“We are taking quick action to reset” – Sourcing Journal

American Eagle Outfitters Inc. ended up outpacing demand after aggressively planning first-quarter merchandise, leaving the specialty retailer with a pile of inventory it will need to reduce in the second quarter.

In a word: Total ending inventory at cost rose 46% to $682 million from $467 million in the prior year quarter. Higher costs drove half the increase, with American Eagle and Aerie each driving half the increase. Total units increased by 24% due to high in-transit and on-hand inventory.

“Looking back, our purchases and overall plans were overly optimistic for the current environment. We’re taking quick action to reset,” CEO Jay Schottenstein told Wall Street investors on a call last week. We are going to pass the spring goods in the second quarter and be in a better position for the second half. We have adjusted our forward inventory plans to reflect a more measured demand outlook. »

Despite the results, both brands remain on solid footing, Schottenstein said. “Aerie’s revenue grew 8% in the quarter and more than doubled from 2019…. Aerie continues to present incredible growth prospects for the future and highly desirable product categories. ” he added. “The AE brand remains very profitable and [has] exceptional cash flow. »

Quiet Platforms, formerly Quiet Logistics, has been actively recruiting new customers, including Fanatics and Saks Off Fifth. The logistics business represents an “exciting growth vehicle,” Schottenstein said. Quiet, acquired with AirTerra last year, partners with Pitney Bowes to accelerate customer delivery times.

Jen Foyle, president and chief creative officer of both the company’s brands, said first-quarter swimwear performance lagged at Aerie, where sales of underwear, leggings, apparel and accessories supported revenue growth of 15%. The American Eagle brand’s top performers were dresses, accessories, jeans and men’s ensemble, but demand fell short of the company’s expectations.

“In addition to resizing inventory, we also see an opportunity to strike a better balance between our key styles,” Foyle said, adding that American Eagle’s jeans business grew by double digits for both genders over the past year. of the first quarter of 2019.

“We currently expect fall and holiday freight costs to benefit from lower ocean and air freight rates,” COO Mike Rempell said. “With regard to product costs, we have managed to control costs through a number of mitigating measures, including the establishment of platform fabrics, the diversification of production facilities and the operation our scale to find efficiencies.”

Rempell said he expects to see some pressure from product input costs in the fourth quarter, particularly higher cotton costs that the company hopes to offset by using less air freight.

A week after the earnings report, the company unveiled a series of actions aimed at strengthening its capital structure. The actions include an exchange of $342 million of its 3.75% convertible senior notes due 2025 for cash and a share of the company’s common stock, leaving only $70 million in principal outstanding; an accelerated stock repurchase agreement with JPMorgan Chase Bank NA for $200 million of company common stock, or 16.7 million shares, and a plan to increase and expand its loan facility asset base to $600 million for a five-year term to unlock additional liquidity.

Net sales: Total revenue for the three months ended April 30 increased 2% to $1.06 billion from $1.03 billion a year ago.

Aerie’s revenue rose 8% to $322 million, while sales of main brand American Eagle fell 6% to $686 million. Consolidated store sales increased 2%, but digital sales declined 6%.

Earnings: Net income fell 67% to $31.7 million, or 16 cents per diluted share, from $95.5 million, or 46 cents, in the same quarter a year ago.

The company missed adjusted diluted earnings per share by 9 cents and revenue by $85.3 million.

For the second quarter, the company said it expects revenue growth similar to the first quarter, reflecting higher markdowns to offset spring inventory, higher transportation costs and l impact of supply chain acquisitions.

For the year, the company lowered its guidance, with total revenue up single digits from fiscal 2021. The company expects to approach the second half better aligned with demand, with a more balanced inventory position and a leaner expense base.

Opinion of the CEO: “The short-term environment will remain volatile. I believe every challenge creates an opportunity. That’s what has kept this company going for the long term,” Schottenstein said. We have always gone through a solid company.