Q4 2019 Earnings Call
I forgot that you existed.
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Greetings and welcome to American Eagle Outfitters fourth quarter 2019 earnings Conference call. At this time all participants are in a listen only mode. A question answer session will follow the formal presentation. If anyone should require operators such as during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now like to talk.
The conference over to your hosts Judy Meehan, Vice President of Investor Relations. Thank you you may begin.
Good afternoon, everyone. Joining me today for our prepared remarks surgery Schottenstein, Chief Executive Officer, Chad Kessler AG Global brand President Jen Foyle Aerie Global brand President and Bob made to our Chief Financial Officer before we begin today's call and you to remind you that will make certain forward looking statements. These statements are based upon information.
And that represents the company's current expectations or beliefs results actually realize may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise except as required by law.
Please note that during this call and then the accompanying press release certain financial metrics that presented in both the GAAP and non-GAAP adjusted basis.
Reconciliations of adjusted.
GAAP results are available in the table attached to the earnings release, which is posted on our corporate website at www Dot HDL Das Inc. Dot com and the Investor Relations section, where you can also find the fourth quarter investor presentation.
Now I'd like to turn call over to Jay.
Thanks, Julie good afternoon, and thank you for joining us.
Start today by providing an overview of 2000 IP.
I'll turn it I'll turn it to the gene for additional details on a quarter Andy here.
I'm pleased to report.
Another here a record sales, which increased to $4.3 billion 2000, Nike marked our fifth straight year of positive comparable sales.
Our ability to capture market share across America, the ordinary underscores the strength of our leading brands as well as the team's ability to execute in a disrupted environment.
Across brands and channels customer engagement was strong.
We gained new customers and traffic to our stores was positive and outperformed ball average loss control or digital business continue to grow at a robust pace fuel buyer app and mobile chat channels.
Very deliberate exceptional growth and it continues to be one of the fastest growing specialty retail concepts. After five years at double digit sales gains.
He had another remarkable year.
Consistent momentum each quarter.
We have successfully expanded aries reach.
Getting customers across both digital and stores.
Every team has done an extraordinary drought.
Great expanding.
Nurtured price correction.
Applying strength also fuel and meaningful profit improvement.
Without a doubt areas one of the most exciting emerging brings today more than ever we see significant market opportunity.
Continues to fuel Airings metal.
American Eagle posted ongoing growth and it signature genes and bottoms categories will continue to gain meaningful market share and achieved record revenue.
We are near the clearly uterine genes bargain.
Arpine Kocharian innovation, new styles fits and amazing values to our customers.
We will continue to fuel our power in this important category.
As we noted last quarter eight jobs have been challenging which resulted in increased promotional activity.
The team has been focused on improvement in this area.
We're seeing some positive early indications.
In summary, 2019 had a number of wins you have the bottom line results were on satisfactory.
We are cable a better performance.
Our 2020 for priorities.
Reset revolve around product improvements inventory optimization dominance in age change and continuing to accelerate Airey group.
We're also working to transform our supply chain to drive operational efficiencies and better serve our customers you'll hear more on these efforts throughout 2020.
And here, we take our responsibility as a corporate citizen very seriously and.
Therefore, I want to when a high wider efforts on new year's tree.
We have been an industry leader in our sustainability efforts last year, we have built environmental goals, which included Harbin neutrality in our own and operate at facilities, which wanting third.
And 60% reduction in carbon emissions by 2040.
Building, a better world, it's consistent with our strong values and corporate culture.
We stay true to our purpose to show the world, There's real power in the optimism that use.
We foster and power billing solution, we should pivoting and hard work to drive success for all our stakeholders.
Lastly, Bob will discuss.
A recent run a virus outbreaks in more detail.
However, I want to emphasize there I priority is the safety of our associates partners and customers. Our team is monitoring the situation closely and will respond to any developments I'm extremely proud of the property and the progress we continue to bet.
Oh, so although we've had some bumps in the road.
It was outstanding World Class organization.
Two of the best brands and specialty retail.
We are financially healthy with a strong free cash flow, enabling us to make key investments in our business, while staying committed to shareholder returns in 2020, we will focus on our strategic pillars, we Gore Branson signature categories alternate channel customers.
Burns across channels improved financial return to accelerate the market expansion for here.
I'm optimistic about our future.
I read it seems on numerous opportunities. Thanks for the tire and you know team for their hard work and dedication and I'll now turn the call over to chat.
Thanks, Jay and good afternoon, everyone 2019 was a year with a number of successes free as well as some challenges.
Comparable sales increased slightly for the full year led by strength in bottoms, including record June sales.
Our customer file increase and traffic and transactions were positive across both stores and digital.
As we noted last quarter soft demand in certain tops categories resulted in higher than planned promotions. This weighed on our fourth quarter performance comparable sales decreased 3% against the 3% increase last year Trafford transactions were positive reinforcing the strength of our brand.
This was offset by a lower average unit retail price.
Due to markdowns.
American Eagle men's and women's jeans wear a standout delivering another best ever quarter, marking the 26 consecutive quarter of records in sales the category was healthy but you ours.
And promotions can contain compared to last year.
We continue to gain market share as we have turned ourselves as a clear destination for genes.
We are winning through innovation and fabrics fits a new styles. There are natural extension of our collections such as women's Kirby and men's aeroflex.
We have strong plans in place to continue our momentum in this category in 2020.
During the holiday season, I was pleased with the customer response to women's sweaters and fleece and mentalities. We also continued to see strong momentum and accessories category, we have invested in over the past few years.
This includes our new mood personal apparel line, which is also performing well.
Positive brand traffic throughout the holiday and post holiday periods enabled us to successfully clear through challenging styles and men's and women's tops. We ended the quarter with inventories in good shape and carryover units down to last year.
Looking ahead to 2020 bottoms led by Jean will continue to be our growth engine.
Talks we are planning inventories cautiously to strengthen pricing power and rebuild merger. In addition, we are focused on better product execution.
And women's we expect to see improvements through strong key item, there toxin teas and benefit from year end fleece business.
We're encouraged to see some improvement based on a favorable response to new items.
Although the men's area has been more challenging customers remain highly engaged for day brand and continue to fuel a thriving trends in jeans active bottoms underwear and fleet, we look forward to seeing the results of upcoming collection.
To see signs of an improvement starting in the second quarter.
Our marketing and engagement strategies at 80 are centered on creating unique ways to authentically connect with our customers. For example, the essence of our brand platform aided and me as a collaboration between our customers on our brand we have real customers co create our campaigns, which has been very well received and continues to deepen the connection with there.
Customers fueling positive traffic and customer KBR.
Although we are not pleased with execution in certain areas. During 2019, it is important to emphasize.
At the American Eagle brand as a healthy foundation, our brand is a clear destination for our customers, particularly in our leading signature category.
He is the number two most popular apparel brand for our customer segment segment second only to Nike, we continue to see strong traffic to our stores and website and have a growing customer file including higher retention and reengagement rates. In addition, we have scale are fully omnichannel capable and generate very strong free cash flow.
In 2020, we are focused on starting to rebuild profitability to a level that better reflects the strength of our brand and our organization.
I want to thank they team for their hard work and commitment and 29 team as a result of the team's continued efforts and creativity I'm confident in our ability to deliver stronger 2020.
Now I'll turn it over to John Thanks, Chad and good afternoon, everyone 2019 was a fantastic year for aerie, marking our fifth straight year of double digit sales growth in total we posted a 28% sales increased 20% comp sales growth higher margins and improved profitability.
Barry group, both in its customer base and loyalty program participation at a double digit rate for the year and also grew at an average customers that we started this journey several years ago to offer fresh take on the intimates and soft dressing market I've been through without the customers have embraced vary the core values that we stand.
For body positivity inclusivity empowerment.
I continue to resonate with so many customers.
Our merchandise collections have been well received and we're successfully expanding into new areas of growth.
Our role models ambassadors and events such as very real talk.
We are building such a strong community and we broaden our reach by opening new stores in new markets, which also are fueling a strong omni channel business.
I'm so proud of the incredible aerie team because they can have an everyday and are working hard to deliver another banner year in 2020.
Looking back in the fourth quarter, it was terrific as well fueled by a strong holiday offering.
Total fourth quarter revenue increased by 29%.
Sales grew by 26%.
This is built on a 23% growth last year, resulting in a two year increase of nearly 50%. The quarter also marks our 20 onest consecutive quarter of double digit sales growth.
Key performance metrics continued to be very very healthy we saw an increase in transactions and a higher average transaction size. This was delivered by a meaningful arrive in the average unit retail brands.
In a highly competitive season, we were able to control promotions, improving our gross and operating margins compared to last year.
Strong performance continues to be broad based with our major categories delivering comp increases our apparel, our apparel growth was led by strength in leggings and important loyalty category for us our core bras and undies remained consistent growth categories as well. We're also very excited about our product pipeline.
For the spring season, our newly launched real good sustainable swim line made from recycled water bottle has been amazing we're looking forward to building an additional real good Santa book sustainable product lines in the future.
We opened 65 new stores in 2019 includes five.
Our total for the year to 332.
We're seeing very strong returns from our investments in new and remodeled stores as well, including exceptional growth trends in newer markets like Dallas, Houston and Denver.
And with as we have discussed in the past our store strategy fuels, our digital business, which now represents more than 45% of the revenue.
We have a robust store opening plan for 2020 with a heavy emphasis on standalone locations and expect to reduce continued benefits from our expanded footprint.
In January we're thrilled to introduce a new area role models to inspire 2020 as the year of change for Harry.
We also continue to grow our network of college brand ambassadors leveraging existing loyal to us to build an authentic presence on presence on campuses.
And as we look ahead, we have so many exciting plans to continue to fuel our momentum in 2020 ambient I look forward to sharing more details in the future.
Lastly of course I'd like to thank this amazing Ameri every team who live and breathe various brand DNA everyday our success speaks to the hard work cash and then talent to this entire organization. We've entered 2020 with momentum Enlink, we look forward to achieving our milestone of 1 billion in short order and now.
During the call over to Bob.
Thanks, Jen and good afternoon, everyone.
American Eagle in areas, both delivered record revenue.
We continue to win in AG genes, which is a key growth pillar for the call.
Expanding Harry has also been a priority in the brand demonstrated exceptional growth throughout the year that strong momentum, including profit improvement continued into the fourth quarter.
Overall, the quarter was challenging for the American Eagle brand.
Discussed on our third quarter call soft demand in certain tops categories resulted in more promotional activity than we had originally planned.
This pressure profitability quarter. However, we experienced continued traffic and transaction gains and a strong response to our promotions and clearance events. This enabled us to successfully clear the holiday merchandise in the quarter with inventories in a better position than we expected.
Turning to the fourth quarter results my comments will focus on adjusted financials, which exclude certain items.
Fine details on these adjustments in the press release and tables on page six through eight from the Investor presentation.
Total revenue for the 13 weeks increased 6% to record 1.31 billion compared to 1.24 billion last year.
Operable sales increased 2% following a 6% increase in the prior year and Mark our twentyth consecutive quarter of positive comp growth.
Additional sales information can be found on page 10 of the investor presentation.
By brand American Eagle comps declined 3% compared to a 3% increase last year.
Positive comps in digital were offset by decline in stores.
Very comps increased 26% following a 23% increase in the prior year significant strength across channels.
On a consolidated basis store comps declined approximately 3%.
Digital sales increased at a double digit rate.
Our online penetration increased 33% of revenue in the fourth quarter.
And 29% for the year.
201 hundred basis points to last year, respectively.
The total company quantity to sales was mixed in the quarter with increased traffic and transaction growth offset by lower average unit retail price due to greater promotional activity.
Gross profit dollars decreased 5% 408 million.
The gross margin rate was 31% of revenue down from 34.6% last year.
Higher markdowns were the primary drivers of decline.
Distribution center and delivery expense also de leverage partially offset by lower incentives.
Slide right leverage.
SGN expense of 287 million decreased slightly from 288 million last year.
As a rate to revenue SGN, a leveraged 130 basis points to 21.8% of sales.
Well, we're incentives were partially offset by higher professional fees.
Depreciation and amortization increased 8% to 44 million.
10 basis points to 3.4% as a rate to revenue.
During the quarter, we incurred impairment and restructuring charges of $76 million.
Suddenly 65 million related to the noncash impairment of 20 stores, including 25 million to impair the right abuse asset we added to the balance sheet as part of the change and lease accounting rules in the beginning the year.
Despite the impairment 20 locations overall fleet is profitable unhealthy and we'll continue to proactively managed to real estate portfolio as soon as we have done and recent here.
The remainder of the charges, primarily reflected severance and other costs some of which related to a review of our store organization structure and payroll model.
Adjusted operating income was 77 million excluded these charges and compared to 101 million last year.
As rate to revenue adjusted operating income declined 5.8% from 8.2% last year.
Our GAAP effective tax rate negative, 187% compared to positive 26.5% last year.
Flexing the impact of valuation allowances on impairments and restructuring charges this year.
Our adjusted effective tax rate decrease to positive, 19.9% compared to 26.5% last year due to favorable changes in income tax reserves a reduction in non executive.
Non deductible executive compensation and other benefits.
Fourth quarter adjusted earnings per share 37 cents exceeded our guidance of 34 to 36 cents compared to EPS of 43 cents last year.
Total and ending inventories in cost increased 5% to 446 million, which was better than we expected.
Inventory units increased 2%.
Inventory increase primarily represented new denim styles and aerie growth.
We were pleased with our ability to clear holiday merchandise during the fourth quarter.
After 2020 clearance units down to last year.
Now a few comments and highlights regarding our annual results.
Total revenue for the 52 weeks increased $272 million or 7% to record 4.3 billion compared to 4 billion last year.
Consolidated comparable sales for the year increased 3% building on an 8% increase last year.
Quite some volatility in the quarter AG brand comps were up slightly for the full year against the 5% increase last year.
Eric accelerated sequentially, each quarter and group comps, 20% for the year building on a 29% currency last year.
Gross profit dollars increased 35 million to 1.52 billion.
And as a rate to revenue gross margin decreased 160 basis points to 35.3%.
SGN agents of 1.3 billion increased 5% and leverage 40 basis points to 23.9% as a rate to revenue.
For the year for the year adjusted operating income of 314 million decreased 7% from 339 million last year as a rate to revenue adjusted operating income decreased to 7.3%.
From 8.4% last year.
This excluding impairment and restructuring charges of $80 million this year.
And restructuring and related charges of 2 million last year.
Annual adjusted EPS of $1.48 was flat to last year.
Our strong financial position remains a competitive advantage, we ended the year with $417 million cash and short term investments and no debt.
We delivered strong free cash flow in 2019, which enabled us to invest in our business and also returned significant cash flow to our shareholders.
Paid dividends of 93 million and we repurchased 6.3 million shares.
One point I'm sort of $112 million in the year.
Consistent with our guidance capital expenditures totaled 210 million for the year in 2020, we expect cap index to be in the range of 225 to 275 million.
Increasing capital spending is driven primarily by investments in our distribution network as well as Arie store openings.
2019 store activity can be found on page 14 to 18 of the Investor presentation.
Total gross square footage increased 3% for the year due to additional square footage from every store openings.
We opened 37, new Aerie Standalone stores and closed four locations. We also opened 28, new aerie side by side stores and closed one location.
For the brand, we opened 27 stores and closed 21 locations as we migrated our footprint to stronger locations.
Our real estate priorities in 2020 are to accelerate the growth of carry with approximately 60 to 70 store openings to reposition and remodel stores and to expand globally for franchise partnerships.
We continue to act, we manage our we lease portfolio has been successful and negotiating rent reductions in short renewal periods.
Average lease term at the end of 2019 was 3.6 years and more than half of our C mall leases expiring 20 point.
We will continue to prioritize best strategic locations.
These include top performing malls with positive traffic trends attracted pro tendencies and favorable economics in additional locations and strong omnichannel trading markets.
Same time, we will continue to close non strategic and unprofitable stores.
Now regarding our outlook.
In the first quarter, we expect EPS of 20 to 22 cents based on comp sales in the positive low single digits.
This outlook includes a penny headwind from the anticipated impact of Corona buyers on our Hong Kong stores in another penny as we app lap the discontinued Japanese license business.
For the full year 2020, we'd like to highlight the fall.
First we are lapping the challenging 2019 and resetting our incentives in 2020.
This would create a material expense headwinds, particularly in the third and fourth quarters second as Chad mentioned, we're working to improve our mens tops, but achieving an inflection in the business may take some time.
Third as you may recall, we will be lapping a 15 cents EPS benefited from the receipt of Jan Japan licensing royalties in the second quarter 2019.
Keep in mind typical year, we generated approximately similar level profit in our first and second quarter.
As Jay mentioned, we're closely monitoring Corona virus developments, we have a task forces tracking a situation in real time to ensure the health and safety universe associates customers and partners and to maintain business continuity.
In addition, we're working with a certain sourcing partners on migrations and currently do not anticipate any near terms supply chain disruptions.
As you know situation remains fluid and could create ongoing uncertainty.
What we know today is reflected in our first quarter guidance.
In closing we are pleased with American Eagles continued momentum in market share growth in teens strong customer engagement and positive traffic and transaction trends.
On a number of initiatives in place to deliver better fashion manage our inventory more tightly and drive incremental efficiencies in the business.
Are there any one of the best emerging brands of retail sector. It is right for a new perspective, we will continue.
To fuel areas momentum expand into new untapped markets and sees on the significant market opportunity.
While fueling the growth cost Aimco, we will focus on strengthening our profit flow through in driving returns to shareholders.
I'd like to close by thanking our entire ATRIO team for their hard work. This year 2019 was a challenging year for the organization for the quality of our people remains a key strength in competitive advantage.
Now, we'll open it up for questions.
Thank you at this time, we will be conducted a question answer session. If you will act as a question. Please press star one on your telephone keypad a confirmation. So indicate your line is the question Q you we prefer to fuel at your will be a question from the Q4 participants using speed requirement and maybe netsuite the comprehensive before Christmas turkeys one moment. Please.
As we pull for questions.
Our first question comes from the line of keeps systems with RBC capital markets. Please proceed with your question.
Yes, hi, Thank you for taking my question.
I guess looking ahead to airy and 2020, Andy accelerating Standalone plans can you just speak to the productivity trends that you see in the Standalone stores relative to the side by side, just how should we think about the mix of new an infill markets as well as any sort of digital halo when thinking about the expansion plan.
For 2020 that would be helpful. Thank you.
Thank you Kate to the question.
Standalone locations compared to this and side by side.
Okay.
The standalone locations versus the side by side locations have a slightly lower.
Square foot productivity and it really only has to do with the size of the box compare to the side by side box.
From a digital Halo perspective on average what we see is approximately 50% of stores.
Sales volume being captured on the on the digital side of the business.
And as far as you're thinking about expansion plans for 2020, we're very focused.
Expanding within trading markets and not on an AD hoc basis, what we find is when we do that we get to capitalize on marketing across the the trading markets, but also it drives a slightly higher digital halo.
Our next question comes the line Im John Morris with D.A. Davidson. Please proceed with your question.
Hi, Thanks, congratulations on the on.
The good work in the start here into Q1.
Bob I think for you couple of questions about Covidien 18.
From a sourcing perspective.
We are beginning to hear from a number of people some metrics that give us a little bit of a better feel on the supply chain side wondering if you can tell us what percent of your fact factories.
Back up in terms of what you're hearing from your suppliers, maybe give us if they'll for.
Are they back in full capacity there is some percentage of capacity.
You know the what are the concerns is really on the raw material segment kind of sub question raw material side in terms of fabric.
What was that something that could impact you hear into Q2 is you're looking to take some of those receipts wondering if theres any.
Delivery delays that you're expecting and would you potentially incorporate some kind of additional freight expense from that not only Q1, but Q2 as well if you can give us a feel for that that'd be great.
Yes.
Thanks for the questions John Bob Bob Let Michelangelo, we've got our supply chain partner COO, Michael when Paul So I'll tell you guys, Hey, Michael Thanks, John Hub hope you're doing well.
Yes. So Phillips says there is theres been a lot of activity really since January.
On the sourcing side I'm happy to say.
100% of our factories and mills are back operating.
They're operating at about 75% capacity now.
But they really been terrific partners they've worked with us.
Prioritize our business and and right now we while we do see some.
Delayed theres nothing that we can't manage without expediting in our supply chain.
It's really too early to tell.
If there will be residual impacts from mills opening later factories opening later and the amount of work that they have to catch up on which is I think.
The second part of your question.
Right now we feel good about our deliveries there might be some unanticipated delays into Q2 and later in the year.
But but again, we have very good partners, we have very good relationships.
And and we feel good about our opportunities to get our product.
Excellent thanks for that information and good luck for spring.
Thank you.
Our next question comes the line of Oliver Chen with Cowen and company. Please proceed with your question.
Hi. Thank your question was just about mens relish the women's it sounds like men's has been a little bit more challenging if you could elaborate on some of the differences there and why it's more challenging.
You've also I'm impressed with traffic in transactions would love your thoughts ahead with what you see for for in store traffic trends as well as managing merchandise margins and that's tough general environment. Thank you.
Yeah. Thanks.
Thanks, a part of the.
Challenge we've seen in men's is I think.
Well Q4, we had some balance issues in the assortment and.
I think shifted too much into or out of some legacy category.
The mountains trend has been a little bit longer lasting then eliminates crime insight anticipate.
We'll take a little longer to get that back on track and also the women's business delivers more newness on a monthly basis, which makes it easier for us to.
Flex into what we see is working and when and I do think.
We've seen great strength in both genders.
Across bottoms.
And accessories, and I think in mens specifically.
We're really inspired by what we see across.
Our active assortment and but bottoms and tops, we've delivered and so we expect to be leaning into that.
But it just takes a little bit more time for us to get the assortment.
Right. It we do see traffic and transaction trends continuing.
That really speaks to the strength of the brand.
And our position as a destination for this generation.
For apparel, especially.
Jeans, specifically so we.
We will continue to lean into our brand strength and our category strength and we're doing everything we can as quickly as you can to make sure. We got the tops assortment righted and both men's and women's.
Our next question comes on line of a journey with Barclays. Please proceed with your question.
Good afternoon, everybody Bob what percent are you actually sourcing now from China, and Asia broadly and also for the comp of the plus two or the blow single digit for the first quarter should we assume a similar spread between aerie.
And a brand and then one for Gen.
What percent of swim the spring product.
And are you hearing any chatter about kind of disruption to spring breaks in any of that sort of up sort itself kind of on the demand side. Thank you very much.
Thank you for the question Adrian.
We source approximately 20% of our products from China today.
And our constantly looking to migrate that to other countries overtime, even regardless of the Corona virus situation.
As for the comp plus two or below single digit first quarter.
It's a.
It's a positive low single digit or low single digit comp that we gave his guidance and I would say, yes, you should expect those similar spread between.
The brand and areas in the first quarter.
And powered by the way.
Anyway.
Thank you.
For Aerie swim represented you know I would say roughly around 10% of the business, but the most important thing about slim is and what we've done strategically is the customers demanding so much more from us and obviously they love our platform and this community that we are building. Its just outstanding so that said we're able to.
Just opened up new categories and introduce the customers to new categories every day and that's what we've been really focused on I have some great no surprises coming everybody's way for back to school I think we have some really good ideas in the brand and some new ideas that I think.
We're really going to expand our Ah. So we're excited about that and then when they think about spring breaks you know what I love that area is our customer base is starting to become more ubiquitous we're getting moms and daughter shopping so we're able to hurdle the spring breaks.
Some of these smaller ships that maybe some might come to that some kind of competitors are seeing so definitely there is now we're getting more and more in our customer base she's growing with us retention is up and so we're able to really mitigate any risks there.
Right.
There was a great.
Our next question comes on line of Janet Kloppenburg with JK Research. Please proceed with your question.
Good afternoon, everyone I'm a couple of questions can at the end of this you will have about 400 stores add with such a deep penetration of Bob Digital I was just wondering.
I thought the optimal number of stores.
What we would end up and had given the talk that on them on the women's tops versus the mens tops I was just wondering you know what's your confidence level was that you could achieve positive comps maybe in the second quarter or thats something that we should be thinking about sort of back.
Thanks, so much.
Yes. So on this year Janet we're going to have about 322, well we ended the year 322 and open up another roughly 60, because we still are not in every market. So we have to cover every market, but we definitely are going to over expand we're gonna be really smart about where we grow and and what markets, we enter and what our grade level.
Yes, we're going to get into the other interesting that thing that's been happening as our renovations and they've been doing amazing threat. So when we put our new market design into some of our older stores, we're seeing really nice comp there and then I guess I would say when you think about the other part of our growth is where we have some older side by side and we can.
Work at a nice deal on the mall, we're going to open up Standalone stores, there as well because again, that's another place where we could actually we need some more square footage.
But again, we're not going to get sloppy when square footage, we're going to be very strategic or we're not gonna oversized the ship by any means. So are we have intense real estate strategy mean meeting that we're really focused on and we're going to expansive. So we're going to make sure we don't oversaturated stylist marketplace.
Okay. Thank you.
Jennifer.
Women's worsening man I think Oh, yeah, I feel we have some really.
I'm excited about some of the green shoots there we're seeing in the women's business and the non bottoms business. So far this spring.
Whether it's like I mentioned.
Script, or some of our key items and bear and antifreeze and graphics and that I think I'm sure you've seen our dress shop that launch and then we're seeing positive response across the board there I think we're balancing.
I'm trying to balance getting some rate back being more promotional than we intended and 2019.
So going after what's working so I think for Q2.
We should start seeing the women's business back women's tops business getting back close to if not positive I think the men's business has been longer ongoing towns I'd love to see I'd like to see that we can get the whole the entire months business to positive comps, but I'm thinking at this.
We're just targeting getting back to meaningful improvement in mens tops from where we think.
Thank you good luck.
Thank you Dan.
Our next question comes on line of large open loop capital markets. Please proceed with your question.
Thanks for taking the question, while we're on mens tops I mean, it seemed as if there were some categories with with holes in the assortment in Q4 is that rectified and and Chad we made any changes to processes more personnel in merchandising as a result of some of the.
Gaps, we're seeing in the assortment in Q4 thanks.
Thanks.
Yes, we definitely had some gaps in the assortment in Q4 as we look to.
Yes, I think I said in the last call, we really LNR and the twos and threes.
Because I really do believe that that's where our guys. Most heavily engaged but invoicing some of the legacy categories and some texture I think we really you know clearly gave up some business there.
Going into spring some of those categories are not.
Hadn't existed in the past I think I really want to make sure that the team is leaning in to where the customers really shifting which is to use them. Please.
Really excited about the growth of fleece and active within the assortment.
But we have made some changes to the process to make sure that we really are covering.
Covering any gaps that we have the balance that we need to have that we're delivering.
Right assortment of customer choices.
And that the assortment as productive as it needs to be to drive positive growth.
Men's we have also made.
Some personal personnel changes and mens moving we just actually recently like this week and moving a lot of the merchants from the mens bottoms area to help shore up.
Mens tops and had a great track record and I think can help with process and making sure we're covering what we need to cover as we move forward.
Great. Thank you.
Our next question comes the line of Tiffany Kanaga with Deutsche Bank. Please state your question.
Hi, Thanks for taking your question, but you people walk us through how you're thinking about has seen a growth in 2020, whether we can see some relief on this front. After all the investments you've made over the past couple of years and if leverage is likely.
Thanks for the question Tiffany as far as SGN expectations for 2000, 2020 women as I mentioned in the script relative to guidance discussion.
We do have a major headwind regarding SGN, a relative to resetting bonus at target.
There was no bonus this year and it's a pretty significant number on an annual basis is worth about 50 million.
On top of that we're expecting SGN a growth outpaced sales growth not only because of the incentive reset but also additional expenses in store payroll corporate overhead payroll and related taxes.
Really driven by supporting.
Every brands significant growth.
Across across the organization in addition to a slight increase in advertising.
So you should expect vesting expense next year to slightly outpace or outpaced revenue growth.
Our next question comes on line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Good afternoon, everyone. As you think about the impairment charges, Bob that you took on those 20 stores.
There are other stores that would be in pad next year or how do you take us through exactly what those stores the elimination of them. How does that help profits go forward, what kind of sales impact does it have and how you're planning that for next year. Thank you.
Thank you for the question Dana.
We talk a lot about how healthy our real estate portfolio is talk speak to the fact is 95% of the portfolio profitable. Those 20 stores that ended up being impaired really represent that 5% of unprofitable stores.
The impairment charge came about really as a result of those stores are not having cash flows adequate to cover the assets not only fixed assets, but as I mentioned in my comments with the new lease accounting standard we put a very significant right abuse asset on the books, which added.
At about $25 million to that 66 total 66 million dollar chart. So would have been more like called $40 million charge.
You know out of the 20 stores up one of those stores were closing so from a sales impact perspective, it's immaterial and.
Thinking about next year and do we have additional impairment risk.
As I said, we've addressed the unprofitable real estate base with discharge and I'm not anticipating any significant impairment charges next year.
Got it.
And then just on the resetting of the incentives in 2020, how are they different from 19.
Well there are different in that in 19, there was no incentive payouts and that in 2020 were resetting to eight bought a budget achievement or target level payout.
Which represents as I've said about $50 million.
Split about a third to Deo W and two thirds to SGN and expense.
Thank you.
Our next question comes on line of Rebecca Duval with Bluefin Research partners. Please proceed with your question.
Thank you for taking my call.
A question Chad and one quick ones you Bob Chad on the AIU. Our last year was really driven by a lot of is the trends out there with knits and now that we're going into spring and warmer weather is there any concern on the you are fight them a women's tops perspective that you will you know.
Obviously, it'll be lapping it but there is there any concern that you think could be a any sort of had went there and that Bob just a clarification on the earnings guidance does that include you know any sort of supply chain disruptions as you guys see now and any additional right based on what you know now and those are in that outlook.
Thanks, Yeah, you know I think last spring we definitely are.
Had a headwind without you are and that the mix trend with all the bear came at a lower your arm actually sold a lot more units.
Well, we struggled to calm and women's tops in the spring season. This year, we have definitely architected the assortment to make sure that that does not happen. We are planning an increase I know you are across women's tops were seeing that so far.
And I think with the balance we haven't the assortment and the strength we're seeing.
In two dresses.
So I've been tops that's offsetting.
That there you are so I expect that we should see about to be or comp, which will be a good thing in the spring season.
And Rebecca.
Our guidance does contemplate any sort of supply chain or any disruptions that are known today now the only known disruptions as I pointed out in my prepared remarks earlier really related to our Hong Kong retail business as Michael pointed out.
Really we're not anticipating any major disruptions in the supply chain in the near future. We've been working very closely with our supply chain partners and you know recently weve introduce a lot of speed within our supply chain that gives us a lot of options. So weve sped up ocean significantly.
From a days perspective in addition to air So we completed between the two and I think we feel at this point, we can mitigate any potential delays that we know.
Thanks, That's super helpful. Best of luck you guys.
Our next question comes on line of Janine Stichter with Jefferies. Please proceed with your question.
Hi, guys. Thanks for taking my question a question for Bob on the inventory nice to see it come in so lean you maybe help us breakout just how much the investment in tops is down and what the balance of the inventory looks like when you strip out some of the investments and denim and area and then also what your plans are for inventory all right. Thank you.
Thanks for the question, Tony So inventory was up 5% or $22 million in the quarter. The bulk of that increases to fuel our denim business a women's in particular and the areas business call. It 20 million for James business and 13 to 15.
In the fuel the area growth, which is phenomenal we cut back on our tops, both in mens and womens inventory positions the tuna call it $15 million in the aggregate by the end of the quarter and we're going to continue to manage those categories tightly until we see the trends turnaround God.
Very.
Speedy supply chain and we've got the ability to chase a number of categories and skews and styles.
So we feel really good about our ending inventories and I really have to think the teams for clearing inventory and all sending in a much better positioned than we expected our clearance inventory levels are much lower than they were last year.
Great. That's helpful. And then just one clarification on the S. You know when you talk about the Schnake or three outpacing revenue growth slightly is that before adding back the incentive comp Easter trying to understand what the underlying expense [laughter].
That.
Can you noted that includes the impact of Institute.
Setting targets backup for incentives.
Got it thank you.
Our next question comes a lot of Kimberly Greenberger with Morgan Stanley. Please state your question.
Great. Thank you so much Bob and thank you for the color on just how to think about as feeney for the year I'm wondering if you can.
Help us I'm, just understand that sort of ebbs and flows in gross margin.
For the year as well, we understand you've got that second quarter hurdle.
Because of the the licensing the license breakage fee last year, that's that's nonrecurring.
Maybe just help us think about if you could the ebbs and flows of the different pieces. If you could put together the merchandise margin as separate from some of the de leveraging BMW there that you're expecting for the year and if there are if there's some quarter to quarter volatility just in terms of how we should calibrate our model I think that would be helpful.
Sure. So we are expecting and we're experiencing up to date merch margin improvement year over year, but we are expecting B O W de leverage for the year for us to leverage B O W. We need to be operating a roughly a mid single digit.
I would call.
So unless we're able to deliver that we will have slight de leverage it flows through to slight de leveraged to gross margin for the year almost flat when I say slight on I mean slight deleverage in the aggregate across gross margin.
Great. Thank you.
Our next question comes on line of Susan Anderson with B. Riley FBR. Please proceed with your question.
Hi, Thanks for taking my question I guess, just a follow up on Kimberly's question.
It sounds like you're expecting some improved promotional environment in first quarter with the improvement in women's tops I guess and then also how are you thinking about you see that I have used for the quarter and then maybe Dan if you could talk a little bit about just if there it sounds like there's been outperformance really across all categories.
Aerie, but is there anything one specific that's really driven driven the reacceleration in comps recently thanks.
Thank you for the question Susan we are expecting improved promotional environment in the first quarter.
You know both across 80 brand, but areas seeing some fairly significant gross margin.
Improvement year over year, I mean in fourth quarter is it was over 340 basis points just to put in perspective.
Looking at.
Hey, you Ses and I am use it was part of the merch margin improvement that I referred to that we're expecting across the year.
Part of that extruding by driven by IMU improvement.
And agencies are going to continue to increase as we mix more heavily into bottoms in AG, Brad and his agenda in the air team grow their apparel offering and particularly bottoms to to put in perspective, when you think about 5% increase of inventory in Q4.
3% of that was driven by increased eight you see than the other 2% was driven by increased units.
And Susan I'm really in holiday I. It's just you know it was so we'll see the line and really all categories were really on fire. We just we had a great holiday season, and we mix really well and the team is just getting smarter with the product that she's responding to so I think they did an outstanding job really.
Diving in and distorting I think it's so important in today's world to make sure that we're buying the product right and distorting it right. There. There's just so much product out there and the more we can focus on what we need to stand for and doing well I think we're going to continue to win on the other thing to talk about here is the digital business, because we're still expanding into new markets.
Are the Halo effect, which I mentioned I'm in my earlier discussion is incredible our digital business represents 45% of the sales and we're really able to leverage and omni channel perspective, then promotional environment, we're able to just do both at the same time, leveraging our store business and digital but.
Really thinking about our promotions and now we can be less promotional that's something we're highly focused on in area. We're focusing on the flow through and how we can continue to be incremental to the total business on the box and the team is really engaged here inside they start in February and so we're looking forward to the balance of the year, hoping that.
The virus has an impact anything or so you know the other threats, but mostly I promise you that scanners engaged on delivering this year.
Great for nice job good like this year.
Okay, Devon F., we have another color we have time for one more question absolutely. Our final question comes on line of Marni Shapiro with retail tracker Tc with your question.
Hey, guys stores do look a lot better for spring, especially in the women side.
I was just curious I know you're testing in a handful of cities buy online pick up in store and I was curious what kind of results, you're seeing and what kind of timeframe here looking about looking out to rolled out across the entire fleet as well is the potential to rollout ship from store as well.
Thanks, Mark if your comments on the women's assortment, we have worked really hard and I do think it's looking better somebody are saying that.
We are testing.
Buy online pick up in store and the tests are going well I think we had a lot of comments going in and really trying to make sure work operationally, we hope to have that rolled out by the end of.
Q2.
We do have shipped from store, we've had that in place.
For quite some time ago started or and it's definitely a meaningful part of how we service our customers.
When she comes into there and to our store environment.
Do you do buy online ship from store or to all your shipments come.
We do piece, we do differently, but entrepreneurs store for about four or five years.
Now, it's about 20% of their volume of direct.
So I was Oh I'm finding.
And then by end of Q2 rolling up the the Knicks fan.
Fantastic Great that's still a spin guys.
Thanks much.
Thanks, everyone that concludes our call today, we appreciate your participation and had a great evening.
This concludes todays teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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