American Eagle Outfitters’ Stock Jumps 18.2%, Profits Slide

American Eagle Outfitters is the latest retailer bracing itself for an increasingly promotional holiday shopping season as it continues to manage inventory and changing consumer shopping patterns.

The retailer — which includes the American Eagle, Aerie, Offline by Aerie, Unsubscribed and Todd Snyder brands — revealed quarterly earnings Tuesday morning before the market opened, falling short on both the top and bottom lines. But the company said it’s made progress in the last three months right-sizing the ship and bringing inventory levels more in line with demand.

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Shares of AEO surged during Tuesday’s session, as a result, ultimately closing up 18.2 percent to $15.36 apiece.

The AE brand is the largest brand in the <a href="" rel="nofollow noopener" target="_blank" data-ylk="slk:American Eagle Outfitters;elm:context_link;itc:0" class="link ">American Eagle Outfitters</a> portfolio. Courtesy Photo
The AE brand is the largest brand in the American Eagle Outfitters portfolio. Courtesy Photo

“I’m pleased to deliver a third quarter that exceeded our expectations, with profit margins meaningfully improved from the first half of the year,” Jay Schottenstein, American Eagle Outfitters’ executive chairman of the board and chief executive officer, said in a statement. “Bold actions to rationalize inventory and reduce expenses are paying off. Our inventory is in good shape, up 8 percent to last year, with progress continuing into the fourth quarter. We are staying disciplined and focused on improving profitability and cash flow, while maintaining a healthy balance sheet.

“As we navigate the current macro environment, we remain focused on our strategic initiatives — leading with innovation and judiciously investing in capabilities that will differentiate us in the long-run,” Schottenstein continued. “Our organization is strong and I have tremendous confidence in the resilience of our brands. We are excited about upcoming merchandise collections and look forward to delivering an exceptional customer experience across brands and channels this holiday season.”

A dress found in the Unsubscribed store.
A dress from the Unsubscribed brand. Unsubscribed is AEO’s slow retail brand.

Revenues for the three-month period ending Oct. 29 fell 3 percent to $1.24 billion, down from $1.27 billion a year ago. Consolidated store revenues were down 4 percent, while total digital revenue fell 5 percent, year-over-year.

The retailer said total brand revenue was down 5 percent during the quarter, but still better than the company’s expectations of a high-single-digit decline. Revenues at the AE brand were down 11 percent during the quarter, year-over-year, to $838 million. Comp sales at the nameplate brand fell 10 percent, compared with last year, or flat compared with 2019’s pre-pandemic third quarter.

Tailwinds for the quarter included the Aerie business. Sales at the innerwear, loungewear and swimwear brand grew 11 percent, compared with last year’s results. Comp sales at Aerie fell 3 percent during the quarter, compared with a year ago, but were up 59 percent, compared with 2019.

Aerie Shapewear
Pieces from Aerie’s “anti-shapewear” shapewear collection Smoothez.

“Intimates is not an oversight,” Jennifer Foyle, president and executive creative director of the AE, Aerie and Unsubscribed brands, told analysts on Tuesday’s conference call. “We’re constantly innovating on the bras.”

She added that across all of the company’s brands, “our core demographic wants comfort. American casual comfort is not going away,” and hinted at a new launch coming in the AE men’s division next spring.

The firm said its supply chain businesses, which include Quiet Logistics and AirTerra, added about 2 percentage points to revenue growth. (AEO created a wholly owned subsidiary, now called “Quiet Platforms,” through the 2021 acquisitions of Quiet Logistics and AirTerra.) Rent and warehousing at the platform also deleveraged, partially offset by lower incentive compensation. AEO said it is continuing to add other third-party brands to the platforms.

Inventory costs for the quarter increased 8 percent to $798 million, compared with $740 million a year ago, with units up 7 percent. The retailer anticipates fourth-quarter inventory levels will be down, compared with last year.

American Eagle Outfitters logged $81.2 million in total income for the quarter, down 46.5 percent compared with last year’s third-quarter profits of more than $152 million.

Throughout the industry, retailers have been readying themselves for a weak fourth-quarter holiday shopping season as inflation persists and many consumers trade discretionary items for experiences. Excess inventory and reduced margins have forced some retailers to increase markdowns ahead of the holidays.

In the case of AEO, the company is expecting fourth-quarter brand revenues to be down in the mid-single-digit range, while brand comps are expected to be consistent with the third quarter, as the retailer plans for a highly promotional holiday shopping season. The company anticipates fourth-quarter gross margin in the range of 32 percent to 33 percent, which is at the higher end of its previous guidance.

“In this business you have to be an optimist, or you can’t be in the retail business,” Schottenstein said on the call. “We see our costs coming down. We see the cost of freight going down, back to 2019 levels. So there is a reason for optimism. We see we have the ability to work closer to need and be able to trace merchandise. So everything is pretty positive. And we can only control what we can control. But I’m optimistic. I see a lot of good signs.

“I think [the holiday shopping season] is going to be better than people expect,” he added.

Investors seemed to agree.

Zachary Warring, equity analyst at CFRA Research, raised his 12-month price target by $2 to $17 a share.

“AEO’s inventory increased just 8 percent to $798 million, with the expectation of [fourth-quarter] inventory to be down [year-over-year],” Warring wrote in a note. “[Third-quarter] operating margin of 9.5 percent was down 700 [basis points, year-over-year] but remains above many peers and in line with pre-pandemic margins. We like the momentum in the company’s Aerie brand and AEO’s current valuation compared to peers; thus, our recommendation on AEO is buy.”

The firm said in a statement that it remains on track to reduce expenses by $100 million by continuing “to drive expense reductions across store payroll, corporate expense, professional services and advertising.”

The company ended the quarter with about $82 million in cash and cash equivalents and about $412 million in long-term debt.

Shares of AEO are down 46.6 percent, year-over-year.

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