Q2 2020 American Eagle Outfitters Inc Earnings Call
Greetings and welcome to the American Eagle Outfitters second quarter 2020 earnings Conference call. At this time all participants are in listen only mode. A question 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 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, our day Schottenstein, Chief Executive Officer, Michael ramp, how Chief operating Officer, and Mike Matthias Chief Financial Officer, and it isn't done Boyle, Chief Creative Officer Free Yo Inc., an area Global brand President and Chad Kessler eight global.
When president will be available during the question and answer session.
Before we begin today's call I need to remind you that we will make certain forward looking statements.
These statements are based upon information that represents the company's current expectations or beliefs results actually really may differ materially based on risk factors included in our as you see 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 excel.
As required by law.
Also please note that during this call and in the accompanying press release.
And financial metrics are presented on both a GAAP and non-GAAP adjusted basis.
Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at www Dot eight Oh, gosh, Inc. dot com any investor Relations section.
Are you can also by the second quarter Investor presentation.
Now I'll turn the call over to Jay.
Thanks, Judy and good morning, everyone.
Well, you worked well and staying safe and the second quarter, we delivered significant improvements throughout our business. It truly testament to how well our teams are executing and these challenging times I'm truly grateful to all those associated across the organization.
Their commitment to our success and the humanity they have display.
Underlying our second quarter results, which they felt good Arnaud 2020 priorities.
Okay and our people.
Preserving financial liquidity and preparing for a new future.
We continue to run a business because there'll be no bars shakes huge customers and partners as a top priority.
Sure well regarding the very best health and safety measures across your officers distribution centers and stores.
Okay, we'll focus our disciplined growth, making good decisions to be sure cash.
Second quarter financial results were impacted by store closures early in the carry their performance demonstrated meaningful progress.
First quarter and sharpen our merchandise assortments lowered inventory and we ask that you're shifting customer demand.
Well online channel performed extremely well and watch brains demand rose 48%.
Fantasy sports rate in over a decade.
Online strength was fueled by new let me touch maximization.
Well, both traffic and strong conversion.
Well that's much over the past several years.
In our digital platform omni channel capabilities and supply chain, Oh, providing the engine to fuel our business and keep pace with our strong customer demand.
Mike will discuss we're implementing strategic supply chain capabilities to support the holiday season and future growth.
He managed the business well tightly controlling expenses.
He told or actions contribute to a significant improvement in our financial position.
Generated $173 million and operating cash flow during the quarter.
During the period with 899 million in cash and over 1 billion in total available liquidity.
Now I'll provide a little more color on or branch first Erie posted exceptional results and the second quarter.
That's a record sales and margins momentum in this business is truly incredible Lebanese road building people should be approximately $250 million in the quarter.
Silk Road show rate it despite the impact of stores closures as nearly 70% of their revenue was done online.
Total customer acquisition increased 22% in the quarter and more than doubled in the digital channel.
We saw strength across categories as customers continue to embrace every strong brand position.
Salary messengers.
And trade right collections. The quota we are pleased to launch.
All right well, you actually were brand, which leverages Aries powerful platform, providing a fresh cake, obviously exciting growth category.
Every year and then maybe try me up like they do what's right.
With rising demand for active appeal.
Oh, well I'd build the strong results. It every waking sports rights competing and police.
The early response has been absolutely terrific I see significant runway for growth.
We are very excited about the prospects for Italy and offline.
Graduations entirely team for their true.
American Eagle second quarter was impacted by store closures at mall traffic decline to upgrade rich. Yet. However, you ran a healthier business, which was less promotional but last quarter. We successfully success, we closed the excess inventory.
He's online demand was strong rising 21% in the core.
We also saw significant growth online customers.
He may pay leadership in dreams in bottoms. The team is hard at work building on that stream improving product line imagine customer choice is more effectively.
We remain committed to running at healthy business through product innovation and strong inventory disciplines.
As we announced this morning I appeal to recognize Gen worlds promotion to Chief Creative Officer.
Well, it's bad that role. She then we'll either grade assumptions for both Italy.
And Americanism.
Yeah, and there's an exceptional town, which demonstrates <unk> ability to gray bars optimize it just your brands and businesses I look forward to influence and leadership as we continue to evolve the AG product line and marquee and produce even stronger you Judge Chen will also continue to fuel theories Trump.
This quarter opportune.
I'm pleased to welcome to new member to ease creative team quite bothers as head of Martin Greg has a wealth of experience building work that customer engagement, but leading retail consumer brands.
We're excited to have them onboard.
That's right like the briefly touch on culture in eight yeah for many years, we at foster an inquisitive and diverse corporate culture accepting people do they are and celebrating different backgrounds of viewpoint and then at the very hard other brands encumbered.
Several years ago, we establish inclusion of diversity work stream. This year, we made a tree.
Inclusion in diversity office or Terry Roberts, we're very proud the progress we made and this work remains an ongoing priority for ATM.
As we prepare for new future revenues in this moment to take a fresh look across all areas over business to ensure we are positioned for even greater success.
I have always been passion about innovation, that's a day, it's more important than ever our teams are testing new experiences that technologies to engage with customers in different ways, we're committed to providing the best experiences and retail as I recognize how crucial this would be to our future success.
Finally, we have a long history of success with the talent experience and navigate through challenging times, our company isn't a healthy financial position the to the most trusted and loved brands in the markets a bit.
Let's say focus on successfully managing through then there could well fueling incredible growth opportunities ahead, now I'll turn the call over to Mike.
Thanks, Jay and good morning, everyone I've been really pleased with how our team stepped up during the second quarter and maintain moved operation accelerated planned projects and quickly develop solutions.
Rapidly changing customer shopping patterns and business.
During the second quarter.
Jim accelerated from already strong level.
Digital demand increased 48% compared to last year.
This was an improvement from 33% growth in the first quarter well exceeding our expectation.
<unk> increased 113% to last year, and the AG thought very healthy 21% increase.
<unk> were positive across the board with growth in traffic conversion and there you are.
Gene shorts, Tees and swim weren't meeting on one category.
The penetration of our mobile channels continues to rise it over 60% currently.
During the quarter, we saw 45% increase in our App downloads and approximately 39 million session.
Our mobile web customers are the most engaged and have the highest spend levels and more than double that of non customers.
In June we successfully launched our new real rewards loyalty program, which enables faster rewards in smaller increments. The new program is designed to engage more customers creep more frequent shopping and improve margin rate.
We're pleased with the strong initial customer response.
This quarter, we expanded our digital footprint in key global Mark.
Local shopping sites open to Japan, Hong Kong, Australia, Singapore, Taiwan, Malaysia.
We also launched our new shopping like Mexico with further upgrade plan for this fall.
We will continue to focus on expansion in important international markets, where we see significant opportunity for growth.
During the second quarter, we continue to fast track our supply chain transformation, we have regional hubs in Boston, Los Angeles in Chicago with Jacksonville, Florida opening this month.
Working in conjunction with our primary fulfillment centers. These hubs will provide improved delivery performance cost benefit and sufficient capacity for us to manage digital demand for the back half of the year.
Our teams have added just additional logistics partners to ensure sufficient delivery capacity during the upcoming holiday season.
Given our expected strong growth in the digital channel beyond this year, we intend to strategically position additional distribution capacity in 2021 and beyond.
Moving to sourcing our strengthened this area was evident in second quarter. Our teams work on costing resulted in positive mark up across both brands.
Notably, although we have significantly cut back on our inventory received we've continued to honor our obligations to vendors and support their liquidity with timely payments.
As a result, our vendor relationships remain as strong as ever and we have secured available treats capacity for the balance of the year.
As we look to the future fueling area growth is a major priority in 2019, Aerie generated almost 800 million in revenue and it remains on pace to reach $1 billion in short order.
We are confident that the ultimate potential is far greater than that.
And with our success in recent years, we still have significant white space in core areas like intimate swim and lounge. These categories represent a combined 40 billion dollar addressable market.
In addition offline offers even more potential within the $16 billion.
Women's active apparel market.
As Jay mentioned area digital channel has consistently exceeded expectations.
However, as we looked at fuel Aries growth.
Doors are also an important selling channel and customer touch points.
We know that stores generate increased brand awareness expanding customer reach and raise average spend in underpenetrated markets.
We expect that area will continue to have a digital penetration above 50% supported by a highly productive and profitable store fleet.
This year, we plan to open 25, new every location.
Includes a few freestanding offline by Aerie stores with the first location coming this fall in Nashville.
Lastly, although these are challenging times, we are excited about the future, we're executing well and positioning our business to emerge with straight.
I'm grateful for the efforts of our teams and what offended big Thank you to our associates and partners around the globe, who continue to support our business with that I will pass the call over to Mike.
Thanks, Michael Good morning, everyone. During the second quarter, our teams demonstrated incredible resiliency and we're laser focused on the value creation levers within our control.
The topline strengthened that stores successfully reopened the digital channel accelerated in every posted exceptional growth.
Back in March we instilled operational disciplines cut inventory receipts reduced spending and took numerous steps to preserve cash.
These actions resulted in sequential improvement in operating earnings and positive cash flow in the second quarter.
Defining our financial position.
We're totally revenue declined 15% to last year, primarily due to the impact of store closures and weaker mall traffic.
In addition, we lapped a $40 million benefit from Japanese license revenue in a year ago period.
Store revenue declined 43% to last year.
The result of closures, we have the equivalent of 32% fewer selling days in the second quarter relative to last year.
Do store hours in week mall traffic were also headwinds offset by a very strong conversion rate.
Open stores during the second quarter delivered roughly 85% sales productivity to last year with May and June over 95% in July coming in lower as we lapped our historical high volume back to school peak weeks.
For the total company gross profit declined 31%, reflecting a reduction in store revenue and higher delivery and distribution center costs, primarily due to higher digital transactions and an increase in cost person.
In addition recall that we lapped the gross profit benefit from the Japanese licensing revenue recognized in the year ago period.
These headwinds were partly offset by lower rent expense, reflecting negotiations with our landlords and the impact of impairments taken in recent quarters.
We also benefited from an increase in markup and Mark Downs were well controlled.
As a percentage of revenue gross margin of 30% declined from 36.7% last year.
As you know expense declined 12% due to cost controls implemented across the organization and lower operating expenses from store closures.
Expense management remains a focus and since because it crisis began the company's executed significant operating expense reductions versus our initial plan primarily in Argentina.
We reported an adjusted loss of three cents per share in the quarter. Our adjusted EBITDA was 43 million, which compared to 132 million last year.
Excluding from these results is 15 million in pre tax incremental coven, 19 expenses and restructuring charges.
Our cash generation was strong during the quarter with 173 million an operating cash flow.
Result, we ended the quarter with 899 million in cash and short term investments.
After repaying 130 million of our outstanding borrowings under our revolving credit facility.
After the quarter ended we repaid the remaining 200 million outstanding balance.
Our only that currently outstanding as our 415 million convertible note issuance.
Preserving liquidity and balance sheet strength remains our major priority and many of our recent cash preservation actions will continue over the balance of 2020.
Example, last quarter, we suspended our cash dividend and share repurchases were put on hold.
Our current expectation that we will not pay a dividend in the back half of the year.
In addition, we meaningfully reduced our capital spending plan lowering our guidance to a range of 102 125 million down from 210 million last year.
This remains our expectation and year to date capital expenditures of 61 million are down from 92 million in the first half for 2019.
We also continue to manage our inventory with discipline our quarter end inventory declined 21%, primarily driven by reductions in American Eagle as we cut receipts due to store closures and our inventory optimization initiatives.
The proactive cut inventory receipts early in this crisis enabled us to improve total company or you ours control promotional activity and then the second quarter with inventory position well.
I have a similarly this discipline plan for the back half of the year.
Given uncertainty surrounding that cover 19 pandemic and AG, we are clean on product heading into the fall season, and we are executing on more narrow and cook assortments that require less upfront inventory buys an area. We continue to invest in inventory to support our growth momentum.
Moving to stores, we are actively evaluating our fleet and plan to increase closures over the next several years and reduce the fixed costs associated with our stores.
Well our fleet remains important for distribution customer engagement with the recent success, we have had acquired and customers through our digital channel in fueling our online growth gives us additional confidence in our plan to reduce our footprint.
At the end of this year, we expect to close 40 to 50 locations, which have been specifically chosen based on lease tenure low profile proximity to other stores and customer engagement levels.
Very confident in our ability to transfer customers and sales from these locations, we will rigorously monitor and analyze the results and based on these learnings well then we'll identify additionally locations close.
We have almost 250 leases expiring this year in a similar number next year as well as an average lease term under three and a half years.
Our flexible lease portfolio will allow us to quickly exit locations that no longer makes sense.
Although we're not providing forward guidance I can share some directional comments as you know the American Eagle brand is the leading back to school shopping destination. In fact, you periods in July and August represent some of the brands highest volume weeks of the year.
As many other retailers have previously noted the uncertainty in the late starts to back to school that put pressure on the sales for the period.
Especially as we have lapped our peak volume weeks.
This year, we expect demand to be spread over a more extended timeframe post labor day into September. We're encouraged by recent performance as we have moved past those historical high volume periods.
In closing as I discussed last quarter, we responded to the current crisis by resetting our organization to better position it for sustained success.
During the second quarter, we made progress in areas like inventory and expense management and capital efficiency additional work is underway.
With over 90% of our stores currently open and the online channel continuing to perform performed well barring an escalation of the pandemic. We expect to see continued sequential improvement from the first half of the year.
We are in the process of updating our long term value creation strategies to ensure we capitalize on aries growth opportunities improve A's profit and returns and optimize our go to market structure and supply chain network.
With that we can open the call up for questions.
Thank you at this time of the conducting a question and answer session. If you'd like to ask a question. Please press star one under telephone keypad a confirmation total indicate your line is in the question Q. You me first started to if you'd like to remove your question from the Q for participants you think speaker equipment, and maybe necessary to pick up your handset before pressing the star Keith.
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 Matthew Boss with Jpmorgan. Please proceed with your question.
Great. Thanks, So maybe just started the aerie brand could you speak to the inflection that you're seeing and customer behavior as the brands momentum continued through August and just any way to help side job opportunity of this business multiyear maybe any perspective on the size there our margin profile longer term.
I would be really helpful.
Sure.
And thanks to the question look I think the team has done an amazing job positioning area for growth we.
We had a five year plan to get $2 billion and we're pretty much on that plant I'm at the end of this year. So.
Miss a this pandemic and all of the crisis that we've seen out there the teams pulled up their sleeves and drove to a strategy that we position five years ago, obviously that product assortment in theory.
Actual adjacent to what's going on out there.
And so when we looked at the business when March you get us all.
We really legal system close reposition caught up three position, we need to do including driving the directed.
No our customer acquisition.
More than doubling and we continue to see that accelerations of teams have been really strategic on bringing customers over into the every branch no I loved working on for the company and working for John seen because he's always coming from a position of strength.
When people are clothing bankruptcies are happening, we're opening up doors and.
That's what the most important thing we can continue to focus on as we will yield portfolio.
There's weakness out there and then it'll take a lot of market share that said, we have a plan to get to a billion dollars an area.
I think there's more acceleration to be had based on the demand from customer and you know even in some of the categories. That's one limits.
Where had an exceptional run in Q2, who would have thought I don't know who's wearing the anytime in meetings, but somebody is because we regained that chair and then certainly excited with that business. So there's so much opportunity here. We mentioned offline were opening up to new stores. The demand was there we saw it and what I love what's happening.
As you know aerie naturally build up of ease metrics and where we should open stores and how we should leverage that Intel and then I'm now what we have is we have Erie in over 300 locations and now we can leverage that all those metrics to really grow offline. So I couldn't be more excited and Michael mentioned that the $16 billion.
Unity, So we're going to continue to chip away, but I can only add that we will always remain hungry and there's always opportunity to do better year over year.
That's great and then just a follow up on gross margin. How are you planning mark on in the back half relative to expansion that you saw in the second quarter and similarly from Mark Downs. How are you thinking about third quarter and back to school, Mark downs or promotional activity that you're seeing out there.
Whether with your own products or laterally across them all.
I'm in Erie, we've been really highly focused on pulling back on promotions and getting paid for all the work we put into our product and we've seen obviously our margins accelerate and we're going to continue to focus on that going back on promotion and driving better quality value relationships and that will happen. The same for AG they've done an amazing job.
Positioning this for acceleration next year.
We have lots of opportunity on that side of the business and I think they've been very cautious and smart about positioning growth for next year.
Thank you. Our next question comes from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question.
Great. Thank you so much the inventory is looking really quite clean you're coming out of Q2 and I wanted to see if you could give us a little bit more color on the ability of your supply chain to really react where you're seeing demand.
In the product are there a number of weeks that you could side in terms of when you see demand how quickly could you get that products back into store.
If you for example are running low in certain categories. We're just looking for color on responsiveness within the supply chain. Thanks.
Hey, Kimberly, it's Michael Rempell I'll take that I'll take that question.
Yeah, let from where we're certainly proud of the team's efforts from sourcing perspective, we discussed in our last call that we we did aggressively clean inventory in the first half of the year to prepare for the second half of the year. So when you're looking at our inventory being down 21, the composition of that is really all fresh.
Product for fall and what we did is in conjunction with.
Positioning inventory conservatively, we positioned fabrics and capacity with the majority of our key suppliers.
To allow us to chase the business. So we feel very confident that as the business is trending and as we're seeing changes as we aren't today, we're responding on a continual basis to further were signed assortment and get into product that is working.
Our chases generally 30 to 45 days. So we're still making calls today that are going to affect the holiday season.
Great that's very encouraging and Michael could I just ask one quick follow up on sure.
Your store closure discussion it sounds like you're taking a good hard look at the fleet and I'm wondering if you could you know just.
Tell us if you could wave a magic wand and have your fleet downside to what you would characterize this as perhaps a more ideal level a understanding areas growing and American Eagle is the brand that you would expect to downsize what does your optimal store sleep number look like.
We're in the U.S.
I can't really had this is Jay Kimberly this is Jay.
We're still looking at that we're setting that that said that like on a regular basis.
And the we still don't have the answer but we're very close to have any answer.
Well, Michael you want to answer you could answer.
Yes, it's Mike with I can jump in yeah, Weve that'd be sovereign and closed 40 to 50, we have.
At the same time, our real estate team reviewing our market studies again for post kobe's expectations store by store market by market.
We have 250 leases expiring at the end of this year. Another 250 in 2021. So those 500 stores are definitely a focus of the market studies.
And we believe there will be some rationalization in place in terms of number of doors within that 500 beyond the 40 to 50 closures.
Could be repositioned square footage rationalization, there's definitely a lot of work underway and we'll have more answers down the road, but we don't have a specific number as of today.
Thank you. Our next question comes from the line of Janine Stichter with Jefferies. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
Take a little bit more into the Beth will trend is there anyway able to provide some perspective underperformance 15 in markets, where schools have actually gone back and then understanding the season will look a lot different this year do you have any expectation for overall recapture it back to school business versus.
It's a clear thank you.
Hi, yes so.
Back to school.
We are the brand of choice as Mike said for back to school and you know largely based on being the jeans brand because it's definitely for this generation Mexico definitely started later it started later across the country and we saw demand start later that impacted both Q2 and the beginning of Q3.
What we're seeing is you know school typically go back.
I had all different time, and we look at early mid and late.
Back to school markets, and we did see significant impact sort of as the calendar rolled through those markets and we saw the decline in mall traffic.
And demand that Mike talked too, but as we normalize the season or get passed the peak time period. We are seeing demand returned to a much healthier level. So through the month of August as we got past early peaks. What's happened in July late July we saw those markets returned to a much healthier level and then mid markets.
Now we're seeing.
This is the time of.
Here that the northeast goes back back to school and we're seeing.
Business, we're trying to more normal level up there. So you know it seems like that curve really flattened out and we're optimistic about and hopeful with what we've seen a laugh.
Last couple of weeks is actually looks like the demand tearing into September and a stronger way than what we've seen in the past. So I'm not really gives us optimism through the quarter is back to school continue.
We're also really excited because even in this time.
We've been gaining share in our signature category of gene.
And we're seeing in back to school as the business returns to better levels were seeing the comps improve.
In jeans as well so we're not walking away from a lot of great short term opportunities and softer afternoon, and uncomfortable drafting, but it's really nice to see the jeans business.
[music].
See healthy trends as we get through back to school as well so.
Great. Thank you and then just a follow up it sounds like back to school could potentially linger into maybe even October this year and how you're thinking about planning holiday, we start the marketing where the force that earlier ethylene heard from other companies and just wondering how you're thinking about planning that the tightening of the flow.
Yeah, So what we've seen a we've seen a lot.
We are expecting I'm back to school to continue.
Turning to Q3 unusual on those are the trial thing now and then for holiday.
Like a lot of other retailers would be.
Capacity constraints and traffic there we're seeing them. All we are going to look to see if we can pull demand up earlier in Q4 before.
The peak Thanksgiving week. So we're looking at strategy to do that I feel really good about the Q4 assortment. We've reacted I'm really aggressively but we started thing after a code that hit in people started sending from home.
So I think performance for Q4 looks great.
You know, we are looking to engage customers and pull.
Volume forward and also of course, making sure that we're maximizing both channel.
At the times it seems right for them so.
On top of all that we have a great holiday campaign, I think we'll cut through a lot of the noise and them all so.
I feel confident in Q4 and I feel.
And I think our strategies and trying to ship volume.
Well hopefully play out.
Thank you. Our next question comes from the line of Paul Lashway with Citi. Please proceed with your question.
Okay. Thanks, guys I was curious if you could maybe give just little bit more color on what you saw in the first half of August versus the back half on how that shook out stores versus online and then just bigger picture doing you mentioned opening some standalone offline stores just wanted to see what's the thinking was behind a a separate box.
How would you use that product a little bit more in either the aerie or or American Eagle box, perhaps as a as an additional traffic driver if that product does is so strong just wanted to understand the decision to open more stores there. Thanks.
Yes.
Yes.
[laughter].
Sorry about the technical difficulties. So of course as we continue to open up stores were starting to see momentum there and Chad mentioned certainly as we.
Labor day, and post Labor day. So again, you know we will continue to leverage that store openings and you know, we're just seeing nice metrics come along with the stores that are open. So again, that's something that we're constantly monitoring and managing the inventories with direct and the new store and all that store.
Openings as we move hopefully out of both at fingers crossed that said or thinking about.
Can you just remind me of your second question sorry, the technical difficulties threw me a little bit.
Yeah sure. The just the offline concept you said Oh, you're opening some separate boxes.
Certainly, yes, so as a reminder, I'm a big about a third of the store right now is with our offline product. So.
We expanded that assortment as we had incredible read on the business that said as I mentioned in my earlier comments, it's warranted its own space and capacity and so that's the two stores that were opening up I'm on the back half of this year, we're going to learn tests in scale on that.
It's just amazing the demand that our customers asking for it would only allow us to our expand all of our other categories and be dominant in intimates swim somebody other soft dressing categories, certainly bras and Bralettes. So I think you know we're going to continue to monitor that and.
So some of our tried and true businesses as we expand offline and then make sure theres an assortment of offline always in an area store. If we're not expanding into the same off and then again don't forget with our direct results. We will always continue expansion, there and an leverage in dry.
The direct business as hard as we possibly can because as you know that's where we we see so many new customers coming into our door.
And Paul It's Mike I can have a little more Coward August is just the your specific question on weeks there isn't wasn't really a big difference in the weeks in August but.
Because all and you're making a brand, especially at diaper business typically the entire month, but just to be clear. We planned August down we anticipated that the uncertainty around back to school timing was going to shift customer behavior, and that's exactly what happened and as Chad said, we're very encouraged about the first 10 days of September here in terms of how we plan the business the monthly.
Cadence and it looks like it's come to fruition for us.
Thank you goodbye.
Thank you. Our next question comes from line, assuming keyboard with BMO capital markets. Please proceed with your question.
Thanks, Good morning over all doing well older.
Can you speak to that.
He or she kg versus area margins at this point and where do you see those longer term and and starting to see much notice, but can you just remind us whether theres any lingering impacts from the Japanese license royalties. Thanks.
Might did you want to take milberg emerging economy.
We continue to see.
These margins growing year over year than it was that strategy for US continue build quality Bill go to you are.
And and.
Like I said balance out.
Our value pricing strategies same for Eagle I think there <unk> in for margin acceleration next year, we have lots of opportunity not only in denim, but in tops, which traditionally run higher margin. So I think as we let's suppose assortments and.
And start to head into next year, I think there's lots of opportunity there.
And like I said that Chad has built an amazing amazing denim business and I think we've a lot of opportunity to get market share in top and I don't know Michael do you want to take the balance of their question yeah. The Japanese license royalty that caused that piece of the question. There is no lingering effect into third quarter Essi or is it was always.
Related to the second quarter.
Great. Thanks, a lot this luck around here.
Our next question comes online.
<unk> Fitzsimmons with RBC capital markets. Please proceed with your question.
Yes, thanks, very much I guess first I was wondering if we could provide an update on digital profitability today versus what you are seen in stores as you're managing around some of these higher fulfillment cost, but you are seeing sounds like them or rent relief years to just you know where are we with the that delta between the channel.
And then next quickly John Congratulations on the expanded role I guess is now that youre going to be taking a look nor greater look at the area eight excuse me eight bran what are some of the guard rail gene put up you know around the brands in order to make sure that the positioning remains really differentiated here I'm just so that we can.
Gain confidence in Aries trajectory, you know certainly go forward as well as you know certainly improvement at the you brands you know into next year. Thank you.
Okay. That's my next Mike I can take the first part of the question. So in terms of channel profitability a lot of the.
Initiatives, we have underway in optimizing cost and especially in inventory you have a definite benefit to the digital channel inventory optimization, especially with choice count reduction skew count reduction.
Historically, we've seen some margin pressure by having too much inventory and quite frankly, maybe being over assorted and that is definitely part of that initiative and we're starting to see that especially with inventory being down right now in the back half and choice count in skew count reductions being a big part of.
That work. So we don't expect margin pressure to the digital channel and that I think Michael hit on some things in terms of supply chain efficiencies and cost optimization those things that we're working on terms of delivery overall supply chain costs will also have a benefit to the digital channels, we actually expect they're not to be a significant gap go forward, especially into 2000.
21 and beyond.
No we're expecting very healthy margin as a digital channel on both channels.
Yeah, and I'm thinking about differentiates brands you know, let me first say that we both our reading in real I think a he has done an amazing job with their selfie campaigns, and allowing individuality and of course aerie real the body positivity platform has given us so much runway as.
I think about differentiation, let's just go back to our roots east rooted in denim inherently is rooted in intimate and layering. So I think there is opportunity to make sure that we're always sort of expanding on the dnase of both of our businesses.
And they're always going to be trends that do cross over and I think this will give us opportunity chat in night to partner together and really leverage you know each brand DNA, while maximizing getting as much market share and any categories that are slightly crossover again with making sure that we're defining each brand.
With their inherent piece of their business denim and intimates. So that's the way we're thinking about it and I, we brought in Craig robbers in marketing I think he's going to do a great job. A this is his expertise really building brands in bringing life to brands and I think he's already has some great point abuse, and Chad and I are going.
You know I.
I think it's gonna be like the new Sonny and Cher U.S., we're going to hold hands and build these brands and continue to create as much and gain as much market share as we can because there's much to grab that they're thinking about some of our competition and whose closed over the past year. So looking forward to that.
Great that's about.
Thank you. Our next question comes from the line of Susan Anderson with B. Riley FBR. Please proceed with your question.
Hi, good morning, nice job managing the quarter.
I was wondering Chad if he could talk about the trends I guess in tops in he came into the year since that was not working.
I mean, I guess you feel like you fix those issues both in men's and women's and then it looks like you've definitely shifted much more casual type top so just curious if there's any read on how those are performing.
Sure, Yes, no we did come in to the you're saying that a lot of work to do in tops and.
And I do think we have a lot of opportunities still to go but even with you know all the crazy asset covet and all the work we did to get Q2 really started finished Q2 really clean we have made and seeing progress both in men's and women's tops.
And women's were really benefiting from a lot of silhouette change.
You know as the bottoms gotten a little looser and the tops were seeing some more fitted talks and starting to do really well and finding a balance between that and oversized I think we're seeing a nice acceleration there.
We also have made it a key point to focus on flew through the.
Covet and also just as an overall trend and and really seeing nice business in Q2 into back to school. There. So I feel like we're seeing good progress in womens tops.
Okay, and then in men <unk>.
<unk>.
We've also started seeing improvement there I think we lost our way a little bit.
Getting away from some core things like soft and some more balanced in the assortment across all the categories. We're seeing great business across fleece and he is there and then we're really excited we reintroduced for back to school a new version of the Eagle of the American Eagle icon.
Which is something obviously only weaken leverage and customers have responded.
Really really what we're really excited about that real OXXO.
I think we are definitely starting to see progress.
In both the talks areas and we look to leverage that through through the rest of year and into next year and I think as Jan said.
I'm really excited.
To work with Gen on a brand and I think we have a kind of opportunity in talks as we go forward.
Great. That's very helpful. And then I guess, just one follow up on store productivity I think may and June were better than July I guess as you've cycled the peak back at school season last year.
Phil like now, it's kind of stabilize or or I guess moderated you know how are you expecting that to pan out in the back half the year. Thanks.
You know I think we're seeing a as I said as we went through cycled through the early mid and late back to school market. You know, we certainly saw.
Impacted productivity in the stores and then Mike mentioned in his prepared remarks that we saw the debt a falling into July and continuing to August in terms of productivity I think the other John's we just need to see is how traffic continues through the fall season, but we've built the.
The plans off a model of leveraging that traffic and driving.
Healthier sales and what we're seeing in their traffic in driving better margins than what we're seeing in the south so.
We are seeing that come to fruition and expect to see that continues to fall.
Okay. That's helpful. Thanks, Good luck in the Bakken.
[laughter].
[noise] thinking our next question comes from the line of Matt Mcclintock with Raymond James. Please proceed with your question.
Yes. Good morning, everyone I'm couple of follow ups, just on the 40 and by the way also congrats John I'm on the 40 to 50 store closures.
How are you thinking about transfer above that volume and I know, it's probably different.
For every store and I know that you're still on the planning process for this but just any general rule of thumb of how much you can typically pick up on with other stores. How much you can pick up online and how much kinda dissipate and just disappears as a third a third a third is up a way to think about it.
Yeah, Hey, this is Mike Oren Peli, it's a it's it's something like that I mean.
You know we've done that in the past than we've seen very good results actually with transfer. So we've seen that we're able to transfer a good percentage of.
Store sales given the size of our fleet to another store or to the web.
And generally that increases profitability the the challenge that Mike was outlining his.
What we what we want to prove that we can do successfully is not just transfer sales, but also continue to acquire customers in those in those markets. So we.
We have a pretty thoughtful plan laid out to not only transfer sales, but make sure that our customer acquisition stay strong and that we're able we're actually able to increase profitability as a result of closing stores, even if those stores where historically profit.
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Thank you. Our next question comes from the line of Janet Kloppenburg JJ came research. Please proceed with your question.
Hi, Good morning, everyone I want to and I got a little late so I may have missed it but are you able to discuss so delineate the current trends.
At Eagle Bush's area right now I was just thinking.
Maybe a little less vulnerable given its exposure or focus on active Ben athleisure intimates and I was wondering how we should be thinking about the productivity of eylea persist equal here in the third quarter and also a cat as you think about.
[laughter], because they're more working from home et cetera, Hum How's that working TTR inventory investment he what denim.
As opposed to more casual active bottoms. Thank so much.
[noise] age and it it's Gen Hi, Hi, Jim Congrats.
Thank you.
It's so amazing the markets year that denim continues to dominate in and I think it goes back to Chad and team how unbelievably comfortable Hart, our denim bottoms. Our it is practically like wearing a jogging or I'm, sorry, legging. So I think they've done a nice job or with the ability to kind of.
Weathered the storm of all the soft dressing and I mentioned it earlier Deanna and you might have joined late but even in area. We're seeing some category not just what we're hearing from our competition. That's working obviously soft dressing please.
Categories friend it in Q2, I'm incredibly well legging, you know sports rights I mean, you name. It we really saw all categories firing and I think our opportunity is as we look ahead in the future Chad at night to work together and grow market share together as a unified team would separate.
Identity, and and I think in the future when we come out of this theres going to be fashion opportunities. All over I think we're going to see trends emerging that weve never seen before and that we can capture in the old business and then continue to drive dairy and grow that soft dressing athleisure piece of the business. So you know a the good news is.
And all these meetings girls are still wearing tops. So that's a huge opportunity for us in American Eagle engineering.
And they want to be comfortable and it's something that we're always focused on in both brands. So I think we have a lot of runway in a lot of opportunity in the future.
Hi, Janet and respond to your question about June investments you know, we definitely want to leverage short term opportunities as Ken mentioned across joggers and lagging.
And we're also making a very.
King point as John also said to emphasize the comfort and the fed of our genes, but there definitely short term opportunity, while addressing and on top and we are shifting and for investments there, but long term, we remain committed to being the number one brand in America, we gained ginger [laughter].
In our target age range one in four pairs of genes sold is now in American Eagle.
So to women has now American it's a it's really incredible the fact that business.
Andrew Q2, we thought double digit growth online for jeans business. So.
That business remains healthy and others as it came through back to school and enter into September were seeing you know the jeans business.
Oh team, we're chasing some with new silhouettes in June through the fall season. So.
Total you know, we're trying to take advantage rostrum opportunity long term.
We continue to be very bullish on Jane.
And Dan at your accurate, it's Mike you're accurate with your assessment of sort of the impact of back to school in the brands. The Crazy hyper peaks, we built in the American Eagle brand historically.
Put more pressure on the brand going back to school, but aerie is less.
Impacted by this customer behavior shift and business that we've seen in Mexico period.
Thank you. Our next question comes from line of Oliver Chen with Cowen. Please proceed with your question.
Hi, Good morning on my earlier comment about the narrow and focused assortment what are the implications there for a war as well as a inventory planning and efficiencies you can drive there and the opportunity you see with classification.
I would also just love your view on the consumer the aerie consumer relative to the eight consumer and how you're thinking about cannibalization risk as a there's classifications that.
Our similar in both and I'm just wondering how the consumer is reacting to a to where they should go in the context of looking for for bottoms or other apparel thinks that Chad you want to answer the first part in Oh go second.
I'm sure I think.
Oliver you know the narrowed Assortments I think will be a big benefit I think over the past couple of years, we gotta go to broaden both channel. We know we can drive more productivity focus on the t. items and I think that that.
There will be a benefit us in stores and online.
And we're already seeing that reflected and healthier and you are.
And help healthier margins so far in the quarter I think that we've got.
I think you know when you look back a lot here.
We were overweighted in inventory that driven by the length, the sort of longer tail and the assortment. So I think it's a you know that's something we just.
One aggressively after a narrow getting more narrow our focused I think it helps you know with upfront costs.
Being deeper helps your product costs, and then being narrow or helps with markdowns at the end of the corner. So.
We think this is a good strategy, we still have plenty of choice you could drive the business and a lot of opportunity.
To grow the tops.
And Oliver Thanks for the question and I believe that this is even more of an opportunity for Chad and I to partner and make sure that again were reading our businesses and.
What we see on personal <unk>, a definite then aerie lounge and of course, we're going to take advantage of trends in both categories, but again, ensuring that our looks are grounded in those businesses I think will help to delineate.
Even more recently over the past year, we've seen trends in both businesses that we've both been able to maximize and dominate in and I think there's still opportunity. There. So I think as we grow there's there's simply market year to be had with ensuring that each brand stands for its its DNA and.
Making sure that the looks archeo towards that so and we will definitely distort the look and make sure that those businesses.
Hey, listen, we'll take one more call.
Thank you Sir our final question. This morning will come from your line of Dana Telsey from Telsey Advisory Group. Please proceed with your question.
Good morning, everyone and congrats Gen. As you think about the regional hubs and supply chain transformation that has occurred what do you see that opportunity on the SGN a side how much could that give you. What's the capacity that you can garner now and then just lastly, as you think about the loyalty program any updates on.
On loyalty so on the loyalty program, he met fix or frequency and what type of customer you are garnering thank you.
Okay, Great Hey, Dan It's it's Michael I'll take your question.
Yeah, the supply chain transformation, we're really excited about.
You know, we talked about it little bit on the last call, but we essentially had a three year plan to.
Changed the landscape as it came to our supply chain capabilities and with the onset of co bid.
We escalated at all in and our.
Completing a lot of it even 2020 in the second quarter alone. When you look at it we had three new distribution centers.
On boarded new logistics partners, we brought live new returns processing, a and technology and.
And we consolidated its important planning into the supply chain in order to speed and flexibility with inventory and our our agility. We also built out more advanced analytics and decision science capabilities and are starting to use machine learning in terms of how we position inventory all of these.
New capabilities are designed to not only provides for delivery to customers faster delivery to stores, but allow it to use inventory more Chile, and ultimately lower delivery costs and distribution costs.
You know everyone expects, we expect I think the industry specs that.
Ecommerce capacity is going to be limited this holiday.
But I feel great about the plans we put in place we're going to have plenty of capacity.
We're going to be able to great service levels.
We're trying very hard to leverage cause certainly our ecommerce costs against last years calls and I feel good that we're going to be able to do that.
And and we're setting ourselves up for the future. So we're going to learn some lessons, adding all these new capabilities, but I really believe that this matching work we're doing it's going to be a differentiator for this year and a differentiator for the company moving forward.
Okay, and then I was going to add there those costs than in tended optimization and benefits will impact gross margin there in our warehousing costs and gross margin not in asking it right Philadelphia.
And and Dana you asked about the loyalty program to we relaunched our loyalty program in the second quarter, a we're thrilled with those results. So we previously had a pretty successful program.
But it gave out rich reward, which was fine because richer awards.
Didnt hit a broad enough to our customer base, we changed the program.
To ensure that more customers got rewards, but actually lowered the value of those rewards and ER and the results has been increased participation in the program increased redemption.
And we think it's a winner for us forward. So.
We also brought that techno in house, which is going to give us a lot more flexibility too.
Adjusted program instant customers and respond to the environment. So we feel great about the new.
Loyalty program the team did an excellent job watching it.
Thank you.
Thanks, Mike I'll answer that completes our call today. Thanks for your participation and have a great day. Thank you.
Thank you this concludes todays.
Disconnect your lines at this time, thank you for your participation.