exv99w2
EXHIBIT 99.2
American Eagle Outfitters, Inc.
First Quarter 2011
Conference Call Transcript dated May 25, 2011
Operator: Greetings and welcome to the American Eagle first quarter 2011 earnings conference
call. At this time all participants are in a listen-only mode. A brief question-and-answer session
will follow the formal presentation. (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.
Thank you, Ms. Meehan, you may begin.
Judy Meehan- American Eagle Outfitters, Inc.- VP IR: Good morning, everyone. Joining me today are
Jim ODonnell, Chief Executive Officer; Roger Markfield, Vice Chairman and Executive Creative
Director; and Joan Hilson, Executive Vice President, Chief Financial Officer. If you need a copy of
our first-quarter press release, it is available on our website, AE.com.
Before we begin todays call, I need to remind everyone that during this conference call members of
management will make certain forward-looking statements based upon information which represent the
Companys 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 would like to turn the call over to Jim.
Jim ODonnell- American Eagle Outfitters, Inc.- CEO: Thanks, Judy. Good morning and thanks for
joining us. I will begin by providing an overview of our first-quarter performance and an update on
each of our businesses. Then, Roger will provide his perspective and Joan will review our
financials.
Overall, performance for the quarter was mixed. Although sales were below plan, we achieved EPS of
$0.14, which was within the range of our expectations. Looking beyond the quarter, Im pleased to
report that we continue to move ahead on implementing the strategic initiatives I discussed on our
last call, which will position the business for increasingly profitable long-term growth beginning
in 2012.
Now, providing color for the first quarter, total sales declined 6% and comps were down 8%. Our top
line was affected to some degree by external factors, yet also reflected internal missteps. We
pursued an assortment strategy which, in hindsight, did not provide enough depth in key items. As a
result, we were not positioned to fuel promotional activities as we did during the spring season of
last year.
At the same time, we faced a highly competitive and promotional retail landscape. We have made the
appropriate assortment adjustments for the fall season, which Roger will review shortly. In spite
of the lower sales, we were able to achieve higher merchandise margin. Additionally, our expense
control initiatives continued to be successful with SG&A dollars down $10 million from last year,
largely reflecting the positive impact of our corporate profit initiative. As you recall, under
this program we are reducing overhead costs. Additionally, we are creating efficiencies across our
supply chain and production operations.
Another positive is our strong financial position. We ended the quarter with more than $600 million
in cash and investments. We are using this cash to prudently invest in our business and to evaluate
other opportunities to enhance shareholder value. When we spoke on our last call I outlined key
initiatives to position the business for growth beginning in 2012. Let me provide an update on our
plans.
Within the AE brand, our focus is on improving productivity levels. Merchandising changes are
underway to strengthen our assortments. In addition, we have further strengthened the team, as
Roger will discuss in his
remarks. We will defend our leading market position in denim and continue to grow this category as
the go-to denim destination for our customer. We must also rebuild our market share in heritage
categories such as tees and fleece where we are making bolder investment and underscoring a strong
value proposition.
In accessories we are achieving positive results with our expanded assortment, including more
handbags, footwear and jewelry, in addition to new offerings that are right for our customer.
Currently, accessories represent just 10% of our sales and we see the potential for its growth to
be at 20% over the longer term. An essential part of this strategy is adding dedicated accessory
shops within our stores. We now have 46 accessory shops and approximately 250 are planned for the
year. We see this as a very exciting growth opportunity.
Together, these initiatives build on an incredibly strong foundation of the AE brand, which remains
one of the strongest in todays marketplace.
Turning to aerie, for the quarter, although sales were below expectations, operating results were
similar to the first quarter last year. As I noted on the last call, we are transitioning aerie to
give greater prominence to the intimate apparel categories. We are introducing new offerings to
build a more complete lifestyle brand. We continue to believe in this brand for the long term.
With increasing sales and strong profitability, AEO Direct is a powerful driver of the future
growth. There are two key drivers. Number one, we are using our brand as a springboard. We are
expanding our online assortments with more unique offerings. We have already seen success with an
expanded dress business, extended sizes and third-party footwear. And we have only just begun, and
we will continue to grow this channel through exclusive offerings.
Number two, we are taking advantage of the Internet as a powerful vehicle for furthering our
international expansion, bringing our brand and truly American style to a global market. Were
expanding our shipping capabilities and payment options to reach more consumers around the world.
Importantly, to support our international strategy, we recently purchased trademarks which have
solidified our ability to expand in additional markets.
Now, speaking of the American Eagle brand abroad, we are establishing a foothold in key
international markets. Our first Hong Kong store opened recently, and the results so far have been
really fabulous, well exceeding our expectations.
Overall, we look forward to continuing our progress. We have tremendous opportunities across all
brands and selling channels, and including significant progress in 77kids, which we expect will
lead to growth in 2012 and beyond.
Now let me turn it over to Roger.
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: Thanks, Jim. Good morning, everyone. As Jim noted, we have made significant progress in
positioning the Company for long-term growth. In a nutshell, I think you can see us returning to
our roots in order to accelerate our growth and profit.
To achieve our goals, we have made some important management changes. Fred Grover is now leading AE
brand merchandise in addition to e-commerce and marketing. This appointment is important for
several reasons. First, Fred has been a great partner over the past 18 years in making American
Eagle a leading lifestyle brand for the 15- to 25-year-old. He has vast experience across all
disciplines and knows our process well. Most importantly, Fred understands the substance of our
brand DNA.
By consolidating AE brand merchandising, store visual, e-commerce and marketing under Fred, we are
bringing a singular focus to all brand experiences. Im very excited to have Fred in this new role.
Secondly, Im delighted to announce that Michael Leedy has returned to our Company as Chief
Marketing Officer. Some of you remember Michael, who led AE marketing from 1996 to 2005. He was the
driving force during our most successful years. Michael created innovative ideas and strong,
impactful images. Like Fred, he knows our Company and our process extremely well and helped us
build AE to the premier lifestyle brand. Michael is incredibly excited to be back, and I know that;
I had dinner with him last night. I have every confidence that he will deliver top-notch marketing
programs which will help drive traffic and create greater excitement around all of our brands.
In addition to these key changes, we have also strengthened the merchandising and design teams in
key businesses. We have hired leaders with proven track records with AE. They know our process, our
brand and our customers well. I am extremely pleased to have them back at AE and Im confident they
will have a positive impact in a very short order.
Now let me address the first quarter. Our sales performance did not meet our expectations. Our
assortments were a bit too broad and incorporated too many styles. As a result, inventories in
denim were light; and, as Jim noted, we did not plan enough inventory depth in key items to fuel
price promotions. Additionally, the environment was highly promotional and competitive.
With that said, our sell-throughs were decent, and we achieved a merchandise margin rate above last
year. Now moving forward, we will be in stock to drive our heritage businesses. Starting with
denim, we will support our number-one market-leading position. Over the past several weeks we have
replenished some of our denim inventories and are getting back to a stronger position to support
demand in this business. For back to school we will be ramping up our offers with new fits, updated
washes, backed by an exciting and targeted marketing campaign. There is newness in the denim
business, and that is very exciting for us in the upcoming seasons. Across the assortment, we must
reclaim the classic preppy styles for our core 15- to 25-year-old customers.
Our approach is consistent with our heritage and how we built our most successful seasons. You will
see a real change evolve over the next several months. The transition within aerie will also occur
in full force this fall with powerful bra launches and a more complete assortment across apparel
categories. Overall, with the changes we have made across our organization, I am confident we will
deliver on our objectives.
Now, to provide you with a further breakdown on the quarter and the outlook, I will turn the call
over to Joan.
Joan Hilson- American Eagle Outfitters, Inc.- EVP, CFO: Thanks, Roger, and good morning, everyone.
Although sales for the quarter came in lower than anticipated, we are pleased that we were able to
deliver earnings within our expected range. Our improved merchandise margin, reflecting strong
inventory discipline, combined with cost savings from our profit initiatives, were key contributors
to this performance.
Now reviewing the details, total first-quarter sales of $610 million were down 6% from the first
quarter last year and comparable store sales declined 8%. This was against our best quarter last
year, when comps increased 5%. This year by brand, AE decreased 8% and aerie was down 7%. AE Direct
sales increased 3% in the quarter.
Looking at consolidated first-quarter metrics, transactions declined in the low double-digits. The
average transaction value increased in the mid single-digits, driven by a high single-digit
increase in the average unit retail price. Fewer price promotions during the quarter contributed to
the higher AUR.
Now moving on to margin, the gross margin increased 170 basis points to 38%. The merchandise margin
increased 70 basis points compared to last year, primarily due to lower product costs and decreased
promotional activity. BOW increased to 240 basis points as a rate to sales, primarily due to rent
related to new store openings and the impact of negative comps.
Now turning to operating expense, SG&A dollars declined $10 million, or 6%, to $158 million. As a
rate to sales, SG&A was flat to last year. The decrease resulted from expense reduction efforts
which yielded savings in compensation, supplies and services partially offset by planned
investments in advertising and new store growth. Lower compensation costs primarily reflected
changes in our incentive comp plan, which largely affected the first quarter and will not have a
similar impact going forward.
Other income of $4.5 million included approximately $0.01 per share related to ARS recoveries.
Turning to the balance sheet, first-quarter ending inventory increased 2% and cost per foot was
flat to last year. As Jim and Roger indicated, this fall we are rolling out our accessory business,
which is reflected in our second-quarter inventory. Looking at apparel, the second-quarter average
inventory cost is planned to increase in the high single-digits and units are down in the low
single-digits. First quarter CapEx totaled $38 million compared to $19 million last year. The
increase reflects store remodeling activity in the first quarter of this year. For the year we
continue to expect CapEx in the range of $90 million to $100 million with a little over half
related to new and remodeled stores.
We ended the first quarter with cash and investments of $611 million.
In terms of our outlook, we currently expect second-quarter EPS to be in the range of $0.10 to
$0.13 compared to $0.13 last year. With respect to sales, while it is still early in the quarter,
we are encouraged by an improvement in sales reflecting better trends in key items. SG&A dollars
are planned flat for the quarter with investments in new stores and advertising offset by continued
expense savings.
For the year we continue to expect EPS to be about flat with 2010 earnings from continuing
operations of $1.02 per share. We expect improved performance in the second half of the year,
providing momentum for 2012. Now I will turn the call back to Judy.
Judy Meehan- American Eagle Outfitters, Inc.- VP IR: Thanks, Joan. Now we will move on to
questions and answers. So that more participants can ask a question today, please limit yourself to
one question. Okay, Rob, we are ready for the first question.
Operator: (Operator instructions). Jeff Black, Citigroup.
Jeff Black- Citi- Analyst: So, Joan, it looks like we saw some cost increase or are seeing some
cost increases on the input side related to the inventory in 2Q. Just tell us where youre seeing
those, what degree of cost rise we are seeing now. And looking to the back half, what are we
looking at there, in your opinion? And what kind of merchandise margins is this guidance presuming
for second half?
Joan Hilson- American Eagle Outfitters, Inc.- EVP, CFO: Okay, Jeff, thats accurate. The cost
increase per the increase in second-quarter relates to product costs, which reflects the
back-to-school inventories, and its a mix of those receipts. And thats up about 8% to 9% in the
quarter.
And then as we look to the back half, we see a mid-teen product cost increase. We are seeing, in
the second quarter, cost pressure in terms of merch margin guidance. And, as you know and as weve
stated in our comments, we have flexibility with our inventory position for promotions, which also
gives us flexibility in our markdown performance for the quarter. So cost pressure with opportunity
in markdowns and top-line opportunity with promotion.
On the back half, we expect merch margin pressure as well, but again we believe we have opportunity
in the markdown line to offset some of that cost pressure, as well as we have been testing some
price increases, selectively testing price increases to offset some of those costs.
Jeff Black- Citi- Analyst: All right, thanks, good luck.
Operator: Adrienne Tennant, Janney Montgomery Scott.
Adrienne Tennant- Janney Montgomery Scott- Analyst: Roger, can you talk about some of the product
in the spring season, where you thought there was perhaps a miss and what is giving you the
confidence, what is changing, giving you the confidence that the fall season merchandise Im
assuming, starting in July, right, the back-to-school merchandise really has some changes in it
that can create some momentum?
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: Well, we had some successes, obviously, in the spring, and those were in the mens area
mens knits, mens underwear, mens sweaters and mens shorts doing quite well.
On the womens side, we had the successes in womens tees and womens sweaters, womens sweats. And
also the shorts business looks like its kicking in pretty nicely for us.
On the downside we went after a khaki business that didnt work. And it kind of lowered our
inventories on the denim front, which in hindsight was an error. Weve compensated for that. We
made quick adjustments. And if you go into our stores now you will start to see the denim starting
to come in. And our assortment for back-to-school is by far superior to any other season we have.
And with this denim now coming in, were seeing a change in the business.
Adrienne Tennant- Janney Montgomery Scott- Analyst: Are you taking less fashion risk in the back
half
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: No.
Adrienne Tennant- Janney Montgomery Scott- Analyst: Because it seems like the callouts that you
had are more of the basic categories, perhaps.
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: Were going to have enough fashion so you have the sprinkles you need in the store, but
our intensity is in the key heritage items we know about and a very strong denim impact.
Adrienne Tennant- Janney Montgomery Scott- Analyst: Thank you, best of luck.
Operator: Michelle Tan, Goldman Sachs.
Michelle Tan- Goldman Sachs- Analyst: I had two questions, one on the inventory side. Im just
curious; I know you mentioned that the investments are behind some key items. Can you help us think
about the shelf life of that, those kinds of items versus the average thing you would put in the
store? How long can you sit on these things before you have to take markdown?
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: Michelle by the way, thanks for your report; I liked reading it very much. And I kind
of agree with you, so
Well, the investments we are making are in you know, American Eagle is really the number one
brand in this space, by far. And every once in a while, for some reason, we let go of our key
heritage programs and we let people take market share from us. Some of these programs are quite
predictable fleece, graphic T-shirts and for us, unlike other people, certain categories within
the denim business. We will protect our turf as we move into back to school.
Michelle Tan- Goldman Sachs- Analyst: Great; and on the shelf life of those key items, is it a
longer shelf life business?
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: It depends on the item. When it comes to denim, you pretty much have a shelf life that
lasts the entire season. When it comes to graphics, we flow them. When it comes to fleece, some
stay for the entire season and some we flow.
Michelle Tan- Goldman Sachs- Analyst: And then on the marketing front, as you mentioned, it does
seem like youve gotten a little bit away from your heritage, not just with the breadth of the
assortments but also with some of the imaging you guys have been using in the spring. How long
before you can move back to that more classic preppy kind of aesthetic? How long does Michael take
to be able to roll some of that out?
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: You know, Michael and Fred and myself weve worked for 15 years together as a
combination, and with Fred for 18 years. Weve had already two dinners in the two weeks that
Michael is back. This is a very cohesive team. We are moving on that front real quick.
Michelle Tan- Goldman Sachs- Analyst: So maybe by back-to-school we should see something materially
different in terms of the branding?
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: I think you will love what you see for back to school. But from holiday on you will see
the input of the combination.
Michelle Tan- Goldman Sachs- Analyst: Okay, great. And my last one is just to understand how much
sales improvement are you guys expecting because of these changes as you give your full year and
your second-quarter guidance?
Joan Hilson- American Eagle Outfitters, Inc.- EVP, CFO: Clearly, we are not giving comp store
guidance for the second quarter. However, we are encouraged, as Roger said, by the trends we are
seeing in the key items. The new denim assortment is on the floor, with several styles on the
floor, not in full force. And the testing on that has been good.
So we feel encouraged by the traction that we are seeing here in the second quarter, which has led
us to feel very encouraged as well for the back half of the year, as we, as Roger mentioned, key
item investment denim, graphics, our core businesses, where we see traction. And the third
quarter is a very strong quarter for us as a brand, and we are comping a holiday of last year that
was of subpar performance. And we believe theres opportunity there.
Michelle Tan- Goldman Sachs- Analyst: Okay, great, thanks so much, guys, good luck.
Operator: Liz Dunn, FBR Capital Markets.
Liz Dunn- FBR Capital Markets- Analyst: Why didnt you buy back any stock in the quarter, and
whats your ongoing perspective regarding share repurchase?
Joan Hilson- American Eagle Outfitters, Inc.- EVP, CFO: We did not buy back stock in the quarter,
and we continue to evaluate that with our Board. As you will recall, we have 14.5 million shares
authorized, and we continue to evaluate that on an ongoing basis. Recollect that last year we
repurchased several million shares, over $200 million, and are tracking at returning about $1.5
billion to our shareholders over the last several years. So we are committed to returning cash to
our shareholders and continue to evaluate that.
Liz Dunn- FBR Capital Markets- Analyst: Joan, how much cash do you like to keep on the balance
sheet, just for safety purposes?
Joan Hilson- American Eagle Outfitters, Inc.- EVP, CFO: Our range and this is a particular low
point in terms of or a high point in terms of what we like to retain, just given how the
business flows. Its $300 million to $400 million is a rough comfort level, given the general
cash position that we have between Canada and the US and so forth. So $300 million to $400 million
is a general range of cushion.
Liz Dunn- FBR Capital Markets- Analyst: Great, thanks.
Operator: Janet Kloppenburg, JJK Research.
Janet Kloppenburg- JJK Research- Analyst: Roger, Im interested in your discussion about returning
to classic preppy styles. Does that mean that this more bohemian styling that weve been seeing in
the stores this spring is something that you are not as much devoted to? Or, are you just talking
about preppy styles on the bottom? If you could talk a little bit about how you are thinking about
the styling direction of the brand
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: Obviously, I dont want to talk about fashion on the call. But clearly, its obvious
bohemian is a trend.
Janet Kloppenburg- JJK Research- Analyst: Right.
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: And its a good trend that works with our preppy looks, so how we mix the two. We are not
going away from bohemian, but we are introducing classic preppy.
Janet Kloppenburg- JJK Research- Analyst: And do you think that your denim I know you have new
fits and a lot of newness. But do you think that because of the price increases, Roger, that you
will have meaningful increase in ticket price in denim this fall? Or what should we be thinking
about that?
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: If I had to give you one category that I have the most confidence in our ability to raise
price, I would tell you its in denim. And of all the tests that weve done, it clearly shows our
spreads in terms of value and quality and style is so up front vis-a-vis the competition that we
have room in pricing in denim.
Janet Kloppenburg- JJK Research- Analyst: Okay, and will so when will we start to see those
price increases? Will it
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: We are very careful. We are very cautious. Weve done it on some washes and on some
styles, and its having zero negative impact on the selling.
Janet Kloppenburg- JJK Research- Analyst: And just the last question is on the key items where I
think you said you were light. Now it has improved. Is it where you want it to be now, or will we
look to the
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: No; you will see it from back to school on.
Janet Kloppenburg- JJK Research- Analyst: Okay, thanks very much and lots of luck.
Operator: Brian Tunick, JPMorgan.
Brian Tunick- JPMorgan- Analyst: Two quick ones if someone could give us an update on the CEO
search and just sort of maybe what the Board is looking for from that role? And then just on the
international trademarks, what was acquired there? And can you just maybe talk about the
go-to-market strategy on the franchise versus Company-owned? What are you guys thinking there as we
move into 2012 and beyond?
Jim ODonnell- American Eagle Outfitters, Inc.- CEO: On the CEO search, Brian, theres no news.
Its very early in the process, and there has been other than preliminary work done by the
search firm, we are probably a month or so away from getting into some specific meet and greets
with some prospective candidates.
As it relates to the trademark acquisition, there was an individual in Europe who held the rights
to a number of countries that we wanted to have access to. We were successful in our negotiations
with this individual, and we have acquired the trademark rights to some 27 countries that it would
have posed somewhat of a problem if wed tried to enter at that time. So we no longer have that
problem, and those markets are now open to us.
As it relates to international modeling, we are right now in a franchisee mode. That means that all
of our international store openings at this particular time are in conjunction with a partner under
a franchise arrangement. We are looking at a few countries in the world where we would either do a
combination of a joint venture or wholly owned. But thats in the very early stages right now.
Brian Tunick- JPMorgan- Analyst: All right, terrific, best of luck for the summer.
Operator: Lorraine Hutchinson, Bank of America.
Paul Alexander- BofA Merrill Lynch- Analyst: Good morning, thanks, this is Paul Alexander for
Lorraine. Could you guys give us an update on the $20 million to $30 million cost savings
initiative? First, is it still $20 million to $30 million? Or now that we are about half a year
into your efforts, do you have a sense of if you are going to be at one end of that range or the
other? And how do you see the timing of that being split?
Joan Hilson- American Eagle Outfitters, Inc.- EVP, CFO: Paul, the $20 million to $30 million is
still the range that we have, and its over the next 24 months. And we have factored in savings as
well within the guidance we have given and have offset some of that with the marketing increases
that weve talked about. So the $20 million to $30 million is still in our sight with some of that
being offset with investment.
Paul Alexander- BofA Merrill Lynch- Analyst: Great, thanks. And then could you talk a little bit
about maybe cotton and costing for 2012? With cotton coming back a little bit, how are you seeing
I know its a little too early to say exactly but directionally, what are you thinking for
early 2012?
Joan Hilson- American Eagle Outfitters, Inc.- EVP, CFO: What we it is early to talk about cotton
for 2012. We recognize that the market is improving. What we can tell you about our back half of
this year is that we were able to within the guidance that we gave and have reiterated here,
that we hit the cotton cost targets that we expected. And we are very pleased with the sourcing
team and the efforts they put forth to do that. So we are right on the mark there and look to gain
some improvement, but how much and where that will be is still a story to be told for 2012.
Paul Alexander- BofA Merrill Lynch- Analyst: Great, thank you.
Operator: Stacy Pak, Barclays Capital.
Stacy Pak- Barclays Capital- Analyst: I guess Im a little confused on the inventory because I
thought what I heard was the merchandise margin increased in this quarter, in part due to tighter
inventory. And yet you are calling for inventories to be up low-double digits, all in, at the end
of Q2. So I guess, where should inventories
be in the second half? How much price increase do you have embedded in your dollar increase or your
dollar-per-share number for the year?
And then, Roger, you have been around a while. I just would like it if you would comment on the
level of promotions that you are seeing in the industry now and how that looks to you and what you
see happening in the second half, given everything thats going on in terms of promotion.
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: Okay, Stacy, Ill take two parts of your question.
One, the volume level for the first quarter was a bit short of where we wouldve liked to have come
out. And Im quite certain it was because we couldnt fuel the competitive price promotions taking
place out there. What we have done in a very prudent way is, as I said before, invested in denim,
in the new accessory part of the business and in the heritage key items. I believe that that will
get market share back that we gave up, in a very prudent way, and use that inventory very
effectively. And it should work both from a volume perspective and from a margin perspective.
As it relates to the level of promotion taking place out in the environment, I walked, obviously,
before each month Im out in the malls. My visit was last week, and I wont talk specifically
about any individual competitor. But the competitive environment is vicious. The price points, the
as low as I, quite frankly, have ever seen them. I dont think we have to get into that fray,
but at the same time we want to have our share of market back.
Stacy Pak- Barclays Capital- Analyst: So I guess just a follow-up, Roger. But if its so vicious
now, why is it going to be so much better in the second half? And why is everyone, without naming
names, going to be able to raise prices altogether in the second half?
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: Well, I think denim is a separate issue. I think when you pretty much own a share of
market in the business, and we havent fueled the inventories to satisfy our customers, I think we,
quite frankly, stand alone. On the other categories we just need to have the fuel to be able to be
in the game.
Operator: Paul Lejuez, Nomura Group.
Paul Lejuez- Nomura Group- Analyst: Guys, just wondering, how did the 46 stores with the expanded
accessory offering perform relative to the chain? And also just wondering, at aerie, just the
transactions per ticket, just trying to figure out what the composition of that comp was.
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: Ill take the first question. The accessory business as you know, we had 10 stores for
holiday and we just added, actually, another 45, which will make it 55. And those were added to
summer two set, which was like 2.5, three weeks ago. Those stores are running I dont want to
give an exact number, but they are running up nicely to the chain. And they are impacting the comp
of those particular stores as well.
Joan Hilson- American Eagle Outfitters, Inc.- EVP, CFO: And with respect to aerie, the transactions
were down in aerie. And ADS we did get some lift in ADS.
Paul Lejuez- Nomura Group- Analyst: Thanks, guys, good luck.
Operator: Dana Telsey, Telsey Advisors.
Dana Telsey- Telsey Advisory Group (TAG)- Analyst: Can you talk about (technical difficulty)?
Joan Hilson- American Eagle Outfitters, Inc.- EVP, CFO: Dana, you are breaking up, and we cant
hear you.
Dana Telsey- Telsey Advisory Group (TAG)- Analyst: Can you talk a little bit about the ancillary
concepts like (technical difficulty)
Judy Meehan- American Eagle Outfitters, Inc.- VP IR: Cant hear you again, Dana.
Dana Telsey- Telsey Advisory Group (TAG)- Analyst: Im going to call back on my other line.
Judy Meehan- American Eagle Outfitters, Inc.- VP IR: Okay. Rob, well go to the next question.
Operator: Sean Naughton, Piper Jaffray.
Sean Naughton- Piper Jaffray & Co.- Analyst: Just maybe a quick update on the real estate front
could you give us an idea of the lift you are seeing on any of your remodel program, the costs of
the remodel, and how many you plan to do this year? And then maybe secondarily, just how should we
think about the new store opening and closings in terms of cadence for the balance of the year?
Jim ODonnell- American Eagle Outfitters, Inc.- CEO: This year happens to be the most remodels
weve ever undertaken in my 11 years here, and they number about 200. They are all not full
remodels. We have really broken down our whole remodel program into three different categories. One
is a complete remodel, and that would be only for very specific stores using very high-profile
shopping centers and our highest-volume stores and the most profitable. The mid tier would be ones
where we more or less do some lighting and some floor refurbishing and painting. And then the third
is the lowest, and thats where we just do the paint-outs and freshen up the stores.
Our results on the remodels have been very positive. They overall are in the low single-digit
mid to low single-digits over their previous sales cadence. And so we are encouraged. And in most
cases on a remodel, when we renew a lease, theres some sort of a remodel thats tied into the
lease renewal. So its not just automatic that on our part that we would just arbitrarily do or
not do a particular remodel. So thats why weve put them in three different categories.
The number of store openings and closings are we have been very frugal in the number of stores
we are opening. On the Eagles, primarily the store openings are all in the factory outlet
environments that have been extremely prolific for us, and we will continue to look at that
channel. We have aerie stores, opened about 10 aerie stores we plan, and 77kids we have about 12
stores planned to be open.
The aerie stores and the 77kids stores Im overall pleased with, that we will continue to Joan
and I will continue to look at the financial cadence as it relates to the brands in total, and that
would be the aerie and 77 brands. And we are going to be very prudent about where we are going to
open stores and how fast were going to open. We want to see some proof in practice, some
improvements in overall performance in both aerie kids is performing well, but I am being very,
very cautious with that brand. And I believe that back-to-school and especially holiday will be the
seasons that we will be able to evaluate overall progress in those two brands.
As it relates to closing stores, we have identified a number of stores over the next two years.
They number somewhere between 85 and 100 stores that are eligible to close. That doesnt
necessarily mean we are going to close them, but we would look at them and contemplate closing. As
we are looking at some of the initiatives that we are embarking on, currently, as Roger mentioned
in depth, and that is with key item pricing, with back to our heritage in some of our key
categories, and some of these store should respond very nicely. And I would hope they would. And so
that number is a number that we are not locked into. But, based on the financials as of today, 85
to 100 stores would be considered for potential closing.
Sean Naughton- Piper Jaffray & Co.- Analyst: And then just real quick, for this year the closings,
though, are likely weighted towards Q4 area, or is it Q3? Or do we just need to see back-to-school
and then see how many we are going to do this year?
Jim ODonnell- American Eagle Outfitters, Inc.- CEO: This year, youre going to see somewhere
between 25 and 35 stores that probably we will close.
Sean Naughton- Piper Jaffray & Co.- Analyst: Okay, thank you.
Operator: Howard Tubin, RBC Capital Markets.
Howard Tubin- RBC Capital Markets- Analyst: Maybe you can talk a little bit more about marketing
and what changes, if any, can we expect now that Michael is back on board?
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: Well, Michael was a very creative marketing guy. He built the brand with us at the very
beginning, and he is very, very connected to driving traffic through stores in a very creative way.
Remember at the very beginning, we were the first ones, when it was real world, we were first in
many, many initiatives. Michael is very connected to the whole social media network, and Fred and
his whole team prior have done an incredible job. I cant talk about some announcements that will
be made tomorrow, but as the premier brand we have a lot of the top social media networks want
us to join with them in partnerships, and there will be a major release tomorrow.
Judy Meehan- American Eagle Outfitters, Inc.- VP IR: Okay, thanks; Rob, next question, please.
Operator: Dana Telsey, Telsey Advisors.
Dana Telsey- Telsey Advisory Group (TAG)- Analyst: On aerie, you mentioned the growth initiatives,
aerie and 77kids, you mentioned aerie sales below plan and operating profit similar. Can you give
further clarification on that business, whats happening product wise? And also, with 77kids, and
how do price increases impact those two businesses?
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: Aerie we like the way aerie looks. Its not robust enough yet. As Jim said, the
operating line is equal to last year. And when you take the aerie as a brand, the combination of it
being in the stores and what it does on the web and its own stand-alone, it is a profitable
business. But the team that we assembled are working incredibly well together. Actually, Jim and I
just did a walk-through of back-to-school yesterday, and compared to last years back to school it
is a major improvement. We really like the way its coming together.
Our hope is that it starts to really give us the increases on the volume side along we are
seeing margin improvement. And we have been running it very lean.
Jim ODonnell- American Eagle Outfitters, Inc.- CEO: As it relates to 77kids, as far as price
increases, our production team has done an outstanding job in negotiating costs for the upcoming
seasons of back-to-school and now into holiday. We dont anticipate seeing major price increases
across the board in 77kids. Primarily, I think it would be a very bad signal to send to a consumer
who we are just trying to attract in a new start-up business.
And the other is that I think where we have initially priced our product, its competitive. Its
not the least expensive in the kids business, but it is very competitive. And I think through
promotions throughout back-to-school and holiday, Im very confident that we are going to hit our
top-line numbers as well as what we anticipate will be our bottom-line results.
Dana Telsey- Telsey Advisory Group (TAG)- Analyst: Thank you.
Operator: Jennifer Davis, Lazard Capital Markets.
Jennifer Davis- Lazard Capital Markets- Analyst: Just a quick question Im sorry if I missed
this. But I know that your previous 2011 guidance was based on a low single-digit comp. Have you
updated that?
Joan Hilson- American Eagle Outfitters, Inc.- EVP, CFO: Well, the low single-digit comp is
consistent, Jennifer, with previous guidance. It puts pressure, more pressure on the back half of
the year. However, remember that the back half of the year was weaker, particularly in the fourth
quarter. And based on the traction that we are seeing in key items today, we feel that the low
single-digit view is appropriate.
Jennifer Davis- Lazard Capital Markets- Analyst: Okay, great. And then can you comment on your I
think you said that you had lower product costs in the first quarter that helped merchandise
margins. So can you go into a little detail on that? And do you expect any of that to continue?
Joan Hilson- American Eagle Outfitters, Inc.- EVP, CFO: It was just, in fact, that, that we had
advantageous product costs in the first quarter that we were able to turn into a better margin
performance for the quarter. As we look forward to Q2, as I said, we expect the product costs to be
up high single-digit, reflecting the blend of back to school as well as the second-quarter product.
And then, as we move into the back half its a mid-teen, reflecting the product cost increase but
very consistent with the guidance that weve given for margin.
Jennifer Davis- Lazard Capital Markets- Analyst: All right, thanks, and best of luck.
Operator: Richard Jaffe, Stifel Nicolaus.
Richard Jaffe- Stifel Nicolaus- Analyst: Just following on that same thought, with product costs up
in the second half and your re-emphasis on some of the key items, how do you anticipate retail
prices on some of these key items? Will you try and balance and take advantage of margin
opportunity in the denim and be more aggressive and pricing on the key items? Or will you just try
and keep margin rates the same and just adjust according to profit to cost?
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: I think you said it all, Richard.
Richard Jaffe- Stifel Nicolaus- Analyst: You have to choose one, Roger, come on.
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: I think you answered your own question.
Joan Hilson- American Eagle Outfitters, Inc.- EVP, CFO: Yes and yes.
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: And if you want to come over here and be a merchant, well let you.
Richard Jaffe- Stifel Nicolaus- Analyst: After this week I might need to. Thanks. So we should look
for competitive pricing on some of these key items? You will go toe to toe with the rest of
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: Absolutely. Obviously, we think these key items that we are building, besides having the
Eagle logo which unfortunately we let go of this, which we will grab back real quick we think
that the design of the
product, even though it is what you would call a key heritage item, has some specialness to it that
makes ours that much better than the competitor.
Richard Jaffe- Stifel Nicolaus- Analyst: And when you say heritage, its not going to be 1999
product recycled? Youre going to be adjusting it for fit, for style, for color?
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: Absolutely. The whole fleece business in womens changes dramatically, but we call it
heritage.
Richard Jaffe- Stifel Nicolaus- Analyst: Very good, thanks a lot, guys.
Operator: Marni Shapiro, The Retail Tracker.
Marni Shapiro- The Retail Tracker.- Analyst: Can you talk a little bit about what is working, first
of all, in non-apparel? I know you have pumped it up in some of the stores bigger than others, but
could you just touch a little bit on you have a lot of belts, hats. Footwear has expanded in
some of the stores, and certainly online its very expanded. Personal care seems to be pulled back
in some stores and pumped up in others. Can you talk a little bit about that?
And could you also just touch on, in the bohemian, you had a lot of wovens in the store that
carried a higher price point. But they were very fashion right and, I thought, looked great. I was
curious if on items like that you saw price resistance or, if the fashion was right, she was buying
it.
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: No. To answer the second question first, the woven top area as we have gone into the
second quarter is very strong. And we do have great items within that assortment on the bohemian
front. As I said before to I think it was Janet, the bohemian trend will continue along with our
classic preppy heritage items. And we are doing extremely well in that category.
In the whole accessory business, our underwear business is very strong, and parts of the belt
business are strong. Parts of the footwear business are strong. And as you know, sandals have been
a bit slow across the country. But we have very good signs on this accessory business. And where we
have the shop within the shop, its doing really nicely as a total. We really dont have more
inventory in an average store in accessories, just yet. We will see that for back-to-school.
Marni Shapiro- The Retail Tracker.- Analyst: And jewelry still is doing well for you guys?
Joan Hilson- American Eagle Outfitters, Inc.- EVP, CFO: Jewelry?
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: Jewelry is doing okay.
Marni Shapiro- The Retail Tracker.- Analyst: Okay, good luck, guys, for back-to-school well for
summer, actually.
Operator: Betty Chen, Wedbush.
Betty Chen- Wedbush Securities- Analyst: I was wondering if you can give us what were the comps for
the womens and the mens businesses in the first quarter. And then I think earlier you mentioned
that you are also looking at shipping to more countries on AEO.com in general. Can you give us the
timing of that and remind us how many countries you are shipping to now or when we can expect that
to happen?
And then also the timing of some of your expanded categories, and how are we seeing and are we
seeing any sort of different purchase patterns between your online customer and your in-store
shoppers?
Joan Hilson- American Eagle Outfitters, Inc.- EVP, CFO: Okay, Betty. The mens comp for the quarter
was down 5% and womens was down 10%.
Betty Chen- Wedbush Securities- Analyst: And the online business, Joan?
Joan Hilson- American Eagle Outfitters, Inc.- EVP, CFO: The performance on the online business was
up low-single digit. We saw an improvement in conversion and with a slight decline in traffic. But
the online business continues to be a very strong profit performer for us and very nice inventory
turns there and a very nice margin.
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: The brand is very strong online, and it represents for us a bit over 12% of our total
business. Its a big number, and its growing and continues to grow. And how many countries we ship
in we are working on certain programs in terms of so we can ship more effectively at a better
cost. But right now, we are shipping to I believe its around 70-something, 70-some countries we
are shipping too.
Joan Hilson- American Eagle Outfitters, Inc.- EVP, CFO: Over 70.
Judy Meehan- American Eagle Outfitters, Inc.- VP IR: All right, Rob, we have time for one more
question.
Operator: Roxanne Meyer, UBS.
Roxanne Meyer- UBS- Analyst: I just wanted to follow up on your strategy to go after key items.
This comes after a few years of shifting your focus to a little bit more on fashion, and Im just
wondering, in the context of your vision to get the older customer in your store a little bit more,
give them day-to-night looks does this change who you are going after, or is this just about
realizing that this is the sweet spot of your business?
Roger Markfield- American Eagle Outfitters, Inc.- Vice Chairman of the Board, Executive Creative
Director: I think you hit it on the second note; its the sweet spot of our business. We have
always wanted to be a 15-to-25-year-old customer who is a high school/college customer. We have
always been college focused, and this just lets us have both, not a singular purpose.
Judy Meehan- American Eagle Outfitters, Inc.- VP IR: Okay, thanks, Roxanne. That concludes our
call today. Our second quarter announcement is scheduled for Wednesday, August 24. Thanks for your
participation and have a great day.
Operator: This concludes todays teleconference. You may disconnect your lines at this time. Thank
you for your participation.