Total net revenue rose by 24% YoY to $1.27billion, exceeding estimates of $1.23billion (FactSet).  FactSet reported that $0.76 adjusted earnings per share beat the consensus by $0.61.

Sales showed that consolidated store revenues increased by 29% due to traffic growth of double-digits. Digital revenue grew 10%, surpassing a 29% comparison from last year. The quarter saw record profits and store revenues surpassing those of the third quarter 2019. This is a clear sign that the company is recovering from the pandemic.

We believe that casual wear will continue to grow in popularity over the next few years.

The company’s third quarter gross margins increased by 410 basis points YoY, to 44.3% (one basis point equals 0.01%). This beat the 42% estimate. Leverage on delivery and rent, as well as stronger product demand and higher full-priced sale, as well as less promotional activity and inventory optimization efforts, was the main reason for this increase. Higher freight costs however were a hindrance.

Also, operating margins of 16.5% are the highest since 2007, surpassing estimates of 13.8%. The quarter’s total operating income was $210million, which is a significant increase over estimates of $170million. The management stated that operating income would “nicely surpass” $600million this year. 

• Aerie’s revenues increased 28% YoY, to $315 millions. This momentum is unstoppable, with Aerie’s quarterly results marking the 28th consecutive quarter in double-digit growth. Management cited high demand for all Aerie products, including off-line activewear and intimates. Management stated that Aerie appears to be gaining market share as they have seen customers purchase more often and in more categories. Due to increased full-price sales and more strategic decisions around promotions, the AUR (or average unit retail) rose in high teens. Aerie’s operating margin, 16.5%, grew by 200 basis points from 2020 to reach a record third quarter. Aerie overcome challenges due to inequal inventory flow caused by factor shutdowns. Aerie’s leggings business was most affected by these shutdowns. This is also a high margin category. Aerie’s margins could have been higher if they hadn’t missed out on a business.
• American Eagle saw a 21% increase in revenue YoY, to $941 millions. The quarter saw growth in all men’s categories, while the women’s category delivered solid results due in part to their denim collection. American Eagle had an excellent back-to-school season, thanks in part to their leadership in jeans as well as new product offerings. American Eagle ranks as the #1 denim company in both women’s and men’s denim for their age group.

There are also signs that American Eagle may not be the market share leader that many believe. According to the company, its customer database is growing and customers are buying more often and spending more. The company also credited inventory optimization and public discipline for increasing AUR and increasing merchandise margin. This quarter’s operating margin was 27.8%. It is a brand new record.

American Eagle Outfitters increased its inventory cost by 32% to $740million. According to the company, this increase could partly be attributed to higher freight costs due to disruptions to global supply chains. This led to uneven inventory flows as a result of factory closings in Vietnam. In order to make sure that the stock is available in their stores before the holiday season, the company decided to offer the product for sale. Management is happy with the stock position in anticipation of a strong holiday season.

The company managed to successfully manage what was a difficult environment, despite the disruption caused by the closure of the Vietnamese factory. Thanks to digital delivery, AEO actually saw a decrease in delivery costs YoY. However, AEO expects to pay freight costs of $70 to $80 millions in the fourth-quarter.

Management spent time discussing Quiet Logistics’ recent acquisition. Michael Rempell, AEO COO stated during the conference call that this deal will allow AEO to achieve “substantially greater sales, margin on far fewer inventory, make more precise inventory allocation decisions, deliver products faster to customers, and do so at a significantly lower price.”

The acquisition of AirTerra led to this deal. Jay Schottenstein, CEO, stated that Quiet Logistics was partnering with AirTerra in order to establish a platform which will revolutionize logistics for retailers.

Cash was $741 million. The company closed the quarter with cash of $741 millions. American Eagle Outfitters is able to provide support for shareholder returns and investment in growth projects through its strong balance sheets. We find 2.5% yield attractive at current levels. Cash flow being what it is, we wouldn’t rule out share repurchases in the future.