American Eagle initiates third quarter guidance

26 Aug '10

5 min read

American Eagle Outfitters, Inc. announced net income for the second quarter ended July 31, 2010 of $0.05 per diluted share, compared to $0.14 per diluted share last year. Due to the closure of the MARTIN+OSA business, its results of operations are presented as discontinued operations for all periods and are further discussed below.

Income from continuing operations for the second quarter ended July 31, 2010 was $0.13 per diluted share compared to income from continuing operations for the second quarter ended August 1, 2009 of $0.18 per diluted share.

“The second quarter was a challenging period, resulting in a miss to our sales and profit plans,” said Jim O'Donnell, chief executive officer. “Given the inconsistencies in business trends and unpredictable consumer behavior, we have intensified our actions to improve efficiencies, streamline our process and strengthen profitability. We are committed to driving change across the organization and delivering sustainable long-term growth.”

Second Quarter Results – Continuing Operations
Total sales for the 2010 second quarter increased to $652 million, compared to $647 million last year. Comparable store sales decreased 1%.

Gross profit decreased 6% to $240 million, or 36.8% as a rate to sales, compared to $254 million or 39.3% last year. The merchandise margin decreased 210 basis points due to higher markdowns as a result of weaker sales performance within key categories of our summer assortment. As a rate to sales, buying, occupancy and warehousing costs increased 40 basis points primarily due to the opening of new stores and negative comparable store sales.

Selling, general and administrative expense was $165 million compared to $161 million last year, a 3% increase. The increase was due to the timing of contract-based equity grants and severance payments. Excluding these items, SG&A was down slightly to last year.

Operating income was $38 million, compared to $60 million last year. The second quarter operating margin was 5.9%, compared to 9.2% last year.

The company's quarterly tax rate from continuing operations for the second quarter was 30.3%. This includes the favorable impact of tax incentives related to the company's distribution center in Ottawa, Kansas.

The company generated income from continuing operations of $26 million, compared to $37 million last year.

MARTIN+OSA Update – Discontinued Operations
On March 9, 2010, the company announced plans to close its MARTIN+OSA concept, including all 28 stores and the online business. The company completed the closure of MARTIN+OSA during the second quarter of fiscal 2010. The loss from discontinued operations for each period presented includes the operating results and closure charges for MARTIN+OSA.

Total cash outflow for the closure charges of MARTIN+OSA, net of associated tax benefits, is expected to be $14 million, which is at the lowend of the company's initial range of $10 million to $40 million. The total year-to-date pre-tax closure charges were $44 million, of which $18 million were recorded in the second quarter of fiscal 2010. Included in the year-to-date pre-tax charges are lease-related items of $16 million, severance and other employee-related charges of $8 million, inventory charges of $2 million and a non-cash asset impairment charge of $18 million.

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