American Eagle Continues Focus on Product, Stores for Second Half

The company posted its 10th consecutive quarter of comps gains.

Shares of American Eagle Outfitters Inc. climbed on Wednesday following the company’s report on second-quarter profits.

For the past few quarters, the retailer has focused on improving product for its American Eagle and Aerie brands, as well as thinking about its store base.

Jay Schottenstein, chief executive officer, told Wall Street analysts on a conference call that the firm has prioritized digital marketing, which has been effective in attracting new customers and noted that in a few weeks the company will introduce a new rewards program. He also said the store base is “strong and highly profitable,” adding that the “focus is on finding the right balance between stores and digital on a market-by-market basis.”

AEO has made progress on lease negotiations and over the past two years, the retailer has “renegotiated or negotiated over 350 lease renewals,” and on average has secured an average rent reduction of 8 percent, Schottenstein said. About half, or 530 leases, are set to expire over the next three years, with 215 expiring this year.

Fiscal year 2017’s capital expenditures are still expected in the range of $160 million to $170 million, with half of that spend slated for store remodeling projects and store openings. The company opened nine Aerie stores, with seven in new markets. It also opened six American Eagle stores, with two in Mexico and four in the U.S. Further, there were nine international licensed stores opened and three that were closed. For the second half, the company plans to open another five American Eagle stores and five Aerie stores in the U.S., Canada and Mexico, along with 32 international licensed stores. It said the company is on track to close a total of 25 to 40 stores this year.

For the quarter ended July 29, the teen retailer saw a 48.9 percent drop in net income to $21.2 million, or 12 cents a diluted share, on a net revenue gain of 2.7 percent to $844.6 million. Comparable-store sales rose 2 percent on top of a 3 percent gain last year. Excluding restructuring charges, adjusted EPS was 19 cents a share. Wall Street was expecting EPS of 16 cents on revenues of $824 million.

Investors were pleased, sending shares of American Eagle up 7.7 percent to close at $12.07.

Schottenstein said during the call, “As we move forward, we are highly focused on opportunities to engage our customers, drive stronger demand and improve profit flow-through. Our e-commerce business was a positive standout once again, as we registered our 10 quarters in a row of double-digit sales growth.”

The ceo noted that the retailer’s web business now represents 23 percent of total revenue, and said that the growth at the Aerie intimates brand gives it the momentum to become a “billion-dollar brand over the next few years.”

Charles Kessler, global brand president for American Eagle, said the brand made progress as it saw strong demand across all of its bottoms categories. American Eagle jeans “performed extremely well where we saw record sales and margins again this quarter,” he said, noting that demand strengthened during June and July. Women’s apparel saw positive midsingle-digit comps with strength across most categories, he said, adding that the design team updated fits, washes and other detail. After several quarters of weak performance, Kessler said men’s apparel showed improvement, particularly in bottoms and there was a “good turnaround in tops.”

The goal for the brand is to have American Eagle be “synonymous with jeans and be the number-one jeans brand,” said Kessler. He saw upside for the category: “Although we are well-positioned today, we see significant opportunity for additional growth. For example, fewer than 40 percent of our transactions during the back-to-school time period currently included jeans. We see this as a meaningful upside.”

Jennifer Foyle, global brand president for Aerie, said the brand “achieved double-digit sales growth for 14 consecutive quarters. This quarter we achieved a 26 percent comparable-sales increase building on a 24 percent increase last year.” She also said that “nearly 40 percent” of sales are through its digital channel. The brand is eyeing 300 stores in total, and the company prefers the side-by-side approach where Aerie is adjacent to an American Eagle store.

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