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American Eagle Outfitters (NYSE: AEO) has achieved steady growth over 2015-18, with the company’s revenue increasing by more than 14%. However, the apparel company's expenses have followed a similar trend over this period - resulting in profits remaining broadly level. Although the company’s revenues are likely to grow by 6.8% in FY 2019 (ending January), expenses are expected to grow at a faster pace. (7.4%) This should result in American Eagle’s earnings margin (i.e., revenues less all expenses, expressed as a percentage of revenues) contracting by 55 basis points from 6.5% in 2018 to an expected 5.9% in 2019 - resulting in a slight decline in American Eagle’s profits for the year.
Total Expenses were $3.8 Billion, with Cost of sales of $2.5 billion, and $1.2 Billion in Operating Expenses
Breakdown of American Eagle's Total Expenses (2018):
Total: $3.8 Bil
Cost of Sales $2.5 Bil (67%)
Operating Expenses $1.2 Bil (31%)
Income tax expense $0.1 Bil (2%)
Other expense -($0.0) Bil (-0%)
American Eagles's Total Expenses Have Increased From $3.3 Billion in 2015 to $3.8 Billion in 2018
% change in total expenses
American Eagle’s total expenses have increased by 14% since 2015, going up from $3.3 billion to $3.8 billion in 2018 and are expected to grow another 7.4% in 2019. This increase has been driven by a combination of the higher cost of sales and operating expenses.The company is expected to have added $280 million to total expenses in dollar terms in 2019, likely driven by a $210 million increase in the cost of sales.Moreover, the company’s total expenses as % revenue would have nudged ahead from 93.5% in 2018 to 94.1% in 2019.
1. Cost of Sales:
Cost of Sales have increased from $2.2 Bil in 2015 to $2.5 Bil in 2018 mainly due to steady revenue growth. As revenues have grown at a similar rate to the cost of sales, the Gross Profit Margin has remained around 37% over the same period.
Cost of Sales
The cost of sales includes the expenses incurred to acquire and produce an inventory for sale, including product costs, freight-in, and rent & occupancy costs for company-operated stores. COGS is the most significant expense driver, accounting for nearly two-thirds of the company’s total expenses in 2018.COGS have increased by 15% over the last few years - rising from $2.2 billion in 2015 to $2.55 billion in 2018 primarily as a result of strong revenue growth.Higher revenues, partially offset by higher promotional activity and increased shipping costs associated with a strong digital business have helped the company maintain a gross margin of 37% over 2015-2018.American Eagle’s cost of sales would have grown by 8.3% in 2019, which represents a gross margin figure of 36%. This increase can be attributed to increased markdowns, as well as higher buying, occupancy and warehousing costs.
2. Operating Expenses :
American Eagle's Operating Expenses include 2 key components:
A. Selling, General & Administrative (SG&A) Costs
B. Other Costs (Depreciation charges & Restructuring Costs )
Total Operating expenses
Breakdown of American Eagle's Operating Expenses in 2018:
Total $1.2 Bil (100%)
SG&A Costs $1.0 Bil (85%)
Other Costs $0.2 Bil (15%)
American Eagle’s operating expenses have increased by 17% since 2015, increasing from under $1 billion to $1.1 billion in 2018, driven mainly by increased salaries and advertising expenses. Moreover, restructuring and impairment charges incurred over 2016-2018 have also contributed to the rise in operating expenses.Additionally, operating expenses as % of revenues are also on the rise - increasing from 27.9% in 2015 to 28.5% in 2018.Total operating expenses would have increased by 6.9% to around $1.23 billion in 2019 mainly due to the expansion of the company’s digital business, resulting in higher selling & distribution expenses. However, operating expenses as % of revenues are expected to remain constant- representing 28.5% of American Eagle’s Total Revenues of $4.3 billion.
(A) SG&A expenses have increased from $835 Mil in 2015 to $981 Mil in 2018. SG&A expense as % of revenue has increased from 23.7% in 2015 to nearly 24.3% in 2018
SG&A expenses as % of total revenue
(B) Other expenses have increased from $148 Mil in 2015 to $170 Mil in 2018. Other expense as % of revenue has averaged around 4.6% over the same period.
Other costs as % of total revenue
3. Non-Operating Expense (Income) :
American Eagle's Non-Operating Expenses (Income) Have decreased From -$2 million in 2015 to -$8 million in 2018 mainly due to higher other income
* Please note that the company does not disclose its interest income and expense separately
Non-Operating Expense (Income)
Other expense (income), net as % of total revenue
4. Income Tax Expense:
American Eagle's Income Tax Expense has steadily decreased over the last few years, apart from 2016 when this metric increased to $123 million
Provision for taxes
Effective tax rate
American Eagle's income tax expense has steadily decreased over the last few years, apart from 2016 when this metric increased to $123 million. Additionally, the company’s tax rate has fallen from 33.7% in 2016 to 24.1% in 2018 due to the enactment of the US Tax reform.The company’s tax rate for 2016 included a 100 basis point charge resulting from valuation allowances on the $21.2 million of impairment and restructuring charges.American Eagle’s effective tax rate is expected to be around 23% in FY 2019.
Our Complete Set Of Analyses On American Eagle Outfitters