American Eagle Outfitters (AEO)
Q3 2011 Earnings Call
November 30, 2011 9:00 am ET
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Joan Holstein Hilson - Chief Financial Officer, Principal Accounting Officer and Executive Vice President
Judy Meehan -
James V. O'Donnell - Chief Executive Officer, President and Executive Director
Stacy W. Pak - Barclays Capital, Research Division
Dana Lauren Telsey - Telsey Advisory Group LLC
Roxanne Meyer - UBS Investment Bank, Research Division
Robin S. Murchison - SunTrust Robinson Humphrey, Inc., Research Division
Jeff Black - Citigroup Inc, Research Division
Thomas A. Filandro - Susquehanna Financial Group, LLLP, Research Division
Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division
John D. Morris - BMO Capital Markets U.S.
Pamela Nagler Quintiliano - Oppenheimer & Co. Inc., Research Division
Michelle Tan - Goldman Sachs Group Inc., Research Division
Jeffrey P. Klinefelter - Piper Jaffray Companies, Research Division
Adrienne Tennant - Janney Montgomery Scott LLC, Research Division
Jennifer M. Davis - Lazard Capital Markets LLC, Research Division
Anna A. Andreeva - FBR Capital Markets & Co., Research Division
Dorothy S. Lakner - Caris & Company, Inc., Research Division
Kimberly C. Greenberger - Morgan Stanley, Research Division
Randal J. Konik - Jefferies & Company, Inc., Research Division
Greetings, and welcome to the American Eagle Third Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Judy Meehan, Vice President of Investor Relations. Thank you. Ms. Meehan, you may begin.
Good morning, everyone. Joining me today are Jim O'Donnell, Chief Executive Officer; Roger Markfield, Vice Chairman and Executive Creative Director; and Joan Hilson, Executive Vice President, Chief Financial Officer. If you need a copy of our third 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 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 on our quarterly and annual reports filed with the SEC. Now I'd like to turn the call over to Jim.
James V. O'Donnell
Thanks, Judy. Good morning, everyone. Today, I will begin with an overview of our third quarter results, including an update on each of the brands as well as AEO Direct. Next, I will turn it over to Roger for a perspective on design, merchandising and marketing. And before we move on to Q&A, Joan will provide additional details on the third quarter and discuss our outlook.
In the quarter, consolidated sales increased 11%, reaching a record sales level for the third quarter, and comparable store sales rose 5%. EPS of $0.27 was at the high end of our guidance. We made meaningful progress in several major areas of our business. Merchandise improvements, combined with powerful promotions during peak shopping periods, led to a strong sales results. Our inventory investments in key items were spot on, enabling us to capitalize on traffic and maximize sales. This resulted in record conversion rates and double-digit unit sales growth. Importantly, we continued to see a positive customer response to both strong value and on-trend fashion assortments.
Strong sales growth enabled us to overcome significant pressure from higher cotton costs and resulted in a slight decline in gross profit of just 1%. As anticipated, cotton prices will continue to affect merchandise profit in the fourth quarter, and it will be well into the spring season before we start to see a correction. However, we do expect to benefit from lower cotton costs beginning in the second half of 2012.
Looking forward, each brand has a critical role to play in our group. Through our portfolio of brands, we are reaching targeted markets. Additionally, we are leveraging our multichannel platform with technology to build awareness, loyalty and most importantly, commerce. Beginning with AE, we are set to build on current momentum. We will capitalize on the popularity of our brand and continue to offer compelling promotions that truly wow our customers. As we did this quarter, our priority is to deliver on trend key items, supported by the right inventory to drive our business and increase market share. We will design and source into items that offer compelling day in and day out value. As we look forward, the primary thrust for the AE brand include, first, maintain and build our leadership in bottoms categories; two, build on our current momentum in tops; and three, continue to refine and expand accessories.
Now moving onto aerie. Our goal over the next few years is to become a recognized force in the intimates business. There's a significant market opportunity as demonstrated by our third quarter performance. The launch of the Drew bra, along with aerie's first ever campaign, was an outstanding success. We experienced double-digit increases in bra sales and have substantial lift to store and online traffic. The launch event served to introduce new customers to the brand and reinvigorated existing customer excitement. We achieved an 8% comp overall with improved operating margins compared to last year. I remain very pleased with the progress and continued to view aerie as a unique and exciting new brand opportunity.
On to kids. 77kids posted positive sales results during the third quarter, particularly in our well-developed online business. We remain very pleased with the progress to date with developing strength in key items. Adding 77kids to our Times Square flagship store is really building brand awareness as well as providing key insight into our international kids' customer. We will continue to evolve the assortments, focus on innovation, both online and in the stores to build brand awareness and grow a strong customer base.