AMERICAN EAGLE OUTFITTERS INC

The second quarter of Fiscal 2024 showed continued progress on our "Powering Profitable Growth" plan, marked by the three strategic priorities. Compared to the second quarter of Fiscal 2023's:

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Amplifying our brands: Total revenue increased 8% to $1.291 billion from $1.201 billion, with American Eagle revenue increasing 8% year over year, and Aerie revenue increasing 9% year over year. American Eagle's comparable sales increased 5% year over year, and Aerie's comparable sales increased 4% year over year.

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Executing with financial discipline: Gross profit increased 10% to $499 million year over year, and increased by 90 basis points year over year to 38.6% as a percentage of revenue.

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Optimizing our operating capabilities: Operating income increased 55% to $101 million from $65 million last year, and increased by 240 basis points from last year to 7.8% as a percentage of revenue.

Diluted earnings per share increased to $0.39 for the 13 weeks ended August 3, 2024 compared to $0.25 for the 13 weeks ended July 29, 2023.

The following tables show the percentage relationship to total net revenue of the listed line items included in our Consolidated Statements of Operations:

The following table shows our consolidated store data for the 13 and 26 weeks ended August 3, 2024 and July 29, 2023:

(1)

International licensed/franchise stores are not included in the consolidated store data or the total gross square feet calculation.

As of August 3, 2024, we operated 843 American Eagle retail stores, consisting of 187 Aerie side-by-side locations, five locations with AE brand, Aerie brand and OFFLINE™ connected as one store, and two OFFLINE™ side-by-side locations, 313 Aerie stand-alone stores (including 39 OFFLINE™ stand-alone stores and 36 OFFLINE™ side-by-side locations), and AEO Direct. Additionally, there were 17 Todd Snyder stand-alone locations and five Unsubscribed locations.

Comparison of the 13 weeks ended August 3, 2024 to the 13 weeks ended July 29, 2023

Total Net Revenue

Total net revenue increased 8% to $1.291 billion for the 13 weeks ended August 3, 2024, compared to $1.201 billion last year. The shift in the retail calendar contributed approximately $55 million to revenue for the 13 weeks ended August 3, 2024. Digital revenue increased 12%, and store revenue increased 7%, driven by increased transaction volume through increased traffic across channels and a slight increase in units per transaction. Total comparable sales increased by 4%, compared to a 1% decrease last year.

American Eagle. The increase in net revenue was driven by increased transaction volume as a result of increased traffic across channels. American Eagle comparable sales increased 5%.

Aerie. The increase in net revenue was driven by increased transaction volume as a result of increased traffic across channels. Aerie comparable sales increased 4%.

Other. The decrease in net revenue was primarily attributable to planned lower revenue from Quiet Platforms offset by lower intersegment eliminations (net reduction of $6 million) due to our change in strategy for this business.

Gross Profit

The 10% increase in gross profit was primarily driven by an increase of $57 million in merchandise margin year over year due to increased net revenue from both American Eagle and Aerie, as well as improved product and transportation costs. Buying, occupancy and warehousing costs increased by $12 million, primarily as a result of the increase in sales volume. However, as a percent to net revenue, buying, occupancy, and warehousing costs decreased by 40 basis points, driven by rent and digital delivery, reflecting a lower product cost per order.

During the 13 weeks ended August 3, 2024 and July 29, 2023, $2.5 million and $5.0 million, respectively, of share-based payment expense were included in gross profit, representing both time and performance-based awards.

Our gross profit may not be comparable to that of other retailers, as some retailers include all costs related to their distribution network, as well as design costs in cost of sales and others may exclude a portion of these costs from cost of sales, including them in a line item such as SG&A expenses. Refer to Note 2 to the Consolidated Financial Statements for a description of our accounting policy regarding cost of sales, including certain buying, occupancy and warehousing expenses.

The increase in expenses was primarily related to:

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a $7 million increase in advertising;

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a $6 million increase in store compensation due to increased wage rates; and

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an increase in other variable sales related expenses; partially offset by

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a $6 million reduction in performance-based incentive expense.

There was $4.3 million and $5.5 million of share-based payment expense included in SG&A expenses for the 13 week periods ended August 3, 2024 and July 29, 2023, respectively, comprised of both time and performance-based awards.

Depreciation and Amortization Expense

The decrease in depreciation and amortization expense was primarily driven by prior year impairments of definite-lived tangible and intangible assets of Quiet Platforms.

Operating Income

The 55% increase in operating income, including approximately $20 million positive impact from the retail calendar shift, was primarily driven by by higher gross profit, a reduction in depreciation and amortization, and was partially offset by an increase in SG&A costs all of which are explained in detail above.

American Eagle. The 13% increase was primarily the result of the 8% increase in revenue discussed above, leading to a $23 million, or 7% increase in gross profit driven by a $30 million increase in merchandise margin, partially offset by increased buying, occupancy, and warehousing costs from the increased sales volume. The gross profit improvement was partially offset by an $8 million increase in SG&A costs, primarily from incremental advertising investment and other variable sales related expense to arrive at the $16 million increase in operating income.

Aerie. The 22% increase was primarily the result of the 9% increase in revenue discussed above, leading to a $23 million, or 16% increase in gross profit driven by a $22 million increase in merchandise margin. The gross profit improvement was partially offset by an $11 million increase in SG&A costs, primarily driven by store compensation and incremental advertising investment to arrive at the $12 million increase in operating income.

General Corporate Expenses. The decrease is primarily due to lower performance-based incentive compensation expense, as well as decreased depreciation and amortization.

Interest (Income) Expense, net

The increase in interest income, net was primarily attributable to increased interest income of approximately $1 million on deposits and a reduction in interest expense of approximately $1 million primarily related to borrowings on our revolving Credit Facility. No borrowings were outstanding on our Credit Facility during the 13 weeks ended August 3, 2024 as compared to an average of approximately $20 million outstanding on our revolving Credit Facility throughout the 13 weeks ended July 29, 2023.

Other (Income), net

Provision for Income Taxes

The provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The effective income tax rate for the 13 weeks ended August 3, 2024 was 25.4% compared to 27.0% for the 13 weeks ended July 29, 2023. The change in the effective tax rate, as compared to the prior period, is primarily due to a change in non-deductible executive compensation and international provisions of the Tax Cuts and Jobs Act ("the "Tax Act").

Net Income

Net income per share increased to $0.39 per diluted share for the 13 weeks ended August 3, 2024, compared to $0.25 per diluted share for the 13 weeks ended July 29, 2023. The increase in net income was attributable to the factors noted above.

Comparison of the 26 weeks ended August 3, 2024 to the 26 weeks ended July 29, 2023

Total Net Revenue

Total net revenue increased 7% to $2.435 billion for the 26 weeks ended August 3, 2024, compared to $2.282 billion last year. The shift in the retail calendar contributed approximately $70 million to revenue for the 26 weeks ended August 3, 2024. Digital revenue increased 12%, and store revenue increased 6%, driven by increased transaction volume as a result of increased traffic across channels. Total comparable sales increased by 5%, compared to a 1% decrease last year.

American Eagle. The increase in net revenue was driven by increased transaction volume as a result of increased traffic across channels. This increase was partially offset by $5 million of incremental revenue from excess end-of-season selloffs, during the 26 weeks ended July 29, 2023, which we did not anniversary this year. American Eagle comparable sales increased 6%.

Aerie. The increase in net revenue was driven by increased transaction volume as a result of increased traffic across channels. This increase was partially offset by $9 million of incremental revenue from excess end-of-season selloffs, during the 26 weeks ended July 29, 2023, which we did not anniversary this year. Aerie comparable sales increased 5%.

Other. The decrease in net revenue was primarily attributable to planned lower revenue from Quiet Platforms offset by lower intersegment eliminations (net reduction of $10 million) due to our change in strategy for this business.

Gross Profit

The 11% increase in gross profit was primarily driven by an increase of $111 million in merchandise margin year over year due to increased net revenue from both American Eagle and Aerie, as well as improved product and transportation costs. Buying, occupancy and warehousing costs increased by $14 million, primarily as a result of the increase in sales volume. However, as a percent to net revenue, buying, occupancy, and warehousing costs decreased by 70 basis points, driven by rent and digital delivery, reflecting lower product cost per order.

During the 26 weeks ended August 3, 2024 and July 29, 2023, $9.1 million and $10.8 million, respectively of share-based payment expense were included in gross profit, representing both time and performance-based awards.

Our gross profit may not be comparable to that of other retailers, as some retailers include all costs related to their distribution network as well as design costs in cost of sales and others may exclude a portion of these costs from cost of sales, including them in a line item such as SG&A expenses. Refer to Note 2 to the Consolidated Financial Statements for a description of our accounting policy regarding cost of sales, including certain buying, occupancy and warehousing expenses.

The increase in expenses was primarily related to:

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a $20 million increase in compensation, primarily due to $13 million of incremental store compensation due to increased wage rates, partially offset by efficiencies in our store labor model;

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an increase of $11 million in advertising; and

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an increase in variable sales related expenses.

There was $18.3 million and $14.5 million of share-based payment expense included in SG&A expenses for the 26 week periods ended August 3, 2024 and July 29, 2023, respectively, comprised of both time and performance-based awards.

Impairment, Restructuring and Other Charges

There were no impairment, restructuring and other charges for the 26 weeks ended August 3, 2024. During the 26 weeks ended July 29, 2023, we recorded $21.3 million of impairment, restructuring and other charges related to Quiet Platforms. We recorded $10.8 million of impairment of supply chain technology assets due to insufficient prospective cash flows to support the asset value resulting from the restructuring of Quiet Platforms, $5.6 million of employee severance, and $4.9 million of contract related charges.

Depreciation and Amortization Expense

The decrease in depreciation and amortization expense was primarily driven by prior year impairments of definite-lived tangible and intangible assets of Quiet Platforms.

Operating Income

The 103% increase in operating income, including approximately $30 million positive impact from the retail calendar shift, was primarily driven by higher gross profit, a reduction in impairment, restructuring, and other charges, and a reduction in depreciation and amortization, partially offset by increased SG&A expenses, all of which are explained in detail above.

American Eagle. The 21% increase was primarily the result of the 8% increase in revenue discussed above, leading to a $58 million, or 10% increase in gross profit driven by a $67 million increase in merchandise margin, offset by a $9 million increase in buying, occupancy, and warehousing costs from the increased sales volume. The gross profit improvement was partially offset by an $11 million increase in SG&A costs, primarily from store compensation, incremental advertising, and other variable sales related costs to arrive at the $49 million increase in operating income.

Aerie. The 16% increase was primarily the result of the 7% increase in revenue discussed above, leading to a $37 million increase in gross profit driven by a $34 million increase in merchandise margin. The gross profit improvement was partially offset by a $20 million increase in SG&A expenses, primarily driven by store compensation, incremental advertising and other variable sales related costs to arrive at the $18 million increase in operating income.

Other. The decrease was primarily the result of a $6 million improvement from Quiet Platforms as a result of lower SG&A and depreciation and amortization expenses, partially offset by a $4 million decline in performance from the Todd Snyder and Unsubscribed brands.

Interest (Income) Expense, net

The increase in interest (income) expense, net was primarily attributable to increased interest income of $5 million on deposits, no borrowings on our Credit Facility, and the elimination of convertible note interest expense on the 2025 Notes due to their Early Redemption last year.

Other (Income), net

Provision for Income Taxes

The provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The effective income tax rate for the 26 weeks ended August 3, 2024 was 22.1% compared to 27.1% for the 26 weeks ended July 29, 2023. The change in the effective tax rate, as compared to the prior period, is primarily due to excess tax benefits on share-based payments and tax audit adjustments.

Net Income

Net income per share increased to $0.73 per diluted share for the 26 weeks ended August 3, 2024, compared to $0.34 per diluted share, for the 26 weeks ended July 29, 2023. The increase in net income was attributable to the factors noted above.

International Operations

We have agreements with multiple third-party operators to expand our brands internationally. Our international licensing partners acquire the right to sell, promote, market, and/or distribute various categories of our products in a given geographic area and to source products from us. International licensees' rights include the right to own and operate retail stores and may include rights to sell in wholesale markets, shop-in-shop concessions and operate online marketplace businesses. As of August 3, 2024, our international licensing partners operated in 313 licensed retail stores and concessions, as well as wholesale markets, online brand sites, and online marketplaces in approximately 30 countries.

As of August 3, 2024, we had 104 Company-owned stores in Canada, 83 in Mexico, 15 in Hong Kong, and seven in Puerto Rico.