American Eagle Outfitters, Inc. (AEO)

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American Eagle Outfitters (AEO)

Q4 2013 Earnings Call

March 06, 2013 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

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Betty Y. Chen - Wedbush Securities Inc., Research Division

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

Kimberly C. Greenberger - Morgan Stanley, Research Division

Janet Kloppenburg

Dorothy Lakner

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

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

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

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

Lindsay Drucker Mann - Goldman Sachs Group Inc., Research Division

Oliver Chen - Citigroup Inc, Research Division

Presentation

Operator

Greetings, and welcome to the American Eagle Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] And as a reminder, 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 now begin.

Judy Meehan

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. Results actually realized may differ materially from those expectations or beliefs based on risk factors included in our quarterly and annual reports filed with the SEC.

Our comments today will focus on non-GAAP results from continuing operations. Please refer to the tables attached to the press release. We've also posted a financial supplement on our website, which Mary will refer to.

Now I'd like to turn the call over to Robert for opening remarks.

Robert L. Hanson

Good morning, everyone. I am pleased with the strength and consistency of our performance in 2012. As we were developing our long-term strategy plan, early last year, we set our near-term focus on 5 immediate priorities: driving a competitive top line, generating margin flow-through from improved inventory management, rebalancing our store fleet, distorting [ph] our online business and gaining leverage on our infrastructure.

The teams' focus on these priorities and efforts to strengthen merchandising led to one of our best years in recent history. We delivered a brand and product-driven customer experience, sharper and more distinctive for our customers. For the year, we well exceeded our targeted annual financial metrics. Revenue rose 11% to a record $3.5 billion. EBIT grew 51%, and we generated strong returns with an ROIC of 18%. Our annual operating margin of 12.6% was the best rate since 2008. In the fourth quarter, we achieved a 9% revenue increase and an operating margin of 15.9%. That was our best since 2007. EPS grew 41%. I'm proud of how the team managed through an unpredictable period, achieving strong revenue growth following an 11% increase last year.

That said, we continue to see plenty of opportunity for further improvements. In 2012, we began concentrating our efforts on the first pillar of our strategy plan, fortifying our brand's capabilities and processes. Throughout the year, the American Eagle Outfitters team created strong merchandise improvements, leading to comp growth across the assortment. The strength of the brand, combined with a more distinctive lifestyle point of view, broadened our customer appeal. Brand traffic, both online and in-store, grew at a healthy pace this year, and we saw a 36% increase in new customers in our AE Rewards program. We plan to build on our fortification initiative, which I will speak to a bit later.

Aerie delivered consistent margin and profit improvements and was accretive to earnings. We've experienced particular strength in the direct channel and have seen a positive customer response as we refocused on our famous-for intimates categories. We're strengthening the store fleet and will close approximately 15 to 20 stores in 2013. We continue to have confidence in our opportunity for aerie as we fortify the brand, refine our assortments and leverage our American Eagle Outfitters customers to a greater degree.

Fortifying our processes, including strengthened inventory principles and supply chain initiatives, led to margin gains. Positive comps were achieved on lower inventories, and we realized a higher selling price and a reduction in the markdown rate in each quarter of the year. We delivered more frequent merchandise flows, enhancing the customer experience and increased our inventory turns. We realized the benefits from lower product costs beyond the benefit of cotton, and have begun to see margin improvement from our product development and supply chain initiatives. Growth in our online channel was consistent and strong in 2012 with a 25% comp increase, sales reaching a record $467 million and with higher margin flow-through versus last year.

We generated strong returns to our shareholders, distributing $403 million in dividends and $174 million in stock buybacks, and we ended the year with $631 million in cash. As part of our ongoing commitment to consistently return cash to shareholders, our Board of Directors authorized an additional 20 million shares for repurchase and raised our cash dividend to an annual rate of $0.50 per share.

I want to thank the teams for delivering a terrific performance in 2012. We managed well through an unstable macroeconomic environment. We're confident in our brand, our merchandise assortments and our strategic initiatives. The fundamentals of our business are healthy, and our financial condition is excellent. We remain focused on building on last year's momentum, making improvements to the bottom line with a strong ROIC focus.

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