American Eagle Outfitters, Inc. (AEO)

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American Eagle Outfitters (AEO)

Q3 2012 Earnings Call

November 28, 2012 9:00 am ET

Executives

Judy Meehan

Robert L. Hanson - Chief Executive Officer and Director

Roger S. Markfield - Vice Chairman, Executive Creative Director, Chief Design Officer, Vice Chairman of the American Eagle Division, President of the American Eagle Division and Interim President of Martin + Osa Brand

Mary Boland - Chief Financial & Administrative Officer and Executive Vice President

Analysts

Anna A. Andreeva - FBR Capital Markets & Co., Research Division

Alex Pham - Wedbush Securities Inc., Research Division

Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Jennifer M. Davis - Lazard Capital Markets LLC, Research Division

John D. Morris - BMO Capital Markets U.S.

Carla White

Oliver Chen - Citigroup Inc, Research Division

Randal J. Konik - Jefferies & Company, Inc., Research Division

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Dorothy S. Lakner - Caris & Company, Inc., Research Division

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

Presentation

Operator

Greetings, and welcome to the American Eagle Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Judy Meehan. Thank you, Ms. Meehan. You may begin.

Judy Meehan

Thanks, Jessie. Good morning, everyone. Joining me today are Robert Hanson, Chief Executive Officer; Roger Markfield, Executive Creative Director; and Mary Boland, Chief Financial and Administrative Officer.

Before we begin today's call, I need to remind you that during this conference call, we will make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results actually realized may differ materially from those expectations based on risk factors included in our quarterly and annual reports filed with the SEC.

We have posted a third quarter financial presentation on our website, which we will refer to during this call. Robert will start with a brief overview of the third quarter. After Roger and Mary give additional comments, he'll come back and review our longer-term strategic initiatives. And then we'll take your questions.

And now, I would like to turn the call over to Robert.

Robert L. Hanson

Thanks, Judy, and good morning, everyone. This quarter marked the third consecutive quarter of double-digit top line growth and over 30% earnings growth. I'm pleased that we've seen continued momentum in our business, while executing on our immediate priorities and building our longer-term strategic plan. In the third quarter, net sales increased 11%, and earnings per share rose 37%. Customers continued to respond well to our brand and product-driven customer experience. In a highly competitive environment, we delivered market-leading top line growth with fewer promotions. Double-digit sales growth was also achieved in conjunction with tighter inventory principles. Favorable merchandise costs combined with lower markdowns and the leverage of rent expense resulted in higher profitability and returns. The third quarter operating margin expanded to just over 14%, our best since 2008.

Now I'll review some of the third quarter highlights. Within American Eagle Outfitters, we were successful delivering highly appealing and fashion-right assortments, resulting in broad-based multi-category strength and a truly differentiated lifestyle offering. Our merchandise, marketing and customer experience teams executed well.

With greater trend responsiveness, more frequent flows and embedded inventory management principles, our product teams did a great job driving top line growth and merchandise profitability. Aerie achieved both top line and bottom line growth with strength in its famous-for intimates categories of bras and undies. We will seek ongoing improvements centered on Aerie's more sharply focused brand DNA with intimates at the core.

We drove increased traffic into stores and saw 20% growth in our active customer base for both AEO and Aerie. Our incremental investments in advertising are proving important as we look to drive further customer loyalty and traffic. Our real people campaign supports the unique, authentic and inclusive positioning of our American Eagle Outfitters brand and has sparked greater customer outreach and engagement.

Sales in our direct business grew 27%, driven by increased traffic. Direct profitability grew 46% due to both IMU improvements and the reduction in the markdown rate. Cash flow was very strong. We delivered an increase in cash versus the prior year, even after we paid a sizable cash dividend of over $300 million in the quarter.

Now a few words on our start to the current quarter. We managed through super storm Sandy effectively, and within a few days, most of our stores were up and running. Most importantly, we're grateful that all of our associates were and are safe, and I'm particularly proud of how our teams provided immediate assistance and support to each other and others in need.

Our holiday season and fourth quarter have started off strongly and consistent with our expectations. Against strong double-digit sales gains last year, we drove positive comps and record sales volumes on Black Friday and over the Wednesday-through-Sunday period, completely offsetting the impact of Sandy earlier in the month. Sales metrics were healthy throughout, including a higher average unit retail price, increased ADS [ph] and strong conversion.

I'm pleased with how we delivered across the channels, with both stores and our online business posting record results and with major advancements in mobile and tablet commerce. So while we still have important weeks ahead, we feel well positioned for our success this holiday.

I want to thank our teams for driving a strong performance in the third quarter and so far through the fourth quarter, yet I'm confident in their commitment to remain sharply focused on delivering consistent improvements and profitable sales growth and strong shareholder returns moving forward.

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