By: David Moin | Link to article
The operator of the American Eagle and Aerie brands says it’s very disciplined with inventories and expenses and that its price-value equation is resonating with consumers.
American Eagle Outfitters Inc., showing further signs its new strategic roadmap is bearing some fruit, reported on Thursday second-quarter top- and bottom-line gains with strength seen across both American Eagle and Aerie, as well as channels.
Net income in the period ended Aug. 3 rose to $77.3 million, or 39 cents per diluted share, from $48.57 million, or 25 cents per diluted share in the year-ago period. Revenue rose 8 percent to $1.3 billion from $1.2 billion.
Operating income of $101 million increased 55 percent, surpassing company expectations earlier in the year for operating income in the range of $95 million to $100 million. The gain included an approximately $20 million from the retail calendar shift. The operating margin expanded 240 basis points to 7.8 percent.
The operator of the American Eagle and Aerie brands slightly raised its outlook for 2024 operating income to $455 million to $465 million, from previous guidance of $445 million to $465 million. AEO also slightly lowered its guidance for total 2024 revenues to up 2 to 3 percent, from previous guidance for revenues to be up 2 to 4 percent. The company expects comparable sales in 2024 to increase approximately 4 percent and total 2024 revenues to be up 2 to 3 percent versus previous guidance of up 2 to 4 percent.
“We’ve exceeded our original plans and guidance for the first quarter and second quarter,” Michael Mathias, executive vice president and chief financial officer, told WWD. “Our second-quarter results were strong and build upon our strong first-quarter performance as well.”
Mathias cited strength across both the American Eagle and Aerie brands, as well as in stores and online during the second quarter.
American Eagle, he said, was fueled by the women’s side of the business. Menswear is “still a work in progress,” though some progress has been made, he added. At Aerie, the Offline subbrand has been driving growth, Mathias said.
Reports of consumers holding back on spending, particularly on discretionary products, have proliferated, but Mathias said, “We feel good about the consumer. Our value equation resonates with consumers. We are in that middle sweet spot where we can navigate the challenges of any specific consumer group.”
AEO’s customer, on average, tends to be in the middle or a bit above the average household income in the U.S., Mathias said. “We are a good alternative to other brands out there. We are less expensive. We are not the least expensive, but the quality of our product for the price is very attractive.”
In terms of the operations, Mathias said AEO’s inventory is “well positioned to our revenue trend and we feel that way for the rest of the year,” he said. Total ending inventory increased 4 percent to $664 million, in line with sales trends. Mathias also said that “expense management disciplines are working for us and we are on plan to control expenses through the rest of the year.” Gross profit of $499 million increased 10 percent, reflecting a gross margin rate of 38.6 percent, expanding 90 basis points.
Mathias told WWD that the company is pleased with how back-to-school business is tracking, while Jay Schottenstein, AEO’s executive chairman and chief executive officer, called out “positive reception we’ve seen to our early fall collections. Our winning formula of outstanding quality and style offered at a great value remains a cornerstone of our brands, positioning us perfectly for today’s consumers. In a dynamic macroeconomic environment, we will remain disciplined and focused on delivering profitable growth and long-term shareholder value.”
AEO’s “Powering Profitable Growth” strategy “is off to a great start, locking in a strong first half and setting us on track to achieve the high end of our prior operating profit outlook for 2024,” Schottenstein said. “The second quarter marked our sixth consecutive quarter of record revenue and we successfully leveraged our cost base — advancing a number of strategic priorities to fuel growth across brands and channels and drive operating efficiencies.”
Powering Profitable Growth was unveiled last March. It targets mid-to-high teens annual operating income expansion on 3 to 5 percent annual growth revenue, and about a 10 percent operating margin over the next three years. AEO hopes to add more than $700 million in sales over that stretch, pushing revenues up from $5.26 billion last year to possibly $6 billion. The strategy focuses on what executives describe as “amplifying” American Eagle and its denim business and expanding adjacent categories, fueling Aerie’s expansion, and accelerating activewear growth via Offline. The plan also calls for greater financial disciplines and “leveraging best-in-class” operating capabilities.
For the third quarter, the company expects operating income to be in the range of $120 million to $125 million. This reflects approximately $20 million of profit that shifted into the second quarter from the third quarter, due to the retail calendar. The company expects comparable sales to increase in the range of 3 to 4 percent, with total revenue flat to up slightly, also reflecting the impact from the retail calendar.
