American Eagle Outfitters (NYSE: AEO) reported Q3 EPS of $0.35, $0.01 better than the analyst estimate of $0.34. Revenue for the quarter came in at $1.03 billion versus the consensus estimate of $1.03 billion.

• Aerie’s momentum continues, posting 34% revenue growth and record profits
• Digital revenue increased 29%, with Aerie growing 83% and AE up 11%
• Gross profit rate expanded, fueled by greater full-price selling across brands
• Positive cash flow further strengthened financial health, ending with $692 million in cash
• AEO well-positioned for holiday season

Third Quarter 2020 Results

• Total net revenue for the 13 weeks ended October 31, 2020 decreased $35 million, or 3% to $1.03 billion, compared to $1.07 billion for the 13 weeks ended November 2, 2019. The decline to last year largely reflected mall traffic declines related to COVID-19, offset by strong online sales.
• By brand, American Eagle revenue decreased 11%, following a 2% increase last year. Aerie’s revenue increased 34%, following a 26% increase last year.
• AEO’s digital reported revenue increased 29%. Aerie digital revenue rose 83% and AE increased 11%.
• Gross profit of $415 million compared to $407 million last year. As a rate to revenue, gross margin of 40.2% expanded from 38.2% last year. The increase in rate reflected significantly higher merchandise margins, primarily due to higher full-priced sales, lower promotions and inventory optimization initiatives. Lower product costs and improved rent expense also benefited the gross margin. This was partly offset by higher delivery and distribution center costs, due to a strong digital business and higher cost per shipment.
• Selling, general and administrative expense of $273 million increased $14 million from $259 million last year, due to higher performance-based incentive compensation.
• Depreciation and amortization expense of $39 million decreased $6 million from $45 million last year, due to asset impairments taken in recent quarters, as well as lower capital spending.
• Operating income of $96 million compared to $103 million last year. Adjusted operating income of $103 million this year excluded $7 million of expenses primarily related to COVID-19 protocols.
• Net interest expense of $8 million compared to net interest income of $1 million last year. Adjusted interest expense of $4 million excluded $4 million of non-cash interest expense on the company’s convertible notes. The increase in adjusted net interest expense reflected cash interest expense associated with convertible notes and lower interest income this year.
• The effective tax rate of 35% compared to 24% last year, primarily due to a change to our expected full year tax rate and the impact of the CARES Act.
• Average shares outstanding of 184 million compared to 169 million last year. The increase reflected 16 million shares of unrealized dilution associated with the company’s convertible notes.
• EPS of $0.32 compared to EPS of $0.48 last year. Adjusted EPS of $0.35 excluded $0.02 of expenses primarily related to COVID-19 protocols and $0.01 of non-cash interest on the company’s convertible notes. The adjusted EPS decline to last year reflected a higher tax rate and the impact from higher interest expense and diluted shares outstanding related to convertible debt.

COVID-19 Expenses and Restructuring Charges

In the third quarter of 2020, the company incurred incremental expenses primarily related to COVID-19 protocols of approximately $7 million pre-tax, or $0.02 per share after-tax.

Jay Schottenstein, AEO’s Executive Chairman of the Board and Chief Executive Officer commented, “The third quarter exceeded our expectations thanks to the exceptional execution, numerous accomplishments and dedication of our teams and the support of our global partners. Once again, Aerie delivered outstanding results, demonstrating the power of this incredible brand and the massive opportunity ahead. Across AE and Aerie, higher full-price selling led to strong margins, reflecting merchandise quality, inventory optimization and our enduring brands.”

“We are very pleased with early holiday trends in November and the strong response to our assortments. We have significant business ahead of us and are well-positioned and ready to serve our customers. I’m also very encouraged by our overall performance this year, especially in the midst of an unprecedented crisis. Our teams really stepped up to accelerate initiatives that will enable us to emerge from 2020 as a stronger organization with momentum and tremendous growth potential.”

For earnings history and earnings-related data on American Eagle Outfitters (AEO) click here.