFFLINE in the reported quarter, which is expected to further boost Aerie’s growth. Also, management has launched a new Real Rewards loyalty program, which is receiving positive customer feedback.

Driven by the strong second quarter performance, shares of American Eagle rose 1.6% yesterday. Moreover, we note that the Zacks Rank #3 (Hold) company has gained 17.1% in the past three months compared with the industry’s 20.7% growth.

Q2 Details

Adjusted loss of 3 cents per share in the fiscal second quarter was narrower than the Zacks Consensus Estimate of a loss of 14 cents. However, the figure compares unfavorably with adjusted earnings of 39 cents reported in the prior-year quarter.

Total revenues declined 15% year over year to $884 million but exceeded the Zacks Consensus Estimate of $852 million. The decline in the top line is mainly attributed to store closures during the second quarter. Also, store revenues plunged 43% year over year due to sluggish store traffic, store closures and limited store hours which more than offset the higher conversion rate.

Meanwhile, the company witnessed robust digital demand, which partly cushioned the top line. New customers grew 22% during the quarter under review with more than double-digit growth in the e-commerce space.

Brand-wise, revenues declined 26% for American Eagle (AE), while it rose 32% for Aerie. Digital demand, as measured by ordered sales, was up 48% in the quarter with demand rising 113% and 21% for American Eagle and Aerie, respectively. This led to strong consolidated digital sales growth of 74%, with a 142% increase for Aerie and 47% growth for AE. Digital demand was mainly driven by a rise in new customers, solid traffic and higher conversions.

Gross profit came in at $265 million in the reported quarter, down 30.8% year over year from $383 million in the year-ago quarter. Furthermore, the gross margin rate contracted 670 basis points (bps) in the prior-year quarter to 30% in the fiscal second quarter. The downside can be attributable to soft store sales along with elevated costs related to higher delivery and distribution center due to higher digital sales and increased shipment expenses.

SG&A expenses declined 11.5% to $224 million, thanks to lower store operating expenses during closures and restructuring actions. However, as a percentage of sales, SG&A expenses increased 360 bps to 28.7%.

Excluding COVID-19 related costs and restricting expenses of $15 million, the company reported an adjusted operating income of $2 million reflecting a sharp decline from $85 million in the year-ago quarter.

Other Financial Details

American Eagle ended the quarter with cash and short-term investments (liquidity) of $899 million. This included $406 million raised in convertible bonds and borrowings of $200 million on its line of credit. During the quarter, it repaid $130 million in borrowings and the above-mentioned $200 million at the end of the quarter. This ensured a liquidity of $1 billion at the end of the fiscal second quarter. Total shareholders’ equity as of Aug 1, 2020, was $997.9 million.

Moreover, the company spent $27 million as capital expenditure in second-quarter fiscal 2020. For fiscal 2020, the company also reduced capital expenditure plan to $100-$125 million, while it spent $210 million in the prior year.

Additionally, it suspended share repurchases and deferred its first-quarter dividend until 2021. This dividend will be paid out on Apr 23, 2021, to shareholders of record as of Apr 9, 2021. It also suspended the second-quarter cash dividend and anticipates no dividend payments throughout fiscal 2020.

American Eagle Outfitters, Inc. Price, Consensus and EPS Surprise

American Eagle Outfitters, Inc. price-consensus-eps-surprise-chart | American Eagle Outfitters, Inc. Quote

Store Update

In second-quarter fiscal 2020, American Eagle inaugurated one AE, one Todd-Snyder and 14 Aerie stand-alone, while it closed eight AE stores, one Tailgate and two Aerie stand-alone outlets.

As of Aug 1, the company operated 1,098 stores, comprising 931 AE (including 175 Aerie side-by-side locations), 160 Aerie stand-alone, four Tailgate and three Todd Synder stores. Additionally, it operated 220 international licensed outlets.

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