American Eagle Outfitters Inc. CEO Discusses Q2 2010 Results - Earnings Call Transcript

American Eagle Outfitters Inc. (AEO)

Q2 2010 Earnings Call

August 25, 2010 9:00 a.m. ET

Executives

Judy Meehan - Investor Relations

James O'Donnell - Chief Executive Officer, President, and Executive Director

Roger Markfield - Vice Chairman and Executive Creative Director

Joan Hilson - Chief Financial Officer and Executive Vice President

Analysts

Jeff Klinefelter - Piper Jaffray

Christine Chen - Needham & Company, LLC

Jennifer Black - Jennifer Black & Associates

Janet Kloppenburg - JJK Research

Richard Jaffe - Stifel, Nicolaus & Co., Inc.

Evren Kopelman - Wells Fargo

Dorothy Lakner - Caris & Company

Randy Konik - Jefferies & Company

Robin Murchison - SunTrust Robinson Humphrey Capital Markets

Lorraine Hutchinson - Bank of America

Adrienne Tennant - Janney Montgomery Scott

Michelle Tan - Goldman Sachs

Laura Champine - Cowen and Company

Stacy Pak - SP Research

Marni Shapiro - The Retail Tracker

Robert Samuels - Phoenix Partners

Betty Chen - Wedbush Securities

David Glick - Buckingham Research

Dana Telsey - Telsey Advisory Group

Linda Tsai - MKM Partners

Tom Filandro - Susquehanna Financial Group

Presentation

Operator

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Welcome to the American Eagle Outfitters second quarter 2010 earnings conference call. [Operator Instructions] It is now my pleasure to introduce your host, Judy Meehan, Vice President of Investor Relations. Thank you, Ms. Meehan. You may begin.

Judy Meehan

Good morning everyone. Joining me today are Jim O'Donnell, chief executive officer; Roger Markfield, vice chairman and executive creative director; and Joan Hilson, executive vice president and chief financial officer. If you need a copy of our second quarter press release, it is available on our website, www.ae.com. Please note that we have included a real estate table in the press release, which presents second quarter, as well as annual, store activity.

Before we begin, I need to remind everyone that during this conference call, members of management will make certain forward-looking statements based upon information which represents the company's current expectations or beliefs. The results actually realized may differ materially from those expectations or beliefs based on risk factors included in our quarterly and annual reports filed with the SEC.

And now I'll turn the call over to Jim.

James O'Donnell

Thanks Judy, and good morning everyone. Let me start this morning with a brief overview of the second quarter. As we previously stated, we knew this would be a challenging period, and it was.

Our results for the period reflected a miss to our sales and profit plan. Based on a sales recovery in the fourth quarter of last year, which continued into the spring, we pursued a unit-intensive strategy in the AE brand. However, second quarter business trends weakened, resulting in deeper promotions to clear merchandise.

This effort was effective, and we entered the third quarter with inventories well positioned for back to school. Second quarter sales increased slightly, and EPS from continuing operations declined 28%, consistent with our recent expectations.

Now looking forward, although the macroeconomic environment remains somewhat unpredictable, we must position ourselves for sustainable long term growth. To that end, we've intensified our actions to improve efficiency from strengthened profitability.

The first step was the closure of Martin + Osa, which is now complete, enabling us to focus 100% on the AE family of brands. The next step is our profit improvement initiative, which I referenced on our last earnings call. This project is comprehensive and affects every function and discipline within our business.

Before I go into more detail about the status of the profit initiative, I would like to look back over the past several years to provide context for our approach. About five years ago, we began aggressively investing in our business to drive and support future growth. We expanded our corporate headquarters, design offices, and distribution facilities. We positioned inventories to support in-stock initiatives and market share expansion. However, our sales performance since 2006 has not kept pace with these investments. In other words, we're building for growth, but our top line has been stagnant.

This brings me to a key element of our profit initiative: recovering sales productivity. We have a great brand in American Eagle, and we must capitalize on this by offering the right fashion at the right price. While we have made progress, particular in bottoms, we need to demonstrate consistency in the tops and build solid, reliable businesses in categories such as accessories. Roger is here to provide color on how we will drive differentiated and trend-right assortments that will resonate with our customers.

Secondly, we have tightened the reins on inventory. We are leveraging new tools and improved processes. We have implemented a new merchandise allocation tool, enabling us to allocate by location, by style, more precisely. We have also revised our store presentation models, and are now planning more classifications to sell out.

In addition, the improvements currently underway in sourcing and production will enable us to chase key styles to a greater degree and leave more open to buy. And this will enable us to generate faster turns and better utilization of inventory investment. In other words, we will be able to do more with less inventory, and thus reduce risk to the organization.

Now moving on to streamlining our business and reducing costs, we intend to create faster decision making, drive sustainable improvement to our cost structure. This includes headcount realignment and the elimination of projects which were a low value to our customers. In addition, we are committed to reducing spending across the organization. Everything is being scrutinized and nothing is off the table.

And finally, we are reviewing our real estate portfolio and facilities. Over the next two to five years we are targeting 50-100 store closures. We will provide information on the expected financial impact of the profit initiative before the end of the year, including the path to a mid-teens operating margin. This is not intended to be just a one-time hit. Rather, we seek to drive fundamental change to how we do business, which we expect will yield long-term benefits for the years to come.

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