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  • Nick Monjo

Aerie Q2 Sales Up 11%, Income Down 83%

Aerie second quarter operating income fell 83% to $11.830 million as net revenue rose 11% to $371.683 million. Earnings were hurt by slow swim sales, discounting, promotions and the cost of opening new stores.

Last year the intimates division of American Eagle Outfitters (AEO) reported operating income of $70.646 million on total net revenue of $335.795 million in the 13 weeks ended July 31, 2021.

CFO Mike Mathias stated that Aerie’s margins were hurt in the second quarter by “sell-offs, to clear inventory and in-season promotions,” as well as “some pressure on margins due to a higher number of new store openings, which are still in their ramp-up period. As inventory resets and newer stores continue to build, we expect Aerie’s margins to show a meaningful recovery back to double digits in the second half.” His comments, and those of other executives, came during the call with analysts to discuss the quarter.

Chief operating officer Michael Rempell explained the company “added approximately 20 new Aerie and Offline locations in the second quarter, bringing our total openings over the past 12 months to approximately 100 new stores.” Offline is the firm’s new activewear brand. In total, as if the end of July, the company reported a total of 276 Aerie and Offline locations, both stand alone and “side by side” (located next to American Eagle stores), without listing the breakdown for each category.

Jen Foyle, president, executive creative director for American Eagle and Aerie, noted the sales increase in the quarter was “driven by new store openings. Comparable sales were down 6%, following a 25% comp increase last year. Swimwear remains soft. While overall demand was below our plan, the majority of categories posted increases to last year. Undies, leggings, apparel and accessories, all posting positive growth. Additionally, Offline continues to show incredible potential and demonstrate strong customer acceptance.”

“I am also pleased to see that Aerie’s multi year growth trajectory remains intact. Since second quarter of 2019, revenues have nearly doubled, growing almost $170 million. Our customer file has expanded by almost two million shoppers.”

AEO as a whole, which sells a variety of apparel, suffered a loss of $42.466 million on sales of $1.198 billion in the three months ended July 30, compared to net profit of $121.511 million on sales of $1.194 billion in the same period last year.

Given the recent setback, CFO Mathias admitted “we are probably going to look at a relatively smaller new store count for next year, just so we can focus on that, but we still believe there is runway in terms of store growth over the next three years. I think there is just a lot of benefit to focusing on the profitability of what we have already invested in over the next four quarters to six quarters.”

COO Rempell, however, reinforced the lingerie brand’s commitment to adding stores. “Aerie store expansion strategy has been very successful in building brand awareness. After significant investment over the past few years, we are slowing down the pace of openings as we focus on maximizing these investments. As we have noted in the past, new stores grow at an accelerated rate in years two and three before approaching the comp store average in year four. So as new stores ramp up, we expect to see very nice returns from our investments, including both the sales and profit generated within the four walls as well as the digital halo created for our online channel. Our typical payback period on Aerie stores is less than three years, with returns that well exceed our cost of capital and reflect the company’s highest ROI.”

He also discussed a variety of issues confronting AEO as a whole. “Moving on to supply chain, after a highly challenging year, I am very pleased to see inbound supply chain improvement. Shipping delays and bottlenecks are easing, transit times are shorter and freight costs, although still elevated to pre-pandemic history, have come off substantially from highs reached last year. As a result, our lead times have narrowed dramatically from their peak last November. Importantly, this is bringing back our ability to be more agile and responsive to changes in demand.” He added that “cotton pricing has also moderated from peaks this past spring and I expect we are going to see product costs look favorable into next year.” — NM

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