This is a summary of the second quarter fiscal 2006 earnings call conducted by American Eagle Outfitters Inc. (AEOS) on August 15, 2006
Management:
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President, CMO: Susan McGalla
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EVP, CFO: Joan Hoxen,
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CEO: Jim O’Donnell
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IR: Judy Mehan
Key Investor Issues:
- Sales rose 17% to $602 million from $516 million in 2005.
- Earnings increased 27% to $72.1 million or 47 cents a share, from $58 million or 37 cents a share.
- The firm is launching aerie by American Eagle and MARTIN + OSA.
Half Year Highlights:
- Net sales rose 16% to $1.1 billion from $972 million in the prior year.
- Earnings were up 20% to $136 million or 89 cents a share.
Second Quarter Highlights:
Sales increased 17% to $602.3 million from $515.9 million in the corresponding period last year as comparable store sales increased 10% up against a 21% increase last year.
- Period sales reflected positive store traffic trends, resulting in a mid single digit increase in the number of transactions per store.
- Units sold per store were up in the high single digits and average transaction value increased in the mid-single digits, driven by a low single-digit increase in units per transaction and a higher AUR.
- Less promotional activity and a strong, full price business contributed to a mid single increase in the average unit retail price.
- All geographic regions comped positively with the mid-teens in the Northeast, low double-digits in the Southwest, high single-digits in the Midwest and Mid Atlantic regions, mid-single-digits in the West and Southeast, and Canada achieved a comp increase in the low 20s.
- New stores continue to perform extremely well, with sales productivity over 90% of mature stores, producing a first-year ROI of over 70%.
The gross margin improved 140 basis points, from 44.2% to a record 45.6% with a lower markdown rate compared to last year and a higher INU led to a 70 basis point increase in merchandise margin.
- The remaining 70 basis points of gross margin improvement came from the leveraging of rents.
- SG&A as a percent of sales leverage 20 basis points to 23.8%, which was the lowest historical second quarter rate.
- Strong comp store sales and well-controlled, on-plan expenses contributed to the lower rate.
- Store payroll leveraged while advertising increased slightly as a percent of sales.
- Included in SG&A was stock option expense of approximately 30 basis points, which was not included last year.
- The firm absorbed incremental planned expenses related to MARTIN + OSA of approximately 40 basis points.
The operating margin increased 160 basis points from 16.6% to 18.2%, a record second quarter rate.
- Other income for the quarter increased to $9 million due to a higher investment balance and yields compared to last year.
- The effective tax rate was 39%, compared to a rate of 36% last year, which reflected a state tax credit received during the second quarter.
- Earnings increased 27% to $72.1 million or 47 cents a share, from $58 million or 37 cents a share on sales growth.
Total cash and investments increased $181 million, to $931 million at quarter end with capital expenditures of $71 million.
- For the year, the firm continues to expect capital expenditures of approximately $215 million.
- Total merchandise inventories were $267 million, a decrease of $4 million compared to the prior year.
- Inventory per square footage costs declined 11% from a year ago, a result of lower in-transit inventory caused by a change in the timing of merchandise flow, as well as tight inventory discipline.
- In the year-ago period, inventories were higher than usual because of the timing of receipts and flow related to a mid-August merchandise update.
Real Estate Strategy:
- The firm opened seven stores and completed 18 renovations.
- The company is on track to open 46 AE stores this year and completes 66 renovations, plus three aerie standalone test stores and five new MARTIN + OSA stores opening this fall.
- Remodeled stores are experiencing a 40% lift in sales and a 51% increase in profitability, generating a first-year ROI of 42%.
- In terms of the company’s major growth initiatives, it is launching aerie by American Eagle and MARTIN + OSA.
Third Quarter Fiscal 2006 Outlook:
- At the end of the third quarter, inventory is expected to be in the range of flat to up low single-digits on a cost-per-foot basis.
- EPS are expected to be in the range of 52 to 54 cents.
- Looking ahead, the company continues to identify opportunities for expense leverage and operating efficiencies.
- For the year, the firm continues to expect capital expenditures of approximately $215 million, including new and renovated stores, the new Pittsburgh headquarters, a new data center as well as the expanded Kansas DC.
- Total square footage will be increased by 8% this year.
Key questions and answers from the second quarter fiscal 2006 earnings call conducted by American Eagle Outfitters Inc. (AEOS) on August 15, 2006
