American Eagle Outfitters, Inc. (AEO)

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American Eagle Outfitters, Inc. (AEO)

Q3 2010 Earnings Call

November 18, 2010 10:00 am ET


James O’Donnell – Chief Executive Officer

Joan Hilson – Executive Vice President, Chief Financial Officer

Roger Markfield – Vice Chairman of the Board, Executive Creative Director

Judy Meehan – Vice President, Investor Relations


Jeff Klinefelter – Piper Jaffray

Brian Tunick – JP Morgan Chase

Kimberly Greenberger – Morgan Stanley

Christine Chen – Needham & Company

Jennifer Black – Jennifer Black & Associates

Paul Lejeuz – Nomura Securities

Janet Kloppenberg – Jacobs Jenner & Kent

Lorraine Hutchinson – Bank of America

Dorothy Lakner – Caris & Company

Liz Dunn – FBR Capital Markets

Randy Konik – Jefferies

Roxanne Meyer – UBS

Michelle Tan – Goldman Sachs

John Morris – Bank of Montreal

Richard Jaffe – Stifel Nicolaus

Marni Shapiro – The Retail Tracker

Jeff Van Sinderen – B. Riley & Company

David Glick – Buckingham Research Group



Greetings and welcome to the American Eagle Third Quarter 2010 Earnings conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. 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 in Pittsburgh are Jim O’Donnell, Chief Executive Officer, and Joan Hilson, Executive Vice President and Chief Financial Officer. Roger Markfield, Vice Chairman and Executive Creative Director joins us by phone from our New York design center.

If you need a copy of our third quarter press release, it is available on our website, As discussed in our press release beginning with the new fiscal year, we will discontinue the practice of reporting monthly sales. Beginning with the first quarter of 2011, we will report sales and earnings together in the quarterly earnings announcement.

Today we will review third quarter adjusted results from continuing operations which excludes the impact of the ARS liquidation this year and a tax benefit last year.

Before we begin today’s call, I need to remind everyone that during this conference call, members of management will make certain forward-looking statements based upon information which represents the Company’s current expectations or beliefs. The 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.

And now I’d like to turn the call over to Jim.

James O’Donnell

Thanks, Judy. Good morning and thanks for joining us. The third quarter demonstrated progress towards driving our brand forward while enhancing overall profitability. We experienced growth in both sales and operating income during the quarter. The increase in our adjusted EPS reflects the positive impact of recent actions to drive higher sales and expand our profit margins.

It is very gratifying to see the AE brand show recovery in important categories and gain momentum with our customers. I’m encouraged that we are on the right track and excited about the opportunities ahead.

Now I will take you some of the initiatives which drove the third quarter profit improvement. I will also address our longer term plans regarding growth. Starting out with merchandise, we delivered high quality trend right fashions. In fact, the third quarter customer conversion rate was up over last year. We are winning where our merchandise is elevated, special and differentiated. We will not compete on price alone.

A clear example is demonstrated by the strength of AE’s denim and sweaters. These products lines represent the best quality and fashion across several compelling price points. Overall, we were less reliant on promotional activities to drive business which is further evidence of our progress. In the third quarter, lower markdowns delivered an improved merchandise margin. Our inventory is balanced and on plan, and enhanced tools continue to drive more precise buying and allocation to stores and contribute to lower markdowns.

We’ve been successful with reducing inventory overall. Turns are faster. We are flowing goods into the stores more frequently, and with improved capabilities in production and design we’re also leaving more open to buy, enabling us to chase strong categories. In fact, we did this for holiday.

Now regarding product cost, there are clearly pressures in the marketplace with sharp increases primarily in cotton and, to a lesser degree, labor. For the second half of 2010 and spring 2011, costs were held flat; however, we expect modest pressure for summer product. Beyond June, it is still too early to forecast. Importantly, we are doing everything possible to minimize the impact. For example, we are consolidating vendors and fabric purchases and leveraging our volume to negotiate better costs. Additionally, we continue to move production to the western hemisphere which has been advantageous to cost, transportation, and increased efficiencies. What we absolutely will not do is lower the quality or fashion content.

During the quarter, we made progress on streamlining and reducing expense. Essentially, we are transforming the business to shed complexities and unnecessary layers in process and structure. We continue to identify opportunities across the organization. A few of the primary initiatives are centered on supply chain, production, and non-merchandise procurement. We are strengthening our time and action calendar which we believe will yield both savings and efficiencies improvements. Additionally, we are consolidating purchase and reviewing all outside vendor contracts. These opportunities combined with product enhancement put us on a path for further operating margin improvement next year.

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