Highlights From AEO's Q3 Conference Call: Comparable Store Sales Declined 5% in First Three Wks of November

American Eagle Outfitters Inc (NYSE: AEO) reports Q3 EPS of $0.21, ex-items, inline with the analyst estimate of $0.21. Revenue for the quarter was $749 million, which compares to the estimate of $748.32 million. Shares are up 4.61% today.

Highlights From AEO's Q3 Conference Call:

• (CEO) Q3 our comparable store sales declined 4%, a significant improvement from the trend of the first-half of the year. Store traffic remained inconsistent and yet we're pleased to have delivered slightly higher conversion rate during Q3.
  
• Although the results are still not up to our standards, the operating earnings declined 26% was half the decline in the first two quarters of this year.
  
• The AE women's comp improved declining 5% compared to 11% decline in the first two quarters of this year.
  
• The AE brand is gaining momentum with the strength in a number of key merchandise categories including denim, woven tops, graphic Ts and accessories.
  
• Women's denim, which is so important to driving overall performance for the brand comped positively in Q3 up significantly year-over-year.
  
• Graphic T's were also strong, the Women's Graphic T-shirts turning positive for the first time in several quarters.
  
• AEO Direct delivered another positive quarter with sales increases of 10% driven by higher traffic and conversion.
  
• We've more than doubled our women's shirt business year-over-year.
  
• Traffic in sales in the new store have been strong out of the gate and we look forward to seeing the store realize its remarkable potential in the coming months.
  
• Overall the aerie brand consistently delivers double-digit positive comps with Q3 at 27%. Martin + Osa achieved a positive 10% comp with improvement in the bottom-line.
  
• 77kids also had a solid Q3 with success in wear-now fashions in outerwear denim and graphics.
  
• (CFO) Moving on to margins, more controlled markdown activity and pre-planned promotional events led to a 20 basis point increase in the merchandise margin. The gross margin decline of 90 basis points was primarily due to higher rent as a percent of sales reflecting new store growth and the negative comp.
  
• SG&A expense in the quarter increased 6%, this was largely due to payroll cost related to new stores and the accrual of incentive compensation which was not incurred last year.
  
• Cost control initiatives remain a priority and have resulted in flat SG&A dollars through the first nine months.
  
• Continued improvement in the comp trend, a higher merchandise margin and expense discipline led to an improvement in our operating margin from the first half of the year.
  
• Now turning to the balance sheet and consistent with our expectations Q3 ending inventory for retail stores decreased 3% of cost per foot and clearance inventory was down 15%.
  
• Looking ahead, our Q4 average weekly inventory per foot is expected to be up in the mid single digits. This is driven by an increase in AE denim, a year-round category, which has performing extremely well. Excluding denim, Q4 average weekly inventories are flat to last year.
  
• In keeping with our reduced spending plan, capital expenditures in Q3 were 33 million, compared to a 69 million last year. For the year, we now anticipate capital spending to be in the range of 120 to 130 million about half of last year. We generated positive cash flow ending the quarter with cash and investments of 719 million.
  
• Through the first three weeks of November comparable store sales declined 5%.
  
• (Q&A) First question; can you just give us the weekly comp compares from November of last year? I knew - I know through the first two weeks of November of last year you comp down 17% and then for the full month of November was down 11. And then the second question is, is there any change in promotional cadence this November versus last? (A)Okay, the promotional cadence for this November is relatively consistent. However, what in terms of timing of advance? And our Thanksgiving Weekend without sharing exactly what it is we think loaded with value for our customers and offers a meaningful price points in key categories of our business and we have some fun events planed as well. So, that cadence is one that we're excited about and look forward to taking to you about on our November sales clock. In week one last year, we were down low-double digit, week two low-single digit, so that's the comparison that we have as we look this the first two weeks of this month at aggregating to down five.
  
• And then weeks three and four of last year in last November? (A)Week three was hard to compare because of the shift of the holiday that prior year had Thanksgiving in it. So, and then as we said last year over Thanksgiving weekend last year we were positive low single-digit
  
• With respect to, sort of two pieces here, the inventory, where you expect to finish up in Q4 up 5% per square foot. [ph] Obviously that's an investment in denim. Maybe a little bit color on that, is it - you feel like it's the higher investment in denim is because of more opportunity, were you a little bit lower than where you wanted to be last year, is there anything else in that mix that we should be aware of any other timing issues or anything like that I assume that really is kind of your spring postioning.And then secondly as we are going into spring trying to look ahead here a little bit, if you can talk a little bit about the where you see the opportunity, where does is Roger see the opportunity and the merchandising team in terms of the product compared to last year, I would expect part of that to be in the knits category, but obviously Vervins doing better, so I want to kind of get a little bit more color there, what is it that you are doing to really fix in turn the knits business and update on that? (A)I'll address the inventory and then Jim will take the assortment for spring. Looking at fourth quarter, what we - we said John just to clarify is that the average inventory for the fourth quarter is expected to be up mid single-digit. When you look at that without denim that will be, we expect that to be flat, that does compare to your point to a down low double-digit last year, so we were somewhat lean and feel that now with a very well trending category in denim that it's an important investment to us to make - for us to make for a holiday. So, hopefully that gives you the color that you are looking for, for the fourth quarter.
  
• Yeah, that makes sense and then on the spring opportunity? (A)Actually the emphasis is still going to continue on with denim as Joan just explained we are making and we'll continue to make a massive presentation of denim to ensure that we are in stock in all of our fits systems as well as all of our washes. The category that has probably the greatest upside opportunities what the one you mentioned John and that's knits and what Roger and the entire team Henry and LeAnn have done is a strong collaboration in ensuring that the knits compared to last year are much more compelling that's defined as much more brand appropriate, they have more of a fashion bent and there is more detailing with in the product and having seen the line I can tell you that there has been a dramatic improvement. And we will be into knit business, but it will be now trend right and it will be priced right and we also have some key promotions around knits that should be very exciting.
  
• Hey, thanks guys, I just wanted to confirm I think inventory you said is going to be down mid single digits, that's on dollars basis, does that mean that units will be up somewhere in the double-digit range just given lower average unit cost. And then second as far as those store closing, just wondering what type of locations these stores are coming out of, what king of malls and should we expect that this is a precaution to more store closings next year? (A)Okay, Paul, so to clarify inventory. Inventory on an average basis, on a cost per foot is expected to be up mid-single digits, without denim we expect it to be flat that is up against last year of down low-double digit as an average for the quarter.

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