AMERICAN EAGLE OUTFITTERS, INC.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand the
Company, our operations and our present business environment. MD&A is provided
as a supplement to - and should be read in conjunction with - our MD&A for
Fiscal 2021 which can be found in our Fiscal 2021 Form 10-K.
In addition, the following discussion and analysis of financial condition and
results of operations are based upon our Consolidated Financial Statements and
should be read in conjunction with these statements and notes thereto.
Introduction
This MD&A is organized as follows:
Executive Overview General description of the Company's business
and certain segment information.
Key Performance Indicators Overview of key performance indicators reviewed
by management to gauge the Company's results.
Current Trends and Outlook Discussion related to the COVID-19 pandemic's
impact on the Company's business, recent
acquisitions and the Company's long-term plans
for growth. In addition, this section also
provides a summary of the Company's performance
over the 13 weeks ended April 30, 2022 and the
13 weeks ended May 1, 2021 .
Results of Operations Provides an analysis of certain components of
the Company's Consolidated Statements of
Operations for the 13 weeks ended April 30, 2022
and the 13 weeks ended May 1, 2021 .
Liquidity and Capital Resources Discussion of the Company's financial condition
and changes in financial condition and liquidity
for the 13 weeks ended April 30, 2022 and the 13
weeks ended May 1, 2021 .
Critical Accounting Policies Discusses where information may be found about
and Estimates accounting policies and estimates considered to
be important to the Company's results of
operations and financial condition, which
typically require significant judgment and
estimation on the part of the Company's
management in their application.
Recent accounting pronouncements the Company has adopted or is currently
evaluating prior to adoption, including the dates of adoption or expected dates
of adoption, as applicable, and anticipated effects on the Company's audited
Consolidated Financial Statements, are included in Note 2. "Summary of
Significant Accounting Policies" of the notes to the Consolidated Financial
Statements included herein.
Executive Overview
We are a leading global specialty retailer offering high-quality, on-trend clothing, accessories and personal care products at affordable prices under our American Eagle®, Aerie® and other brands.
We have two reportable segments, American Eagle and Aerie. Our Chief Operating Decision Maker (defined as our CEO) analyzes segment results and allocates resources based on operating income (loss). See Note 12. "Segment Reporting," of the notes to the Consolidated Financial Statements included herein for additional information.
Key Performance Indicators
Our management evaluates the following items, which are considered key performance indicators, in assessing our performance:
Comparable sales - Comparable sales and comparable sales changes provide a measure of sales growth for stores and channels open at least one year over the comparable prior year period. In fiscal years following those with 53 weeks, the prior year period is shifted by one week to compare similar calendar weeks. A store is included in comparable sales in the thirteenth month of operation. However, stores that have a gross square footage change of 25% or greater due to a remodel are removed from the comparable sales base, but are included in total sales. These stores are returned to the comparable sales base in the thirteenth month following the remodel. Sales from American Eagle, Aerie,Todd Snyder , and Unsubscribed stores, as well as sales from AEO Direct and other digital channels, are included in total comparable sales. 25 --------------------------------------------------------------------------------
Sales from licensed stores are not included in comparable sales. Individual American Eagle and Aerie brand comparable sales disclosures represent sales from stores and AEO Direct.
Omni-channel Sales Performance - Our management utilizes the following quality of sales metrics in evaluating our omni-channel sales performance: comparable sales, average unit retail price, total transactions, units per transaction, and consolidated comparable traffic. We include these metrics in our discussion within this MD&A when we believe they enhance the understanding of the matter being discussed. Investors may find them useful as such. Each of these metrics is defined as follows (except comparable sales, which is defined separately above):
•
Average unit retail price represents the selling price of our goods. It is the cumulative net sales divided by the net units sold for a period of time.
•
Total transactions represents the count of customer transactions over a period of time (inclusive of Company-owned stores and AEO Direct, unless specified otherwise).
•
Units per transaction represents the number of units sold divided by total transactions over a period of time (inclusive of Company-owned stores and AEO Direct, unless specified otherwise).
•
Consolidated comparable traffic represents visits to our Company-owned stores, limited to those stores that qualify to be included in comparable sales as defined above, including AEO Direct, over a period of time.
Gross profit - Gross profit measures whether we are optimizing the profitability of our sales. Gross profit is the difference between total net revenue and cost of sales. Cost of sales consists of merchandise costs, including design, sourcing, importing, and inbound freight costs, as well as markdowns, shrinkage and certain promotional costs and buying, occupancy and warehousing costs and services. Design costs consist of compensation, rent, depreciation, travel, supplies, and samples. Buying, occupancy and warehousing costs and services consist of: compensation, employee benefit expenses and travel for our buyers and certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operations.
The inability to obtain acceptable levels of sales, initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross consolidated profit and results of operations.
Operating income - Our management views operating income as a key indicator of our performance. The key drivers of operating income are net revenue, gross profit, our ability to control SG&A expenses, and our level of capital expenditures for a reasonable period of time.
Cash flow and liquidity - Our management evaluates cash flow from operations and investing and financing activities in determining the sufficiency of our cash position and capital allocation strategies. Cash flow has historically been sufficient to cover our uses of cash. Our management believes that cash flow will be sufficient to fund anticipated capital expenditures, dividends, and working capital requirements for the next twelve months and beyond.
Current Trends and Outlook
COVID-19
The ongoing COVID-19 pandemic remains highly volatile and continues to evolve on a daily basis, and we continue to see disruptions and volatility in our business caused by the COVID-19 pandemic. The unpredictability of the trajectory of the COVID-19 pandemic has significantly diminished visibility into the future operating environment, and we believe that the Company may continue to experience degrees of volatility and business disruptions and remain at risk for periods of closure of our stores, distribution centers, and corporate facilities. While trends in new cases of COVID-19 inthe United States improved during the first quarter of Fiscal 2022 compared to the final quarter of Fiscal 2021, caseloads have been increasing recently in many parts of the country and we cannot reasonably estimate the extent to which our business will continue to be affected by the COVID-19 pandemic. Past and future impacts of the COVID-19 pandemic also have the ability to disrupt the operations of our partners, suppliers, and vendors, which could lead to or exacerbate existing supply chain disruptions, shipping delays, and freight cost increases. We are monitoring ongoing developments, and we will take further actions that we believe are in the best interests of our associates and customers, as needed. For further information about the risks associated with the COVID-19 pandemic, see "Risk Factors" in Part I, Item 1A of our Fiscal 2021 Form 10-K. 26 --------------------------------------------------------------------------------
Quiet Logistics Acquisition and Supply Chain Platform
OnDecember 29, 2021 , the Company completed the acquisition of Quiet Logistics. With this acquisition, the Company expects to be able to execute on operational efficiencies to create a supply chain platform with significant long-term growth potential.
Omni-Channel and Digital Capabilities
We sell merchandise through our digital channels, www.ae.com, www.aerie.com, www.toddsnyder.com, www.unsubscribed.com, and our AEO apps, both domestically and internationally in 81 countries. We also sell merchandise on various international online marketplaces. The digital channels reinforce each particular brand platform and are designed to complement the in-store experience. Over the past several years, we have invested in building our technologies and digital capabilities. We focused our investments in three key areas: making significant advances in mobile technology, investing in digital marketing and improving the digital customer experience.
Results of Operations
Overview
Our first quarter of Fiscal 2022 proved to be challenging due to a tough macro
environment. Comparisons from an extraordinary Spring last year driven by
stimulus payments and pent-up customer demand, were compounded by rising
inflation, higher gas prices and a stronger than anticipated pivot to other
discretionary categories. Despite these near-term challenges, our brands remain
strong with performance continuing to reflect structural improvements compared
to pre-pandemic 2019.
The following table shows the percentage relationship to total net revenue of
the listed line items included in our Consolidated Statements of Operations:
13 Weeks Ended
April 30, May 1,
2022 2021
Total net revenue 100.0 % 100.0 %
Cost of sales, including certain buying, occupancy
and warehousing expenses 63.2 57.8
Gross profit 36.8
42.2
Selling, general and administrative expenses 28.3
25.6
Depreciation and amortization expense 4.5 3.7 Operating income 4.0 12.9 Interest expense, net 0.4 0.8 Other income, net (0.4 ) (0.2 ) Income before income taxes 4.0 12.3 Provision for income taxes 1.0 3.1 Net income 3.0 % 9.2 %
The following table shows our consolidated store data:
13 Weeks Ended
April 30, May 1,
2022 2021
Number of stores:
Beginning of period 1,133 1,078
Opened 19 11
Closed (11 ) (15 )
End of period 1,141 1,074Total gross square feet at end of period (in '000) 6,975 6,816 International licensed/franchise stores at end of
period (1) 258 236 (1)
International licensed/franchise stores are not included in the consolidated store data or the total gross square feet calculation.
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As of April 30, 2022 , we operated 878 American Eagle retail stores, which
include 186 Aerie side-by-side locations and two OFFLINE™ side-by-side
locations, 254 Aerie stand-alone stores (including 19 OFFLINE™ stand-alone
stores and 18 OFFLINE™ side-by-side locations), and AEO Direct. Additionally,
there were five Todd Snyder stand-alone locations and four Unsubscribed
locations.
Comparison of the 13 weeks ended
Total Net Revenue
Total net revenue increased 2%, or
AmericanEagle Total net revenue for the 13 weeks endedApril 30, 2022 for the American Eagle brand was$685.6 million compared to$727.7 million for the 13 weeks endedMay 1, 2021 . Aerie
Total net revenue for the 13 weeks ended
Gross Profit
Gross profit decreased$48.2 million , to$388.0 million compared to$436.2 million last year. Our gross margin percentage decreased to 36.8% of revenue from 42.2% of revenue last year. Higher freight costs impacted the gross margin by approximately 340 basis points and our Supply Chain Platform had a 120 basis point impact as we integrate and ramp up the business. Delivery and rent costs also increased, offset slightly by lower incentive compensation.
There was
Our gross profit may not be comparable to that of other retailers, as some retailers include all costs related to their distribution network as well as design costs in cost of sales and others may exclude a portion of these costs from cost of sales, including them in a line item such as SG&A expenses. Refer to Note 2 to the Consolidated Financial Statements for a description of our accounting policy regarding cost of sales, including certain buying, occupancy and warehousing expenses.
Selling, General and Administrative Expenses
SG&A expenses increased 13% or$34.3 million to$298.8 million from$264.5 million last year. As a percentage of total net revenue, SG&A expenses increased 270 basis points to 28.3%, compared to 25.6% last year. The increase in expenses was primarily related to increased store wages and hours and corporate compensation, professional services and advertising, partially offset by lower incentive compensation accruals.
There was
Depreciation and Amortization Expense
Depreciation and amortization expense increased 24% or$9.1 million , to$47.4 million for the 13 weeks endedApril 30, 2022 , compared to$38.3 million for the 13 weeks endedMay 1, 2021 , which was primarily driven by increased capital spending and the recent acquisition of our Supply Chain Platform. As a percentage of total net revenue, depreciation and amortization expense was 4.5% for the 13 weeks endedApril 30, 2022 compared to 3.7% for the 13 weeks endedMay 1, 2021 . Interest Expense, net Interest expense decreased$3.9 million , to$4.6 million , for the 13 weeks endedApril 30, 2022 , compared to$8.5 million for the 13 weeks endedMay 1, 2021 . The decrease in expense was primarily attributable to the adoption of ASU 2020-06 which reduced non-cash interest expense related to amortization of the non-cash discount on our 2025 Notes. 28 --------------------------------------------------------------------------------
Other Income, net
Other income, net was$4.4 million for the 13 weeks endedApril 30, 2022 , compared to$1.9 million for the 13 weeks endedMay 1, 2021 . The increase was primarily attributable to foreign currency fluctuations and changes in other non-operating items. Provision for Income Taxes The provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The effective income tax rate for the 13 weeks endedApril 30, 2022 was 24.0% compared to 24.7% for the 13 weeks endedMay 1, 2021 . The change in the effective tax rate, as compared to the prior period, is primarily due to the decrease in nondeductible executive compensation offset by lower excess tax benefits on share-based payments.
Net Income
Net income decreased$63.7 million , to$31.7 million for the 13 weeks endedApril 30, 2022 , or 3.0% as a percentage of total net revenue, compared to$95.5 million , or 9.2% as a percentage of total net revenue for the 13 weeks endedMay 1, 2021 . Net income per share decreased to$0.16 per diluted share for the 13 weeks endedApril 30, 2022 , compared to$0.46 per diluted share, including$0.02 of the amortization of the non-cash discount on the 2025 Notes for the 13 weeks endedMay 1, 2021 . The change in net income was attributable to the factors noted above.
International Operations
We have agreements with multiple third-party operators to expand our brands internationally. Our international licensing partners acquire the right to sell, promote, market, and/or distribute various categories of our products in a given geographic area and to source products from us. International licensees' rights include the right to own and operate retail stores and may include rights to sell in wholesale markets, shop-in-shop concessions and operate online marketplace businesses. As ofApril 30, 2022 , our international licensing partners operated in 258 licensed retail stores and concessions, as well as wholesale markets, online brand sites, and online marketplaces in 25 countries.
As of
Liquidity and Capital Resources
Our uses of cash have historically been for working capital, the construction of new stores and remodeling of existing stores, information technology and e-commerce upgrades and investments, distribution center improvements and expansion, and the return of value to shareholders through the repurchase of common stock and the payment of dividends. Additionally, our uses of cash have included the development of the Aerie brand, investments in technology and omni-channel capabilities, and our international expansion efforts. Historically, our uses of cash have been funded with cash flow from operations and existing cash on hand. We also maintain Credit Facilities that allow us to borrow up to$400 million , which will expire inJanuary 2024 . InApril 2020 , the Company issued$415 million aggregate principal amount of convertible notes due in 2025 in a private placement to qualified institutional buyers. Interest is payable semi-annually. Refer to Note 8 to the Consolidated Financial Statements for additional information regarding our long-term debt.
As of
The following sets forth certain measures of our liquidity:
April 30, January 29, May 1,
2022 2022 2021
Working Capital (in thousands)
1.74 1.66 2.01
Working capital decreased $10.9 million compared to January 29, 2022 and
decreased $208.2 million compared to last year. The $208.2 million decrease in
our working capital compared to May 1, 2021 , is driven by a $562.9 million
decrease in cash and short-term investments primarily related to the acquisition
of our Supply Chain Platform in Fiscal 2021 totaling $358.1 million , partially
offset by a $215.4 million increase in inventory, a $81.4 million increase in
net accounts receivable, and a $53.0 million decrease in accrued compensation.
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--------------------------------------------------------------------------------Cash Flows (Used for) Provided by Operating Activities
Net cash used for operating activities totaled$108.2 million for the 13 weeks endedApril 30, 2022 , compared to net cash provided by operating activities of$0.4 million for the 13 weeks endedMay 1, 2021 . For both periods, our major source of cash from operations was merchandise sales and our primary outflow of cash from operations was for the payment of operational costs.
Cash Flows Used for Investing Activities
Net cash used for investing activities totaled$58.7 million for the 13 weeks endedApril 30, 2022 , compared to net cash used for investing activities of$112.2 million for the 13 weeks endedMay 1, 2021 . Investing activities for the 13 weeks endedApril 30, 2022 primarily consisted of$58.4 million of capital expenditures for property and equipment. Investing activities for the 13 weeks endedMay 1, 2021 primarily consisted of$75.0 million of short-term investment purchases and$36.8 million of capital expenditures for property and equipment.
Cash Flows Used for Financing Activities
Net cash used for financing activities totaled$38.4 million for the 13 weeks endedApril 30, 2022 , compared to net cash used for financing activities of$22.1 million for the 13 weeks endedMay 1, 2021 . Cash used for financing activities for the 13 weeks endedApril 30, 2022 consisted primarily of$30.4 million for cash dividends paid at a quarterly rate of$0.18 and$8.2 million for the repurchase of common stock from employees for the payment of taxes in connection with vesting of share-based payments. Cash used for financing activities for the 13 weeks endedMay 1, 2021 consisted primarily of$22.9 million for cash dividends paid at a quarterly rate of$0.1375 and$10.9 million for the repurchase of common stock from employees for the payment of taxes in connection with vesting of share-based payments, partially offset by$12.1 million of proceeds from stock option exercises.
Credit Facilities
InJanuary 2019 , we entered into a Credit Agreement for five-year, syndicated, asset-based revolving Credit Facilities. The Credit Agreement provides senior secured revolving credit for loans and letters of credit up to$400 million , subject to customary borrowing base limitations. The Credit Facilities provide increased financial flexibility and will expireJanuary 30, 2024 . All obligations under the Credit Facilities are unconditionally guaranteed by certain subsidiaries. The obligations under the Credit Agreement are secured by a first-priority security interest in certain working capital assets of the borrowers and guarantors, consisting primarily of cash, receivables, inventory, and certain other assets and have been further secured by first-priority mortgages on certain real property. As ofApril 30, 2022 , the Company was in compliance with the terms of the Credit Agreement and had$7.9 million outstanding in stand-by letters of credit. No loans were outstanding under the Credit Agreement as ofApril 30, 2022 andMay 1, 2021 .
Capital Expenditures for Property and Equipment
Capital expenditures for the 13 weeks endedApril 30, 2022 were$58.4 million , and included$44.0 million related to investments in our stores, including 19 new stores (7 American Eagle stores and 12 Aerie stand-alone stores), and fixtures and visual investments. Additionally, we continued to support our infrastructure growth by investing in information technology initiatives ($12.5 million ) and our Supply Chain Platform ($1.0 million ). For Fiscal 2022, we expect capital expenditures to be approximately$275 million related to the continued support of our expansion efforts, stores, information technology upgrades to support growth, and investments in e-commerce, as well as to support and enhance our supply chain. We expect to be able to fund our capital expenditures through current cash holdings and cash generated from operations.
Stock Repurchases
During Fiscal 2019, our Board of Directors ("Board") authorized the repurchase
of 30.0 million shares under a share repurchase program. During the 13 weeks
ended April 30, 2022 , we did not repurchase any shares under our
publicly-announced share repurchase program. As of April 30, 2022 , our total
remaining share repurchase authorization was 30.0 million shares.
30
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During the 13 weeks ended
The aforementioned repurchased shares have been recorded as treasury stock.
Dividends
During the 13 weeks ended
The Company maintains the right to defer the record and payment dates of its dividends, depending upon, among other factors, the progression of the COVID-19 outbreak, business performance, and the macroeconomic environment. The payment of future dividends is at the discretion of our Board and is based on future earnings, cash flow, financial condition, capital requirements, changes inU.S. taxation, and other relevant factors.
Critical Accounting Estimates
Our critical accounting policies and estimates are described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our Consolidated Financial Statements for the year endedJanuary 29, 2022 contained in our Fiscal 2021 Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of our critical accounting policies and estimates may require our management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Our management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.
Fair Value Measurements
ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date.
Financial Instruments
Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. In addition, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
•
Level 1 - Quoted prices in active markets.
•
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly.
•
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
As of
In accordance with ASC 820, the following table represents the fair value
hierarchy of our financial assets (cash equivalents) measured at fair value on a
recurring basis as of
Fair Value
Measurements at
Quoted Market
Prices
in Active
Markets for
Identical Significant Other Significant
Assets Observable Inputs Unobservable Inputs
(In thousands) Carrying Amount (Level 1) (Level 2) (Level 3)
Cash and cash equivalents:
Cash $ 145,173 $ 145,173 $ - $ -
Interest bearing deposits 83,602 83,602 - -
Total cash and cash equivalents
$ - $ -
31--------------------------------------------------------------------------------
Long-Term Debt
The fair value of the 2025 Notes is not required to be measured at fair value on a recurring basis. Upon issuance, the fair value of the 2025 Notes was measured using two approaches that consider market related conditions, including market benchmark rates and a secondary market quoted price, and is therefore within Level 2 of the fair value hierarchy.
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