American Eagle Outfitters Q2 Earnings Call Highlights

Key Points

• Second-quarter results exceeded expectations: Revenue rose 8% to $1.4 billion, comparable sales increased 6%, and operating income more than doubled to $211 million, aided by a $161 million net benefit from tariff refunds.
• Aerie and OFFLINE remained the key growth engines: Revenue increased 25% to $536 million, with comparable sales up 19%. Management expects high-teens to 20% comparable-sales growth for the brands in the third quarter.
• American Eagle showed improvement but still faces inventory pressure: Comparable sales declined 1%, and markdowns on seasonal and older-fit merchandise are expected to continue. The company forecast third-quarter operating income of $110 million to $115 million and full-year operating income of $540 million to $550 million.

American Eagle Outfitters NYSE: AEO reported second-quarter revenue and operating income at the high end of its expectations, aided by continued rapid growth at its Aerie and OFFLINE businesses and a substantial benefit from tariff refunds.

Consolidated revenue rose 8% year over year to $1.4 billion, while comparable sales increased 6%. Operating income reached $211 million, compared with $103 million a year earlier. The result included a net $161 million benefit from tariff refunds, the company said.

Executive Chairman and Chief Executive Officer Jay Schottenstein said the quarter represented “another important step forward” for the retailer. He pointed to progress at the American Eagle banner and what he described as outstanding performance at Aerie.

Aerie Leads Growth

Aerie, including the OFFLINE activewear business, generated $536 million in revenue, a 25% increase from the prior year. Comparable sales climbed 19%, with growth across channels and product categories.

Jen Foyle, president and executive creative director for American Eagle and Aerie, said demand was broad-based across core apparel, intimates and activewear. She highlighted customer response to tees, tanks, fleece, bottoms, sleep-to-street products and seasonal assortments, as well as OFFLINE’s Cloud Fleece franchise and sports bras.

Foyle said Aerie’s core intimates business remained strong, supported by its focus on comfort and fabrication. The brand introduced its Float bra collection in July, which she said complements Aerie’s structured bra assortment. The company also nearly doubled the size of its Advocate program during the quarter as it sought to expand customer engagement.

Management said Aerie entered the third quarter maintaining momentum against more difficult comparisons. The company expects Aerie and OFFLINE comparable-sales growth in the high-teens to 20% range during the third quarter.

Foyle said Aerie has room to expand awareness, noting that the brand’s awareness level was about 59%, compared with roughly 76% for American Eagle. She said the company is using store events, digital spending, Aerie Realmakers and its advocacy program to build the customer community.

American Eagle Improves, but Inventory Work Continues

American Eagle revenue increased 1% during the second quarter, while comparable sales declined 1%. The result marked a sequential improvement from the first quarter, according to management.

The men’s business posted its fourth consecutive quarter of positive comparable sales, driven by strength across bottoms categories. In women’s, the company cited favorable response to outfitting strategies, including tiny tops paired with oversized bottoms, as well as cargo styles and fashion bottoms.

Foyle said new denim fits, including wide-leg, straight and low-rise styles, gained customer acceptance. She said the retailer had pivoted its denim offering toward working fits, particularly low-rise styles, but continues to rebalance inventory in older fits.

Management said remaining American Eagle inventory cleanup is primarily concentrated in seasonal merchandise, particularly shorts, along with some fashion products. The company expects some markdown pressure at the banner to continue in the third quarter as it works through that inventory.

For the third quarter, American Eagle expects comparable sales to be approximately flat. Mike Mathias, the company’s strategic advisor, said stores remain below the banner’s overall trend, while digital performance has been stronger. However, store performance has improved so far in the third quarter, particularly during the back-to-school period.

The company has spent the past four quarters investing in brand awareness and now plans to shift more marketing dollars toward conversion-oriented tactics. Management said traffic, store conversion and product strategies will be key measures as it works to return American Eagle to sustained growth.

Margins Reflect Tariff Refunds and Brand Differences

Gross profit increased 34% to $672 million, and gross margin expanded 980 basis points to 48.7%. The company said tariff refunds produced a $179 million gross-profit benefit and accounted for 1,300 basis points of gross-margin expansion.

Merchandise margins declined 330 basis points, as improvement at Aerie was offset by markdowns at American Eagle. Selling, general and administrative expense rose 19% to 29.6% of sales, including $18 million of incentive expense tied to tariff refunds. The remaining increase primarily reflected planned advertising investments.

• Second-quarter earnings per share were $0.79.
• Inventory cost increased 14%, while inventory units rose 9%.
• Capital expenditures totaled $66 million during the quarter.
• The company returned $21 million to shareholders through its quarterly dividend.
• American Eagle ended the quarter with approximately $148 million in cash and investments and total liquidity of $783 million, including its revolver.

Outlook and Leadership Transition

For the third quarter, the company expects consolidated comparable-sales growth in the mid- to high-single digits and operating income of $110 million to $115 million. Gross margin is expected to be similar to the prior year, while SG&A expense is projected to increase in the high-single digits.

For the full year, American Eagle forecast operating income of $540 million to $550 million, based on consolidated comparable-sales growth in the mid-single digits. The company expects full-year gross margin to increase year over year.

Mathias said the updated outlook reflects a flatter sales expectation for American Eagle in the second half than previously anticipated, along with markdown provisions for inventory rebalancing. Aerie is expected to remain a major growth contributor.

The call also marked the transition of the chief financial officer role to Ravi Thanawala, who said he had spent his first weeks at the company listening and learning about the business. Thanawala said his priorities include connecting brand growth with disciplined execution, stronger profitability and thoughtful resource allocation. Mathias, who reviewed the quarter’s financial results and outlook, will continue as a strategic advisor.

About American Eagle Outfitters (NYSE:AEO)

American Eagle Outfitters, Inc NYSE: AEO is a leading American specialty retailer offering apparel, accessories and personal care products for men and women. The company's flagship brand, American Eagle, focuses on casualwear including denim, tops, outerwear and accessories targeted primarily at teens and young adults. In addition to its core apparel lines, the company operates the Aerie brand of intimates, loungewear and swimwear, which has gained recognition for its body-positive marketing and inclusive sizing.

American Eagle Outfitters conducts business through a combination of over 900 brick-and-mortar stores in North America and Greater China, complemented by a growing e-commerce platform that serves customers around the globe.

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