American Eagle Outfitters, Inc.
Q4 2005 Earnings Call Transcript

Published: 2 Mar 2006

[Operator:]

Our first question comes from Tom Filandro with SIG. Tom Filandro. Thanks. Can you give us a sense of the INU outlook for the spring season in ’06. I heard you mention some opportunity was achieved in the fourth quarter. And given the change in the pricing the tier pricing strategy, just a general view of the average unit resale pricing heading into the spring season. Thank you. Joan Hoxen. Hi Tom. Our view on INU is we’ve experience significant INU growth in the past five years and certainly in the fourth quarter we experienced it. As we look forward, we’re always mining for INU opportunities, but as we restructure our operating plans for ’06, we expect modest increase in INU and will continue to drive that line. Susan McGalla. Okay Tom, I’ll take the tier pricing part of your question. First of all I want to reiterate, one of our unique competitive advantages in the way that we’re positioned is the way that we’re priced and the way we deliver value to our customer. We are committed to that absolutely. But we are in select categories really letting the talent of our design team take some key categories and develop tier pricing to help us sell market share and really compelling product in those categories. It’s working very well for us. Tom Filandro. Is that suggesting that AE heading into spring are moving in a more positive direction? Susan McGalla. I’d tell you that we’re counting on conservative positive improvement. Tom Filandro. Thank you very much. Best of luck to you all. Operator

[Operator:]

The next question comes from Jeff Black with Lehman Brothers. Jeff Black. Thanks, congrats on a nice quarter. I guess for Susan, could you give us a little color on what you think the shift to more intimate means in terms of comp as we look at AUR vs. units per transaction. And when would you expect this initiative to be incremental to the comps? Can we see and impact in ’06? Thanks.

[Susan McGaff.:]

A couple of things on there. I would tell you that right now the business is just sizeable enough that it is currently contributing to our comps. It contributed to our comps in q4 and we see that obviously being an even more important piece as we grow it, as we move into this year and beyond. The average unit retail that actually has improved. It’s lower than the main brand run, but it’s improving because of the way that we’re balancing underwear and dormwear in that piece of the business. And the last thing that I will leave you with is because, and again I can’t reiterate it enough, this is not a new business for us. We have been working, we’ve been succeeding, we’ve experienced disappointments and learnings, over the last 5 years in this business. And, in a very intense way over the last 2 years we have different real estate models and levels of assortment that we’ve been looking at out there. We know this business is incremental to the main brand. And, that is another reason that we are very confident and excited about growing this business on a go forward. Jeff Black. Okay. Fair point. Thanks and good luck. Operator

[Operator:]

The next uestion comes from the line of Todd Slater with Lazard Capital Markets. Todd Slater. Good morning. Good numbers again. I may have missed this, but could you talk about the comp growth you’ve seen or expect to see in the denim area? Just talk a little about how denim is tracking both as a percent of revenue and a percent of inventory ownership. In other words, are you turning it the way you’d hoped to? And, sort of how is it performing? My second question is just on the inventory ownership. Just go over a little bit where the biggest areas of the increase are again, up 16% - it’s obviously tracking ahead of your sales per s.f. numbers. And then last on the SG&A the incremental cost issues that you mentioned with the Canadian assets breakdown, Martin & Osun expenses and so forth. How much would the SG&A have been leverage on your 7% comp? what sort of a leverage point on comps going forward with martin and Osun and other expenses do you expect? Thank you. Susan McGaff. Alright Todd, I’ll take your denim question. As it relates to denim, I will tell you we’re turning denim slightly better than a year ago. We’re very happy with its current performance and this being not only certainly a powerful marketshare player for us but also as well and even more importantly it’s probably the most important component of our lifestyle and what our girl and guy care about in terms of when they get dressed in the morning. So, we will continue to be improving and growing this business throughout the year. Joan Hoxen. With respect to the inventory. Our inventory as we mentioned todd is positioned for growth, particularly in the categories we talked about, intimates, knits and our denim business as well as we have some growth in there positioned for men’s. we have focused the inventory content on the categories that we’re going after. We believe it’s appropriately positioned and balanced and it provides us an opportunity for potential upside. But it’s a very well managed position. With respect to the SG&A question, I would roughly say that without some of those costs it would be about an 80 basis point leverage in the 4th quarter. Todd Slater. Okay, and looking forward in ’06 what’s the leverage point there on comps? Joan Hoxen. As I mentioned we look at our operating plan to leverage at a mid single digit, slightly leverage at a mid single digit including a view of investment and all of our critical growth initiatives. Todd Slater. Okay. And just to follow up on the inventory, so you’re planning for inventory to be up a lot higher than the comp numbers are running. So, the inventory’s turning more slowly, but you’re planning for upside there? Joan Hoxen. Clearly, we have positioned our inventory in a way that allows us to achieve opportunities so that . also I mentioned that as we look toward our guidance in the first quarter end, that it’s moving toward the low double digits. So we are also managing our inventory flow, Todd. Todd Slater. Low double digit on the inventories or the comps? Joan Hoxen. On the inventories for the end of Q1. Todd Slater. Got it. Okay, thank you. Operator

[Joan Hoxen.:]

Sure, Kimberly. The situation in BOW is we have NOS in there as well and we also did experience some leverage in rent, which was a positive. But the decision to sell the Canadian distribution business is the biggest piece of that. So that’s probably wasn’t included in your model. Kimberly Greenberger. Okay Joan. Could you tell me what the charge was on the gross margin line for NOS? I think that it was (inaudible)? Joan Hoxen. Yes and I believe that the margin level, Dale do you have that number? Dale Clifton. The (inaudible) dollars about $1.3 million were included in the buying and warehousing. In addition to that we had incurred an operating loss through the NOS business of about $1 million that was incremental to last year as well. So, the combination of those two things really deleveraged the buying occupancy, warehousing through distribution side. Joan Hoxen. Again, it’s a (inaudible) leverage of about 40 basis points. Kimberly Greenberger. Okay. I was just doing a quick calculation. It looks as though buying occupancy and distribution would have been flat year over year instead of down 90 basis points. It would have been almost a $7 million differential so…we’ve got $1 million on the operating loss for NOS, $1.3 million on I guess the loss on the sale, so I’m still coming up short by maybe $3.5 million. Joan Hoxen. Okay. You know what we’ll do is we’ll take that away and we’ll come back to you on that. Kimberly Greenberger. Great, thank you. Operator

[Susan McGalla.:]

Jim do you want to take the international and home office first? Jim O’Donnell. Yeah, let me take that. Dorothy, as I stated in my presentation, we had a little change in course in our asian operation. What we’re doing now, we have a number of different options that are available to us. I’m just tryin got evaluate which one would be the most expeditious for us and one that would put the least amount of strain on the American Eagle brand. I would say that we would have something much more definitive to speak to in probably 3rd quarter of this year. But, we’re still very optimistic about the Asian market. We do have opportunities in other countries there but we feel strongly that Japan should be the entry point and… Dorothy Lackner. Do you feel strongly that you need a partner there?

[Jim O’Donnell.:]

I don’t feel as strongly as I did after some of the due diligence. I think it would be beneficial to have one, but I’m not sure how the structure would work as it relates to ownership and also overseeing the operations. Dorothy Lackner. So you might consider going alone?

[Jim O’Donnell.:]

With some minority help, yes. Dorothy Lackner. Okay, great. Jim O’Donnell. That is one of the options. The headquarters…right now we’re on course to move into the first part of our growth and expansion into the downtown Pittsburgh market. There are 2 structures. One is already constructed, which we call quantum 2 and we expect that based on our current schedule to move in there sometime around late spring of ’07. And in quantum 3, it’ll probably be spring of ’08. Dorothy Lackner. And the distribution center? Jim O’Donnell. On the distribution center we are expanding approximately 530,000 in Ottawa, Kansas where we already have an existing facility of approximately 400,000 s.f. That’s schedule right now, if all things go well, we could be operational mid ’07. Dorothy Lackner. Okay, great. Susan McGalla. And to your questions on Aerie, as it relates to margin, we have had a track record here and our track record has shown that the margins for Aerie are at or slightly above that of the main brand, which obviously is one of the main reasons this is so attractive to us. And to answer your question on bras, we mentioned that we were putting a bra test out there for spring of this year in about 100 stores. We have about a month under our belt and have learned a lot and have been very pleased with our results and the learnings and are looking to expand that into the fall of this year. Dorothy Lackner. Any sense of the number of stores you might expand that to? Susan McGalla. We’re hoping by the fall period it will be atl east double that. Dorothy Lackner. Great. Thanks. Good luck.

[Operator:]

The next question comes from Adrienne Tenant with Wedbush Morgan. Adrienne Tenant. Good morning, congratulations. Just a couple of questions. Susan, the first question would be, as you’re looking at back to school and how strong denim was last year, can you give us any color on the penetration of denim last year and what you’re thinking about in terms of categories that can either replace some of that penetration as well as some of the AUR increase there. And then secondly, when you look at the historical sales productivity, it looks like you’re reaching new levels, new highs. Where do you think that can go? Susan McGalla. First of all as it relates to denim, we are as I told you, we spend every month of the year, we’re constantly working on what our next strategy in denim will be in back to school and the most important time periods for launching newness. The one thing I will tell you is that we have had in the works for the past 8 months since we launched last back to school, is a positioning for this coming 3rd quarter of a significant amount of newness that will be driven into tour denim category. We are going to be leveraging all of our key fits that our girl and guy come to us for that we’ve built market share in but we will be offering some new fits and also a compelling amount of newness in wash change. So, we are very excited and fastest growing category, we will absolutely be anniversarying our value price point at $29 and $39.50 and making sure that we maintain that penetration .our growth right now is actually coming from jeans over $40. so we are going to be very strategic about that, very balanced in our price positioning but we’re very excited about what we’re moving toward in back to school in denim. And then…

[Joan Hoxen.:]

Adrienne, with respect ot the sales productivity our goals are to achieve $560-$600 per s.f. and we believe that we’re seeing strong productivity in our stores, we’ve seen historical levels that were relatively high, but at this point we do have a larger store than we did historically. So we feel comfortable with that target of $550-$600 with the growth initiatives that we have in the pipeline. Adrienne Tenant. Okay. Then Susan, just did you have this penetration of denim last back to school season? Susan McGalla. Yeah. We’re right around that 20% range that we’ve been running and we’ll be planning at somewhere around there with the opportunity to grow it. Adrienne Tenant. And then just with the are you a believer in that and will you be playing that? Susan McGalla. We’re certainly aware of that. I think the great thing about the way that we approach these trends is we certainly have to be aware of them, our design team is working very hard to take that trend and figure out exactly what it means for our American Eagle girl and you’ll see our American Eagle version of that trend for Adrienne Tenant. Okay great. Thank you so much. Operator

[Holly Guthrie.:]

Thank you and congratulations everybody. I have 3 questions. First could you just break out the in-tact on the for including the charges? And second, further clarification on gross margin, your guidance and the impact of the AE all-access pass. Could you talk a little bit about your plans to maybe pull back some of the markdown activities at the store as the AE pass rolls out and is implemented and is used? And do you think at some point this year some of those markdowns . How does that flow? And then if you could, talk about any differences in your product planning in ’06 vs. ’05, either speaking more on the lines of immediate a little bit of change in the cycle and is there any product delivery differences in the spring vs. last spring? Joan Hoxen. Okay. Let me start off by saying with the shipping, there’s no impact to comps relative to that item. As we look forward in the markdowns, what we’ve been articulating is that we believe that we’ve taken a very realistic view of what we need to position markdowns at in our operating plan to support a good solid assortment on the floor, provide the freshness in seasonal updates. But also we have to bear in mind that are doing other things in the business to leverage that. One of those would be a key initiative that’s under way which is profiling which will help us understand and provide better allocations to our store by individual location at the five level. And we also continue to fine tune and leverage our profit . So, coupled with that, to Susan’s point, our inventories are very strategically focused and we feel good about where they are, we feel good about the inventory flow and as we look forward with the tools that we have, we believe that we can really manage that very well. And Susan and I with the merchandise team and the merchandise planning team and finance groups are very much in lock step. On managing our inventories and our margins, to sustain the high rates that we’ve achieved. That would be the comment on markdowns. With respect to ae all-access pass, we recorded initial investments in that program in the fourth quarter. As Susan mentioned, we feel very good about the enrollment, it’s exceeding our expectation and we feel good about how the program has been moving along. And we expect to be able to talk to you more about ae all access as we progress through the spring season and can better assimilate and have good information to report back to you on. Susan McGalla. The other thing I will add in addition to what Joan said, we have been pulling back on markdowns in preparation for rolling out our ae all access, so all of that double couponing and multiple couponing that quite honestly was going on in our business a couple of years ago, we’ve been working over the last 18 months to pull that back. That is happening and we felt that we ran a very successful business last year as we were working through that change and we sit today in position to reward loyalty productively. Again, our markdowns are focused productively into driving loyalty into our business. And to answer your last question, we have no major product planning changes, as we move into this year. The only thing I can tell you we are committed to our of the year to offer units to our customers. It’s a very important way that we run the business.

[Holly Guthrie.:]

Thank you.

[Operator:]

Ladies and gentlemen we have reached the end of the allotted time for questions and answers. I will now turn the call back over for any closing remarks. Jim O’Donnell. I just want to thank everyone who participated on the call and we’ll be speaking to all of you very soon. Thank you. Copyright policy