American Eagle Outfitters (AEO)

Q2 2013 Earnings Call

August 22, 2012 9:00 am ET

Executives

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

Mary Boland - Chief Financial & Administrative Officer and Executive Vice President

Analysts

Thomas A. Filandro - Susquehanna Financial Group, LLLP, Research Division

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Eric M. Beder - Brean Murray, Carret & Co., LLC, Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

Randal J. Konik - Jefferies & Company, Inc., Research Division

John D. Morris - BMO Capital Markets U.S.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

Jennifer M. Davis - Lazard Capital Markets LLC, Research Division

Anna A. Andreeva - FBR Capital Markets & Co., Research Division

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Janet Kloppenburg

Dorothy S. Lakner - Caris & Company, Inc., Research Division

TST Recommends

Betty Y. Chen - Wedbush Securities Inc., Research Division

Presentation

Operator

Greetings, and welcome to the American Eagle Second 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. 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 Mary Boland, Chief Financial and Administrative Officer.

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 upon 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 from continuing operations and excludes other non-GAAP adjustments. Please refer to the adjusted operating statements accompanying the press release. We've also posted a second 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'm pleased to introduce Mary Boland, our new Chief Financial and Administrative Officer. I know she looks forward to getting to know all of you over the next several months.

Today, I'll start with highlights of the second quarter. After Roger and Mary give additional color on the quarter, I'll come back and provide an update on our initiatives and strategic goals.

Business momentum continued nicely in the second quarter, led by successful product and marketing execution across our brands. Net sales rose 11% and adjusted EPS increased 62%, well exceeding our initial expectations.

Despite a tough retail landscape, we delivered a competitive top line with less promotional activity. This combined with favorable merchandise comps and expense leverage, fueled higher margins and returns. The second quarter adjusted operating margin expanded over 300 basis points to 9.1%. We're certainly pleased with this result, but recognize it is against very weak margins last year and still below an acceptable margin run rate. As we look forward, we see plenty of potential for further margin expansion.

Now let me run through some of the second quarter highlights, starting with kudos to Roger and the team. They executed well, building on our famous 4 categories while interpreting new trends for our customers. We are delivering a better product-driven customer experience. We saw a 33% increase in active customers and drove increases in traffic and conversion. All of this great team performance helped us achieve record second quarter sales results in a highly competitive environment.

We did a good job executing our promotional plans, balancing top line growth with profit improvement, which is an area of further opportunity. aerie contributed to our growth, led by strength in intimates. We experienced higher productivity and stronger overall operating margins. We're making good progress and seeing greater consistency, yet our focus is squarely on increasing aerie's profitability as we move ahead.

E-commerce produced 28% sales growth this quarter and contributed even higher bottom line results. We saw strong traffic and online conversion, with strength in our famous 4 businesses. During the quarter, we also launched our online factory store, which is aligned with our outlet growth strategy.

To wrap up the second quarter, I'm proud of the team's progress, particularly within the context of this retail landscape. Our focus is on the future and bringing consistent performance over the long haul. On that note, we are not even through the first chapter of maximizing our true potential. More on that in a few minutes.

Now, Roger, over to you.

Roger S. Markfield

Good morning, everyone. We were once again pleased by the brand momentum demonstrated in the second quarter. We experienced consistent strength across the assortments, including our famous 4 categories: denim, shorts, knit tops and color, as well as near-in businesses like dresses, woven shirts and fashion tops. Both men's and women's comps increased in the high single digits. Our assortments were trend-right, distinct and colorful, setting us apart across the retail landscape.

The teams are executing well on our core basics, core fashion and fashion, which has been both tight and is turning faster. With strong merchandising and design leadership, the team is doing a great job reading and interpreting new fashion trends for our brands.

We are really pleased with how our back-to-school season has trended so far. Our plan was solid across our business, and our customers are really responding. This season, we delivered compelling fashion, a wear-now focus, more product flows and a leading diverse denim assortment. Our strategy is to flow more newness regularly to stores, delivering what our customers want when they want it. This was demonstrated by our by "buy now, wear now" assortment in July, which emphasized outfitting around shorts and tees. Our fashion line, which represents about 25% in women's and 15% in men's, has distinguished us in the marketplace. And our leading denim line is diverse across fits with new styles combined with our heritage fits, new washes and treatments, as well as the right balance of indigo, the right color palette plus prints and patterns. Consistent with our strategy of regular product flows, our new fall assortment arrives in the stores later this week, Friday.

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