WWD: American Eagle Outfitters Wants to Be a $6 Billion Business

By: Evan Clark | Link to article

The retailer topped fourth-quarter expectations and laid out a three-year plan to continue growing by 3 to 5 percent a year.

The momentum is picking back up at American Eagle Outfitters Inc. - and the retailer said it has a clear path to profitably add more than $700 million in sales over the next three years.

It's a big moment for AEO, which has been working hard to refocus, rationalizing at American Eagle while also revving up Aerie and operating more efficiently.

The company found a good springboard for its three-year plan in the fourth quarter, when adjusted earnings came in stronger than expected and sales grew by 12 percent, with some help from an extra week.

All told, revenues tallied $5.26 billion last year and the company is now looking to push that up to $5.7 billion or $6 billion in the next three years, with an operating margin rate of about 10 percent.

"We're laying out a path to consistent 3 to 5 percent revenue growth," said Mike Mathias, chief financial officer, in an interview ahead of the company's meeting with Wall Street on Wednesday.

Mathias said AEO has been engaged in a lot of "self-help" initiatives around improving profits, cutting costs and investing in capabilities to support its brands - becoming savvier on marketing and media spend and on inventory.

"We spent several years on inventory optimization and efficiencies that have taken hold," the CFO said. "We've really structured ourselves and put a governance process in place around cost management, expense management. All the pieces that are in place now that on this 3 to 5 percent revenue growth, we're structured now to deliver value from that growth in a different way than we've been able to in previous years."

In the fourth quarter, AEO's revenues rose to $1.68 billion from $1.5 billion a year earlier - an increase helped along by $57 million in sales during an extra week in the most-recent period.

American Eagle's sales rose 11 percent to $1.1 billion, with a 6 percent gain in comparable sales. Aerie was up 16 percent to $538 million, with a 13 percent comp.

The adjusted gross margin rate of 37.3 percent represented a 340-basis-point improvement, driven by a combination of stronger consumer demand, lower product and transportation costs, lower markdowns and more.

The bottom line, though, was hit hard by a $131 million, mostly non-cash impairment and restructuring charge that covered the refocusing of the Quiet Platforms logistics business and efforts to streamline.

Accordingly, net income for the quarter fell to $6.3 million from $54.6 million a year ago.

But adjusted earnings per share came in at 61 cents, 11 cents ahead of the 50 cents analysts projected, according to FactSet.

Jay Schottenstein, executive chairman and chief executive officer, said in a statement: "We are entering 2024 with momentum and from a position of strength with an exciting lineup of innovation and customer engagement initiatives. Our balance sheet is healthy and we are seeing early proof points of our new long-term strategy to deliver industry-leading earnings growth and shareholder returns."

Much of that momentum is being driven by elements controlled by Jennifer Foyle, president and executive creative director of American Eagle and Aerie.

After a period of significant change - American Eagle closed some 130 stores over the past three years as Aerie evolved into a growth machine - Foyle said both businesses are ready to charge into the future.

While Foyle said the American Eagle's women's business logged "great results" in the fourth quarter and that the business planned to lean in on the category, there is a lot more going on.

"We have new brands that we're launching or categories that we think will give us age expansion within American Eagle," she said. "We have men's AE 24/7, which is ageless. We have our new 77 brand, which is a little bit more premier denim, and we're seeing early nice results there. And then just leaning into 'social casual,' is what we're calling it. That's our core day-in and day-out business in AE."

The American Eagle stores are also being remodeled with what Foyle described as its "Lived In concept," which welcomes shoppers with expansive storefronts and big fitting rooms.

All of this marks a significant evolution for the American Eagle business, which fell out of step for a little while.

"We were chasing comp with a lot of inventory," Foyle said. "We really just had the team focus on what we do best, our core categories, while then adding on as we sort of walked away from that over assortment. We have focused on profitability while rationalizing, and we did a nice job with that."

Meanwhile, Aerie is still in the steep part of its growth curve.

"We're still not in all markets, so there's still tons of opportunity to introduce our brand into new markets, particularly on the West Coast," Foyle said.

The brands' active offshoot Offline is also being well received and is clearly getting a spotlight at the company.

"Over assortment is not what we're up to," Foyle said. "We're focused on delivering comp product year-over-year. Our top 10 items to our top 25 items, we look at every detail."

That has Aerie pushing the core while also leaving a little left to chase trends as well.

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