Q3 2020 American Eagle Outfitters Inc Earnings Call
Greetings and welcome to American Eagle Outfitters third quarter 2020 earnings conference call at the same all participants are in the listen only mode of question answer session will follow the presentation. If anyone should require operator system. During the conference. Please press star zero on the total okay.
Please note. This conference is being recorded I would now let's turn the conference over to your host the Wiener Vice President of Investor Relations. Thank you you may begin.
Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer, Despoiled, Chief Creative Officer for AOE, Inc, and Aerie Global brand President, Michael Rehaut, Chief Operating Officer, and Mike Matthias Chief Financial Officer. In addition, Chad Kessler, Amy <unk> global.
The president will be available during the question and answer session before.
Before we begin todays call I need to remind you that we will make certain forward looking statements. These statements are based upon information that represents the companys current expectations or beliefs. The results actually realized may differ materially based on risk factors included on the FCC filings. The company undertakes no obligation to publicly update or revise.
Any forward looking statements the whether at the result of new information future events or otherwise, except as required by law.
Also please note the during this call and end the accompanying press release certain financial metrics are presented on both the GAAP and non-GAAP adjusted basis reconciliations of adjusted results to the GAAP results are available on the tables attached to the earnings release, which is posted on our website at Www Dot 80, Oh Gosh, Inc. Dot com.
And the Investor Relations section.
The or you can also find the third quarter investor presentation, and now I'd like to turn the call over to Jay.
The next Judy and good afternoon, everyone I hope all of the or well end staying safe.
I'm very pleased with our third quarter performance, especially at the match of the pandemic.
Earlier this year.
We wouldn't expect the deliver these results and have over $1 billion of liquidity entering the fourth quarter.
This was due to operating discipline at.
Well, it's much greater to the incredible team work across your company and.
End of third quarter, we produced our best of gross margin in some years at our adjusted operating income was four at the last year.
Despite numerous the headwinds related to cope with it.
The salt stronger full price selling at had limited promotional activity leading to a meaningful increase in merchandise margin.
This is a testament to the strength of our brand and our product as well as our disciplined inventory management.
I'm extremely proud of the team for their brilliant execution and ability to lever of these results while working to be bolt on.
Our approach of the policies in force the going off the bench at play to win.
At approach paid off.
Every extended its incredible track record of growth was at 34%, Inc. Research revenue at record profits at.
The age merchandise assortment were well received the product margins improved.
I'm very pleased to see could change the growth in our core businesses, especially has changed on bought on.
I'm encouraged quite resilient roadmap for the areas, we're looking to strengthen.
When we offer great product.
At customer experiences our customers respond and that's our focus on.
The digital channel excelled at the were successful delivering our customer problems were strong with the on the entirely deliveries.
Investments Weve made over the past several years, the Vasily, it's bad or omni channel capabilities or having a meaningful impact on our business although.
Although stores were impacted by negative mall traffic, we continue to outpace the ball is very strong conversion.
Our stores once again led the industry with the very best show at safety measures, ensuring the comfort and confidence of our customers and associates I'm very proud of how all eight year of associates true it up during this crisis.
Back in March we established three near term priorities protecting our people preserving cash in preparing for the future.
With the crisis the ongoing we remained focus on these areas.
Our people are always our top priority.
We continue to invest in its four new tools and technologies that make sure we offer the best measures the keep our associates and customers see the.
Thanks, the average across the organization, we quickly took steps to secure I find the actual health today eight years, the bulk of select group of retail companies with financial strain.
When we combine excellent financial the strong brands, leading operational capabilities and exceptional products, we have the winning formula for future success.
As I look ahead, I'm very optimistic yes.
This past years made or a copy of the stronger and better position for future growth.
I've been leading at you know for many years I see more opportunities for our business the day than ever before.
Regarding holiday, we are pleased with the early trends.
Yes, there is significant business ahead of us.
As you will hear from the team we're positioned at ready to serve our customers.
However, and whenever they choose to shop.
We look forward to on the all your longer term growth range on January 21st.
More details on the BD will be provided in the upcoming weeks at.
In the meantime, I hope everyone has a great holiday season, and police day say with the.
That I will pass the call to true.
Thanks, Jay and good afternoon.
I hope, everyone is safe and well.
2020 has certainly been an exceptional year for the Aerie brand.
I'm thrilled to report another strong quarter very close it at 34% increase in revenue during the quarter. The third quarter. That's built on the 26% increase last year end marked the 24th consecutive quarter of double digit growth.
On the net debt outstanding and we are truly grateful for our customers and how they embraced aerie throughout this crisis.
Although mall traffic continues to be a challenge we are seeing a meaningful acceleration on line.
The <unk> digital revenue rose, 83%, the last year and stores were up modestly.
Across the board on metrics were positive the.
The you are with particularly strong at we were significantly less promotional merchandise margins expanded the last year.
We saw a meaningful improvement in overall profitability, which hit record levels.
Despite the strong gross.
Customer acquisitions were up 15% in total and 62% in our digital channel.
We continue to engage with our customers through social media on grassroots effort to build the community of the are you moving up the.
In fact, we've had some of our most incredible brand moments on six of which you the man and bring new customers the aerie.
Across the board our key categories rose in the double digits with higher merchandise margin I'm thrilled to reports at our new offline Activewear brands I've had an incredible debut in October we opened our first store with a very strong customer response, and now we have four stores up and running off.
The offers something unique and different end, an exciting growing category and have the big opportunity ahead of it I can't wait to share more details on our future plans for both aerie enough line in January.
Every success comes down to our amazing team.
The call our associates passionate is an understatement of.
On their loyalty of devotion to our aerie real movement and our customers are truly remarkable.
Thanks for all you do and what you see on for every day.
Now moving on to the American Eagle.
The third quarter demonstrate an improvement from the first half of the year keep in mind. He has a much higher store penetration the knarr, so weak mall traffic related because of it was the larger headwind.
On the other human <unk> digital channel, what's wrong with positive Brant end you are GAAP.
Engagement was up a new on digital acquisitions rose 23%.
Our focus on inventory optimization and profit improvement is showing results.
We were particularly pleased on very encouraged by the strong merchandise margin, which was our best in several years promotional activity was well controlled and full price selling increase across the business.
We continue to see very good man and on meeting jeans and bottoms businesses.
As you know we have built an amazing franchise and aging which has been incredibly sticky category the fuel loyalty end customer retention.
The business remains the priority and we continue to innovate and invest in the category I could not be more excited about the future as consumers increasingly embrace a casual income fee lifestyle that plays into our strength.
We have been encouraged by recent improvements in our tops, where we introduce better styles and fabrics as Bob.
And we will continue to build on the success as we move into the spring and 2021.
We are working to enhance the quality and create more emotional connection with our collection and the stronger point of view supported by inspirational marketing that directly ties back to the price.
We will win by refocusing on key items.
At with conviction, while eliminating unproductive styles that do not generate strong returns.
We are excited about holiday and we are ready.
We feel really good about the reception to the product line and continue to move our marketing efforts for.
In the early fourth quarter 80 launched a new proud of collection in partnership with Disney That's in stores now.
This collaboration unites two I kind of brand equity and the unique and fun way end customer reception has been fantastic the.
The capital of selling quickly and we are seeing significant engagement on picked up.
As you know at began working more closely with the brand this past quarter than I have in the past.
My Big take away is that I could not be more impressed with the enthusiasm in talent across the team.
Sure so much exciting work in progress across marketing product and customer experiences and we cannot wait the share that with you in the coming quarters.
I want to thank Chad and Craig along with the entire 18 for their end whats creativity and commitment to our customers I'm very excited about our new initiatives and atens future and success.
With that I'll pass it on the Michael.
Thanks, Jen and good afternoon, everyone I would like to begin by thanking our associates and partners around the globe our businesses bounce back much more quickly than anticipated and the credit goes to the dedication and hard work of our teams and partners.
The digital channel remained strong this quarter, increasing 29% to last year area.
Area of digital sales increased 83% and the Eagle was up 11% even.
Even with all the stores opened our digital demand remained well ahead of our pre pandemic trend online sales represented 37 per cent of on revenues in the quarter and 45 per cent for the year to date.
Channel KP eyes were positive across the board led by double digit traffic conversion and transaction gross.
Third quarter digital channel margins were strong as we reduce the promotion to maintain disciplined pricing, resulting in higher 80 wires and an increase in the basket size.
As we noted last quarter, we reduced the online choice counts as part of her inventory optimization strategy aimed at driving higher margins, our third quarter results reflect the strategy and we see meaningful opportunity for additional progress moving forward.
Outside of North America, we continue to expand our international E Commerce business in the license markets.
In the third quarter, we further extended our digital footprint by launching local shopping sites in Brazil, Israel, Russia, South Korea, and Turkey building on our previously discussed market entry activity in the second quarter.
It remains early days for of digital business in many of these region, but we are very pleased with the initial customer response, and we continue to see sizable great opportunity in international markets.
In the quarter, our store channel also performed well in the still challenging environment, which included continued reduced operating the hours and capacity restrictions at healthy safety remains the top priority.
Store revenue decreased 16% at positive the you on conversion were offset by traffic declines as.
As with the digital channel, we saw improved the merchandise margin in stores.
Across channels, we continue to strengthen on customer engagement.
Average customer spend rose and digital channel customer acquisitions increased 37%.
Last quarter, we successfully brought her loyalty program in the house for the first time this.
At this enables new capabilities.
Richard customer insights and greater flexibility in administering the program.
As part of this initiative, we also relaunched the new reward system designed to activate a wider range of customers by providing more frequent benefits. We're street seeing very strong results from the change, including better redemption rates higher transaction value and improved margins we.
We have accelerated our focus on new technologies to further enhance the customer shopping experience.
Earlier this year, we accelerated omni channel shopping Tweens income.
Clearly the opus and curbside pickup.
In recent weeks, we had been gunned testing self checkout in stores and same day delivery for online orders.
We have also improved the page would speed on our website by 60% and taken steps to ensure a site can handle significantly higher holiday peak transaction volumes.
Our distribution and fulfillment network is also running very well and we are prepared for continued growth in the high volumes. We expect this holiday season the.
For new distribution hubs have increased our overall fulfillment capacity, which will enable us to support growing digital demand.
This de centralized fulfillment network also means our inventory of be located closer to customers in stores, which has many advantages our customer delivery speed and our ability to replenish stores will be much quicker.
In fact, we will be able to fulfill approximately 400 store locations within one day and 900 within two days.
In total these capabilities will enable us to provide better customer service, while reducing the inventory on our network optimizing sitting at close to manage delivery cost pressures and maximizing our operating flexibility.
Our organization has been planning for an unprecedented at holiday for eight months and we are well positioned to succeed.
As you heard from Gen. Our creative in the operational teams have collaborated on very strong holiday assortment for a in the area, including the improvements to some of our key items.
We're also prepared to manage the unique operational challenges. This holiday season will present and our teams are ready to serve our customers whenever wherever and however, they do like end.
In closing we are very pleased with our third quarter results and the into the fourth quarter and the position of strength on.
I hope everyone enjoys the holidays and I look forward to speaking to you early next year with that I will pass the call or sort of Mike.
Thanks, Michael Good afternoon, everyone. The.
Despite ongoing headwinds from kind of a 19, our third quarter results demonstrated meaningful sequential progress from the second quarter and exceeded our expectations the.
The start to the quarter on August was challenging due to delayed back to school demand, but as expected the men flattened shifted post labor day, resulting in positive results in September and October.
Adjusted operating income was flat to last year, reaching 103 million, reflecting at 10% operating margin.
Environment improved from the first half at our business further benefited from compelling product and strong cross channel execution.
Additionally, I'm, particularly pleased to see good progress on our inventory optimization work, which what led to a significantly higher merchandise margin in the quarter.
Our teams continue to perform at the highest level.
And if set our business up for near term and long term success.
Total company revenue declined 3% the last year, reflecting mall traffic declines related to kind of at 19 offset by strong on line sales.
Mall traffic pressure at a greater impact on the brand given its larger store base.
Traffic at both AE and Aerie outpaced the mall and our store teams executed exceptionally well driving significantly higher customer conversion and average transaction value.
Gross profit dollars increased 8 million or 2% the last year and gross margin expanded 200 basis points to 40.2% the.
This is our highest gross margin rate in the several years.
Inventory optimization initiatives combined with the positive reception to our product assortment led to a higher full price selling and lower promotional activity in the quarter.
Lower product cost also contributed to a favorable merchandise margin.
Rent leverage due to the impact of impairments taken in recent quarters as well as negotiations with landlords.
This was partly offset by delivery and distribution center cost pressure due to the increased digital shipment volume and higher cost per shipment.
At <unk> expense increased 6% due to higher incentive compensation ft. They would've declined in the absence of incentives at the managed other controllable expenses tightly including services professional fees store labor and advertising.
Our store labor savings versus last year were more modest than in the first half of the majority of our fleet was opened for the entire quarter.
Our effective tax rate was 35%, primarily reflecting a true up to our expected full year rate due to better operating performance, including the impact of the anticipated benefits from the care of that.
The higher tax rate represented a seven cents EPS headwind relative to last year.
Our share count was 184 million and included 16 million shares of unrealized dilution associated with our convertible notes.
Adjusted operating income of one of the $3 million was flat to last year excluded from these results of $7 million in pre tax incremental COVID-19 expenses end restructuring charges at.
Adjusted net income was 35 cents per share in the quarter end excluded two cents of cobot, 19 expenses and restructuring charges and one cents related to non cash interest on the company's convertible notes.
The adjusted earnings per share decline to last year reflected our higher tax rate as well as well as higher net interest expense and diluted shares outstanding related the convertible debt.
We continue to manage inventory well with our quarter end position down 13%, reflecting reductions in American Eagle as we focus on inventory optimization in the stream on assortments reduce unproductive sq use and achieve better alignment with our sales plans.
Our inventory increased the support strong demand and we continue to use the strength of our sourcing organization to chase into demand.
As I've indicated inventory optimization is an ongoing priority and I believe will have a material effect on profit improvements over the next several years.
During the quarter, we repaid the remaining 200 million outstanding under our revolving credit facility and ended the period with 692 million in cash and short term investments.
Our total available liquidity, including our Undrawn revolver is over $1 billion.
Our only debt currently outstanding as our 415 million convertible note issuance.
We're very pleased with our success on preserving liquidity on balance sheet strength. During 2020. This will remain our capital allocation priority in the near term given ongoing external uncertainty.
As business visibility continues to improve our objective is to resume direct returns to shareholders through our long term cash dividend program supplemented by buybacks.
We continue to expect full year capital expenditures of 100, the $125 million in 2020 down from 210 million last year.
The other day capital expenditures of $93 million or down from $150 million in the first three quarters of 2019.
As discussed on previous calls we are actively evaluating our store fleet for closures of the next several years.
We plan to close at least 50 locations this year.
The stores are being selected based on their at least tenure mall profile proximity to other stores end customer engagement level.
We are confident we will see healthy sales and customer transfer from these locations and learnings from these closures will inform our plans for 2021 and beyond.
We'll hear more about our store strategy at our Investor meeting.
Now as we look forward we are prepared for the holiday season, we have strong plans in place and ready for the anticipated shift in business, including a higher mix of online transactions and the man that is spread out over a more extended timeframe.
In fact, we are already seeing holiday demand take place in November.
Our inventories well managed to end, we expect continued at U.R. improvement and healthy merchandise margins.
With more online shopping we expect distribution center and delivery cost increase at.
We expect EPS units increased relative to last year.
In closing, we made great progress in the third quarter, we strengthened our financial position, while also laying the groundwork for a longer term growth opportunities.
We look forward to providing more details on all of our multiyear plan and long term financial targets in January with that we can open the call up for questions.
At this time, we will be conducting the question and answer session. If you looked at a question. Please press star one on the telephone keypad. The confirmation total indicate your line is in the question queue you make per store to fuel the to remove your question from the Q per participant using speaker equipment at maybe not sure. The FICO per handset before question the store keys one moment. Please.
We call for question.
Our first question comes from the line of Janine Stichter with Jefferies. Please proceed with the question.
Hi, Thanks, so much for taking my question at and congrats on the progress.
And great to see the lower markdown control and the inventory control I guess I'm wondering how you're thinking about planning your inventory into spring just given what is still pretty challenging visibility and then anything you learned from what seems to be a reduction skew count how you're thinking about your investment in the U.S on for the core Eagle brand. Thank you.
Yeah, I can take that thanks to the so I think what we've learned a lot about the in the back half of this year relate to inventory optimization in terms of our positioning of inventory to sales and that our expectations of merchandize merchandize.
Margin expansion in relationship to the sales as well.
We are continuing the plan inventory conservatively end of this spring season, we don't believe I think we all know that the impact of the pandemic is not completely behind us.
We expect definitely some headwind there through the rest of the winter here at into Q1.
So we are definitely still planning inventory down in relationship to our sales expectations really at similar range. The what we're seeing today and even our third quarter, ending inventory being down 13% related to or in relationship to our down 3% sales as we head into the spring season at the similar relationship that were planning.
Okay, Great and then on maybe just a follow up on S. You name. It is the range of increased expenses to be similar to what it was in Threeq you end at the main driver there still incentive comp or is there anything else, we should think about the.
Now, we're expecting very similar as Jay performance at incentives would still be the driver of the with the 6% increase in the third quarter similar mid single digit increases what we're expecting incentives with the driver at the at the only other uncertainty there is exactly how.
You know revenue comes to us by channel would still be of variable nature to Sq day based on that outcome as well.
All right. Thanks, so much best of luck the holiday.
Thank you.
Our next question comes from the line of Oliver Chen with Cowen. Please proceed with your question.
Hi, nice quarter of Jay We had a question for you. We were curious about your thoughts on the future of the mall as you look across retail on what you've seen and what you expect in the future, particularly as you think about higher productivity malls, and American eagle locations versus lower productivity and what kinds of true.
Transformations may need the have happened in store.
I would also just love your take as you you rapidly have many different strategic priorities and reinventing the store experience at large what's happened the with the pandemic that have been your biggest the changes on those priorities. Thank you.
Of the first of all at once.
Out of 60% of.
Of our locations that come up the index at next 12 to 24 months the gives us a lot of flexibility.
The right now in the mall the key the key two of the customer experience has given the same shopping environment. The one thing. We're very proud of is that will be the open on stores, we make sure there was no social distancing.
At this was that this would not emphasize on the call yet, but look at the inventory levels at the store.
Our inventory maybe down 13% at the American Eagle stores are down 30 plus percent at store level.
So you know so the stores have been performing very well considering they have 30% less like the inventory choice.
In the store.
Look at you know when you look at the Pentagon the is and if you have the right merchandise.
Its right its sales.
We have items that are just blowing off the shelves right now.
I wish we had more of certain items on a very hot right now so I think it's really given his focus on those on the special programs at really drive at that weight to the business.
Look at as far as the the customers go we're going to want to go out and show people or the choppy at the bits to get out I mean every one of the you can see what's happening right now the government selling people CDC don't travel don't travel on airlines were like at record.
Record amounts, we just play play the everyone stays space this week.
We pray that people per active social Gibson said, they're traveling and they don't spread income spread at that anymore.
But at the same time.
We're very optimistic of the vaccines on the horizon.
I believe the next few weeks, we'll start given the backseat out.
And you know what you know what my personal guidance in the next day by the late.
Late winter early spring things that are the starting to come back but at the.
Back on the normal.
At that same time, the customers when they come back into the margin rather basis, they don't want to have experiences.
I think on it'd be excited when they go shop too.
They will be looking at pretty sharp merchandise you would be looking for sharp looking stores and one thing is that the this whole time really proud of our opinions. We haven't stopped I mean are at store operations people on store. The drivers were challenging of them to say what the stores will look like in the space.
The spring time.
What type of things, we have to add and then for the merchandise slide the you know our designers it was amazing that true all this kind of again the back in April when everything was shut down our desires. We're still design all the way they reported by zoo by remote it was amazing the product the fabric that we are able to develop around.
On the world without being able travel at really specifically if it's the volumes about our game. So I'm very proud of my team they've done a great job keeping the probably the pressure.
I think one thing we're proud of the walk in our store the C. Fresh merchandise same you see new stuff you see exciting stuff and.
End between Jen and Chad they've done a great job there.
Thanks, Jay very helpful Best regards.
Okay.
Our next question comes on line of Jay So with the U.S. Please proceed with your question.
Great. Thanks, So much of my question is on merchandise margins in the aerie versus the American Eagle right now how did those trend during the quarter compared to last year at how do they compare to each other and then secondly, the possibly give us a little bit more color on what you see the November month to date, maybe compare to what you saw in October. Thank you.
Yeah I'm just.
You know.
Budding up against what you've heard you know we've done the incredible job managing our inventories on and that was the priority while maximizing the gross area certainly.
As you can see on where near that 1 billion Mark were really excited about it.
Same plan ahead of billion by the end of 2020, and it's right in front of of so we're really excited about aerie, but going back we did at with integrity and you know not over Assorting and in the in both brands. So on aided at one heck of a job managing inventory.
<unk> stores and I will tell you is just kudos to the store team. They leveraged the hell out of Q3, when the customer entered that door.
We the were greeted the were safe and.
And we converted those customers so I couldn't be more proud of the team that said just your short for your answer.
Erie margins were right in line Merch margin Britain line, the AG, which were.
The didn't show in years. So at news you heard the flow through the number so we're right in line at the the work that we've done an area of you ours are at an all time high.
On same for AG, and we're going to continue that progress.
Our focus as we head into.
At the next year into next year is down the B quality.
Over quantity. So we can compete on on their own terms and really design and develop and innovate the best product out there in the mall.
Did I answer both of your questions by the way I got a little excited about the $1 billion Mark [laughter] [laughter].
Definitely I think at here, a little bit about November of month to date and sort of.
Then for November Okay. We're here, Okay. So November we've actually seen acceleration on the numbers that we just quoted in Q3 and you know I'm.
I'm sure. There's some pull forward here you see all of our competition in the big plays the Amazons of the world.
People are pulling the promotions in the early there could be some shipping constraints I have to say.
I heard from Mike on Pal our operations are best in show, we spent there and we're seeing the rewards. It's amazing at you know I tested every day.
At you name it I adjusted every competition and let me tell you every competitor, including Amazon and I have seen great results on our shipping.
And our time to the doors, so that's been a priority of ours.
You know and I will say just the inventory management Army inventory management, and our ability to move those units, where we're selling them.
He wasn't getting [laughter], we're really thrilled about it so but we have some.
Hurdles ahead of us.
At Black Friday Leary at you know we have a couple of big weeks in front of of who knows with Covidien and certainly fingers crossed the hope that this pandemic end and the vaccine works. So we have to be very cautious where we play sort of inventories, but I think we're in position to come from a point of strength.
Got it thank you so much.
Our next question comes a lot of Matthew boss with JP Morgan. Please proceed with the question.
Great Thanks, and congrats on the improvement.
So maybe first question can you just speak the customer acquisition trends that you're seeing at the very initiative in place to retain new customers post the pandemic and channel what do you see of the opportunity to leverage Assortments of synergies at the American Eagle brand, maybe just from a high level is as you dig in.
Yeah, So customer acquisition at continues to be double digit.
On the bouts of the 15% zone. So we continue to you know get the customers and our door and retention is top of mind on.
I like what we're seeing though on based on some of our new product offerings, including off line. We are starting to see a little hedge towards an older customer. So she is liking some of the versatility with our product offerings and we're going to continue to focus on that as we build the off line Assortments and make sure that we are growing in area the line.
Around our intimate space and building on that as we opened up offline stores I will tell you in same malls, we are seeing pure incrementality on so I can I'm in a mall, where we opened up an off line in area. We are seeing on similar results as far as comp on the Aerie side and then pure gross.
On the off line side so.
Yeah, I couldn't be more thrilled with the results and we're going to continue to make sure that we're massaging those investments and the and and the offerings in both categories. So we can you know you know really leverage the opportunity. It's it's the 16 billion dollar opportunity on the off line side and I think we're going to show up in such a unique.
Way and I'm really excited there's lots of good things in store on offline and per Harry to.
The bars looking at the broader assortments with AG and airy.
I Love were chat at nice at right. So we have the ability now the really share our learnings on both sides, but really focusing on what we do best at the results in denim were nothing far from.
Unbelievable in Q3, when when really you know September opened up or they just continue to innovate there.
Our new Cozy gene that we just offered true holiday.
The timing kind of been more on perfect at its it's really seeing.
Seeing really making nice headway on and really pointing to new business opportunities in denim and I'm excited about that but I'm not in the share all of my secrets.
And we'll continue to focus on AG the outside I called the outside grants right. They're the ones that go out on the street. The what are the clothes outside in the areas a little bit more indoor you know so I think if we continue to play on those.
Play that way with each other at brand and understand our Assortments and make sure. We're maximizing Bose I think we have lots of market share to gain as we approach the future seasons, and I'm really a lot of growth opportunity and I think we have a great solid plan.
To get to 2023.
Great and then just a follow up on the gross margin could you help quantify the magnitude of merchandise margin expansion in the third quarter, maybe how best to think about drivers of gross margin in the fourth quarter and I'm sure. It's the topic for the analyst day, but is there any way to unpack the gross margin opportunities that you see multiyear at the American.
Brown or even maybe just high level of some of the drivers to think about.
[noise] knocking the cover of thanks I can cover the overall makeup of gross margin. So yes gross margin leveraged by 200 basis points as you know a.
Thanks, Mike the merchandise margin expansion, we were thrilled with obviously it was around 500 points almost 500 points in the quarter of.
Net by just the mix shift of the digital business delivery and distribution costs associated with that and as we all know on the industry.
And just some additional expense there that everyone's dealing with so.
That was the make up of the 200 points in the third quarter of the fourth quarter of you know just typically a more promotional environment. We do we are expecting even more of a shift to digital silver.
So were expecting improvement in gross margin not to the same level as we saw on the third quarter, though because of those.
Two points.
Our next question comes from the line of pulling the West with Citi. Please proceed with your question.
Hey, Thanks, guys I'm curious if you could talk about the trends at the very versus the throughout the quarter.
Both kind of store on digital perspective, just trying to understand the fluctuations in each business just given the the weaker store.
Start to back to back to school.
He said the November quarter to date.
It was better than or an acceleration versus threeq here, but curious about how it's performing relative to your October exit rate and the and then just one follow up.
Curious, what you're seeing in terms of customer overlap between airy and AG in recent quarters versus what you've seen the pre pandemic. Thanks.
Thanks, Mike I can direct.
Okay, Yeah yeah.
You start right because the I'll take the first part of it was just what the third quarter. So as as I said in my opening remarks.
We definitely expect it and saw shift the back to school demand typically our peak is really the August through labor day, the season definitely flattened out and we saw a continuation of.
Yeah, we were down in August based on that September was we were really pleased with and really have the sort of highest penetration of the September in the third quarter than we've ever seen because of the shift of demand.
At I'll cover we were pleased with as well I think we saw store some of that the man coming talked over based on the school timings out there of market by market.
I don't think anything of that was any kind of into at holiday at the time so.
So the November we are pleased on side of it I think right now we are seeing now holiday demand pull the put up earlier on November than we've typically seen so now we shipped the season the right back to school was the shift to later in the quarter October we're pleased with results a little more normalized.
On to our history now I think we're seeing holiday demand pulled up earlier in November than we've ever seen so we're shifting gears on the back to school fall mines at the holiday and it's just going to be a different or just the different animal in total.
The agenda on the second part of the question.
Yeah, just as far as of yet.
The school as Mike said start out a little softer for the brand the highly dependent on in August, but we saw a nice acceleration as I mentioned on the last Oh.
Question on denim, we're really loving what we're seeing there and that continues to be at trend and techniques that again, I'm, just really seeing nice movement at.
Newer silhouette, so and the team is really position.
On that business incredible and I really am excited about whats the time as we move into Q on Q2 and on into 2021 on the downside on that.
Not to forget about men mens, yes really at over a year ago has worked on tire.
Tirelessly to build I'm, just really build back on would say some incredible franchise businesses and to be honest, we've been chasing that business on a.
Really at at the gate, just seeing so much great momentum in just like I said some of our tried and true franchise businesses and we're chasing at an it's nice to see mens tops in particular were coming back to the lives and I think on we have some exciting things happening there as well as far as Arie at <unk>.
I don't know I, just like the the first time I think I said this on the call, but in 20, some odd consecutive quarters of double digit growth I really.
All categories fired in Q3 like and not just.
Small accounts like were talking.
Huge comps in each category and I could not be more thrilled with the team of just including intimates, we're not going to ever forget about the core of our brand in the area and I think I think really will be able to expand that as we opened up the off line business on new doors and expand that whole side of the business and we can really then on.
We gain more momentum even more momentum on the Internet side. So just really overall you know I think.
No just the current trends its really played into the Aries business, but I think in the future soft dressing isn't going to go away and I think we can dominate their you know it will be a continued categories at I think every customer of ours and new customers want to participate in because comfort is not going to go away with these next generation. So.
Yeah, we have a lot we have so much opportunity on women's tops of the teams really delivering there as I see the future Assortments and I'm just not to forget all of this is wrapped up in it with the pretty both of them with great marketing and I really have seen the pivot as we've moved into Q4, Craig Robinson team had the work so.
So fast and furiously I don't know if you've had the chance to see the of Disney campaign, we're going to sell out of that product it's amazing.
The Mickey dancing with Addison I don't think Weve done the I hope the getting on stance of making so he definitely legs Addison and.
Ratable incredible views on on that tick tock at campaign and and there is so much more to come there.
So.
Did I answer all your questions I'm sorry.
Yes, just one about the comes from the overlap as well before we end up.
The graph.
On it was early on the really leverage at the customer to build the Erie five.
File we are starting to see really nice momentum as the as you know entries on organically into the Aerie site for instance on digital those numbers are on.
Up double digits, and so I think we're really earning you know our wings. So to speak on really in the aerie standing on its own we still have overlap of but we're seeing erie solo baskets of driving a.
To new Heights, So we're going to report out more on this in the investor call, but at we're going to continue to focus on the you know I'm as we move into that billion dollar range. I think you know we have to really then say whats next how are we going approach at what new customers can we introduced to this range into this brand as we continue to.
To grow area grow off line and then continue this profitability story at American Eagle.
Got it thank you because the.
Our next question comes from the line of featuring with Barclays. Please proceed with your question.
Yes, thanks, very much and congratulations on the great progress.
I guess my my question is actually 10 for you on on Aerie you'd mentioned that the gross margin now in line with that of American Eagle I was wondering as you move toward the end billion dollar level on are you at an inflection point of economies of scale and buying at the store operating expenses et cetera, such that you're at the.
Operating margin level that you should start to see that inflection I'll say the in line with American Eagle. Thank you and then I have one more.
Oh, Okay of course.
Yes, that's.
The answer is that simply.
On the plan is the accelerate Aries profitability and end that's definitely on the key to our on future strategy.
And then what was your other question Mike.
My other question is on it on the Sq and $8. So dollars were up mid single digit in the third quarter on can you just talk about the components of the Sq name on how we should think about that in the fourth quarter of the cobi of related expenses the on the.
And the incremental I guess in plain expenses.
Yes, sure. So that you know as we said it was up 6% in the quarter due to incentives.
That impact was.
Roughly if you back out the instead of in fact, you'd be down and down mid single digits.
The of everything else with the nest DNA, we're pleased with store labor was down the last year mix of some fixed elements of the definitely variable expense services professional fees travel advertising was down a bit of from a from a control of a perspective otherwise discretionary.
Senses as well the variable expenses were down in the in the quarter fourth quarter, we're expecting very similar kind of makeup of our SDMA and again like I said earlier at little bit uncertainty of exactly how revenue comes by channel and then on.
Having impact on EPS DNA of but as of now expecting a similar makeup.
Okay, great. Thank you very much best of luck.
Our next question comes from the line of Dave The Buckley with Bank of America. Please proceed with your question.
Hi, Thanks for taking my question I was curious could you speak to your margin profiles by channel just the Congress brick and mortar and where you see the heading into 2021.
Sure. It's Mike again, right now we are not seeing has again within our inventory optimization initiatives and aligning the channel more than we ever have from a promotional perspective, we're not seeing a big difference between end merchandise margins between the channel.
And actually I think when you think about the overall cost of.
Excess inventory excess choices and skews we typically.
The other at the other sort of accounting Mark on reserves post season transfer impacts the other impact of inventory beyond just our kind of weaken weak out Pos margin we're.
We're seeing big benefits there as well so we're not running down inventories at the levels, we would have historically not selling off inventory or expecting to for the same levels and a lot of those from an accounting perspective, some of those impacts would hit the digital channel just more from an accounting.
Perspective, and we're.
We're not going to see that at least the right now on the short term the levels we've seen historically.
And to the earlier question of how were setting up inventory into spring and what we intend to do for next year, we're expecting really 2021 to be similar similar impact on from our inventory optimization and reductions in choices are skews inventory relationship. The sales that focus we have we expect of benefits to continue in the 21.
Thank you.
Our next question comes the line of Lord jump on with loop capital markets the suit to question.
Thanks for taking my question is actually on the balance sheet looks like of crude comp per crude expenses were up about $73 million, what what accounted for that increase and accruals.
The incentives would be the biggest part of that there's some other other noise in there as well of incentives would be the biggest on huh.
Got it and then secondly on the Aerie brand I mean, I'm certainly hearing the the message that you're looking for potential closures in AG does that impact the store opening plans or potential for the aerie brand.
No at our expectations for capital.
The investments into next year, we are definitely excited about the continuation of the Aerie story and investing in area and new stores and we are also please prelim preliminarily excited about offline performance on what that could look like in future years as well starting in 2021.
The other point I'd make about the balance sheet question. You had is that just a reminder, we did not pay any incentives in 2019, so the difference year over year.
Has that included in as well.
Actually we did not pay out of bonus the did not have a incentive compensation at 29.
Got it thank you.
Our next question comes on the line of kicked at some with RBC capital markets. Please state your question.
Yes, hi, thanks, very much for taking my question John I know, it's still early days of the offline stores, but I'm curious if you can share what had been some of the surprises associated as you start to roll out that concept just any additional insight you could give us on on you know off line productivity, maybe within an every box.
That would be helpful. Just to give us an initial I guess taste of what off line could be here and the next Mike are you at there was a call out of some of you see benefit I believe in the third quarter can you just help us think about or help us a look through how you're thinking about the U.S.
Since the fourth quarter and it may be at the first half of 2021 at some of the skew count reductions continue to take hold but it does sound like there will be some investments in quality the calm on that would be helpful. Thank you.
Well one of our near end surprises was a prominent influencer of she has about 700000 followers. So you know she's not Addison on we'd love, what we did any of the with Addison, but on [noise].
She showcase one of our leggings and organically at went viral at wells. It happened on Friday end, just so great to see at I Love that net really means at some things resonating with the customer out there and happening happening natural is just brilliant. So we left the what we saw sales.
I guess going back to leggings and you know, we we knew that that would be the foundation of the business and as far as productivity. It's still early to tell we have a few different formats out there we're actually building into an old format. We have a brand new format. The design and then there is the side by side format. So it's a little early.
The tell a you know to really measure this but I will say leggings are for sure you know at highly profitable business and on one of our more productive businesses.
I think I've had too much coffee [laughter].
Did I answer your question on early Jay I think that it's early to say, but we love what we're seeing I mean, I mentioned on one of my earlier questions on we are seeing incrementality.
Again, the I will just what I love about the team on early on.
We just don't take this for granted we have to remain humble. The after you know I always say this and we have to remain hungry, but we were wide opened to understand the customer experience in the same all.
Well and that's how we're really going on test and scale and learn and drive the best results for each brand. We do see this as a third brand for our organization, but again, we want to do it with integrity quality quality is just I can't say enough with the quality and doing things really well because that's the way.
It really lasts over time and that's how you build the brand.
You know at tell you build the brands and so at the top of mind for me every day.
And this is what a great day.
Take the second part of your question.
The mute your website.
[music].
Yeah.
The second part of your question was about.
Margin and what we're seeing from an AC perspective, we are expecting cost benefits both.
Both in the fourth quarter and through the spring and summer of next year. So.
Like Jay said, we're investing in quality, but we're leveraging strong relationships strong sourcing capabilities and we're going to see that come through the end improve the markets sales in Q4 and end in the first half of next year.
Great guys best of luck for holiday.
Thank you.
Thank you so much.
Our next question comes from the line of Susan Anderson with B. Riley. Please proceed with your question.
Hi, Good evening, Thanks for taking my question and nice job managing the quarter on I guess, just a follow up on the AG top trends the in mens and womens on it sounds like you've seen an improvement where are they at I guess versus what you would hope they would be I guess, how far along are you in terms of getting those back on track and.
How much more further to go thanks.
Yeah. Thanks for your question you know we're excited about what we are seeing in talks the teams have worked as Jay mentioned the teams worked all year.
Really focusing on great cost that go with our industry, leading jeans assortment, so really focusing on knit tops fleece, and we're really seeing there where we exceeded our expectations on those categories coming through Q3.
And expect to because the that continue in Q4.
One of the great things, we've been really working on since the start of the.
Endemic and we're accelerating at work with Gen of working more closely on the brand as well as Craig joining but it's really focusing on the tops assortment downside of they said, we really want to focus the nets category the genes, but we have so much opportunity to focus on quality on value on key items on great marketing that excites the customers on.
You have built an amazing bottoms business over the past.
Years.
And were owed more on top and I'm confident that we're taking the steps the we're going to get that through Q4 and going into the 2021 and beyond.
Great and then just one follow up I guess on the store traffic and sales at sounds like you do feel like maybe some sales are being pulled forward in November but I guess with you know some hot spots popping up have you seen at slowdown in the store traffic and sales and I guess has that transferred on line then.
We are seeing [noise] on some of the hot spots, we are saying, there's some additional capacity constraints and some more traffic impacts of the stores as ever expense on the call are doing just an amazing job converting the traffic at they are getting on leveraging the traffic that we're seeing.
And we are seeing in places that are impacted by capacity on by traffic we are seeing.
On that demand shift online so those markets day kind of on path as the rest of the business I'm just shifting more to digital.
Okay, great. Thanks, so much good luck for holiday.
Given.
Devon, we have time for one more question.
Our final question comes from the line of Janet Kloppenburg, which educate research. Please proceed with your question.
Hi, everyone and thanks for squeezing me in here Tonight, Congrats on a nice quarter.
I had a concern about American eagle inventories at the total inventories down maybe 13, but eylea up so eagles inventories have to be down quite a bit and I noticed some shortages on the stores in October I wondered if that impacted your sales at all on the quarter and the third quarter, perhaps late in the quarter.
And how you're thinking about inventory now for the E plant.
Thanks, Janet Yeah, we have.
We inventories were definitely significantly down in AG and we did have some shortages through the quarter. We had planned the quarter tight in terms of the inventory we weren't sure how of the trend was gonna open back up the stores we opened.
In the late spring and early summer and how the lack of back to school in person would impact demand.
The good news is that demand exceeded our expectations and we were able to use inventory we had to really drive the sales we were able to GAAP as well as greatly improved margins on the product that we had on.
Our go forward thinking on inventory continues to be that we want sales to outpace inventory.
We believe the we're always.
I'm happiest when sales are outpacing inventory gives us the best margin results and allows us opens up in the towards for us to chase.
The Q3 was was the little was definitely more out of balance than we would want to plan going forward.
Okay and just in terms of November on the trends I assume when you talk about acceleration you mean, it's you've seen acceleration across both planned and I'm just wondering.
If you think that the promotional activity, which has hit the earlier the shale at the last if we should look for that to moderate as the quarter of goes along and and trying to think about what impact that may have on the top line trend. Thank you.
We are seeing the acceleration in trend in both brands as Mike said.
Especially in the U. brand once we got through August we've seen a range.
Quite happy with the brand results.
And we have seen acceleration on both brands in November I think we are benefiting from HM.
Concerning sun from people shopping earlier and maybe from other People's promotions, we have been less promotional and both brands on November.
Today than we were at last year.
And as John commented there so a lot the go between now and the Christmas holiday.
But we plan to compete this week. Obviously this is a critical weak and then when we come out of that interest I would also add one thing.
I think we of the sharpest looked at dice out the or period.
[laughter] it looks pretty good Jay.
Thank you.
[laughter] and with our [laughter] I think of the terms of the quote me on that yet I got at I, well, the cool [laughter] at our merchandise against anybody else well yet.
Great.
On whatever inventory positions, we have the opportunity.
To be less promotional through the through Q4 as we are already.
Okay I can't thank you enough all the best flow great holiday. Thank thank you. Good morning, Thanks, Jana like Jay.
And with that we reach the ones.
We've reached the end of our question and answer session and I will like to turn the call back over to Jay frankly.
For any closing remarks.
Or we weren't stay safe.
Well, we went through it we're going through a the usual times right now.
And you know the.
You know the yield on that so we're going to be very interesting weeks.
And the hopefully a you know the you know our kind of become through strong end will come to the strong but really stay safe that's most important thing.
I'd say.
And with that this concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
So the.
Yes.
So you see.
HM.
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[music].