Q4 2020 American Eagle Outfitters Inc Earnings Call
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Greetings and welcome to the American Eagle Outfitters fourth quarter, 2020 earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation and if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being.
[noise] recorded and is now my pleasure to introduce your host Judy Meehan. Thank you Judy you may begin.
Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer, and Mike Matthias Chief Financial Officer, and addition, Jen Foyle, Chief Creative Officer, or a Yelp, Inc, and Aerie Global brand, President and Michael and Paul Chief Operations Officer.
Join us for Q&A.
Before we begin todays call I need to remind you that we will make certain forward looking statements. These statements are based upon information and that represents the company's current expectations or beliefs.
And it's actually realized may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise except as required by law.
Also please note that during this call and in the accompanying press release certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis reconciliation from adjusted results to the GAAP results are available and the tables attached to the earnings release, which is posted on our corporate website at <unk>.
Www Dot eight year old gas, Inc, Dot com and the Investor Relations section.
Here you can also find the first fourth quarter investor presentation.
And now I'd like to turn the call over to Jay.
Thanks, Jody and good afternoon, everyone I Hope you and your families are safe and healthy.
I'm extremely proud of our results and the fourth quarter and throughout 2020.
COVID-19, and severely tested us and yet our success is a testament to the power of our people our brands and our operations early on we took decisive action to protect our associates and customers and preserve cash and prepare for a new future visa.
These actions enabled E O the thrive and deliver positive results, while also developing our plan for consistent profit growth.
Looking back on 2020 after a difficult start with the abrupt closure of all stores, we saw substantial improvement and each quarter we.
We ended the year on a very strong debt fourth quarter adjusted operating profit grew 38% compared to 2019.
This is a remarkable achievement and the pace at the parent debt related traffic pressures in stores and cash flow was strong and we ended the year with $850 million and cash and approximately $1 2 billion and total liquidity.
I'm very pleased that today, we announced the reinstatement of a quarterly cash dividend.
We have a strong and long tradition, and returning cash to shareholders and are very proud of this commitment.
Last year, we also spent time preparing for a new future and.
That would bring our real power real gross value creation plan.
And you heard at our Investor meeting in January our strategy is centered on five key pillars, which we believe will support top tier financial results over the next few years I will briefly discuss each of these now as well as initial progress in each area.
Our first pillar is a double aerie to $2 billion and revenue by 2020 three area.
And he had an exceptional 2020.
During the fourth quarter revenue grew 25%, marking our fifth consecutive quarter of double digit growth.
Earnings adjusted operating profit grew and an incredible 52% as merchandize margins expanded.
And it leverage the expense base.
Consistent with the trend throughout the year Air lease momentum was broad based across categories and this speaks to the incredible power of our lifestyle brands.
Active wear was a clear standout in the quarter and our highest growth category and July we consolidate or active and short shortening and to a new sub brand offline by Erie as part of our strategy to maximize our potential and this exciting growth category.
We have been extremely pleased with the customer response, and addition of offline strong gross our data shows the sub brand is attracting new customers to the Aerie brand.
At the same time, Ares Cork and the categories Ken.
Turning to perform for example, intimates grew at a double digit rate in the fourth quarter led by broad latch and Andy we continue to be amazed with all aerie is accomplish and see significant future runway.
Our second pillar is to at night and American Eagle for profit growth.
You heard a few weeks ago, the AE brands, most meaningful opportunity is to drive stronger and more consistent profitability and cash flow.
This was a clear focus and Twenty-twenty I'm pleased with the progress made over the course of the year.
And he's fourth quarters results sequentially improved from the third quarter.
And with continued pressure on stores as revenue declined 9%, yet digital grew 20% and overall adjusted operating profit increased 29%.
We ran a very healthy business and that remains a major priority as we look to the future.
Our leading jeans franchise with yet again.
And out in the quarter, we gained share even as we meaningfully reduced holiday promotions and saw AUR growth.
And he continues to introduce product focused marketing campaign and showcase our relabel and positive spirit.
Last week, we announced our genes are forever spring 2021 campaign.
Featuring stars of the hit Netflix show outer banks.
We also launched a new innovative shopping experience and partnership with Snapchat.
We are really excited about this launch as we continue to introduce new ways to fuel customer engagement.
Overall, I am proud of the AE team's execution and confident we will continue to see great progress in 2020 one.
Our third priority is to continue to invest and customer focused operations.
Digital fulfillment capabilities, we developed over the past year, whereas we're.
And were critical during the holiday on.
Our digital channel revenue grew by $155 million during the fourth quarter.
The growth rate of 35%.
And really proud that we were able to handle the increases and site traffic and shipment volumes, while still maintaining excellent customer experience and service levels.
A regional distribution network also ensured we had inventory located at the right places at the right time.
Despite industry cost increases the team did a nice job mitigating delivering cost pressures.
Our supply chain transformation initiative is a significant competitive advantage and will continue to drive efficiencies and support bottom line growth.
Sports strength any ROI discipline.
This was a focus throughout the year and evident and our results during the fourth quarter, we drove meaningful gross and operating margin expansion and generated robust cash flow.
This performance reflects strong inventory optimization and expense management, which will remain major priorities and in addition, we will continue to invest and our growth businesses and as I see more opportunity for HBO than ever before.
We are a purpose led company with enduring brands and inclusive and optimistic culture and there's a.
A lot of great work going on across the company and the <unk>.
Many months, we look forward to awarded our first real change scholarships for social Justice. We also continue to focus on the environment across our operation and we are thrilled with the customer responds to a real good product lines.
And close them, although we still face an uncertain macro environment, we are entering 2020, one with great momentum.
I'm optimistic about the future.
And the promotional environment is more rational than we've seen in recent years, we have two of the most loved and and demand brands and retail.
Favorable real estate environment strong operational capabilities and improving competitive backdrop.
And a disruptive retail landscape has created many opportunities and we have the right strategy and leaders to capture.
Notable profitable market share gains and the future.
Please they have Jen Foyle, and Michael and Paul joining us today.
And Q&A they can't.
By further insights on our brands and channels now I will turn the call over to Mike Matthias and review the financial results.
Thanks, Jay Good afternoon, everyone I am pleased to report that the fourth quarter and year and were far better than expected at the onset of the pandemic we.
We saw sequential improvement and each quarter ending on a positive note with fourth quarter adjusted operating income up 38% to last year, driven by strong merchandise margins across brands and channels.
Our performance and really speak to the quick action vision and strong execution of our teams.
And the fourth quarter total company revenue declined 2% with strong online sales, mostly offsetting declines in stores.
Digital revenue rose, 35% with Aerie up 75% and <unk> up 20%.
Online sales for the quarter and the year represented approximately 45% of our total mix.
Increasing significantly from 29% for the full year of 2019.
Digital Kpis were very strong with double digit traffic growth improved conversion and a high single digit increase and AUR.
Our focus on tightening assortment breadth and optimizing inventory levels enabled us to control promotions and drive greater full price sell through.
Store channel revenue decreased 20%, reflecting mall traffic declines as anticipated store revenue declined across both brands as we lapped high volume seasonal store events like Black Friday, and Super Saturday, which were meaningfully impacted by the pandemic.
We also dealt with the impact of store closures across Canada, California, and other regions that reduced total selling days by 6% relative to last year's fourth quarter.
Continuing a trend throughout the year. These pressures were partly offset by strong conversion and AUR.
By brand area continues to demonstrate strong momentum revenue increased 25% to $337 million and the fourth quarter comparable sales grew 29% building on a 26% increase last year with.
And with Aes greater store penetration the brand was more affected by the store channel headwinds. However, we were pleased to see improvement from the third quarter brand revenue declined 9% to $943 million.
Comparable sales declined 8%.
Total gross profit dollars increased $32 million or 8% during the quarter and gross margin expanded 300 basis points to 34%.
Merchandise margins expanded significantly reflecting the benefit from continued promotional discipline and our inventory optimization initiatives.
Our product Assortments were well received which enabled higher full price selling.
As Jay mentioned rent leveraged as a result, and negotiated savings and benefits from recent impairments.
Offsetting this we saw higher delivery distribution and warehousing costs as well as higher incentive compensation.
And yet the impact of delivery cost pressure was less significant than expected, reflecting strong execution and efficiency benefits from new fulfillment capabilities.
SG&A expense increased 2% due to higher incentive compensation.
Better than our expectation due to our ongoing focus on expense management across labor and other store related costs and the absence of incentive compensation and SG&A would have declined 4%.
Adjusted operating income of $106 million increased 38% compared to last year adjusted operating margin of eight 2% expanded 240 basis points.
Adjusted EPS was <unk> 39 per share and the quarter, our diluted share count was $197 million and include 26 million shares of unrealized dilution associated with our convertible notes.
Now some detail on our brands I'm really pleased to see both brands generate strong increases and operating income, which is a testament to our ROI mindset and strategic execution.
American Eagle adjusted operating income increased 29% to $145 million, despite the revenue decline and.
Adjusted brand operating margin improved 450 basis points to 15, 4%.
Due to merchandise margin expansion and rent savings.
While we have made incredible progress at American Eagle I want to underscore that there is still meaningful opportunity for future profit improvement.
<unk> adjusted operating income grew 52% to $48 million adjusted brand operating margin expanded 250 basis points to 14, 3%.
Reflecting merchandise margin improvement and expense leverage from revenue growth.
Corporate unallocated expense increased 28% to $87 million, primarily due to incentive compensation.
Ending inventory was down 9% American Eagle inventory declined 21% due to continued inventory optimization initiatives as well as lower end of season clearance.
Inventory increased 10% to support demand growth, but clearance was lower to last year.
We are very pleased with our inventory discipline during 2020, which has validated my long held view on that we can meet customer demand and deliver an exceptional experience while generating higher returns on inventory investments.
And this work is ongoing and I believe will have a material impact on our profit improvement over the next several years.
Our balance sheet wasn't advantaged during 2020 and continues to strengthen.
During the fourth quarter, we generated $213 million and operating cash flow and ended the period with $850 million and cash and short term investments at.
At year, and our total available liquidity, including our Undrawn revolver was approximately $1 2 billion early debt currently outstanding is our convertible note.
As Jim mentioned, we are pleased to reinstate our dividend and have also unsuspend and our share repurchase program and 2021, we expect capital expenditures of $250 million to $275 million, which is up from 128.002 million 20 and in line with the average annual target we shared at our Investor meeting.
We will continue to actively monitor our store fleet and we closed 57, and total locations and 2020, including over 50 American Eagle stores, the sales and customer transfer rates from these locations will inform our decision making around our 2021 lease expirations.
The vast majority of our 2020 store renewals for one year. So we have significant flexibility, including almost 450 lease expiring this year.
And we expect to continue to negotiate material rent savings and plan to open approximately 60, aerie locations, including 25% to 30 offline stores, which will be and mix of standalone and aerie side by side.
And our Investor day in January we laid out a path to $5 5 billion and revenue and a 10% operating margin by 2023.
Back half results increase our confidence and these goals and we expect to make continued progress in the coming year.
Looking ahead, we are pleased with how we started the year and expect our 2021 results to put us on a strong path to our 2023 targets.
And yet the operating environment remains uncertain and so we're not providing annual guidance at this time.
Regarding the first quarter, we expect revenue and operating income to exceed our results from the first quarter of both 2020 and 2019.
In closing we began implementing our go forward strategies to drive earnings growth optimize as profitability established leading capabilities and continue to focus on investment returns.
Our strong performance during the fourth quarter as a key proof point that validates our approach and strengthens our confidence and our future opportunity.
With that we will open it up for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate that your line is and the question queue.
Press Star two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
And the interest of time, we ask participants to limit themselves to one question and one follow up one moment. Please while we poll for questions.
Okay.
Yes.
Okay.
Thank you. Our first question comes from Adrienne <unk> with Barclays. Please proceed with your question.
Good afternoon, let me just say well done on a really tough year and exiting with good momentum so congrats on.
And I guess my first question is going to be on the commentary about.
Could the quarter, having sales higher than 2019.
Can you give us any color on February trend.
And then just.
The the notion is at the end of the quarter being able to chase that inventory once stores would open inventory access relative to the port congestion debt is off to talked about these days on.
And then for John can you talk about the aerie side by side locations vis vis the standalone.
And how you're thinking about the gross of the core business.
On the Standalone locations and the impact on the side by day. Thank you very much.
Okay.
Thank you Adrian and thanks for the covenants on our quarter.
I can take the first part of the question on quarter to date.
We're really pleased with how the quarter started and obviously theres a lot of noise out there with just weather and you mentioned port congestion, which Michael maybe add some color to that part of the answer.
But we are definitely pleased with what we've seen so far here and the last week or two especially since the weather has broken and we're all.
Keeping tabs on just how.
How much of a challenge February wasn't general and and the amount of snowfall and in fact, even on the southwest, Texas being shut down for a week or two so I think.
Hopefully pass all of that but as we sit here today and as we are in early March we are seeing really good signs.
In terms of where we're headed for the quarter, which really just reiterates why we gave the general guidance on what we're expecting.
And a total quarter level against 2019 results both on the sales line and Op, Inc. Operating income line.
Yes, Jay.
Go ahead.
Go ahead, Mike sorry.
Sorry Darren.
Yes.
Oh, sorry, I was just debt.
Following the follow on flow through on that was just any color on the gross margin flow through of those sales.
Yes, we're still I mean, and the formula is intact, our inventories in great shape.
And the merch margin improvement we've been talking about we feel really good about that continuing and the first quarter, we are seeing that to date.
So from a.
Benefit to the P&L and where we're seeing leverage both from a gross margin and operating rate perspective, we are continuing what we saw on the back half of the year and both third quarter and fourth quarter is our expectation.
Great.
And then Adrian regarding our store growth opportunity right now.
We're about even equal and we have.
And 70, Standalone stores, and 178 and side by sides and almost 350 stores.
And we're approaching this mall by mall in some cases, we're exiting the side by side and opening up.
Standalone, where we can have more square footage and get the true experience of areas. So again this is mall based.
Depending on the model and depending on the opportunity and the deal.
It comes before us So 50 Aerie stores already opened this year and then we are going to open 30 off line stores. This year. So we're really excited about our growth opportunity and as you know Adrian and what we see is that beautiful halo effect.
When we enter a new market.
Just reap the benefit on line as well and we're going to continue to use that approach as we approach every market.
Alright, great and hey, thanks.
Thank you.
Hey, Jamie it's Michael just touching real quickly on your question about inventory.
We did experience like yours suggests suggesting.
And the congestion and both at the U S ports.
The overseas ports.
And that did cause us to delay our floor sets for both AE and Aerie from January into February, but I have to tell you. Our teams did a terrific job, they're very proactive and very aggressive.
In terms of quickly identifying situation and moving up on.
Our handovers, adding additional carriers.
Calling on different ports, and we feel very good about our inventories flow now so.
While transit times or longer it's all accounted for.
In our in our guidance and.
And we don't see we don't see and issue with some from the sales.
Great. Thank you very much share.
Thank you. Our next question comes from Matthew Boss with Jpmorgan. Please proceed with your question.
Great Thanks, and congrats on that on another nice quarter. Thanks.
Thanks, Matt.
Maybe first Janet at Aerie, how would you rank top areas of the assortment that you're leaning into to drive continued momentum and new customer acquisition.
As we think about the other side of the pandemic and the market share opportunity that you see from here.
Yeah first I'd just like the team I mean, I think we really excel during a very challenging year.
Not only did aerie.
External but we opened two new brands, one offline and then a small brand.
Unsubscribed, which is a tiny concept but.
Certainly we've seen great results on the offline in the off line business and I think that that will remain a killer.
<unk> for us and we're going to continue to grow as I mentioned 30 stores this year.
Various formats, we're still testing and learning.
But really we've seen just unbelievable results there.
I have to say it.
It was pretty impressive this year on all categories really fired up.
Seeing nice results and Internet and we continue to dominate and comfort intimates.
And really what that generation wants today, but still pretty and feminine and we're going to continue to.
Innovate on that category and dominate.
Every category apparel had great results tops and fleece.
Really we'd like to Covid consider FC intimates lifestyle destination.
So we are going to continue to grow our customer continues to ask for more and.
And speaking of customers, we did grow that based on 16%, so really nice uptick there considering when stores.
Closed we were still able to leverage direct and that business to entertainment customers to our brand.
Great and then just on the gross margin helped us to think about merchandise margin opportunity. This year, meaning can you build on the performance that we saw on 2020 and as we think about costing INU and inventory management or are there any structural impediments to gross margin exceeding 2019.
And so as we think back to historical gross margins, which were even higher.
And thanks, Matt It's Mike.
I think I mean, we talked about on Investor day, two we still see significant opportunity and our inventory optimization work and initiatives I think will be the benefits and the results. We saw on the back half we're very pleased with that.
And that was just the starting point I think.
We still have a lot of opportunity and the first half of the year here.
Those initiatives to benefit us and we Havent really tackled.
Every category, yet I think we talked a lot about the AE brand and tops and refining SKU counts and choice counts where your.
John and team are working on.
And some other fronts bottom's being a category and there's opportunity and.
So I think thats we.
We still see runway in terms of merch margin expansion beyond what we achieved in 2020.
The gross margin side of things is we don't see any impediments to continuing the benefit in 2021, there is one.
To remind everybody about since you asked which we did have that one time benefit in Q2 of our licensed partner payments that was about a $40 million benefit too.
The top line $35 million plus or so to our gross margin line. So thats a one time.
Sort of a hurdle from if we're if our.
Grounding ourselves in 2019, just a reminder, that that's out there, but nothing else everything else, we're doing in terms of inventory optimization inventory position to sales.
Formula is still intact, essentially sales outpacing inventory and margin outpacing sales that's our goal.
Yes and.
And Mike I would just add on to that since the since you specifically asked.
We do see markup as a benefit.
At least through back to school right now so.
Despite higher shipping costs, we feel very good about our ability to achieve higher markups through the first three quarters of the year.
Great Congrats again.
Thank you.
Yeah.
Thank you. Our next question comes from Oliver Chen with Cowen and company. Please proceed with your question.
Hi, and thank you very much great quarter.
Looking ahead with inventory management and the opportunities you have there what some of the lower hanging fruit, particularly as you think about localization and making sure the digital and physical inventory.
Inventory is where you want it.
And would also love your takes on on the AE tops.
And women's and contrasting the opportunity between men's and women's and just where you are with your roadmap to continue to innovate there. Thank you.
Okay, Oliver I'll take your I'll take the first part of your question about inventory management.
Obviously, we've talked extensively about our supply chain transformation and noted we set up.
And and the potential that has and.
And what I would tell you is we're very pleased with our results in fourth quarter.
We did we did.
Deleverage delivery expense, but we de leveraged less than we had expected to.
Because we had that inventory closer to customers and because we had more consolidated digital shipments.
And really like Mike was saying, we feel like we're just scratching the surface I mean, when you look under the covers and that strategy. There is a lot that we could do better.
And net.
Going to do better in the coming years, so making sure we are better in stocks by store by size, even though we're doing it on less inventory and making that inventories so much more productive and profitable so.
We feel great about that we're expanding our same day pilot.
We did in fourth quarter to 50 markets over the next few months and again, that's another great opportunity for a business like ours that has strong digital channel strong stores channel to leverage both to provide great great experiences for customers. So.
There's a lot on our roadmap inventory productivity is top of mind, but theres a lot that we're going to do also to dramatically improve the customer experience.
And John do you want to take the question on tops.
Thanks, Oliver how are you Oliver by the way and <unk>.
To hear from you.
Top line.
And Dear to my Heart Oliver.
Let me just go back when I started in September I want to first say that I'm, just so impressed with the AE team and the talent that really resides on that team from design to merchandising.
Full throttle I really have been more than impressed and look.
And what mens was underway over a year and a half ago, we really buckled down there and really looked at.
Really getting back to key items and famous for items and we are just really seeing nice results from that hard work with the team.
Fast forward on the womens and let me start with bottoms first because where theres a great bottom there is always a great top and we've really realign the team. So we're really thinking full outfitting Oliver that that's one first shifts that we've made that I think is really important and also brought in some new talent.
A new woman to run merchandising, who were thrilled with Rene branches, so really excited with that move and.
With that going back to them and back in September we started to see a shift and bottoms Oliver.
And we're seeing looser fits more fashion I would just say, we're getting into a little bit of a fashion cycle here, maybe a bigger faster and cycle, we've got a nice job.
Net bottoms team Oliver really test and scale denim as a true machine and I think we are underway to really have a great balance to bottoms assortment so that said.
We're going to have those tops and it really worked with the bottoms and.
And really that's how we're going to look at it Oliver I, we're really getting back to best practices and women's day that would be key items again.
Great quality I'd like to say, we're headed into a fashion cycle, Oliver but that said, we're not going to turn our back on the quality and the value price.
We're known for and American Eagle.
Thank you so much Jim a follow up on ESG.
<unk> ranks really well on a lot of the Cowen surveys for ESG, just would love your take on what's important for investors to prioritize or know about in terms of what American Eagle is focused on with respect to ESG.
Yeah, Oliver I mean, if this is Michael we put out.
Our aggressive goals.
In terms of our carbon reduction.
In the coming years and and.
We feel like it's important to be a leader our associates care about it our customers care about it and and we're going to achieve those goals.
We recently launched a real good campaigns.
And with.
Taking our iconic jeans, and making sure that they were made and a much more sustainable way.
And we've received great results customers really like the product.
Jen and building on that concept and our design teams are both and start inspired by and excited by design.
Designing and developing product and a more sustainable way so for us and Thats the future. That's the way that's what our customers expect thats, what our associates expect and we think it's going.
Going to be good for the environment and good for business.
Thanks, Jim Thanks, Michael Best regards.
Thanks, Oliver take care.
Thank you Oliver.
Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Good afternoon, everyone and nice to see the progress you had mentioned about delivery costs being a little bit less than expected due to some new fulfillment initiatives can you expand on that and how you're planning on delivery going forward and then on inventory levels. How are you planning them for Aerie and for American Eagle as we go.
Through this first half of the year and just any thoughts on spring break and I've seen some of the new products you are having both on the jeans side and what you're talking about new styles and on the aerie side anything to highlight in particular that we should be watching for thank you.
Yeah.
Sure Dana So I'll talk about delivery cost first.
Yeah.
We did we did absorb cost increases and.
Every retailer did last last season.
But we were able to offset.
Some of those cost increases by shipping fewer shipments per order.
By shipping closer to customer.
And bye bye.
Using some regional carriers.
That strategy was very effective for us and it's been a maniacal focus and the team we've hired a lot of new talent to supplement the great talent that we had on that team.
And they have a great roadmap this year to really look to offset that.
Delivery increases wherever possible. So it's actually a big opportunity for us as I think about the year.
In the first quarter is when we shut down our stores.
And we were shipping product from the stores and we are shipping product.
And of all over the place as we were trying to liquidate so that creates an opportunity for delivery in the second quarter, we absorbed much higher delivery costs.
As we had our highest rates actually of the year.
And again, we were shipping individual units from stores all across the country. So that creates an opportunity for us and like I said before and the third and fourth quarter, we feel like.
Although we are extremely proud of the job that our team did with supply chain transformation.
And the job we did localizing inventory, we feel like it's early days for that strategy. We feel like there is so much opportunity to leverage our stores more for curbside and same day delivery.
To do a better job regionalized, and the inventory and using local carriers to deliver the inventory and still shipping to customers and fewer packages. So delivery is a huge focus from the company. It's obviously a growing expense.
But we feel like we have a really good path to mitigate.
Much of the increase and much of that deleverage go forward.
And Dan and I can take I can take the inventory piece real quick really quick just from the number side of it.
At the end of the fourth quarter. There you saw the spread we were down nine on fourth quarter revenue down, 2% and then each brand being really commensurate with its with individual performance.
And <unk> down 21, and inventory on down nine sales area inventory up 10.
On call it 25% to 30% growth so the first quarter and the first half of the year really that spread really from the brands and definitely total level and something were looking to maintain and then we are refining our back half plans really this is the time of year, we're looking and still at Q3 and still have some time ahead of us for Q4, but we're refining those as we speak.
And Dana regarding spring, Great look I'm really excited and we had some tailwind.
And in our favor right now the stimulus package tax returns and the weather is starting to break.
Without unveiling all of our secrets when the weather did break we were seeing some nice results and key categories for us.
Swim and shorts are starting to open up I'd like to say no and AE. We just launched our outer banks campaign, which is really a nod to all of our new fashion and our product and that really happened.
At the end of last week, and we're seeing great results from that campaign 3 million.
Organic views, which is a big number for us, which is pretty impressive and some of the best Instagram likes ever and we love the comments that were receiving.
And it is pointing to that these kids are ready to get out.
And with their mass on so to speak but they're ready to get out. So look on we're just entering our spring break time period, and I think we have all guns ready to fire.
Thanks.
Dana and one clarification, it's Mike again, just as I talk about the inventory levels for the first half we are looking at 2019 compares just so you understand that.
And both on the Rep, not only revenue, but inventories as well obviously, our first our 2020 inventory for Q1 and Q2 was.
Probably not a good benchmark to look at with all the activity once the pandemic hit so those are the 2019 inventory compare and delta.
Thank you.
Thank you. Our next question comes from Janet Kloppenburg with Jay J K research associate.
Please proceed with your question.
Good evening, everyone and congratulations.
On a on a great year.
And a lot of good change.
First Gen and if you could talk a little bit about this fashion shift I'm hearing and patterns as well and.
And maybe how it pertains to genes and any change and styling.
How are you positioned and if you're starting to see and spend shift away from Combi casual.
Two a little bit more dress up and go out and love to hear about those trends.
And also for <unk>.
So Jay and Mike and I'm wondering what you're thinking about from a productivity level, if youre seeing them and crew and what your threshold will be this year.
As the stores reopen and traffic returns.
And wondering where you'll be satisfied.
And looking for those levels to match 2019 on.
Can you at all on a lower level and comes from rent abatements.
And just lastly should we expect digital flow to slow as store productivity revamps and thank you.
Thanks, Dan and I.
Look regarding trends.
You know I mentioned, it earlier and denim, we definitely are seeing a shift.
Looser denim for women's and flares and it's really you know a fashion cycle. However, I think comfort will always be at the forefront of everything we do our genes are the most comfortable jeans and I think.
And we really posted great results and our jeans business as both the men's and women's so I think it speaks volume for this time period, where everyone.
Assume that we were only selling sweat the assets, we've really had a nice run and denim as well so really pleased with the results there and we're going to continue to always have that innovation.
And that comfort and in everything we do.
And and bottom as well as top and when.
I think about that ship and bottoms and we really have to think about the rises rate rises are still high and.
And what are the tops and work with that.
And certainly fashion tops are we're getting hints of it and we're seeing some nice results and again, we're always going to make sure that our assortments our balance.
With our key items and the right fashion and.
And then in <unk>.
And look.
And we.
The stories and we're certainly aligned with the pandemic and on what we see and for lounge, but what I really am excited for and I've been talking to the teams about this is balancing out both brands right and and what are the foundations and what are the intimate second support some of these new trends that we're seeing and I mentioned, we have 107.
And to eight side by side. So we're gonna be able to really you know when you think about that we're going to leverage the aerie brand and no pun intended but support.
And with intimates and great fashion, there too so.
And I sit today.
It's great because I get to really Hum.
And try to maximize both brands and both off line for both brands.
Yes, yes, and yes.
Yes.
Yes.
Optimistic.
This was great news this past week about J&J I'm very proud that on the J&J shot that's the first.
Dose was given and Columbus, Ohio at the shot and same center in the World for the first J&J shocks that we are very proud of that and well congratulations on that and you shouldn't be yeah. Thank you. Thanks. Thank you.
Yes.
Feeling is debt than the next 60 days. This country is going to this country is going to be vaccinated and a very rapid pace and that will give people a lot of confidence to go out and we're already seeing people going out right now.
People want to get out.
Can't wait to get out and we're very we're very excited.
And about the balls and.
And I can tell you that and this is probably the best opportunity for us to pick up new locations that were being offered.
New great locations.
And affordable rents for us so we're very optimistic.
And I believe that.
The next few months things will start getting back to normal and then I.
Going into next year.
We're going to see a boom in this country.
It's going to be like worried twenties.
And youre going to see a lot of excitement, yeah, youre going to see people getting out and and.
And look and our challenge would be is give people good enough experiences that they wanted to.
Shop with us at the same time.
And people getting more and more use of digital.
It's part of life today, and and the last several years, if you look at the online business.
And it keeps growing and it hasn't gone down.
Yes.
Mark and Mike and it kind of yes, yes, Okay I would just say.
It goes without saying, but that's from a change of trend and bottoms.
Great for the AE business. So anything that gives people a reason to go out and refresh their bottoms wardrobe.
It should be really really strong for the AE business, and I know Jen and Chad and their teams there they are all over it.
Okay, and just lastly, any concerns around cotton pricing right now.
No I mean, it's definitely it's definitely something that we're watching like I said, we feel good about them all the prices that we have.
Locked in through back to school, but theres definitely raw material cost increases that we're dealing with.
We are trying to book early platform fabrics, and yarns and fibers whenever we can.
And theirs.
Theres some merchandising strategies that are helping US also so gen strategy of.
Narrowing the assortment and being narrower and narrower and deeper and.
Actually gets rid of a lot of the fringe styles that costs more that had lower markups and net were less productive so.
We're watching cotton, we're taking aggressive action to try to mitigate increases.
But it's something definitely something we're paying attention to.
Yeah.
Thanks, a lot everyone.
Thank you.
Okay.
Thank you. Our next question comes from Simeon Siegel with BMO capital markets. Please proceed with your question.
Thanks, Good afternoon, everyone and a nice cap to the to the year.
And so obviously great revenue growth for Aerie, just a quick clarification can you just speak to the sales to comp spread I'm just trying to think through just shoot me I'm missing something but why is revenue growth lagged and comps with the new stores and then similarly, I guess, Mike and can you help us understand the aerie impairment charges that are going on.
What are those how do you think about the go forward and I just had a quick follow up on international Thank you.
You still have to remember one thing.
We're still operating and most of our stores and a 50% capacity and some states where we're operating at 25% capacity. There is still a pet debit going on.
And even though we're optimistic and we're excited and we're seeing great progress.
Still in the middle of the pandemic.
Yes for sure Jay and that actually explains the spread because I mean total revenues total revenues that were reporting.
Jack external reported results total revenue versus last year versus the comp out there and excludes all the closure activity right.
California, Canada, so were pulling out from a comp reporting purposes youre pulling out this year and last year for total revenue. So a lot of cases, you're reporting no revenue. This year against the revenue last year, that's why the total revenue and a little lower than comp does that help explain that.
Definitely makes sense.
And then on the apparel area impairment front and so if you think about most of the activity or the activity. This year being in Q1 and then this is what we just reported are disclosed here in Q4, Q1, and we took care of.
And really when you think about the mall based stores the lower tiered stores a lot of a lot of the stores that would be tied up and what we talked about and our closure activity and.
Flexible lease term short term renewals so lot of impairment had to do with debt.
And that mall base lower Tier Group, Inc.
Q4 here now almost 910 months later.
We had some assumptions back in Q1 around tourist location and flagships.
Some of the more urban locations that have not actually reopened or open back up. So we came back around and really impairment accounts being a bit of an accounting exercise and the assumptions youre using that was the change and that's what we did again this time around which for <unk> specifically.
Some of the locations that were.
Part of that impairment, where flagship and sort of urban.
Tourist locations.
Got it. Thank you and then you have a nice international license business. So how big of whats the EBIT or EPS contribution this year and how do you think about that.
Going forward. Thank you.
Yes for <unk>.
<unk> one.
If you go back to 19 EBIT bottom line contribution was in the probably low double digits.
And we're around that somewhere around that without just without that soon and can benefit in Q2, the international and contribution from an EBIT perspective would have been and a low double digits.
And I think for 'twenty, one we're looking to get back to those $19 levels and even surpass that I think as we said on the Investor day, we're not be all that bullish or we're not counting on sort of.
Big growth and international although we think that could be and opportunity and we're likely being conservative around our targets short term for 'twenty, one kind of getting back to 19 levels or just a little bit above and beyond 19 levels is what we believe is achievable and again, possibly conservative.
Great, Thanks, Alright, and sort of Oxford.
The year.
Right, Yeah, that'd be very conservative we'll see.
Say it very conservative.
Towards our international business.
<unk>.
Great. Thanks, a lot best of luck for the year.
Thank you.
Yeah.
Our next question comes from Marni Shapiro with retail tracker. Please proceed with your question Hey, guys Congrats and.
And I guess welcome back to North Carolina, and after 20 plus years wasn't Dawson's Creek that long ago.
[laughter] baccarat.
And background eventually.
And I still love that Jeff and Jay actually of a Big picture question for you you guys have a very strong balance sheet now.
And you have a lot of growth ahead of you and area and offline with you on solid ground and over the last couple of years. The company has invested and a lot of different things from derma fine and urban necessities to Tom Snyder I guess, how are you thinking about those kinds of investments today, where there are a lot of small.
And we'll companies that have had a tough go at it.
During the pandemic and.
I've been stocking unsubscribe actually because if a friend of mine and I'm. Just curious what you guys are doing with I know, it's tiny and meaningless curiosity, because you guys dabble and a lot of these random things.
Alright, Alright, I'll answer the first part of the question and I'll, let John answer the other question about what unsubscribe, which is sort of babies.
Yeah.
Well first of all you know it's better to have a good cash in the bank did not have them and cash. So we're very happy that we're sitting on a position that we're sitting on that's number one.
Number two you know.
And if we see the opportunity for something that capital of that says.
We are interested but.
We had our Investor day last month.
We know we laid out our goals of doubling Ares business, we see a big upside even American Eagle business, we see that upside and we even had the Saar appointed we call. It our strategies are to make sure that we stay focused and I think you can hear on that on this call. The way the gen answers the questions the way that both by to answer any questions.
Is that they are very focused on the initiatives that we're doing we believe that if we do what we have right now and our wheelhouse, we could create tremendous shareholder value.
And that's our major game plan, but if the right opportunity came along we do have a very good balance sheet, we could take advantage of it but it has to be something that makes it worthwhile for us and complements us and it's something that's beneficial to us and have the ones you've invested in and been successful in your and your view like Dorma Fi urban necessities and successful.
Necessities was a test store.
And I look.
And it shows a lot of things, whether we operate or not we learned a lot of same store.
Dora and five were still working with.
We have Todd Schneider that we think is a good opportunity to.
Offline was something that we explore.
And then at Orange and I.
I think off line can be very big big.
Big ups for offline and non subscribe and I'll, let you and talk to that.
And there is an opportunity to because it's.
And it's been very well received Jan.
Yes.
We opened up during the pandemic and our first stores and East Hampton and then we do open up another store in Westport at the end of this month. So we're on track for that openings slightly a little tiny delay, but we're excited about that opening and Westport.
Unsubscribed was concept it is after all this fast retail.
And just really understanding this next generation and what theyre going to be.
Raving, we felt like there was room for what we call slow retail right thoughtful retail.
Low fashion Upcycled recycled.
Everything has a nod to.
Whether it's a third party artist and are.
And are you name it we really tried to make sure that everything in that store and we're not 100% there, but our plan is to get 100%.
It is green and and organic and reached an all day all the things that are happening right now and.
Look our results have been great with.
And with the product looks amazing and the team was just out there yesterday.
We received our new spring delivery I, just it looks amazing guarantee and we're out there.
Working at the store and the customer response has been amazing. So we're really proud of that little concept and look we've leveraged the team to launch with brands and so right now where it's not and we don't find the disruptive at all in fact, it's complementary because it's.
It's a little higher and and we can learn there and and and learn and.
Test and scale to our for our other brands.
I sort of like that positioning.
But again, we're going to really open up gracefully with that line.
And it's definitely not the opportunity right now that we see and offline and when I looked at the numbers year to date and offline. It's it is spectacular and.
And some other numbers and the business out there and some competitors and we have far surpassed that number already so.
And we know that this is a brand that really is going to resonate with the customer and the store.
And I can't wait to get those stores that have been and and.
And I'll get back to normal business again, because I think the offline stores.
Sure.
So we're just really excited about all the growth opportunities and.
And Aerie you know we're on our path to 2 billion now so we hit our 1 billion dollar Mark and.
Right on time.
And now we're looking for this next three years of growth, we have our eye enterprise on that 2 billion growth and that team are adding.
Eddie and team and they're ready so.
We're going to remain humble along the way, but we're pretty excited about these opportunities and that's great.
Size of the off line stores.
And also to add like we're having specials and we're gonna have a special celebration this Friday with the Aerie team.
Let's celebrate that $1 billion Mark.
Total what's the size of the offline stores that you're building on average.
So we're still in the process of testing various formats. So we have.
About to open up a shop within shops on Greenwich Avenue.
And we have a side by side, so we're actually still playing with the perfect.
The perfect square footage, but we're in the zone of 2500 square feet I shouldn't say 2500, 3500 brilliant and best of luck guys. Thanks. Thank you.
Thank you. Our next question comes from Kate Fitzsimons with RBC capital markets. Please proceed with your question.
Yes, hi, congratulations on the results.
Yes.
Jay or Jan and I guess speaking about this fashion cycle that you used.
You see that we're on the tip of I mean, and your experience what is the duration of some of these cycles. When we are seeing the silhouette shifts.
And flea and then Ken you, obviously, you know you're really excited about the offline opportunity within Aerie. You noted you know offline is bringing new customers into the brand.
And speak of Aerie Cross shopping with E. What is the offline cross shopping with Aerie are you seeing those customers go to AE.
Any insight there would be helpful. Thank you, yes, so I'll answer the first part the second and then I'll let.
And answer the rest the important thing is we see denim as strong as ever.
Ken.
Yeah, I mean, I have to say and <unk>.
I think I'm aging myself, when I say this but one.
And one of my first well and when I was at the GAAP I saw this fashion denim cycle. So I've I've definitely have been there and have experienced and that shift and that transition so I'm pretty excited about.
What we're about to face and Michael said, it really well.
And if we get into the fashion denim cycle, and where we sit from a market share I feel like we have a lot of opportunity.
Look.
I feel like.
Yeah.
And the opportunity set from something like yeah.
And I keep on saying this but I want to make sure I'm answering your question right, but we have you know we are about to.
You know embarked on and fashion cycle, but again I think the brands that that thrive and that have longevity also have and not the timeless.
And and you see it you know the the fast fashion retailers come and go but the ones that survive are the ones that balance and I keep on using that word today, but really have that assortment, that's well oiled that we still have our key items and our focus and really able to leverage those items and drive you know our profits and our <unk>.
And are.
You know and and that's important but again it is about making sure we strike a balance where heritage brand.
And I'm pretty excited because I feel like that's part of the trend that's happening right now and what I saw for back to school is really exciting again, and it's not fast fashion, it's just the right fashion.
Okay, I think Paul we have time for one more question.
Thank you our last question comes from Paul <unk> with Citi. Please proceed with your question.
Thank you this is Kelly crago on for Paul.
Quick question on the <unk> guidance is there any way you could get a bit more granular when you think about.
And what you expect sales and <unk> to be versus F 19, and he weighed Q to quantify that and then when you think about that on a brand level do you expect American Eagle.
Brand sales to be above one <unk> and 19 as well as areas.
So Kelly and thanks for the question, but yes, we're not we're not really providing any more specific guidance than the general guidance at this point.
And just because of continued uncertainty we're comfortable with what we sat around at a total quarter level exceeding revenue and bottom line, but no real more no real granularity, but beyond that at this point.
Got it Okay and then on.
And just on SG&A any.
High level thoughts on on where you think that shakes out.
And this year versus up 19 anything to think about on a quarterly basis. What are some of the the big buckets to think about as far as cost savings versus marketing.
Any detail around that would be great.
And then just lastly on the on the merch and sorry on the gross margin strength and <unk> was that mainly merchandise margin expansion or did you see some occupancy.
Leverage and in the fourth quarter as well.
So can you quantify and and how should we think about that that line item.
And in F. 'twenty one thank you.
So I'll take the second question first and gross margin and fourth quarter and significant occupancy Levered, yes, now the combination of the impact from the impairment and we talk but also rent reductions rent negotiations.
It was both so.
And so we saw significant leverage within our buying and occupancy costs.
But the bottom line or the dropped two gross margin was largely.
From merchandise margin because we did after offsetting the rent leverage within buying and occupancy was delivery and.
Distribution cost headwinds.
The SG&A for 'twenty, one and then I'll give you a little little bit of flavor against 2019, right now it's been a moving target as you can imagine because when you talk about the full year being uncertain and there's a lot of variable cost within SG&A as we sit here now we're looking at it sort of and that mid.
Mid to high single digit growth call. It against 2019, so implying kind of a low single digit.
Both rate over two year period from 19, but again Thats Theres two couple of things and keep in mind.
And then going back to 2019, we didn't pay any cash incentives. So you can imagine we have a placeholder there and that and that growth rate I. Just gave you which could move and then the other things I would say is we have a.
Pretty robust sort of rolling forecast approach to that we're implementing.
In terms of how we're managing across the year. So as we look at revenue and when you look at demand shifting and we reset our expectations from a top line perspective and inventory around that we're doing the same thing and on the expense line. So.
Advertising store labor or other variable expenses could definitely move with that so that kind of mid single digit a little higher to higher range I'm, giving you is based on current revenue expectations, but theres a lot on moving parts and variability to that.
Got it thank you so much.
Okay Alright.
Alright.
Thank you everybody that concludes our call today. Thanks for your participation and talk to you soon.
Everyone stay safe stay safe.
And.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.