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AEO Battles Inflation Headwinds; Reveals $42 Million Loss

American Eagle Outfitters continues to be plagued by inflationary pressures and other macro headwinds.

The firm — which includes the American Eagle, Aerie, Offline by Aerie, Unsubscribed, AE77 and Todd Snyder brands — revealed a $42 million quarterly loss Wednesday after the market closed. Much like many of its competitors in the retail space, the cause can be traced back to excess inventory, rapidly changing consumer habits and price hikes along the supply chain.

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“This is an unprecedented time in retail. As we cycle [through] exceptional demand from last year, a tougher macro environment is impacting consumer spending behavior,” said Jay Schottenstein, AEO’s executive chairman of the board and chief executive officer. “Second-quarter performance reflected these challenges, constraining revenue and amplifying margin pressure as we fully cleared through excess spring and summer goods.

“In a shifting macro environment, we are focused on controlling the controllables,” he added. “We entered the second half with inventory levels in a much better position and an assortment that is current for the fall season. Given ongoing external uncertainties, we have taken additional actions to improve financial performance. We have made more expansive expense reductions and are pulling back further on capital expenditures. As an additional cautionary move, we have paused our quarterly cash dividend to strengthen our cash position.”

AEO also plans to save money by keeping selling, general and administrative expenses flat, year-over-year, compared with previous estimates of low-to-mid-single-digit growth in the second half, by way of additional “expense cuts with a focus on store payroll, corporate expense, professional services and advertising.” The adjustments are expected to save the company roughly $100 million in annualized expenses, compared with the prior target’s of $60 million.

But Michael Mathias, chief financial officer at AEO, told WWD that the expense cuts do not include layoffs.

“To improve profitability and cash flow we have paused noncritical spending,” he explained. “This includes a hiring freeze and optimizing expenses within store compensation, professional services, travel and advertising. We have also lowered capital spending for the remainder of the year and into 2023.”

Like many retailers, American Eagle Outfitters has struggled with shifting consumer preferences, too much inventory, subsequent markdowns and higher prices for things like freight, delivery, warehousing and rent. There are macro geopolitical pressures, too, including the ongoing war in Ukraine and global inflationary pressures. For AEO, that meant a loss of $42.4 million in the most recent quarter, compared with gains of more than $121 million last year.

Among the biggest headwinds, quarter-end inventory costs rose 36 percent to $687 million in the three-month period ending July 30, up from $504 million a year ago. The company said the AE and Aerie brands drove about half of the increased inventory amount, a combination of total units up 22 percent for the quarter, and increased store openings for the two brands over the last 12 months. SG&A expenses also rose 5 percent for the quarter to $308 million, driven by higher store wages, corporate compensations, advertising costs and other professional services.

AEO’s operating income was $14 million for the quarter, compared with nearly $168 million last year, which included a $30 million impact from higher end-of-season selloffs, $25 million from higher freight costs and a $9 million loss from Quiet Logistics.

Top-line, total company revenues were nearly $1.2 billion, flat compared with 2021’s second quarter. Consolidated store revenue fell 2 percent, year-over-year, while total digital revenue was down 6 percent for the quarter. Total brand revenue declined 2 percent, year-over-year, while AEO’s supply chain business Quiet Logistics added approximately 2 percentage points of revenue growth. (This spring, AEO signed Fanatics to the platform, followed by Saks Off Fifth.)

By brand, revenues at the nameplate brand declined 8 percent to approximately $778 million, compared with nearly $846 million last year. Comp sales at AE fell 10 percent, year-over-year.

Meanwhile, innerwear and swimwear brand Aerie remained the crown jewel, with sales for the last 13 weeks rising 11 percent to nearly $372 million, up from about $336 million last year.

Comp sales at Aerie declined six percent, year-over-year.

“Our brands and products remain highly relevant and sought after by our customers,” Schottenstein said. “I am confident we will successfully navigate current challenges and set AEO up for a stronger future.” He added that the recent back-to-school shopping season was strong.

Still, current quarter demand trends remain challenged, the company said, with brand revenues down in the high-single digits. As headwinds persist, the company is anticipating more promotional activity in the back half, with its third- and fourth gross-margin rates in the mid-30s and low-30s ranges, respectively.

AEO added that it has made progress lowering inventories to be in line with demand trends and is expecting third-quarter ending inventory to be up in the mid-single digits, while fourth-quarter inventory is expected to be down, year-over-year.

The company ended the quarter with more than $98 million in cash and cash equivalents, $376 million in long-term debt and 1,160 stores across the AE, Aerie, Unsubscribed and Todd Snyder brands.

Shares of American Eagle Outfitters closed up 2.62 percent to $11.57 Wednesday.