American Eagle Outfitters, Inc. (AEO)

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American Eagle Outfitters (AEO)

Q4 2011 Earnings Call

March 09, 2011 9:00 am ET

Executives

Joan Hilson - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Judy Meehan - IR

James O'Donnell - Chief Executive Officer, President and Executive Director

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

Analysts

Dorothy Lakner - Caris & Company

Sean Naughton - Piper Jaffray

Dana Telsey - Telsey Advisory Group

Richard Jaffe - Stifel, Nicolaus & Co., Inc.

Randal Konik - Jefferies & Company, Inc.

Lizabeth Dunn - FBR Capital Markets & Co.

Christine Chen - Needham & Company, LLC

Jeff Black - Citigroup Inc

Michelle Tan - Goldman Sachs Group Inc.

Brian Tunick - JP Morgan Chase & Co

John Morris - BMO Capital Markets U.S.

Jennifer Black - Jennifer Black & Associates

Kimberly Greenberger - Morgan Stanley

Laura Champine - Cowen and Company, LLC

Janet Kloppenburg - JJK Research

Presentation

Operator

Greetings. And welcome to the American Eagle Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] 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; Roger Markfield, Vice President and Executive Creative Director; and Joan Hilson, Executive Vice President and Chief Financial Officer. If you need a copy of our fourth press release, it is available on our website, ae.com. As we review our financials today, please keep in mind that fiscal 2010 results are from continuing operations and are adjusted to exclude the impact of the ARS liquidation this year and the tax benefit and investment loss 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 actual results may be materially different from these expectations or beliefs based on risk factors included on our quarterly and annual reports filed with the SEC.

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

James O'Donnell

Thanks, Judy. Good morning. And thanks for joining us. I'll begin by recapping our performance for the fourth quarter and fiscal 2010, and then provide my perspective as we look towards 2011. Roger will provide an update from a merchandising point of view and then Joan will take you through the financials and our outlook.

I'm pleased to report that we made progress even though it was not a significant as we would have hoped. Let me share with you some color. In the fourth quarter and fiscal 2010, we achieved an increase in our operating margin and generated EPS growth despite a decline in sales. Our fourth quarter operating margin expanded to 14.6% from 13.3% last year. Fourth quarter EPS increased 16% and our adjusted annual EPS grew 11%. For the year, operating income was $317 million and cash flow was once again quite strong. We ended the year with cash and investments of $740 million and after returning $400 million to shareholders through 2010 stock buybacks and dividend payments.

The improvements we made reflect initiatives I discussed on our last conference call, specifically, we took actions to strategically manage the business when it continued to be a very challenging retail environment. We had strengthened assortments appropriately, managed inventory levels and we realigned our talent. Our results also reflect our disciplined approach to expenses and that, too, contributed to the operating profit improvement for both the year and the fourth quarter. We continue to make progress implementing our corporate profit initiatives which are aimed at gaining efficiencies across our supply chain and production operations, as well as reducing overhead costs. These projects are expected to deliver $20 million to $30 million in savings over the next two years.

Now as we look to fiscal 2011, we are building on this progress and positioning our brands for our long-term profitable growth. Roger and I will provide some additional color here. Highlighting the prospects for our AE brand, aerie and our direct-to-consumer, especially in the international marketplace, as well as our outlook for the 77kids. We expect to see major benefits from these efforts to occur in fiscal 2012.

A key priority in 2011 is to drive increased productivity at the American Eagle brand as we work to bridge the gap between current sales and historic levels. The AE brand remains among the strongest in today's marketplace with meaningful brand equity, great quality and affordable prices. We have real customer loyalty and an established and enduring American heritage. We continue to lead the market in both men's and women's denim. The enviable position we have earned for our brand is a platform for profitable growth here and internationally.

Clearly, continued improvements in merchandising will be critical to our success. We made progress in 2010. We're especially encouraged by the response we saw to the assortment in the third quarter. Our team is focused on delivering more consistent performance. We know where we need to make changes and those efforts are well underway. We see a significant potential for growth through bolder investments in key businesses, building on our market-leading position with core customers. One example is in accessories where the expanded assortments in handbag, footwear, jewelry which complements our core offering. Within the aerie brand, we continued to drive sustained profitability and growth and have already witnessed consistent improvement in operating earnings including in the fourth quarter. During 2010, we repositioned the assortment and we're making further refinements in 2011 to highlight and give greater prominence to the strength of our intimate apparel categories while building more complete lifestyle brands.

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