American Eagle Outfitters, Inc. (AEO)
Q3 2008 Earnings Call Transcript
November 25, 2008 9:00 a.m. ET

Executives

Judy Meehan - Vice President, Investor Relations
James V. O''Donnell - Chief Executive Officer, Director
Joan Hilson - Executive Vice President, Chief Financial Officer

Analysts

Rick Patel - Merrill Lynch
Kimberly Greenberger - Citigroup
Jeff Black - Barclays Capital
Paul Lejuez - Credit Suisse
Brian Tunick - JP Morgan
Jeff VanSinderen - B. Riley & Company, Inc.
Jeff Klinefelter - Piper Jaffray & Co.
Adrienne Tennant - Friedman, Billings, Ramsey & Co.
Christine Chen - Needham & Company, LLC
Todd Slater - Lazard Capital Markets
Linda Tsai - MKM Partners
Richard Jaffe - Stifel Nicolaus & Company, Inc.

Presentation

Operator

This conference is being recorded. It is now my pleasure to introduce your host, Judy Meehan, Vice President of Investor Relations. Thank you. Ms. Meehan, you may begin.

Judy Meehan

Good morning everyone. Joining me today are Jim O''Donnell, Chief Executive Officer, and Joan Hilson, Executive Vice President, Chief Financial Officer.

If you need a copy of our third quarter press release, it is available on our website, AE.com.

Before we begin, I need to remind everyone that during this conference call members of management may make certain forward-looking statements based upon information which represents the Company''s current expectations or beliefs. The results actually realized may be materially different from those expectations or beliefs based on risk factors included in our quarterly and annual reports filed with the SEC.

And now I''ll turn the call over to Jim.

James V. O''Donnell

Thanks Judy. Good morning everyone. As you are well aware, we continue to face a number of challenges which impacted third quarter results. We experienced lower store traffic, weak consumer demand, primarily in women''s. As a result, earnings per share excluding the impairment charge decreased 33%, driven by a 7% comp store sales decline.

Certainly, the times are uncertain; however, I''m confident in the strength of our organization and believe that we are well positioned to weather the storm. Now here''s why. This is a seasoned management team, one that has experienced difficult times before. We''ve not only survived, but we emerged a stronger company. Our Company is highly profitable and we have consistently generated strong cash flow. Although the third quarter earnings declined, we achieved a 12.6% operating margin, and so far this year we''ve generated $320 million in EBITDA. Our balance sheet is strong. Currently, we have $616 million in cash and cash equivalents, with $333 million of cash and liquid treasury funds.

Looking forward, we expect the near-term environment to remain challenging and we''re planning accordingly. To that end, we are reducing costs and tightly managing inventory (inaudible).

Also, we significantly lowered our 2009 capital spending plans, driven by our decision to open fewer new stores next year. We now expect to add a total of 29 stores versus our original plan of 90. Capital expenditures are expected to be in the range of $110 to $135 million. That compares to $250 to $270 million this year. Longer term, we see continued new store opportunities for all of our brands; however, given the current state of the economy, I believe conserving capital and lowering our cost structure takes precedence.

American Eagle is an established and leading brand of 15 to 25-year-olds, with a long heritage of quality merchandise offered at great value. Right now, consumers are seeking lower prices and trusted value more than ever before. Within the AE brand, we are responding with affordable pricing and promotional events while maintaining our strong tradition of great quality. We are highly committed to protecting our market share and doing so profitability. We can achieve this through appropriate inventory investments, building value into our initial pricing plans, and lowering indices and markdowns. For example, in the spring season we have planned and purchased a higher portion of our assortment to be value priced and on promotion compared to last year.

Like many others, we''ve experienced soft demand in women''s. Strengthening this important business is our number one priority and opportunity. Over the past several months, we''ve improved our process to be more effective. We are making critical decisions more quickly and importantly, we''ve appointed a new head of AE women''s design. And going into 2009, I believe we''re in a stronger position, with increased customer connectivity and a more streamlined organization.