American Eagle Outfitters is on a roll.
While competitors throughout the fashion world have begun to express concerns over Omicron’s effects on sales and profits, American Eagle Outfitters — which includes the American Eagle, Aerie, Offline by Aerie, Unsubscribed, AE77 and Todd Snyder brands — did an about-face on the retail industry Tuesday morning, ahead of its presentation at the ICR 2022 virtual retail conference, raising its two-year operating income and revenue targets.
“We’re going to hit record revenues [this quarter],” Michael Mathias, American Eagle Outfitters’ chief financial officer, told WWD in an exclusive interview. “Every quarter this year will be a record-revenue quarter, including the fourth quarter. We’ve had record income quarters all year, every quarter through the second and third quarter. The fourth quarter wouldn’t have quite been a record, but it would have been the highest since 2007, if not for the excess freight costs. Otherwise, we’re pleased with the performance of both brands, the demand level and the bottom line.”
Mathias is referring to the additional $80 million in air and ocean freight costs incurred during the fourth quarter — which the company forecast during November’s conference call — thanks to supply chain disruptions, such as factory closures in Vietnam.
“We spent a lot more than we typically would have on that part of the business, the transportation costs to get the product here,” Mathias said. “But in both brands we’ve seen customer growth through the back half of the year. We’re still trending into a 25 to 30 percent growth rate in Aerie and that just shows no sign of slowing down. And [the growth drivers] are really [our] strength across all categories and continued new customers are driving growth.
“Not to say that there weren’t some possible disruptions from that supply chain impact. We spent an extra $80 million [on delivery],” he continued. “But I think we rolled over pretty well based on the demand numbers we’re communicating. We were focused and said we were going to spend what we need to spend on freight and transportation costs to get our product here, to mitigate the supply chain disruption back of the business. We didn’t want the customer to feel it during the holiday.”
The formula seems to be paying off. American Eagle Outfitters, which said a year ago that it would reach $550 million in operating income by 2023, and then later said it would hit $600 million by the end of 2021’s fiscal year, is now anticipating it will reach $800 million in operating income by 2023, while also generating $5.8 billion in annual revenues within the same time frame, up from previous targets of $5.5 billion by 2023. Meanwhile, Aerie’s annual revenues are also expected to surpass $2 billion by 2023, while the company anticipates American Eagle’s annual revenues up slightly from 2019 levels at about $3.6 billion by 2023.
For 2021’s fourth quarter, the retailer is expecting revenue growth in the mid-to-high teens range, compared with 2020’s fourth-quarter results, and up in the mid-teens compared with 2019’s fourth quarter, helping surpass $5 billion in revenues for the year.
“I am extremely proud of the team’s outstanding execution throughout the past year, which has instilled real structural improvements within our company,” said Jay Schottenstein, executive chairman and chief executive officer of the firm. “Inventory and real estate optimization combined with strong demand fueled by product improvements have reignited profitability at the American Eagle brand. Aerie cemented another year of industry-leading growth and achieved a substantial inflection in profitability as its powerful brand platform continued to scale. Operational excellence drove solid results amidst external disruptions. We closed out a milestone year for our supply chain, anchored by two key acquisitions, which secured cost efficiencies, locked in key strategic advantages and created a new platform for future growth. As I look forward, I see tremendous growth potential and opportunities across the organization. I am excited to see us build on our successes as we strive to reach greater heights and create lasting value for our shareholders.
“At the end of the day, you have to win in logistics; you have to be able to bring your costs in, your expenses [in] and be able to compete against everybody,” Schottenstein added during Tuesday’s ICR presentation. “[The acquisitions] will give us the ability to go against the Amazons of the world, go against the Targets of the world, the Walmarts of the world. Because if you can’t [manage logistics] in an efficient manner, you’re not going to win. And we’re introducing live retailing in our stores. And we’re going to be introducing more and more new technologies and new excitement in the store, because you have to. If you don’t you won’t win and [things] change very fast.”
Still, headwinds abound throughout the retail industry, such as the recent surge in the Omicron variant. Mathias acknowledged that American Eagle Outfitters too has encountered some challenges, such as staffing shortages in distribution centers and stores, but added, “nothing that’s a significant impact to our business right now. January is the smallest month of the quarter, so the total impact of the quarter, we don’t see as being that significant with Omicron. I think everyone expects the peak [of Omicron] here in January. And we have no reason to believe that won’t be the case. We believe and we hope we won’t see a significant impact in the first quarter into the spring season. And we’ll see how that plays out. Nothing we can control, but we’ll just kind of keep tabs on what we’re seeing in our own business.
“We don’t see any reason to believe that we’ll have serious disruption to our store hours or have significant store closings because of the spike,” he added. “We’re just navigating it week to week.”
In fact, Mathias said the retailer will continue to open more Aerie and Offline locations in the near term, while optimizing the American Eagle real estate fleet. An ideal store count, he said, would be between 600 and 700 American Eagle stores in North America and a combined 500 Aerie stores, adding that leases for some AE locations, many of which were previously slated to close, are being renegotiated thanks to a return to stores in 2021.
“Right now that flexibility is key for us and we’re seeing great results out of our stores, so there’s no reason for us to be more aggressive than we already are around closing,” Mathias said.
“As we head into fiscal year 2022, these [logistics] businesses that we’re acquiring, we believe they could be somewhat significantly additive to both revenue and income for the company,” he added. “These targets [that the company is setting today] for 2023 don’t compensate for that yet. The income benefits we’ve seen, in terms of how we’re managing inventory and delivery costs and supply chain costs, this node network that we partnered with Quiet [Logistics] on over the last year, year and a half, we’ve seen benefits to our expenses, from inventory costs, our markdown costs, merchandise margin benefit from this network, along with controlling delivery and supply chain costs. We continue to leverage and seek continued improvement going forward. The initial reason for the acquisition was to lock down those benefits for our business. But then we also see upside and opportunity in terms of just revenue and income from these logistics businesses that will be additive to our consolidated results go forward.”
Shares of American Eagle Outfitters, which closed up 2.6 percent Monday to $24.12, are up 3.5 percent, year-over-year.