This is a summary of the first quarter fiscal 2006 earnings call conducted by American Eagle Outfitters Inc, (AEOS) on May 16, 2006
Management:
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CEO: Jim O’Donnell
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DIR: Judy Mehan
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President, CMO: Susan McGalla
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EVP, CFO: Joan Hoxen
Key Investor Issues:
- Sales increased 14% to $522.4 million from $456.5 million in the corresponding period last year.
- Earnings rose 16% to $64.2 million or 42 cents a share, from $55.3 million or 35 cents a share in 2005.
- Strong cash flow resulted in a $244 million increase in cash, short-term and long-term investments to $912 million.
First Quarter Results
Total sales increased 14% to $522.4 million from $456.5 million in the corresponding period last year as comparable store sales increased 9% compared to a 27% increase last year driven by strong operating disciplines within a flexible framework.
- Recent new store economics also remain quite positive with sales productivity, with approximately 90% of the company’s mature stores going to first year of operation.
- Gross margin was 48.6%, declining 10bps from a record 48.7% of last year due to a lower merchandise margin against a record high from last year, partially offset by the leveraging of buying, occupancy and warehousing costs.
- Gross margin decline was also the result of an increase in markdowns over last year.
- Merchandise margins declined by 60bps, partially offsetting higher markdowns, while giving higher IMU.
- Buying, occupancy and warehousing costs leveraged by 50bps, primarily due to ramp and operating margin was 18.9%.
Selling, general & administrative expense was $135.8 million compared to $116.5 million last year, including $3.6 million of stock option expense that was not included last year.
- The increase in expenses was driven by marketing and other efforts done by the company to deliver consistent performance as well as ongoing improvements to the teams.
- The effective tax rate was 40% compared to 39% last year, with the higher rate due to the tax repatriation plan to take place during the quarter.
- Operating income increased to $98.8 million from $87.5 million in 2005, while other income was $7.5 million compared to $3 million in the prior year, driven by the company’s ability to maintain its brand momentum and driving strategic initiatives toward market share gains.
- Income from continuing operations increased to $64.2 million, compared to $55.2 million last year.
Strong cash flow resulted in a $244 million increase in cash, short-term and long-term investments to $912 million driven by stronger assortments, which delivered better than expected merchandise margins.
-Capital expenditures were $36 million and the firm expects capital expenditures of $215 million for the year, which includes new and remodeled stores.
- The increase in capital expenditures guidance reflects additional store remodels and the accelerated construction schedule for the company’s Kansas facility.
- Total merchandise inventories increased $19.7 million to $195.3 million compared to last year.
- The company’s inventory per square footage cost increased 1.4% and the units per foot were down 2.1%, reflecting higher than expected sales in April.
Growth Strategies Advance:
- The firm''s new intimates sub-brand, ""aerie by American Eagle,"" will launch in the fall period, supported by a multi-dimensional real estate strategy.
- New and remodeled stores will open with more square footage dedicated to intimates, and the intimates presentation in existing stores will be expanded.
- Three stand-alone aerie locations will also open and additionally, the assortment will expand to include a complete line of bras, undies and AE dormwear.
- Plans are underway for the opening of the first four stores of the company''s second major U.S. brand, MARTIN + OSA, targeting 25-40 year olds.
- The new brand will launch this fall in premier shopping centers at Tysons Corner Center in Virginia, Fashion Island in Los Angeles, NorthPark Center in Dallas and San Francisco Center.
Second Quarter Outlook
- The company expects ending inventory to increase in the low to mid single digits at a cost per foot compared to last year.
- Earnings per diluted share to be in the range of 39 cents to 41 cents.
- The company expects stock option expense to total 4 cents to 5 cents per share for the year.
Key questions and answer for the first quarter fiscal 2006 earnings call conducted by American Eagle Outfitters Inc, (AEOS) on May 16, 2006
Lauren Levitan:
Can you clarify on the remodels?
Jim O’Donnell: The remodel program is very successful and we continue to be aggressive in remodeling the majority of the stores, which would amount to 95%.
Lauren Levitan:
Can you tell us what percent of the chain will be meeting your standard by the end of this year?
Jim O’Donnell: Maybe, 95%.
Lauren Levitan:
Should we expect a higher capital expenditure to the level of this year to moderate next year?
