Teen clothing retailer American Eagle Outfitters, Inc. (AEO) reported Tuesday a 39% year-over-year surge in profit for the third quarter, helped by a tax benefit as well as absence of an impairment charge this year. However, non-GAAP earnings per share for the quarter dropped 30%, but came in line with analysts' expectations. Quarterly net sales declined 1%, but topped consensus estimate by a whisker.
The company also noted that it is poised for a continued recovery in 2010 as it drives forward with creativity, vision and discipline, and said it would provide earnings guidance for the fourth quarter along with its November monthly sales results.
In a statement, chief executive officer, Jim O'Donnell said, "Although earnings results remain below our standards, American Eagle Outfitters continued to gain ground during the third quarter. The AE brand showed improvement across key merchandise categories. Additionally, aerie and Martin+Osa achieved strong top line growth."
Third Quarter Results
The Pittsburgh, Pennsylvania-based retailer reported net income of $59.16 million or $0.28 per share for the third quarter, up from $42.60 million or $0.21 per share in the prior-year quarter.
The results for the latest quarter include a tax benefit of $0.07 per share associated with the repatriation of earnings from Canada, while the year-ago quarter results included $0.09 per share of other-than-temporary impairment charge related to auction rate securities.
Excluding the special items, non-GAAP earnings for the quarter dropped 30% to $0.21 per share from the year-ago quarter's $0.30 per share. On average, 32 analysts polled by Thomson Reuters expected the company to report earnings of $0.21 per share for the third quarter. Analysts' estimates typically exclude special items.
Total net sales for the quarter declined 1% to $748.96 million from $754.04 million in the same quarter last year, but topped twenty nine Wall Street analysts' consensus estimate of $748.32 million by a whisker.
Comparable store sales decreased 4% for the quarter, compared to a 7% decline last year. Meanwhile, during the first three weeks of November, consolidated comparable store sales declined 5%.
The recession has had a negative impact on many retailers due to reduced customer spending. In October, American Eagle's total sales was down 5% to $195.1 million, while in September sales rose 7% to $246.0 million from last year. In August, sales decreased 4% to $307.7 million. Meanwhile, comparable-store sales for the month of October dropped 5%, September comparable store sales were flat, and August comparable store sales decreased 7%.
Peer Performance
Among American Eagle's peers, San Francisco, California-based specialty retailer Gap, Inc. (GPS) reported last week that its third quarter profit increased 25% from last year, driven by higher margins and improved sales at Old Navy stores. Net earnings rose to $307 million or $0.44 per share from $246 million or $0.35 per share in the prior-year quarter. Quarterly net sales increased 1% to $3.59 billion from $3.56 billion last year.
Another peer, New Albany, Ohio-based teen apparel retailer Abercrombie & Fitch Co. (ANF) reported earlier in the month a decline in profit for the third quarter, hurt by sharp decline in comparable store sales, despite a one-time benefit. Net income dropped to $38.78 million or $0.44 per share from $63.90 million or $0.72 per share in the year-ago quarter. Quarterly net sales for the quarter decreased 15% to $765.40 million from $896.34 million last year.
Other Metrics
Sales for AEO Direct, which includes ae.com, aerie.com, martinandosa.com, and 77kids.com, for the third quarter increased 10%, driven primarily by increased traffic, and higher conversion.
Operating income for the third quarter dropped to $70.30 million or 9.4% of net sales, from $94.88 million or 12.6% of net sales, in the prior-year quarter.
Gross profit for the quarter was $300.13 million or 40.1% of net sales, down from $309.41 million, or 41.0% of net sales, in the year-ago quarter, due to higher rent as a percent to sales, reflecting new store growth and the negative comparable store sales.
Selling, general and administrative expenses grew to $193.27 million or 25.8% of net sales, from $181.72 million or 24.1% of net sales, in the prior-year quarter. Provision for income taxes were $10.70 million, lower than $36.85 million in the same quarter last year. The year-ago quarter reported other-than-temporary impairment charge of $19.89 million.
Capital expenditures for the quarter were $33 million, compared to $69 million in the year-ago quarter. The company ended the third quarter with cash and cash equivalents of $512.60 million, compared to $332.84 million at end of the prior-year quarter.
Total merchandise inventory at the end of the third quarter grew 1% to $425 million from $422 million at the end of the year-ago quarter, as a result of new stores and the growth in AEO Direct. Inventory related to retail stores at cost per foot decreased 3%.
During the third quarter, American Eagle opened five aerie stores, closed two AE stores, and completed the renovation of seven AE stores.
Nine Month Highlights
For the nine month period, American Eagle reported net income of $109.70 million or $0.53 per share, lower than $146.33 million or $0.70 per share in the prior-year period.
Net sales for the year-to-date period edged down to $2.02 billion from $2.08 billion in the same period last year.
Outlook
"We are focused on building upon our successes and maintaining momentum across all brands. Our strong emphasis on offering superior value and quality at affordable prices will enable us to compete effectively and gain market share. I am confident that we are poised for a continued recovery in 2010 as we drive forward with creativity, vision and discipline," O'Donnell added.
However, the company noted that due to the importance of Thanksgiving weekend, it would provide fourth quarter earnings guidance on along with its November sales announcement on December 3, 2009.
Meanwhile, the company said that it expects to close an additional 10 to 20 stores during the fourth quarter, and is planning to add about eight new and 25 remodeled AE stores, as well as 21 new aerie stores during the year.
The company also expects fiscal 2009 capital expenditures to be in a range of $120 million to $130 million.
Stock Quote
In Tuesday's regular trading session, AEO is currently trading at $15.27, up $0.73 or 5.02% on a volume of 6.03 million shares. In the past 52-week period, the stock has been trading in a broad range of $7.36 to $19.86.
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