American Eagle Outfitters, Inc. (AEO)

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American Eagle Outfitters (AEO)

Q2 2011 Earnings Call

August 24, 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

Dana Telsey - Telsey Advisory Group

Stacy Pak - Barclays Capital

Jeff Black - Citigroup Inc

Christine Chen - Needham & Company, LLC

Betty Chen - Wedbush Securities Inc.

Michelle Tan - Goldman Sachs Group Inc.

Paul Lejuez - Nomura Securities Co. Ltd.

Adrienne Tennant - Janney Montgomery Scott LLC

Brian Tunick - JP Morgan Chase & Co

Jennifer Davis - Lazard Capital Markets LLC

Jennifer Black - Jennifer Black & Associates

Jeffrey Van Sinderen - B. Riley & Co., LLC

Samantha Panella - Raymond James & Associates, Inc.

Kimberly Greenberger - Morgan Stanley

Janet Kloppenburg - JJK Research

Lorraine Hutchinson - BofA Merrill Lynch

Presentation

Operator

Greetings, and welcome to the American Eagle Second Quarter 2011 Earnings Conference Call. [Operator Instructions] 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 begin.

Judy Meehan

Good morning, everyone. Jim O'Donnell, Chief Executive Officer, is joining us by phone today. Here in Pittsburgh, we have Roger Markfield, Vice Chairman and Executive Creative Director; and Joan Hilson, Executive Vice President and Chief Financial Officer. If you need a copy of our second quarter press release, it is available on our website, ae.com.

Before we begin today's call, I need to remind you that during this conference call, we will make certain forward-looking statements based upon information which represent 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, everyone. I will begin with an overview of our second quarter performance, which will include an update on each of the brands, as well as AEO Direct. Next, I will turn it over to Roger to share his perspective on design and merchandising. And then we'll conclude with a financial review and an outlook from Joan.

As we all know, the lack of economic recovery has created a persistently challenging retail environment. That said, we managed our business prudently and made progress on our longer-term initiatives. I'm pleased to report our second quarter sales increased 4%, demonstrating improvement from the first quarter, and our EPS of $0.10 was within the range of our expectations.

During the second quarter, we began our strategy to maximize our key item businesses, like denim and shorts, with stronger and more impactful promotions. This strategy, combined with ongoing merchandise improvements is driving improved results. Although comparable store sales were flat, they were consistently and certainly stronger than the previous few quarters. Performance was fairly consistent within the AE brand, both men's and women's comps were flat, which is a positive sign for women's business.

Overall highlights for the quarter include AEO Direct, which increased 16%, and aerie stand-alone stores demonstrated stronger margin results. Overall, though, our promotional activity was planned and well controlled. However, as expected, higher cotton prices pressured margins and will continue to do so in the second half of the year. There are several indications that the cost of cotton is stabilizing. If that's the case, there is opportunity to recoup a good portion of the margin that we lost and will recover in 2012.

Expense management efforts continued to pay off with SG&A leveraging in the quarter. As Joan will review in greater detail, we are moving into a second phase of our profit improvement initiative, which also includes a deeper dive into our real estate initiatives, as well as other ongoing expense savings. Our balance sheet remains exceptionally strong with more than $500 million in cash and investments at the end of the quarter, and we continue to use our cash to invest in the business.

This brings me to growth. There's no doubt we are focused on managing expenses, but at the same time, we still have our sights set on growth. Early this year, we laid out a series of key initiatives to move us towards that goal.

Here is a brief update. Within the American Eagle brand, we are capitalizing on the strength of the brand and our continued dominance in key categories, as I mentioned earlier, such as denim. Beginning with back-to-school, we have made bolder investments designed to win back market share. This customer is still highly focused on price, and yet we are delivered in our promotional activity. By investing in proven businesses, offering powerful everyday value and creating excitement with compelling promotions, we believe we will continue to drive strong top line.

Our merchandise investments include a strong focus on AE jeans as denim is obviously a critical driver for the back-to-school business and fall. We've increased inventory to support demand, particularly in styles that carry through holiday and as well into the spring season. We've also made an important investment in accessories, where we see significant future opportunity. The response has been encouraging, particularly in women's, and we are excited about its potential.

At quarter end, we had 250 accessory shops within the American Eagle stores, and we expect to have 400 of these shops by holiday. Also new for AE this holiday, we plan to launch a comprehensive American Eagle personal care line for both men and women.

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