American Eagle Faces More Headwinds (NYSE:AEO)

William Arsn

Source: Barron

Source: Barron’s

American Eagle Outfitters (AEO) reports earnings September 9th. Analysts expect revenue of $820.19 million and EPS of -$0.17. The revenue estimate implies a decline of over 20{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} Y/Y. Investors should focus on the following key items.

Declining Revenue

Retailers that depend on sales through physical locations have had a tough time of it during the pandemic. American Eagle Outfitters was one of the few retailers that generated consistent revenue growth prior to the pandemic. The company was forced to temporarily close stores to stem the spread of the pandemic, which caused sales to free fall. Last quarter, American Eagle generated revenue of $552 million, down 38{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} Y/Y. Revenue from the American Eagle brand and Aerie brand fell 45{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} and 2{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05}, respectively. Total brand demand for Aerie – total digital sales plus store revenue – actually rose in the double-digit percentage range. The brand promotes body positivity and empowerment and has been a hit with women. Aerie could potentially drive outsized growth for American Eagle after the economy fully reopens.

The company’s digital platform generated about 30{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} of the company’s annual revenue last year. Last quarter, the digital platform experienced a surge in demand:

Thanks to their efforts throughout this crisis, fulfillment remained operational as online demand surged. Digital traffic, conversion, and transactions rose significantly over last year. Online orders accelerated throughout the quarter, with April the strongest month. This momentum has continued into May, even in markets where we have re-opened stores.

The strength of our brands and product offerings has been clearly evident. In the quarter, AEOs online demand was 33{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05}. After stores closed, demand accelerated to nearly 70{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} as new online customers more than doubled for both American Eagle and Aerie.

Some of this demand could help drive online sales this quarter. This could be an opportunity for American Eagle to distance itself from competitors with weak digital platforms.

Falling Margins

The decline in scale caused margins to crater last quarter. Gross margin was 5.1{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05}, down from 36.7{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} in the year earlier period. Store closures and liquidation of summer merchandise weighed. The liquidation made way for American Eagle to purchase merchandise for the upcoming school season. If back-to-school sales are not as robust as expected, then the discounting could continue. Gross profit was $28 million, down over 90{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} Y/Y. I expect gross margins to remain compressed until the revenue slide abates.

SG&A expense was $188 million, down 18{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} Y/Y. Compensation expense and store costs fell due to furloughs. I expect management to make more cuts to SG&A expenses over time. However, it may not be enough to keep EBITDA from declining. American Eagle incurred an EBITDA loss of $160 million, which was down from EBITDA of $94 million in the year earlier period. I expect the company to slowly cut losses this quarter and for the rest of 2020.

Strong Liquidity

In addition to its Aerie brand, American’s fortress balance sheet could be another competitive advantage. Some retailers have the liquidity to survive the weak economy and some do not. American Eagle has $886 million in cash and short-term securities and about $900 million in working capital. About $421 million of working capital is tied up in inventory, down from $446 million in February. It is imperative that the company pare inventory to drive cash flow this quarter.

Last quarter, American Eagle experienced a cash burn of $244 million. It suspended its quarterly dividend and raised new debt of over $600 million. These moves helped shore up liquidity. Its total debt load is now at 2.7x last twelve months’ (“LTM”) EBITDA. The debt could become a point of contention if EBITDA continues to decline. The company must improve its EBITDA or it could be limited in how much more debt it can take on. This is an important quarter for American Eagle to prove it can sustain itself without raising new capital.


AEO is up over 70{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} off its March lows. Until the company generates positive EBITDA growth, the stock remains a sell.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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