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American Eagle (AEO) Q3 Earnings Top Estimates, Sales Miss

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American Eagle Outfitters, Inc. (AEO - Free Report) reported third-quarter fiscal 2020 results, wherein earnings beat the Zacks Consensus Estimate, while sales missed the same due to sluggish traffic amid the pandemic. We note that shares of American Eagle slipped 2.2% yesterday.

Nonetheless, the company continued to witness robust digital sales. Management remains particularly impressed with the performance of the Aerie brand, which also benefited from a solid debut of the OFFLINE activewear brand. In fact, increased full-priced sales across both Aerie and American Eagle (AE) brands led to solid margins in the quarter.

Apart from this, the company remains pleased with the initial holiday season trends in November, as well as a solid response to its assortments. The company’s inventory is well managed and it anticipates continued AUR enhancement and favorable margins. Also, increased online shopping is likely to perk up distribution center and delivery costs.

Q3 Details

Adjusted earnings of 35 cents per share beat the Zacks Consensus Estimate of 33 cents. However, the bottom line declined 27.1% year over year due to an elevated tax rate, as well as the effect of increased interest expenses and shares outstanding associated with convertible debt.

Total revenues declined 3% year over year to $1,031.6 million and fell short of the Zacks Consensus Estimate of $1,054 million. The downside can be accountable to soft mall traffic amid the pandemic, partially compensated by robust online sales. Brand-wise, revenues declined 11% for AE, while it rose 34% for Aerie.

Store revenues declined 16% year over year due to sluggish traffic, which more than offset favorable AUR and conversion rate. Meanwhile, the company witnessed a robust digital demand. Markedly, digital channel customer acquisitions jumped 37% in the quarter under review. Despite stores having reopened, digital demand remained strong and exceeded pre-pandemic levels. This led to strong consolidated digital sales growth of 29%, with an 83% increase for Aerie and 11% growth for AE. Overall, online sales formed 37% of the company’s revenues during the third quarter.

Gross profit came in at $415 million in the reported quarter, up almost 2% year over year from $407 million in the year-ago quarter. Furthermore, the gross margin rate expanded 200 basis points (bps) to 40.2% in the quarter under review, which marked the company’s highest rate in several years.

The upside can be attributable to elevated merchandise margins, which in turn stemmed from increased full-priced sales, reduced promotions and inventory optimization efforts. Also, reduced product costs and improvement in rent expenses aided the gross margin. These were somewhat negated by increased delivery and distribution center costs due to a solid digital business and escalated cost per shipment.

SG&A expenses rose from $259 million to $273 million in the third quarter due to greater performance-based incentive compensation.

Excluding COVID-19-related costs of $7 million, the company reported an adjusted operating income of $103 million, which came in line with the figure reported in the year-ago period.

Other Financial Details

American Eagle ended the quarter with cash and short-term investments of $692 million. This included proceeds from convertible notes offering of $406 million. During the quarter, the company repaid $200 million of the remaining balance on its revolving credit facility. Total shareholders’ equity as of Oct 31, 2020, was $1,068.2 million.

Moreover, the company spent $31 million as capital expenditure in third-quarter fiscal 2020 and $93 million year to date. For fiscal 2020, the company anticipates capital expenditure in the range of $100-$125 million, while it spent $210 million in the prior year.

Additionally, American Eagle had suspended its dividend in June 2020, alongside deferring 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. The company anticipates no dividend payments throughout fiscal 2020.

Store Update

In third-quarter fiscal 2020, American Eagle inaugurated three AE and seven Aerie stand-alone stores, while it closed three AE stores.

As of Oct 31, the company operated 1,105 stores, comprising 931 AE (including 177 Aerie side-by-side locations), 167 Aerie stand-alone, four Tailgate and three Todd Synder stores. Additionally, it operated 225 international licensed outlets.

Shares of the Zacks Rank #3 (Hold) company have surged 56.1% in the past three months compared with the industry’s growth of 53.8%.

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