Shares of American Eagle Outfitters Inc. fell 3.3 percent following the retailer’s report of second-quarter results that beat Wall Street’s estimates.
For the three months ended July 30, net income rose 25 percent to $41.6 million, or 23 cents a diluted share, from $33.3 million, or 17 cents, a year ago. Net revenue rose 3.2 percent to $822.6 million from $797.4 million. The company said consolidated comparable sales rose 3 percent on top of an 11 percent increase last year.
Wall Street was expecting EPS of 21 cents on revenues of $820.2 million.
The company said the quarter’s results were driven by “improved merchandise margin due to lower cost and higher realized selling prices,” adding that this was “partially offset by increased delivery expense related to growth in digital sales.”
For the six months, net income rose 31.7 percent to $82.1 million on a 5 percent gain in revenue to $1.57 billion.
Jay Schottenstein, chief executive officer, said on a conference call to Wall Street analysts that the results “marked the eighth consecutive quarter of profit improvement.” He told analysts that the company’s goal has been to position its brands for the new retail environment, one that “involves broader competition and the ways in which our customer interacts and shops. We believe that we are now out ahead of this profound transformation in our industry and we attempt to stay there.”
The ceo was confident about the retailer’s positioning, adding that the company has been working strategically in lifting brand equity by “raising the bar on merchandise innovation and strengthening our customer focus. I also believe we made good investment to support best-in-class technologies and capabilities. We will continue to invest, innovate and lead.”
Schottenstein noted that technologies, such as stretch fabrics that are in bottoms, are showing up in the chain’s tops as well. “Our focus on product and brand also dovetails with improved speed to market in disciplined inventory management,” he said. Further, its online business through mobile has been strong, with the multichannel shopper consistently spending more than s single-channel shopper, he said.
For the 2016 third quarter, the company expects EPS at between 40 cents to 41 cents, based on an expected low-single-digit increase in comparable sales. That compares with EPS of 35 cents last year.
The company opened five stores and closed seven in the quarter. Internationally, it opened 13 licensed stores. It also ended the quarter with total cash of $248 million, compared with $327 a year ago. In the past year, it invested $227 million in share buybacks and returned $94 million in dividends and invested $135 million in capital expenditures, which resulted in the lower cash balance.
Charles Kessler, American Eagle Outfitters’ global brand president, said on the call that brand comps rose 1 percent for the quarter. “Across the brand, we achieved higher selling prices and [an] increase [in] transaction size….Women’s posted a positive midsingle-digit comp, with strength across most categories….Demand for men’s was not as strong, with comps down in the low single digits.
In an interview, Kessler said the guidance to low-single-digit comp for the third quarter is in line with the initial read going into the period. He said there’s been “strong initial reaction to back-to-school.” Kessler noted innovation that the company has brought to denim across the men’s and women’s pants categories.
As for the stretch component in the denim fabrication, he said most firms have provided two-way stretch, and American Eagle’s new tech fabrication, called Denim X, has a special yarn that provides stretch and doesn’t bag out. “Denim X looks good from the minute you put it on. We are providing the customer with fantastic wear and exceptional comfort.”
The men’s styling trend has a slimmer fit than in the past, while women’s fit is driven by a skinnier leg. The company is also taking the technology in denim and using it for other bottoms’ fabrications, Kessler said. The company is improving its overall fit technology, using the learnings from its denim collection for other bottoms that it sells. Just this month, the company incorporated four-way stretch to its men’s chino offerings. In women’s, the technology is being used in “twills, sateens and other fabrics going forward,” said the global brand president.
Kessler also said of the premium technology: “There’s no one else using this technology at the price point we offer.” He explained that while others discuss the idea of improving their jeans with stretch, American Eagle buys the fabrication in bulk, and then is able to pass along the savings to the consumer, giving them better price points than the chain’s competitors.
While the men’s bottoms business did well in the quarter, its men’s tops business was weaker, but Kessler said the new fleece tops being offered have “seen great consumer response.”
Jennifer Foyle, Aerie’s global brand president, said in the telephone interview that the company is incorporating more technology in the new sports and yoga line that will be available this fall.
“It’s really more than just yoga. We have an offering of bottoms [for] chilling. It’s the lounge part of the line for hanging out. We have leggings and tops that have developed into the play category. There’s more compression, and more technology. Once she gets into [more] movement for workout gear, there’s high-compression technology,” Foyle said.
Aerie’s brand president said the company is planning on expanding the technology used in bras as well. The most technical line is its Sunnie Collection, which features 360-degree stretch in its bras. A comparable fabrication is used for its Sunnie Undies offering.
In the quarter, the Aerie brand saw strength in most categories, including intimates, swim, accessories and apparel. The company plans to open 55 Aerie stores over the next 18 months, in a combination of freestanding sites and side-by-side stores next to its core American Eagle branded site.
American Eagle has separate merchandise offerings for b-t-s and for fall. Kessler said the floor sets will update over the Labor Day weekend, with traditional fall product such as sweaters and long-sleeve items — a move that helps earlier deliveries and later ones to better match with the buy-now, wear-now mindset. New items are introduced each month, he said, with the fourth-quarter floor set scheduled for the beginning of November; Aerie floor set will be introduced to stores just slightly ahead of its sportswear-focused sibling, Foyle said.
RBC Capital Markets’ Brian Tunick said the chain’s solid results highlight the company’s “ongoing share gains on the mall.” He added that, “We are particularly impressed by the results given [last year’s] tough 11 percent comp compare.”
Jefferies’ Randal J. Konic said the results show “continued healthy momentum,” adding that the stock decline in the morning was the result of high expectations, which he said also represented a good buying opportunity.
Shares of American Eagle on Wednesday closed at $18.33 in trading on the Big Board. Investors weren’t happy with third-quarter guidance, just a 3 percent comp gain in the quarter ended and the projected low-single-digit comp increase for the third quarter. Over 17.1 million shares changed hands, compared with an average three-month trading volume of nearly 4.9 million shares.