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American Eagle (AEO) Q4 Earnings Beat on Higher Margins

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American Eagle Outfitters, Inc. (AEO - Free Report) reported fourth-quarter fiscal 2020 results, wherein both the top and bottom lines beat the Zacks Consensus Estimate. While earnings increased year over year, revenues declined on sluggish mall traffic and store closures amid the pandemic.

Nonetheless, American Eagle continued to witness robust digital sales. Management was particularly impressed by the performance of the Aerie brand, which benefited from the OFFLINE activewear brand. Also, smooth progress on Real Power, Real Growth value-creation plan aided the results. As a result, management remains encouraged about fiscal 2021.

Management remains focused on five key pillars, including doubling of Aerie’s revenues to $2 billion by 2023, American Eagle (AE) brand’s growth, making investments in customer-focused operations, strengthening ROI discipline, and embracing the power of its people, culture and purpose. The company targets revenues of $5.5 billion and operating margin of 10% by fiscal 2023.

Shares of the Zacks Rank #3 (Hold) company have surged 35.4% in the past three months compared with the industry’s 29% rally.

Q4 Details

Adjusted earnings of 39 cents per share beat the Zacks Consensus Estimate of 36 cents. The bottom line increased 5.4% year over year on strong margins.

Total net revenues dipped 2% year over year to $1,292.3 million but trumped the Zacks Consensus Estimate of $1,284 million. The year-over-year downside can be attributed to soft mall traffic and store closures amid the pandemic, partially compensated by robust online sales. Brand-wise, revenues declined 9% year over year to $943 million for AE, while it rose 25% from the year-ago period to $337 million for Aerie.

Further, comparable sales (comps) slipped 1% from the prior-year quarter. While AE comps dropped 8% year over year, Aerie comps jumped 29%.

Store-channel revenues declined 20% year over year due to lower mall traffic. Notably, store revenues fell at both the brands, given significant impacts of the pandemic. The company also dealt with store-closure impact across Canada, California and other regions, which lowered total selling days by 6% from the year-ago quarter. These headwinds were partly compensated by solid conversion in AUR.

Consolidated digital revenue growth was recorded at 35%, with a 75% increase for Aerie and 20% for AE. Overall, online sales accounted for roughly 45% of the company’s overall mix for the fourth quarter.

Gross profit came in at $439.9 million for the reported quarter, up almost 8% from $408 million in the year-ago quarter. Furthermore, gross margin expanded 300 basis points (bps) to 34% for the quarter under review, driven by significantly increased merchandise margins across brands on higher full-priced sales, reduced promotions and inventory optimization efforts. Also, lower rent expense acted as a tailwind. The growth was partly offset by elevated delivery and distribution center costs on higher digital mix and shipment costs, along with increased performance-based incentive compensation.

SG&A expenses rose 1.8% year over year to $292.1 million for the fiscal fourth quarter due to greater performance-based incentive compensation, somewhat offset by lower store payroll.

Excluding impairment and pandemic-related costs of $103 million, the company reported an adjusted operating income of $106.2 million, which increased 38.5% year over year. Also, adjusted operating margin expanded 240 bps to 8.2%, mainly due to higher gross margin stemming from increased full-priced sales and reduced promotions.

Other Financial Details

American Eagle ended the quarter with cash and short-term investments of $850.5 million. The cash balance included proceeds from a convertible notes offering of $406 million. Total shareholders’ equity as of Jan 30, 2021 was $1,086.7 million. At fiscal 2020 end, the company’s overall available liquidity including undrawn revolver was nearly $1.2 billion.

We note that it generated operating cash flow of $213 million for the fiscal fourth quarter and $202 million for the fiscal year.

Moreover, the company’s capital expenditure was $35 million in the fourth quarter and $128 million in fiscal 2020. For fiscal 2021, management anticipates capital expenditure in the band of $250-$275 million, with investments in strategic customer-facing supply chain.

Additionally, American Eagle’s board has reinstated quarterly cash dividend of $0.1375 per share, given the company’s healthy balance sheet and liquidity position. This is payable on Mar 26, 2021 to stockholders of record as on Mar 12. Management has also unsuspended the share repurchase program.

Store Update

In fourth-quarter fiscal 2020, American Eagle inaugurated two AE and nine Aerie stand-alone stores, while closing 36 AE stores, and one Aerie stand-alone and Todd Synder outlet each. Further, the company remodeled and refurbished three stores during the aforesaid period.    

As of Jan 30, American Eagle operated 1,078 stores, comprising 901 AE (including 179 Aerie side-by-side locations), 175 Aerie stand-alone and two Todd Synder stores. Additionally, it operated 229 international license outlets.

We note that the company has been actively monitoring the store fleet. It plans opening nearly 60 area locations including 25-30 OFFLINE stores, which will be a combination of stand-alone and Aerie side-by-side.

Outlook

Management did not issue fiscal 2021 view on uncertain operating landscape. Nonetheless, with respect to fiscal first-quarter performance, it projects revenue and operating income to exceed the first-quarter level of both 2020 and 2019.

We note that American Eagle reported revenues of $551.7 million and adjusted operating loss of $202.6 million for first-quarter fiscal 2020. Further, it recorded revenues of $886.3 million and adjusted operating income of $49.4 million for first-quarter fiscal 2019.

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