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American Eagle Outfitters Reports Third Quarter 2010 Results

November 18, 2010

Stronger Sales and Margin Contribute to Improvement

PITTSBURGH, Nov 18, 2010 (BUSINESS WIRE) --

American Eagle Outfitters, Inc. (NYSE:AEO) today announced income from continuing operations for the third quarter ended October 30, 2010 of $0.17 per diluted share, compared to $0.32 per diluted share last year. Adjusted income from continuing operations for the third quarter ended October 30, 2010 was $0.29 per diluted share, which excludes a realized loss from the sale of investment securities of $0.12 per diluted share. This compares to adjusted earnings from continuing operations for the third quarter 2009 of $0.25 per diluted share, which excludes a tax benefit of $0.07 per diluted share associated with the repatriation of earnings from Canada as outlined in the table that follows.

Jim O'Donnell, chief executive officer, commented, "Our third quarter results reflect meaningful progress toward our goals and demonstrate the positive impact of recent initiatives. We achieved sales growth with less reliance on promotional activity. Our operating income improvement stemmed from stronger merchandising, well positioned inventories and expense management. Looking ahead, I am confident that we can achieve further recovery in operating profits over the course of the next 12 to 18 months."

Third Quarter Results - Continuing Operations
Total sales for the third quarter ended October 30, 2010 increased to $752 million, compared to $736 million last year. Comparable store sales increased 1%.

Gross profit increased 3% to $312 million, or 41.6% as a rate to sales, compared to $304 million or 41.3% last year. The merchandise margin increased 90 basis points due to less promotional activity and stronger sales performance during the peak back-to-school selling period. As a rate to sales, buying, occupancy and warehousing costs increased 60 basis points primarily due the timing of new store openings, which included our new flagship store in the SoHo district of Manhattan.

Selling, general and administrative expense for the third quarter ended October 30, 2010 was approximately flat to last year at $185 million. Third quarter 2010 SG&A expense includes approximately $2.5 million of severance and related charges. Excluding these charges, current year SG&A expense was down slightly to last year and reflects the company's continued focus on expense reductions. As a rate to sales, SG&A decreased 50 basis points to 24.6% from 25.1% last year.

Operating income was $91 million, compared to $85 million last year. The 2010 third quarter operating margin was 12.2%, compared to 11.5% last year.

MARTIN+OSA Update - Discontinued Operations
The loss from discontinued operations for each period presented includes the operating results and closure charges for MARTIN+OSA.

The total year-to-date, pre-tax closure charges were $43 million, which were primarily recorded in the first half of fiscal 2010. Included in the year-to-date, pre-tax charges are lease-related items of $15 million, severance and other employee-related charges of $8 million, inventory charges of $2 million and a non-cash asset impairment charge of $18 million. The company has completed the closure of MARTIN+OSA and expects no further charges to be incurred.

AEO Direct
The company's direct business includes ae.com, aerie.com and 77kids.com. In the third quarter, sales decreased 2%. This compares to a 9% sales increase last year driven by increased traffic and higher conversion due to promotional activity. Decreased promotional activity in the third quarter of 2010 resulted in higher margins and profitability for AEO Direct as compared to the prior year.

Inventory
Total merchandise inventory at the end of the third quarter was down 4% to $410 million compared to $425 million last year. Third quarter ending inventory per foot decreased 2%, with clearance inventory down at the end of the quarter.

Looking forward, fourth quarter average weekly inventory per square foot is planned down in the high single-digits.

Capital Expenditures
For the third quarter, capital expenditures were $26 million compared to $33 million last year. The company now expects total 2010 capital expenditures to be in the range of $90 million to $100 million. Of this amount, approximately half relates to investments in our store fleet.

Real Estate
In the third quarter, the company opened five AE, three aerie and two 77kids stores. In addition, the company remodeled six AE stores and one aerie store. Store closings in the third quarter included four AE stores. For additional year-to-date and fiscal 2010 information, please refer to the accompanying real estate table.

Cash and Cash Equivalents, Short-term Investments and Long-term Investments
The company ended the third quarter with total cash and cash equivalents of $631 million, as well as $9 million of investments in auction rate securities with a weighted average maturity of less than two years.

During the third quarter, the company liquidated 95% of its investment portfolio for cash proceeds of $150 million and a realized loss of $24 million, or $0.12 per diluted share. The company's investment portfolio was originally purchased as highly liquid short-term instruments; however, due to the deterioration of the ARS market, the company's ARS investment portfolio was subsequently classified as long-term, with a weighted average contractual maturity of approximately 26 years. This liquidation allowed the company to convert substantially its entire investment portfolio to short-term liquid assets.

Fourth Quarter Guidance
Due to the importance of Thanksgiving weekend, the company will provide fourth quarter earnings guidance on Thursday, December 2, 2010 along with its November sales announcement.

Discontinuation of Monthly Sales Reporting
Beginning in fiscal 2011, the company will discontinue monthly sales reporting. Sales and earnings will be reported together in the quarterly earnings announcement.

Conference Call Information
At 10:00 a.m. Eastern Time on November 18, 2010, the company's management team will host a conference call to review the financial results. To listen to the call, dial 1-877-407-0789 or internationally dial 1-201-689-8562 five to seven minutes prior to the scheduled start time. The conference call will also be simultaneously broadcast over the Internet at www.ae.com. Anyone unable to listen to the call can access a replay beginning November 18, 2010 at 1:00 p.m. Eastern Time through December 9, 2010. To listen to the replay, dial 1-877-660-6853, or internationally dial 1-201-612-7415, and reference account 3055 and confirmation code 348837. An audio replay of the conference call will also be available at www.ae.com.

Non-GAAP Measures
This press release includes information on non-GAAP earnings per diluted share ("non-GAAP" or "adjusted"). This measure is not based on any standardized methodology prescribed by U.S. generally accepted accounting principles ("GAAP") and is not necessarily comparable to similar measures presented by other companies. The company believes that this non-GAAP information is useful as an additional means for investors to evaluate the company's operating performance, when reviewed in conjunction with the company's GAAP financial statements. This amount is not determined in accordance with GAAP and therefore, should not be used exclusively in evaluating the company's business and operations.

American Eagle Outfitters, Inc., through its subsidiaries, ("AEO, Inc.")offers high-quality, on-trend clothing, accessories and personal care products at affordable prices. The American Eagle Outfitters(R) brand targets 15 to 25 year old girls and guys, with 937 stores in the U.S. and Canada and online at www.ae.com. aerie(R) by american eagle offers Dormwear(R) and intimates collections for the AE(R) girl, with 147 standalone stores in the U.S. and Canada and online at www.aerie.com. The latest brand, 77kids(R) by american eagle(R), is available online at www.77kids.com, as well as at seven stores across the nation. The 77kids brand offers "kid cool," durable clothing and accessories for kids ages two to 10. AE.COM(R), the online home of the brands of AEO, Inc. ships to 76 countries worldwide.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: This release contains forward-looking statements, which represent our expectations or beliefs concerning future events, specifically regarding fourth quarter results. All forward-looking statements made by the company involve material risks and uncertainties and are subject to change based on factors beyond the company's control. Such factors include, but are not limited to the risk that the company's operating, financial and capital plans may not be achieved and the risks described in the Risk Factor Section of the company's Form 10-K and Form 10-Q filed with the Securities and Exchange Commission. Accordingly, the company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. The company does not undertake to publicly update or revise its forward-looking statements even if future changes make it clear that projected results expressed or implied will not be realized.

AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
October 30, January 30, October 31,
2010 2010 2009
(unaudited) (unaudited)
ASSETS
Cash and cash equivalents $ 630,775 $ 693,960 $ 512,603
Short-term investments 3,700 4,675 3,300
Merchandise inventory 409,509 326,454 425,415
Accounts receivable 40,346 34,746 46,584
Prepaid expenses and other 52,757 47,039 52,188
Deferred income taxes 50,910 60,156 54,362
Total current assets 1,187,997 1,167,030 1,094,452
Property and equipment, net 652,361 713,142 741,019
Goodwill 11,395 11,210 11,165
Long-term investments 5,915 197,773 203,152
Non-current deferred income taxes 27,475 27,305 22,719
Other assets, net 23,981 21,688 23,401
Total Assets $ 1,909,124 $ 2,138,148 $ 2,095,908
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 196,504 $ 158,526 $ 198,978
Notes payable - 30,000 50,000
Accrued compensation and payroll taxes 30,289 55,144 23,932
Accrued rent 71,133 68,866 67,983
Accrued income and other taxes 11,620 20,585 22,574
Unredeemed gift cards and gift certificates 20,266 39,389 19,632
Current portion of deferred lease credits 16,465 17,388 17,605
Other current liabilities and accrued expenses 21,285 19,057 20,293
Total current liabilities 367,562 408,955 420,997
Deferred lease credits 81,730 89,591 93,607
Non-current accrued income taxes 36,302 38,618 36,265
Other non-current liabilities 22,246 22,467 21,734
Total non-current liabilities 140,278 150,676 151,606
Commitments and contingencies - - -
Preferred stock - - -
Common stock 2,496 2,486 2,486
Contributed capital 543,265 554,399 538,007
Accumulated other comprehensive income 26,751 16,838 16,478
Retained earnings 1,745,912 1,764,049 1,726,531
Treasury stock (917,140 ) (759,255 ) (760,197 )
Total stockholders' equity 1,401,284 1,578,517 1,523,305
Total Liabilities and Stockholders' Equity $ 1,909,124 $ 2,138,148 $ 2,095,908
Current Ratio 3.23 2.85 2.60
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars and shares in thousands, except per share amounts)
(unaudited)

 

13 Weeks Ended
October 30, % of October 31, % of
2010 Sales 2009 Sales
Net sales $ 751,507 100.0 % $ 736,011 100.0 %
Cost of sales, including certain buying,
occupancy and warehousing expenses 439,198 58.4 % 431,836 58.7 %
Gross profit 312,309 41.6 % 304,175 41.3 %
Selling, general and administrative expenses 185,050 24.6 % 184,948 25.1 %
Depreciation and amortization 35,804 4.8 % 34,653 4.7 %
Operating income 91,455 12.2 % 84,574 11.5 %
Other income (expense) 1,986 0.2 % (451 ) -0.1 %
Realized loss on sale of investment securities (24,201 ) -3.2 % - 0.0 %
Income before income taxes 69,240 9.2 % 84,123 11.4 %
Provision for income taxes 36,049 4.8 % 16,175 2.2 %
Income from continuing operations 33,191 4.4 % 67,948 9.2 %
Loss from discontinued operations, net of tax (167 ) 0.0 % (8,789 ) -1.2 %
Net income $ 33,024 4.4 % $ 59,159 8.0 %
Basic income per common share:
Income from continuing operations $ 0.17 $ 0.33
Loss from discontinued operations 0.00 (0.04 )
Net income per basic share $ 0.17 $ 0.29
Diluted income per common share:
Income from continuing operations $ 0.17 $ 0.32
Loss from discontinued operations 0.00 (0.04 )
Net income per diluted share $ 0.17 $ 0.28
Weighted average common shares
outstanding - basic 195,590 206,517
Weighted average common shares
outstanding - diluted 197,323 209,393

 

39 Weeks Ended
October 30, % of October 31, % of
2010 Sales 2009 Sales
Net sales $ 2,051,471 100.0 % $ 1,984,488 100.0 %
Cost of sales, including certain buying,
occupancy and warehousing expenses 1,241,758 60.5 % 1,202,812 60.6 %
Gross profit 809,713 39.5 % 781,676 39.4 %
Selling, general and administrative expenses 519,188 25.3 % 497,594 25.1 %
Depreciation and amortization 107,378 5.3 % 101,072 5.1 %
Operating income 183,147 8.9 % 183,010 9.2 %
Other income (expense) 2,470 0.1 % (3,939 ) -0.2 %
Realized loss on sale of investment securities (24,426 ) -1.2 % (2,749 ) -0.1 %
Other-than-temporary impairment charge (1,248 ) 0.0 % (225 ) 0.0 %
Income before income taxes 159,943 7.8 % 176,097 8.9 %
Provision for income taxes 65,047 3.2 % 42,316 2.2 %
Income from continuing operations 94,896 4.6 % 133,781 6.7 %
Loss from discontinued operations, net of tax (41,287 ) -2.0 % (24,083 ) -1.2 %
Net income $ 53,609 2.6 % $ 109,698 5.5 %
Basic income per common share:
Income from continuing operations $ 0.47 $ 0.65
Loss from discontinued operations (0.20 ) (0.12 )
Net income per basic share $ 0.27 $ 0.53
Diluted income per common share:
Income from continuing operations $ 0.46 $ 0.64
Loss from discontinued operations (0.20 ) (0.11 )
Net income per diluted share $ 0.26 $ 0.53
Weighted average common shares
outstanding - basic 201,678 206,169
Weighted average common shares
outstanding - diluted 203,539 208,663

AMERICAN EAGLE OUTFITTERS, INC.

GAAP TO NON-GAAP EPS RECONCILIATION
(unaudited)

13 Weeks Ended
October 30, 2010 October 31, 2009
GAAP Diluted EPS from Continuing Operations $0.17 $0.32
Add back: Realized loss on sale of investment securities 0.12 -
Deduct: Impact of tax benefit related to the repatriation of earnings from Canada - (0.07)
Non-GAAP Diluted EPS from Continuing Operations $0.29 $0.25

AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
For the 39 Weeks Ended
October 30, October 31,
2010 2009
Operating activities:
Net income $ 53,609 $ 109,698
Loss from discontinued operations 41,287 24,083
Income from continuing operations 94,896 133,781
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization 110,247 102,616
Share-based compensation 21,929 18,985
Provision for deferred income taxes 5,222 (24,765 )
Tax benefit from share-based payments 12,848 8,880
Excess tax benefit from share-based payments (4,265 ) (2,729 )
Foreign currency transaction loss 44 6,537
Net impairment loss recognized in earnings 1,248 225
Realized loss on sale of investment securities 24,426 2,749
Changes in assets and liabilities:
Merchandise inventory (89,988 ) (128,156 )
Accounts receivable (7,454 ) (5,080 )
Prepaid expenses and other (4,879 ) 8,580
Other assets, net (677 ) (1,317 )
Accounts payable 40,326 50,025
Unredeemed gift cards and gift certificates (18,916 ) (23,028 )
Deferred lease credits (2,868 ) 8,748
Accrued compensation and payroll taxes (24,379 ) (5,161 )
Accrued income and other taxes (13,647 ) 12,342
Accrued liabilities 2,336 1,622
Total adjustments 51,553 31,073
Net cash provided by operating activities from continuing operations $ 146,449 $ 164,854
Investing activities:
Capital expenditures (65,363 ) (105,955 )
Sale of investments 177,472 77,014
Other investing activities (1,849 ) (1,108 )
Net cash provided by (used for) investing activities from continuing operations $ 110,260 $ (30,049 )
Financing activities:
Payments on capital leases (1,774 ) (1,337 )
Repayment of notes payable (30,000 ) (25,000 )
Repurchase of common stock as part of publicly announced programs (192,268 ) -
Repurchase of common stock from employees (18,024 ) (230 )
Net proceeds from stock options exercised 5,762 8,736
Excess tax benefit from share-based payments 4,265 2,729
Cash used to net settle equity awards (6,434 ) (1,414 )
Cash dividends paid (64,659 ) (62,117 )
Net cash used for financing activities from continuing operations $ (303,132 ) $ (78,633 )
Effect of exchange rates on cash 1,553 2,846
Cash flows of discontinued operations
Net cash used for operating activities (18,309 ) (19,458 )
Net cash used for investing activities (6 ) (299 )
Net cash used for financing activities - -
Effect of exchange rate on cash - -
Net cash used for discontinued operations $ (18,315 ) (19,757 )
Net (decrease) increase in cash and cash equivalents $ (63,185 ) $ 39,261
Cash and cash equivalents - beginning of period 693,960 473,342
Cash and cash equivalents - end of period $ 630,775 $ 512,603
AMERICAN EAGLE OUTFITTERS, INC.
REAL ESTATE INFORMATION
(unaudited)
Third Quarter Year-to-date Fiscal 2010
Fiscal 2010 Fiscal 2010 Guidance
Consolidated stores at beginning of period 1,083 1,103 1,103
Consolidated stores opened during the period
AE Brand 5 11 14
aerie 3 10 11
77kids 2 7 9
Consolidated stores closed during the period
AE Brand (4) (14) (15) - (25)
MARTIN+OSA - (28) (28)
Total consolidated stores at end of period 1,089 1,089 1084 - 1094
Stores remodeled during the period 7 20 25 - 30
Total gross square footage at end of period 6,323,099 6,323,099

SOURCE: American Eagle Outfitters Inc. 

American Eagle Outfitters, Inc.
Judy Meehan, 412-432-3300
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