This summary is based on the fourth quarter fiscal 2007 earnings call conducted by American Eagle Outfitters (AEO)) on March 12, 2008.
Management:
- Vice President, Investor Relations: Judy Meehan
- Chief Executive Officer, Director: James V. O''Donnell
- President and Chief Merchandising Officer: Susan P. McGalla
- Executive Vice President, Chief Financial Officer: Joan Hilson
Key Investors Issues
- Net income dropped 7% to $140.5 million or 67 cents a share compared to $150.2 million or 68 cents a share last year.
- Sales increased 2.3% to $995.4 million compared to $973.4 million in the prior year.
- The company completed the repurchase of 9.9 million shares of common stock for approximately $195.1 million.
Full Year Highlights:
- Sales increased to $3.055 billion from $2.794 billion in 2006.
- Net income was $400.0 million or $1.85 a share, up marginally from $387.4 million or $1.74 a share last year.
- The company repurchased 18.8 million shares for approximately $438.3 million.
Fourth Quarter Highlights
Total sales increased 2.3% to $995.4 million compared to $973.4 million though comparable store sales decreased 2%, reflecting a decline in traffic, resulting in lower transactions per store.
- However, the transaction value increased, driven by a higher average unit retail price.
- The higher AUR resulted from the performance in certain merchandise categories and higher pricing realized in the January clearance business.
- BOW increased 140 basis points and rent was higher as a rate to sales, due to negative comp store sales, new store openings, and the extra week as well as higher delivery costs primarily related to direct fulfillments.
Gross profit was $455.3 million or 45.7% as a percent to sales, down from 47.9% last year.
- Supplies were also lower as a rate to sales and professional services were higher, while most other expenses were either flat or increased slightly as a rate to sales.
- Merchandise margin declined as a result of higher markdowns, partially offset by lower product costs.
- Buying, occupancy and warehousing costs increased as a percent to sales, primarily driven by rent expense and higher delivery costs related to the company''s direct business. - The deleveraging in rent was due to the decline in comparable store sales, new store openings and the extra week in the fourth quarter last year.
Net income was $140.5 million, down 6.5% from $150.2 million last year and as a percent to sales net income was 14.1%, compared to 15.4% last year.
- Operating income was $209.2 million compared to $226.8 million last year.
- As a percent to sales, operating income was 21.0%, compared to 23.2% last year.
- The remodeling program demonstrated outstanding returns with a pay-back on investments of 16 months and the firm continued expansion of Aerie.
Standalone stores are demonstrating strong early performance, with the majority of the stores trending to $400 in sales per square foot and Aerie leverages across all segments of the infrastructure.
- The firm achieved a 21% operating margin in a tough retail environment and leveraged SG&A expenses by 50 basis points on a negative 2% comp.
- It cleared through Fall and holiday inventory and entered Spring with inventories at cost per foot down 5%.
- The firm also bought back $195 million of stock, bringing the annual total to $438 million, leaving 41.3 million shares available for repurchase through 2010.
The firm ended the year with a total cash and investment balance of $786 million, including approximately $418 million of investments in auction rate securities.
- Since year-end, the firm has reduced its position in auction rate investments to $372 million and has a current cash balance of $368 million.
- The strong cash flow will be used to fully fund ongoing operations as well as capital plans related to growth initiatives.
- Inventory excluding the direct business decreased 5% on a cost per square foot basis.
- Capital expenditures totaled $250 million and were primarily related to store growth and renovations, headquarters, and distribution centers.
Strategic Insights:
The company entered 2008 with inventory down 5% per foot and is consistently managed to quick inventory turns and maintain flexibility through the trigger strategy, which allows prompt response to sales trends.
- Going forward, the firm will adopt a more conservative position on its initial buys and initiated an expense management program which is ongoing and very comprehensive and is expected to realize a number of cost savings.
- It expects to gain efficiencies through the new global in-transit tool, which will enable management of the flow of goods more precisely with greater flexibility, thus receiving inventory closer to need.
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