This is a summary of the fourth quarter fiscal 2008 earnings call conducted by American Eagle Outfitters, Inc. (AEO) on March 11, 2009.
Management:
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VP, Investor Relations: Judy Meehan
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CEO, Director: James V. O''Donnell
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Executive VP, CFO: Joan Hilson
Key Investor Issues:
- Profit fell to $32.7 million, or 16 cents per share, from $140.5 million, or 66 cents per share, in the same period a year earlier.
- Sales fell 9% to $905.7 million from $995.4 million a year ago, while same-store sales slid 16%.
- Full-year net income lost 55% from a year ago. Full-year revenue fell 2%, while same-store sales fell 10%.
- In the first quarter, American Eagle expects a profit of 4 cents to 7 cents per share.
Fourth Quarter Highlights:
The fourth quarter proved to be an extremely difficult conclusion to an already challenging year. American Eagle Outfitters faced particular softness in the women’s business and a severe drop in consumer spending. The change in demand during the largest sales period of the year drove unplanned, reactive promotions. This put significant pressure on profit margins.
As a result, fourth quarter earnings per share declined 71% with a 16% comp store decline. In 2008 American Eagle Outfitters posted a 10.1% operating margin and generated net income of approximately $180 million.
With continuing strong cash flow American Eagle Outfitters ended the year with over $470 million in cash and liquid Treasury funds.
AE first priority is delivering trend-right assortments with a strong value proposition in the AE brand, particularly in Women’s. It is imperative that AE instills a dose of innovation to the product and do so quickly.
The AE Women’s business had some bright spots this spring.
Although still negative February showed an improvement in critical areas. For example, Women’s spring denim assortment comped positively as new styles combined with a powerful promotional event was well received by the customers. In addition to being an important volume driving category, a positive response at denim speaks to the strength of AE customers’ connection and drives related selling.
New concepts continue to be important in 2009.
Aerie continued to demonstrate progress with stand alone stores comping slightly positive last year. AE will build upon its success in bras and undies which are critical categories in this business. In fact, February bra promotion had the strongest customer response to date. Expanding bra offerings, particularly in sizes, fits, colors and patterns is a major focus in 2009.
Additionally, AE is continuing to redefine Dormwear, fitness and personal care categories to complete the Aerie lifestyle.
In 2009 AE expects ongoing productivity and profit improvements. Martin + OSA demonstrated a positive response to new merchandise assortments in 2008 with a 30% comp store sales increase. However, these results were partially driven by promotions.
AE direct business was highly successful in 2008 with sales reaching $307 million which was a 26% increase.
Initiatives including expanded sizes, store to door, innovative marketing and an easier shopping experience are driving sales and profit increases.
AE has opportunities that are targeted at IMU improvements.
AE is moving productions to countries with lower cost structures such as Cambodia and Viet Nam without compromising value.
Beginning in the second quarter initial inventory investments are targeted to be in line with the current negative comp sales trends. In 2008 AE responded to steep decline in sales trends with aggressive expense reduction initiatives. In 2009 AE will continue to pursue cost savings across the organization.
Overall fourth quarter sales and earnings were below plan.
Fourth quarter EPS was $0.19, excluding the non-cash investment and store impairment charges. This compares to $0.66 per share last year. In response to weak demand AE were highly promotional throughout most of November and December. In addition to product specific mark downs AE offered a buy one-get one 50% off for most of the holiday season. AE were successful in achieving its year-end inventory targets. However, the effect on the merchandise margin was severe causing a 71% earnings decline.
The 16% comp store sales decline was due to both weak traffic and conversion at the AE brand.
Higher promotional activity drove an increase in units per transaction yet caused a lower average unit retail price. The gross margin decline was caused by lower merchandise margin which was marked along with IMU pressure. Within the gross margin AE also de-leveraged rent primarily due to the comp decline.
