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American Eagle Outfitters (AEO)

Q1 2012 Earnings Call

May 23, 2012 9:00 am ET


Judy Meehan

Robert L. Hanson - Chief Executive Officer and Director

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Roger S. Markfield - Vice Chairman, Executive Creative Director, Chief Design Officer, Vice Chairman of the American Eagle Division, President of the American Eagle Division and Interim President of Martin + Osa Brand

Scott M. Hurd - Interim Principal Financial Officer, Interim Principal Accounting Officer, Vice President and Controller


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Greetings, and welcome to the American Eagle Outfitters First Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Judy Meehan, Vice President of Investor Relations for American Eagle Outfitters. Thank you, Ms. Meehan. You may begin.

Judy Meehan

Good morning, everyone. Joining me today are Robert Hanson, Chief Executive Officer; Roger Markfield, Executive Creative Director; and our Controller, Scott Hurd.

Before we begin today's call, I need to remind you that during this conference call we will make certain forward-looking statements. These statements are based on information that 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.

Our comments today will focus on results excluding 77kids. Please refer to the adjusted operating statements accompanying the press release. We've also posted a first quarter financial supplement on our website.

And now I'll turn the call over to Robert for his opening remarks.

Robert L. Hanson

Thanks, Judy, and good morning, everyone. I'll start with highlights of the first quarter. After Roger and Scott give additional color on the quarter, I'll come back and provide an update on our 5 near-term priorities.

We're pleased with the progress demonstrated by our first quarter performance. Net sales rose 18% and adjusted EPS increased 38%, which came in above our plan and early expectations. Strong demand enabled us to pull back on planned promotions, and top line growth helped mitigate pressure from higher cotton costs. We leveraged fixed operating expense, while also contributing to bottom line growth.

The operating margin for the quarter showed year-over-year expansion to a rate of 9.1% compared to 7.3% last year. The improvement was good, yet we have plenty of opportunity relative to our historical rates which have averaged well into the double digits.

Now let me run through some of the first quarter highlights. We delivered on driving a competitive top line with broad-based category strength. Our merchandise teams did a very good job identifying and executing on current trends. Higher in-store traffic and an improved conversion rate were consistent throughout the quarter.

Building on the fourth quarter sales momentum, we saw a 20% increase in repeat customers and their basket increased over last year. We did a good job managing markdowns and pulling back on promotional activity, which continues to be an area of opportunity. We saw strength within aerie across each channel. We achieved greater productivity and improved operating margins in this business.

American Eagle Outfitters Direct produced 22% growth this quarter and contributed an operating margin well above our average store fleet.

During the quarter, we also had successful franchise store openings in Israel with 9 locations as well as Japan, where our 2 stores experienced record opening results. This provides further evidence of a global appetite for the American Eagle brand.

To wrap up the first quarter, I'm appreciative and proud of the progress the teams made and want to recognize them for their success. This was a solid first step, yet our focus is 100% on stronger execution and building the capabilities to sustain consistent performance over the long term.

Now, Roger, over to you.

Roger S. Markfield

Good morning, everyone. It was great to see our brand momentum in the first quarter, especially while pulling back on promotions. We were able to regain our position as the destination for spring break. We led with a powerful color story, which was distinct and reflected the energy and optimism of the AE brand. The teams delivered particularly well in our core bottoms businesses with denim, pants and shorts among the strongest businesses. Tops also performed well, led by color, trend and women's, a more differentiated fashion assortment. We like what we see on the horizon and how our product teams are interpreting new trends.

Looking ahead to back-to-school and holiday, we will build on business momentum and apply a more disciplined and distorted approach to our assortment plans as we target higher margin.

You will notice more frequent flows of merchandise into our stores. We are not going to elaborate too much on it, but the goal is to create more in-store newness and turn fashion items faster.

On the marketing front, Michael and team are doing a great job aligning our marketing and imagery more strongly with our heritage of an optimistic American brand. We are excited about our upcoming marketing campaign for back-to-school, which truly captures the spirit of the AE brand lifestyle.

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