American Eagle Outfitters is the latest retailer to be plagued with rising supply chain costs, increased inventory and other inflationary pressures.
The firm — which includes the American Eagle, Aerie, Offline by Aerie, Unsubscribed, AE77 and Todd Snyder brands — revealed first-quarter earnings Thursday after the market closed, improving on top-line revenues, but falling short on bottom-line profits as a result of macro headwinds. The company subsequently revised its outlook, guiding down for both the current quarter and full year.
“The first quarter proved challenging, with demand well below our expectations, pressuring operating profit,” said Jay Schottenstein, AEO’s executive chairman of the board and chief executive officer. “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. In hindsight, our plans entering the year were too optimistic. We are taking swift measures to adjust our inventory and expense base with a firm goal of entering the second half better aligned with demand trends.”
Total revenues for the three-month period ending April 30 increased 2 percent, $20 million, to approximately $1.05 billion, compared with $1.03 billion the same time last year. The strength continued to lie in the Aerie brand, with revenues rising 8 percent to nearly $322 million, up from $297 million a year ago. Meanwhile, sales at the American Eagle brand fell 6 percent to $686 million, down from $728 million last year.
“There were definitely some adjustments that we had to make,” Jennifer Foyle, president and executive creative director of AE, Aerie and Unsubscribed, told WWD in an exclusive interview. “[AE] is a more mature business than Aerie and we have to approach it differently.” But she added that denim, in both men’s and women’s, continues to be one of the brand’s strongest categories.
Price gaps in demographics also played into results. As seen in some retail competitors’ quarterly reports, Foyle said AE and Aerie brands’ price-sensitive shoppers, many of whom skew younger and were recipients of last year’s stimulus checks, are perhaps the most cautious of inflationary pressures throughout the economy. Meanwhile, Todd Snyder’s and Unsubscribed’s older, slightly more affluent consumers were less likely to feel impacted, and therefore spend less, because of rising prices.
“Suiting is certainly working in Todd Snyder and dresses are working in Unsubscribed,” Foyle said. “Also experiences. We’re definitely seeing business where it is more about the experience: concerts and people being out. They want to see each other again.”
Case in point, consolidated store revenue increased 2 percent during the quarter, indicating consumers’ desire to return to in-person shopping, as well as shop online. Compared with 2019’s pre-pandemic first quarter, store revenues increased 1 percent, while digital revenue increased 48 percent.
Foyle added that weather served as both a headwind and tailwind, depending on the region.
“The weather was a little tough,” explained, referring to the unseasonably cold weather in the Midwest. “If we could just get some steady weather going, I think we’re going to be in good shape. I hate to blame business on weather, but we definitely saw some nice surprises in some of our regions, like the South. They had a very healthy business, in fact, as compared to last year.”
But macro headwinds loomed throughout the retail landscape. AEO credits some of its own to higher freight costs (roughly $35 million) and increased expenses throughout the supply chain, such as rising rent and delivery fees, for bottom-line income declines. There was also about $12 million in fees stemming from AEO’s acquisitions of two separate logistics firms — Quiet Logistics and Airterra — last fall; a 13 percent rise to $299 million in SG&A expenses during the recent quarter, and increased inventory costs, up 46 percent to $682 million, compared with $467 million last year. In addition, total inventory units were up 24 percent, year-over-year, split roughly the same between the AE and Aerie brands.
The company logged $31.7 million in profits, down from $95.4 million a year ago, as a result.
The company now expects current quarter revenues to trend similar to the first quarter with a gross margin rate of roughly 33 percent. The retailer also lowered its outlook for the year, now anticipating operating profit to be approximately $314 million, as achieved in fiscal year 2019, with total company revenues up in the low-single-digit range, as compared with fiscal year 2021.
“These times are certainly tough to navigate with all the unfortunate events that are happening with the war and certainly its unprecedented times,” Foyle said. “We’re going to get through this quarter and we’re going to do it prudently. And we’ve right-sided the business for the third and fourth quarters. The team has been quite nimble in tough times and it’s tough to be nimble when we’re chasing product and some of our old, best-practices are not easy in today’s climate.
“We’re going to strategically get through what we need to get through in the second quarter, as far as inventory is concerned and I like where we’re positioned,” she continued. “We’re not going to over promote if we don’t have to. We don’t want to set the bar [too high] to go up against for future years. We want to make sure where we’re promoting, we’re doing so strategically and then write off inventory that’s excess. That’s how we’re approaching the second quarter and setting ourselves up for the third quarter.”
Michael Rempell, executive vice president and chief operating officer at AEO, added: “We continue to drive efficiencies by using our innovative approach to delivery and fulfillment through the use of local distribution nodes, as part of [our] Quiet platforms. In the first quarter, we saw further reductions in our number of shipments per order and shipped our digital orders faster, with a 13 percent reduction in delivery times. We also are extending these benefits through our third-party Quiet Platforms business to customers through a shared supply chain services network.”
The logistics firm recently started working with Fanatics and Saks Off Fifth.
Meanwhile, AEO’s profit miss comes after a handful of retailer competitors — from Abercrombie & Fitch and Urban Outfitters to mass-channel merchants Target and Walmart — reported similar top-line earnings growth, but income declines because of inflationary pressures.
“The most important thing we can do is right-size our inventory to our sales expectations and that’s what we’ve been getting at in the third and fourth quarters,” Foyle said. “We’re really looking forward to 2023 and beyond. We feel excited and we’re not going to quit with innovation and product and leading that way. And always ensuring the quality. During these times, I feel like many retailers go for price and knee jerk a little bit. And that’s not what we’re here to do. We’re a brand in it for the long haul. And we’re going to continue to focus on our quality and our value equation.”
Schottenstein added: “Despite near-term challenges, our brands continue to reflect progress from pre-pandemic periods, grounded in our ‘Real Power. Real Growth’ strategy. Aerie remains on a remarkable trajectory with revenue more than doubling and profit expanding over five-fold, versus first quarter 2019. Greater focus in our assortment and real estate footprint at AE continue to drive efficiencies in the business. We are committed to maintaining and building on these structural improvements and right-setting the business to deliver improved profitability in the second half.”
The company ended the quarter with $229 million in cash and cash equivalents and $405 million in long-term debt.