Q3 2019 Earnings Call
Just don't take some Bonnie dreaming of it easy waking up without wait now.
And you're looking at the heart.
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Greetings and welcome to the American Eagle Outfitters third quarter 2019 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I.
I would now like to turn the conference over to your host Ms. Judy Meehan. Thank you you may begin.
Good morning, everyone. Joining me today for our prepared remarks, R.J. Schottenstein, Chief Executive Officer, Chad Kessler AG Global brand President Jen Foyle area called <unk> and Bob made to our Chief Financial Officer before we begin today's call I need to remind you that we will make certain forward looking statements. These statements are based upon.
On information that represents the company's current expectations or beliefs results actually really may differ materially based on risk factors included in RCC filings. The company undertakes no obligation to publicly update or revise any forward looking statements whether as a result of aren't new information at future events or otherwise, except as required by law and now I'd like to turn the key.
All over to Jay Thanks, Judy and good morning, everyone.
And the third quarter, we delivered strong comparable sales growth and record revenue.
I was reading a bargain promotional activity increased relative to our expectation yeah. We had three bps that was in line with her guidance importantly, we continue to Liberal Arts College.
Hello.
As our core a dream every business is demonstrating strong performance.
Our consolidated basis, that's worked hard Nike consecutive quarter, a positive comps with growth in both Brett.
We also saw topping tweets in stores and continued double digit increases all line.
Every demonstrated I'm ashwin Mehta with growth in accordance accelerating our growth year over year and two year stack basis.
This marked at 28 consecutive quarters.
Double digit sales for.
New customers embracing the bread and expanded a barrel offerings have been very well retreat, we see.
Yeah, we will remains one of the fastest growing brands and retail the day.
Probability that can you still group.
We're just getting started I'm very excited about the so that's a good opportunity yet.
Good American Eagle, Brad back to school Cheez It was exceptionally strong.
Strong demand and seasonal apparel.
Third quarter sales profits was led by our focus on dreams, which had delivered once the five consecutive quarters.
Record sales.
We're pleased with our investments in new government fits and starts.
However, after back to school, we experienced softer demand in certain apparel categories, primarily a men's and women's tops, which led to higher markdowns.
Some of these pressures have continued into the fourth quarter.
Team is working harder to strengthen the areas of underperformance and I'm confident we will be back on track in short order.
We have an incredibly strong organization.
Highly relevant brands and a leading omnichannel platform.
We remain laser focused on long term strategic pillars to profitability growth across brands and channels improved inventory efficiency deliver reportedly show and now I'll turn the call to Chad you get further color on any results.
Thanks, Jay and good morning, everyone.
And the third quarter, we had record sales fueled by a successful back to school season comparable sales increased 2% building on a 5% increase last year, we posted comp growth in both stores and online strong traffic and increase transactions were key drivers of our sales performance.
American Eagle genes led the business posting the 25th straight quarter of record sales.
Genes were positive across genders with new styles, leading the way our new women's Kirby collection is driving incremental growth.
As we continue to fuel our leading jeans business, we have additional newness and innovation on the horizon and see a significant growth runway ahead. For example, this week, we launched a new women's Dream, Jean and New airport textiles in mens.
Other positive apparel call outs include men's and women's squeeze and women's skirts and dresses last quarter I discussed strong performance across prior accessories business and that momentum momentum continued in the third quarter.
Although still small accessories was the fastest growing women are you women's classification, and an above average performer and bands as well.
I was also pleased with our initial launch of mood easily wellness in personal Caroline.
Still early days, we're happy with the customer response, and see ample opportunities to expand this product line and I'm sure.
Along with many wins there were a few areas that fell short of our expectations.
Mr plan for certain men's and women's tops categories led to increased markdowns and higher promotional activity.
Got it challenges in tops up continued and will pressure the fourth quarter.
We have been working hard to strengthen areas of underperformance with a focus on ensuring product innovation quality style and value.
We're also planning a better balance between sales and inventory growth as we move forward.
I'm clearly not satisfied with product messes I remain pleased with many of our core businesses and the strength of our brand our brand health metrics are favorable with a growing active customer base and rising retention rate.
I can assure you that we're focused on strengthening our business. We have a track record of quickly course correcting and that is our top priority.
There's still a substantial portion of the quarter head and we're focused on delivering the best to our customers, while ensuring that we clear through excess inventory and after the spring season well position.
Now I'll turn it over to John Thanks, Chad and good morning, everyone I'm thrilled to report the Aerie delivered another outstanding quarter total third quarter revenue increased 26% fueled by a comparable sales increase of 20% and the contribution from new stores.
Comp sales growth built on a 32% increase last year, resulting in a two year stack a 52%.
The quarter also marked the twentyth consecutive quarter of double digit sales growth.
We continue to gain meaningful market share in a healthy manner.
Customer base expanded as we attracted new customers to our brand and we also saw an increase in the average then.
The third quarter, the number of transactions group fueled by positive traffic across all channels.
Our store traffic was well ahead of mall averages.
The average transaction size increase led by higher average unit retail prices.
And despite a highly competitive environment, we controlled promotions and strengthened our margins compared to last year.
Merchandise collections have been very well received by our customers with all major categories delivering comp increases.
Intimate are performing extremely well with broadly lending is continuing to be our consistent core category.
Also extremely pleased with the response to our apparel collection, which is posting outstanding result.
Our store expansion plans are also tracking well and we opened 24 new stores in the quarter.
As demonstrated by our growth, we're seeing a clear benefit from our store opening activity, including digital uplift in new markets.
We're very pleased with the execution of our real estate strategy Ediary and believe it remains a key success factor for the brand.
Digital is also growing rapidly and represented nearly 40% of our business in third quarter.
Eric strength lies in our unique brand position and how we connect with their customers in a real authentic way.
Through our amazing role models and brand ambassadors, we advance the core tenets of empowerment and body positivity, we're a brand for real women.
And the emotional connection of our customers have with aerie is truly inspirational.
And this connection empowers us further to build our brand and think beyond today and whats next rare.
I'm very pleased with the holiday season, thus far that's far and favorable response to our collections, we will stay focused on delivering another successful quarter.
Lastly, I'd like to take a minute to congratulate the team the level of consistency. We have delivered an area is not easy and is it is a testament to strong execution across the entire organization I can assure you that this team is focused on maintaining our momentum well into the future. As we look ahead, we have an exciting product lineup and continue to.
Visibility to exceeding $1 billion in sales and now I'll turn the call over to Bob.
Thanks, Jen and good morning.
We delivered positive comparable sales growth across brands and channels in the third quarter and EPS was consistent with our guidance.
Sales were fueled by strong back to school shopping after which demand for AG apparel slowed.
This backdrop, along with product Miss isn't a etops resulted in higher promotional activity to spur demand and clear through inventory.
This pressured overall profits.
As the team noted Aireon AG jeans demonstrated sales and profit growth throughout the period, which has also continued into the fourth quarter.
Turning now to our third quarter financial results.
Total net revenue increased 63 million.
Rising 6% to third quarter record of 1.07 billion.
Saudi to comparable sales increased 5% building on 8% growth last year.
Oh, they did comps were driven by growth in the number of transactions, partially offset by lower average transaction size due to lower average unit retail price.
By brand.
American Eagle comps increased 2% in third quarter, following a 5% increase last year, Harry comps increased 20%.
Building on a 32% growth last year.
We saw positive comps across stores and digital.
Both brands and on a consolidated basis stores increased 2%.
Digital sales rules in the low double digits, reaching approximately 28% total revenue up 100 basis points from last year.
As in recent quarters, we saw the biggest increases coming from our App and mobile channels, which combined now represent over half of our digital business.
Total gross profit increased 8 million or 2% to two to 407 million.
The gross margin rate to revenue decreased 160 basis points to 38.2%.
The decline last year, primarily reflected increased markdowns.
Buying occupancy and warehousing costs were flat as a rate to revenue.
Selling general and administrative expense of 259 million increased 4%.
As a percent of revenue SGN, a improved 50 basis points to 24.3%.
Store salaries and professional fees increase as a rate to revenue offset by lower incentive expense.
Depreciation and amortization rose 3 million to $45 million or 4.2% as a rate to revenue, which was flat compared to last year.
Operating income decreased 5% to 103 million from 109 million last year and the margin rate to revenue decreased 110 basis points to 9.7%.
The effective tax rate of approximately 24% was similar to last year.
Yes, a 48 cents was flat year over year.
Now regarding inventory, which can be found on page 10, and the investor presentation.
Yeah ended the quarter with inventory of costs of 647 million up 56 million for 9% from last year.
Similar to last quarter, the increase primarily reflects inventory to support strong demand for AG genes, including new styles and expanded sizes and to support new Aerie stores.
With that said clearly certain AG apparel categories are underperforming and we see opportunity improve overall inventory management.
We've been reviewing assortment architecture customer choice and SKU counts in our overall principles to bring inventory levels more in line with sales growth overtime.
Capital expenditures totaled 58 million in third quarter, and 150 million year to date.
We continue to expect Capex to be in the range of 200 215 million for the year.
During the third quarter, we completed approximately 32 million in share repurchases and paid 23 million in dividends to shareholders.
We exited the quarter with a little over 35 million shares available for repurchase.
Our liquidity position remains strong and we ended the quarter with total cash and investments of 265 million and no debt outstanding.
Looking at our real estate portfolio, our priorities are to continue to accelerate the growth of Barry to reposition and remodel E stores.
To expand our global footprint.
And to close underperforming stores as leases expire.
Based on the openings to date and our plans for the balance of the year. We continue to expect roughly 60 every store openings. This [laughter] [noise].
On the overall freak fleet, we have significant lease flexibility that enables us to exit less desirable locations overtime.
It was approximately 130 underperforming stores since 2015, as we continue to strengthen our fleet.
Looking ahead over half of our leases are up for decision by the end of 2021.
Additional store information can be found on page 13 through 17 in the Investor presentation.
Now looking ahead.
The beginning of the holiday season has been softer than expected as challenges an 80 apparel business have carried into the fourth quarter. As a result, we expect fourth quarter EPS in the range of 34 to 36 cents in comparable sales to be approximately flat to last year.
Outlook assumes greater gross margin pressure than in the third quarter, reflecting an increase in promotional activity as we clear through inventory to enter spring with fresh collections.
We expect SGN $8 to be roughly flat to last year.
And our guidance also reflects an effective tax rate of 20% to 22% for the quarter.
Our fourth quarter guidance compares to EPS of 43 cents last year and excludes potential impairment or restructuring charges.
In closing.
We have a strong organization with meaningful opportunity ahead.
We're extremely encouraged by Aries momentum and we're committed to fueling growth for this exciting emerging brands.
Despite some near term challenges the American Eagle brand is strong supported by our leading genes in bottoms businesses.
We are taking quick action to strengthen product assortments and improved inventory management, which will position the business for increased success in 2020.
We remain focused on improving profit flow through and delivering return to shareholders.
Thanks.
And we'll now take your questions.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one under telephone keypad, a confirmation Tony will indicate your line is in the question can you maybe first start to if you'd like to remove your question from the Q for participants using speaker equipment. It may be necessary to pick up your handset before.
During the Starkey.
To allow for as many questions as possible we request that you each asking one question. Thank you.
Our first question comes from the line of Oliver Chen with Cowen and company. Please proceed with your question.
Hi, Thank you regarding men's and women's tops, but what's the rationale for or reasons for both both underperforming in both men's and women's and what are your thoughts on the timing of digesting that and the nature of.
The problem in terms of.
The fall product first the spring.
Love your thoughts there and a quick follow up regarding airy and American Eagle, If you could articulate some of the key synergies between the two businesses that would be helpful. As well. Thank you.
Sure I think yeah. When you look at the men's and women's tops clearly.
I'm not happy with the results that we saw in Q3 and as we said that continuing I think it's a little bit different between the two gender. So in women you know for Q3 art and the total nets categories. We actually when you look at fleece net Tees and everything.
We're pretty close to flat, we're really have been suffering from a downtrend in woven shirts across.
Both quarters.
Those trends are continuing.
For Q1, I really feel like we made good changed the assortment, but that said we have planned the quarter conservatively and we have a very responsive supply chain that we've talked to in the past I feel like we have some great trends that go with our genes going into Q1, and we will change where we need to to try to drive that business.
And as we also said you know the accessories business continues to be.
Really strong there in women and men.
You know we've had inconsistency in the men's business for some time.
We are working to evolve the men's assortment I think some of those changes we made in tops have paid off we've seen some real excitement and some of our net and fleece categories.
But I think some of the changes we made have been too fast.
For the customer so for 2020, we are looking to find more balancing the assortment similar to women's we are taking a more conservative stance in Q1 in tops and then as we look to rebalance the assortment and we will change where it shows itself.
I think you know when you look at the two brands together I think there's amazing there's great synergies you know we share a lot of customers.
I think you know area brings.
A lot of excitement to the total company I think they loyalty, we see it with a customer in the retention rates and the love of our genes I'm also keeps customers coming back, but if you look you know it varies expanded apparel.
I would not say that's not the hasn't.
Really negatively impacted a like if you look at fleece in general right. That's a great category for both 80 and American Eagle and both Jan both brands had.
Record police businesses in Q3 in men and women. So I think really having two great brands that appeal to its customer base is is a powerful thing for us.
Thank you best regards.
Thank you.
Thank you. Our next question comes from line of Kate Fitzsimons with RBC capital markets. Please proceed with your question.
Yes, hi, Thank you for taking my question I guess, Chad a building on that last point you alluded to you know to your supply chain efforts and you know shorter lead times now and how you've brought them down over the last few years, just trying to get a sense of where you are today with that capability and maybe how that speed can allow you to work your way out of these issues, maybe a bit faster.
And you could have you know three or five years ago, Oh, Yeah, I think theres a couple of things that we have working for you know we had.
Don't ask why which has evolved into.
Hey studio, which is a very fast fashion capsules that we're able to pulse into the assortment monthly and those really give us a lot of learnings.
Trends, we see upcoming and where customer appetites, maybe and then we've done so much work with our.
Bulk suppliers.
Across.
[noise] across the supply chain to platform fabrics that whenever a customer likes and to respond quickly into that so we're able to chase product.
Very quickly and you know a matter of weeks.
See something that's working and that the strength again that we haven't both brands, but I think we should as we look to Q1, you know we have a lot of stuff. We're excited about in the assortment I think a lot of things we've learned from last spring and through the fall and we're going to put that out as we set the spring Wanna assortment the energy.
January and we should be able to start chasing that product with what shows itself and for spring break and Easter timing.
Okay I real quick Bob just I wanted to follow up quickly on your comments on the inventory how does your plans you got inventory growth more in line with sales over time can you speak more Pacific specifically to Fourq, you expectations and just when you might expect that alignment to occur. Thank you.
Yeah.
Up next year, and we also as part of our strategic.
It is are going to continue to accelerate the area [laughter] and looking to 2020, and we're going to open a comparable number of stores to this year. So there will be additional inventory investment for that so we should start seeing inventory getting more in line with sales by the end of Q1, beginning of Q2 of next year.
Great. Thank you best of luck.
Thank you.
Thank you. Our next question comes from line of Polish way with Citigroup. Please proceed with your question.
Hey, guys. Thanks can you talk about the merchandise margin performance Aerie at American you go specifically, just what we saw year over year this quarter and your expectations for score to secure the.
The tariff and possibly in bad in the fourth quarter guidance and what percent of your goods are coming from China, a 10 there. Thanks.
Yes, so on the merge margin performance on you know for Q3, a with the E brand, we saw a pretty significant decrease versus last year relative to area. We actually saw a very sizable increase in merch margin roughly a 400 basis points.
Improvement you know looking to Q4, we're expecting a similar trend among each brand. So aries merch margin continuing to improve significantly and with some headwinds to the AG margin is we look to continue to clear the problem inventory that we had talked about the.
Product categories, the that Chad went into detail on.
Regarding a terrorist so for this quarter coming off in Q4, we expect roughly a three to 4 million dollar impact as a result of tariffs.
And.
China represents roughly 30% of our unit volume that we use source globally.
Thanks, guys. Good luck.
Thanks.
Thank you. Our next question comes from the line of Dan Kelcy with Telsey Advisory Group. Please proceed with your question.
Oh Dana are you there.
Well the toll take the next caller okay.
Hi.
Oh, you're there okay you Don.
About that hi, you as you think about upcoming fourth quarter and into next year, particularly chat on the tops portion of the business what should we see differently going forward and as the tops weakness more of the men's issuer women's issue when do you see it well the competitive environment versus internally to yourself. Thank you.
Thanks.
You I think I think we're seeing a right now in both men's and women's I think the women.
Business has been healthier generally over time and I think we still feel confident we'll be able to respond and impact that more quickly I think one thing we really want to do while we continue to focus on the jeans business is also communicate more directly with the customer about the great tops that we have that go with the gene.
I think we can.
Yeah, we have very powerful messaging abilities, and I think well we want to continue to be focused on growing our jeans business. I think we can talk more to the tops as well.
I think and man.
I think as I said part of it I think we made we evolve the assortment more quickly.
Then the men's customer was ready.
For entirely in as I said, there's been some good win but clearly are some challenges there as well.
But I think we also do see some broader challenges in the mens.
Business in the space.
You know what we see an external data it looks like the men's customer at this point isn't as engaged in apparel, but the good news is.
We continue to expand the jeans business with that customer we continue to expand our underwear and accessories business with that customer we are seeing growth and some of the tops categories. So.
Well the man.
Customer has been inconsistent there are definitely categories for which we are a destination and he's coming to us.
And so I think well there might be some external challenges, we got to own what we're seeing in our business and a right that ship and get the customer back shopping tops and bottoms.
Thank you.
Thank you. Our next question comes from line of Marni Shapiro with the retail Trucker. Please proceed with your question.
Yes.
Chad sorry to pick on you today, [laughter], but I could you.
Talk in a little bit more detail about what you mean by you move too fast on the men side was it.
Young money didn't sell well I'm just kind of curious and then also in the Eagle you guys have dabbled in the activewear business on enough for years area has been in it a little bit more consistently you had something I'm with area was Alley Reesman you did something with Eagle was was a talk them I believe it was can you just talk a little bit about.
With that space it feels like it remains very important in the aggregate and Eagle hasn't really committed to it. So if you can talk about those two things sure I think in men's what I mean by going a little fast as you know I think.
You know as you see a 15 to 25 year old customer out there you know, there's so much around peas, and fleece as really being the defining wardrobe for this guy today with as Jean.
And we shifted a lot of the assortment of those categories and walked away from some.
Legacy items that while they were down trending we're still a meaningful in volume.
And I think we shifted we expected that.
The customer would move as quickly as we did into.
The dominance I guess of the T. isn't police these in the assortment today.
And I think that we can just make sure. It's always hard when you vacate and area and I think we just need to make sure we're more balance going forward I'm in the team's been all over that.
For active I think we have a a lot of opportunity inactive you know a few years ago a.
Walked away from the leggings business, and we had ARY service lines business for us and when which has obviously been tremendous engine can talk to that and in men's we have.
Been a little in and out of it partly because we are jeans business that we want to make sure we're selling apparel that outfits welfare gene.
We continue to see I'm, the jogger business do well and our active fabrications that weve introduced doing well. So I think we have a lot of opportunity and active for both men's and women's as we.
Look forward so.
Yeah. Those are categories as I said, we want to make sure they fit within the overall lifes genes based lifestyle brand, but I do think we have a lot of opportunity in men's and women's and active.
And save you a serious.
I think my money in areas.
Honestly, it's the way we build out our lifestyle you know Oliver it I've previously.
You know, how we look at the businesses and really I'd like to say Aries.
You know really surrounds the apparel around the lagging business and it's it's a big business for us and I think we're doing it best in show right now so I'm really proud of what the teams delivering there and when we have a lot more to offer in that category in the future, yes, not worried about the area active business. It looks very good did talk my work for you guys I'm just curious.
Yeah, I think we've gotten some good learnings from takoma about some additional styles and fabrications that the customer response to an active so.
You know were always trying to.
Sort of look around the corner and see what's coming next than Takuma was a great opportunity for US we carried the line exclusively and it was much more it's much more purely active.
Then things we've done in the past and so I think we have gotten some strong learnings from that excellent. Thanks guys.
Thank you. Our next question comes from the line a Susan Anderson with B. Riley FBR. Please proceed with your question.
Hi, Good morning, Thanks for taking my question just a quick question on the AG bottoms I guess it maybe if you could talk about performance of genes versus non gene product is one outperform the other and then also just curious to get your thoughts on where you think where at in that denim cycle and if you feel like your mix in denim right now.
Now is at the appropriate levels or should we see any changes for 2026.
Yeah, we loved gene so our jeans business is great. The bottoms business overall is very healthy we continue to deliver record quarter. After a record quarter and I feel confident that we'll do that again.
In Q4, it's really driven by Jean silhouette.
No we are the destination for genes, but the number one women scenes brand in America and the number two jeans brand overall and I think that's what we're most famous for him a customer's comes as far as a driver I think a lot not only on the topline sales but also.
A lot of their retention rate a healthy retention rates, we see in our customer base. So I think you should expect to see more five pocket silhouette.
Both indigo in on Didnt go from us going forward.
Our customer loves us silhouettes, we have the best fit fabric quality value.
Out there so I'm in terms of the denim cycle.
I think customers continue to be very engaged in jeans, and our genes specifically.
We had doubled down in jeans, the last time people. So the genes were maybe.
Not happening and I paid off for us and we will continue to lean into the category that where most famous for.
Great. That's helpful. Thanks, So much good luck for holiday. Thanks.
Thank you. Our next question comes from line of Janet Kloppenburg Judicate Research. Please proceed with your question.
Good morning, everyone.
Hey, Chad I was wondering if you could talk.
A little bit more about the men's business you said you will.
Thanks, and data that shows men, but less engaged a I know, there's a strong skate trend going on right now I'm not sure that's applicable the here maybe it is but you could talk a little bit more about what you're saying that I thought that was interesting in Jan you know pink is being very very promotional particularly on the apparel side and it sounds like.
No that's not hurting you clear Lake and Glatch, but just wondering you know what you're saying they are in the if you see you know a bit pink emerging as as a more potent competitors going forward. Thank you yeah, I mean, Janet how are you seeing it by the way.
Well.
And we always say entirely in an area. We're really proud of how we led this body positivity movement, Janet and I think you know it comes really from a place of authenticity and as we see a lot of competitors are now following suit. It keeps US ahead of our game and we have to keep on thinking on what to do different next year and how we can keep on surprising or cut.
Dumber regarding product. This team is on fire, Okay. The design team and the merchant team has never more than focused we are working tirelessly looking at every item every detail.
Every wash every button I can only tell you how much we labor over the top 25 items in this brand and 'em, we are continuing to do that I'm thrilled with the spring assortment.
The marketing I've already seen it it's phenomenal and you know Oliver I Love competition, because it makes us think Carter and sweat things out a little bit more and keeps assemble so I welcome it.
Yeah, I think chat already answered the question.
[noise] Chad.
I I feel like I've talked a lot about men's I think the keeping his I'm still very engaged in our two categories and so it's up to us to make sure that the rest is assortment is compelling for him.
Okay.
Thanks, Dan it.
Thank you. Thank you. Our next question comes from the line of Janine Stichter with Jefferies. Please proceed with your question.
Hi, Good morning. So first question for Chad I think you talked about curvy genes feeling like it was incremental can you talk a little bit more about that is evidence you had that you're getting a new customer same thing with extended sizing that I think you launched earlier in the year and then for Gen and I think you said aireon much margins were up 400 basis points curious how that breaks out in terms of Laura.
Motions versus just sheerly getting scale out of business, that's now getting larger and how we should expect the much margins to evolve and as you as you gave more scale and ultimately add to get better under bice. Thank you.
Yeah, we're really I'm excited about Kirby as I said, we are seeing a incrementality there we saw a strong.
<unk> business and our core jeans business and then Kirby.
Really exist grew on top of that added on top of that so we feel really good about Kirby and what that is done and bringing in a the opportunity to serve both existing customers, who weren't able to where the genes <unk> previously or weren't able to optimize the fit for themselves previously as well as attract new customers customers to the brand were found with a extended.
Hi, this is that as the sizing increases there's just less there's not as much awareness around it.
And so the uptake hasn't been quite as fast as or explosive as Kirby.
But customers are becoming more aware of it has been in the assortment for a while and we are seeing some of those sizes a pickup.
And we definitely were less promotional I'm, we're definitely getting paid for all the.
Labor, we're putting into our garments and we've really focused on pulling back on promotions and be more strategic with our promotions.
Great. Thank you.
[noise]. Thank you. Our next question comes from line of Westcott Rochette with Evercore ISI. Please proceed with your question.
Thanks, guys.
One big positive on the quarter is your comp traffic seems really accelerate a low double digits can you kind of break that down is that mostly driven by Erie was it driven by the.
And more inclusive size in the Kirby.
Do you see that traffic conversion kind of broken out.
Yeah, all all brands in channels Comped positively on traffic with digital really leading the way with a high teens traffic and then Aerie also with American Eagle in the low to mid single digit Tropic. So we actually had experience really strong.
Entropic for Q3.
Great and then I think you kind of touched on the last question, but you know as you bring in more of the you know the crew because when you get that question.
You get that product out and customer gets to learn it do you feel that you have enough appropriate tops business to serve that customer is that an area that you need to continue to expand as well.
Yeah, I think you know I think on the traffic just to touch on it and as Bob mentioned is all positive it but I think that that's really driven by our brand strength and the messaging, we're putting out there in both brands you know customers want to find out what we have going on and that's really really a strength that both brands have in terms of Kirby.
You know I think.
Sort of a quick answer would be that in some ways. We didn't have the right tops right because the tops assortment.
Hasn't been as strong as the bottoms assortment.
But I do think we see that.
A bit across the board, but I think you're right I think there are some learnings around.
The customer, that's why and Kirby and what top she might want to wherever those gene and so we do look even with the assortment were set this week, we've made some silhouette changes.
To the top that hopefully, we'll see a positive response and I think will serve more of our customers overall.
That's great and just if I could just one more.
The urban necessities for a while I'm just the learnings you've had with bad weather footwear could be bigger kinda classification for you going forward. Thank you.
I think we can Oh go ahead, you see that that ethical teacher opportunity for us.
Years ago years ago years ago, it used to do up if they got footwear.
So this we see this as it seems wrong.
Hi, Great looking holiday guys.
Thanks next question.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question Q. Please press star one on your telephone keypad. Our next question comes from line of Rebecca Duval with Bluefin Research Partners. Please proceed with your question good morning, and thank you for taking my question.
Question.
Where are you with the ball versus cycle, I know that kind of gone back and forth.
This last year and I'm, just wondering what you're seeing there and then.
I'm sure you're talking about.
The third quarter.
Lots about top you are positive, but I'm, just wondering when it and where it.
Hi.
And if it was due to net being stronger or any more commentary.
Thank you.
Sure Bralettes had a great quarter, a we're anniversarying are Rob Revolution, as we called it in area and I'm really proud of the core assortment. The teams really focused in on what frames, we need to service, our customer and how many and I think they've done a nice job, they're focusing and we also had a great launch you list.
More of a fashion lunch I would say in the core bra business and it performed really well to the point, where we're going to keep that style drilling.
Going into Bralettes, they had an amazing quarter. They are there just as I said you know some of this you have to ride the wave a little bit everyone got into the business fast and furiously. When it was trended I would like to say we were one of the first to do a big and do it well and.
That said you know a lot of ER, our competition sort of.
No.
Leaned their assortments down and we continue to hold the course and it's proven to be great for us. So that's a core part of our business and broad than they thought they had a great quarter.
I think for.
Top yeah, we did come through.
So back to school time period.
Feeling good about what we're saying well over the top trend and women and a really strong.
Or strong business balanced across all of our next category.
That did start to soften later in Q3, and we're just we're not seeing enough incremental positivity from the total.
Knits business to pickup for.
Our woven shirt.
Weakness in there in the fall time.
Thanks.
Best of luck.
Thanks.
Thank you. Our next question comes from the line of John Morris with D.A. Davidson. Please proceed with your question.
Hi, Thanks kind of a two part question here, Bob I, just wanted to check with you on traffic.
Into Q4, you know you're talking about traffic being positive and strong across all brands and I know, we don't want to get too much into the metrics on Q4, yet, but it kind of gets it you know brand strength you know is traffic.
Generally positive across both brands I'm trying to kind of ascertain how much of this is Josh.
The tops.
Yes, it Eagle because we are hearing the traffic has been pretty weak across the board for most retailers. So that would be helpful. If you can shed some insight there.
Traffic for US was very strong in Q3 as I outlined by brand in channel and you know looking at Q4 to date traffic is not an issue.
At all its really just ensuring that we are promotional enough to move the units we need to move in the quarter a clean inventories. So traffic has been very good and I just think that that reinforces the strength of the brands, particularly as you are seeing or hearing a lot of our compare.
<unk> and others in the space talking about slow traffic or will tropichop.
Yeah, I think that's encouraging an important jan.
Really nice work there what's driving the higher 80 war, if you can give us a little bit more color there and how much more opportunity do you see going ahead.
You are.
You know the teams just doing a nice job ensuring that we're getting paid for all the quality that we're putting into our garments that first and foremost and we continually look to pull back on our promotions. So that's helping and you know we're mixing into.
Just hiring you are businesses apparel and broad score abroad.
A warrant our highest say you are in the business and they had a great quarter or sell variety ours I should say so it just really the way we're mixing the business and ensuring that we're getting paid for our product.
Got it thanks, good luck for the rest of holiday guys. Thank you. Thank you John .
Thank you. Our next question comes from line as Matthew Boss with Jpmorgan. Please proceed with your question.
Great. This is Steve is it going on for Matt. This morning. Thanks for taking our question. We have two questions on margins Firstly merchandise margin at this point do you expect most of the tops product to be clear through by the end of the fourth quarter or would you expect some markdown pressure to continue in the first quarter. Then secondly on SGN, a fourq you guidance for dollar slot.
It's materially lower than the third quarter spend what's the primary factor in driving the step down in growth and as we get to next year. How do you think about the run rate fresh and $8 in this business. Thank you.
Yeah. So on your last question Steve for SJ.
The primary factor driving to step down in the growth you know we look into next year's we are comping a whole lot of the investments that we made throughout the course of the year in both store payroll and advertising. So that's one of the drivers there Oh one of the drivers and this isn't necessarily a good thing driving.
Our SGN a savings in increased rate I'm in the third quarter is really just a pullback in incentive comp versus same period prior year.
And cutting back on some of our other expenses discretionary expenses in light of or the margin performance in the quarter.
And then you know your questions relating them to margin and margin pressure as a result of the tops Mrs. Let's say, a we feel in with the velocity of the unit sales that were seeing with the current promotions that were running and what we're contemplating that we will be clean and the tops inventory by the end of the third quarter.
Our fourth quarter and it won't carry into Q1 next year.
Great. Thanks, very much best of luck in holiday.
Thank you.
Thank you ladies and gentlemen that concludes our question answer session I'll turn the floor back to make me and for any final comments.
Okay. Thank you all for your participation and continued interest we will be available today for any follow up the you have and we wish you all are happy holiday.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.