Q1 2021 American Eagle Outfitters Inc Earnings Call
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Greetings and welcome to the American Eagle Outfitters first quarter 2021 earnings conference call on.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over to your host Judy Meehan you may begin.
Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer, Jen Foyle, President Executive Creative Director for American Eagle and Aerie.
Michael of empower Chief operating officer, and Mike Matthias Chief Financial Officer.
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 the 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 the GAAP and non-GAAP adjusted basis reconcile.
Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate web site at H E. Oh, Gosh, Inc. Dot com in the Investor Relations section.
Here you can also find the first quarter investor presentation.
As a note due to the significant impact COVID-19 had on fiscal 2020 financial results. Our first quarter of fiscal 'twenty 'twenty..1 result arc impaired to the first quarter of fiscal 2019, which we believe the more meaningful comparison.
And now I will turn the call over to Jay.
Good afternoon, and thanks for joining us today.
I'm extremely pleased with the pace of our business and the outstanding financial performance in the first quarter.
Even as we compare to the pre pandemic 2019 of them.
Results were truly remarkable and validate the strength of our value creation plan.
We exceeded expectations in essentially all areas of the business.
Giving us a strong start to the year.
The hit record first quarter revenue of over $1 billion and the highest first quarter operating income in our history of of hungry of $33 million, which was up 170 per cent from 2019.
Importantly, we saw strength across both of the American Eagle and Aerie brand.
Ran an extremely healthy business with margins hitting the highest levels in many years.
The actions, we took in 2020, including our strategic growth pillars combined with the favorable external environment are having a very meaningful impact on our business.
Starting with our first pillar.
Accelerating the aerie to $2 billion.
This quarter, providing even more evidence that aerie is the most exciting brand and retail per day.
On nearly 90% revenue growth operating earnings rose well over 700 per cent.
Aerie is truly hitting its stride.
Yeah, the increased digital penetration.
And the geographically.
The push new and explosive categories like offline laden and the additional apparel items as Jen will review, we continue to gain new customers at a fast clip.
Spending more on our brand at this pace, we expect the hit our $2 billion target faster than it than expected fueling significant earnings growth.
Second the ignite in AE as I said back in January the American Eagle is a strong and highly profitable brand with significant opportunity for both growth and profit improvement.
The first quarter demonstrated the potential we.
We are seeing of favorable response to our product and new marketing.
Well the jeans category continues to dominate.
Across the brand we hit high margin rates with promotional.
Well contain I'm very proud of the great progress under Jim's leadership I know, we are only at the beginning of realizing American Eagle is full of potential.
Next customer facing priorities delivered in the first quarter fueled by our leading on the capabilities digital growth was terrific as momentum continues.
Also saw an improvement in our store business as consumers are starting to get out more on.
The loyalty relaunch is a homerun and position of stronger customer experience positive margin contribution and higher rois.
The supply chains delivered great results, even in the face of logistics headwinds will.
Deliveries were on time, and we were able to successfully chase into top performing items. The multiyear investment we've made in these areas continue to pay off.
Our fifth pillar to strengthen ROI discipline is clearly evident in our results per.
First quarter growth and our profitability is a testament to the incredible collaboration across teams.
<unk> taken our eye off the ball every day focused on ensuring strong financial management.
Top priority.
And lastly, ESG initiatives I'll highlight our environmental goals.
Continue to make great progress.
Do see waters utilizing more of a sustainable raw materials, and reducing energy to ultimately achieve carbon neutrality in our own facilities by 2030, we.
We know of sustainability is important to our customer.
And it's important to us too.
Burning on our on our could limit the social responsibility and I N. D. This month, we are awarded our first 15 real change scholarships for social Justice.
We are excited to support educational pursuits of our amazing associates, who were actively driving anti racism equality and social.
Before I turn it the Gen clearly 'twenty 'twenty, 1 it's off to a great start.
So proud of the excellent execution across all areas of the company.
The past several months truly validates my belief.
We have more opportunity than at any time in the past we.
We have 2 of the best brands in the industry with significant momentum and we have the right teams the leadership in place to achieve our goals.
The macro environment is favorable with pent up demand and new trends that play to our extreme.
At this pace, we expect to achieve our 2023 goal of $550 million of operating income way ahead of schedule.
With that I'll turn the call over to Jay.
Thanks, Jay and good afternoon, I hope everyone is doing well.
The least we've had an incredible start to the year across both Aerie and American Eagle.
There's clearly strong demand and momentum for our brand.
Our strategy to expand into new categories strength in product and marketing and fuel our brand platform are having a meaningful impact in our business.
It's truly gratifying to see strong sales and customer growth and a very high level of profit flow through.
Let me begin with Aerie I'm thrilled by the incredible excitement and energy for Aerie and our merchandise collection.
We continue to set records across the brand.
Building on the momentum throughout last year, the first quarter accelerated sales.
Sales rose an incredible 89% from 2019.
The consistency we are experiencing is truly amazing this was the 26th consecutive quarter of double digit growth.
As Arie Dot com becomes the go to destination for our customers the online business more than doubled hosting of growth of 158 per cent.
Store revenue increased 36 per cent with about 1 third from new store openings.
Ares active customer file expanded approximately 40 per cent as we entered new markets and we increased engagement on social channel, including Tictoc, where we saw tremendous response.
With new customers attracted to our brand and demand for our merchandise accelerating brand equity scores show growing awareness.
Sales metrics are strong across the board and notably our of you ours were up 50% high demand is driving greater pricing power of significant reduction in promotions contributed to an over 700 per cent increase in operating profit and of 23.5 per cent operating margin.
Across categories, we saw broad based strength with all areas rising in the double digits.
Intimates with terrific as well the swimwear with product innovation and newness are fueling demand.
Aerie signature legging business is exceptional and continues to expand with the success of our new offline by Aerie Activewear brand related categories, such as fleece tanks and sports Bras are also tracking very well.
Geographic expansion is of major priority and the opportunity for Aerie, we opened 6 new stores in the quarter, including a new offline by Aerie store, bringing a running total of offline opening to 5 stores.
We are very pleased with the early result, as Mike will review, we plan to continue our market expansion strategy.
Shifting gears now to American Eagle as I said at our Investor Day in January AE has a wonderful heritage defined by individuality purpose and heart Michael.
My goal has been the hardest 8 years of iconic image and update it for today's youth.
Harmonizing the old with the new we want to leverage our dominance in jeans and focus on more outbidding.
We're also optimizing our inventory for better margins.
I'm so excited with the progress we've made in such a short period of time, we've achieved the best margin in many years and customer demand is strengthening across all categories.
This quarter, we saw a 39% increase in operating profit with operating margins rising to 28 per cent.
Our focus on inventory optimization and profit improvement drove merchandise margin expansion.
We made better decisions around promotional activity and drove greater full price selling.
We are also pleased with the improvement in sales led by a 20 per cent increase and the digital business.
Customer engagement was up 2% with new digital acquisition up 17%.
Demand across our jeans and bottoms business remains very strong.
We continue to solidify our position as the number 1 brand within our demo and the number 1 women's brand across all ages.
With the new denim cycle underway, we're innovating and investing to maintain our leadership position and to offer the absolute best of our customers as the.
Silhouettes transition I'm excited for what's in the pipeline.
In the first quarter I'm pleased to report that we had our best quarter ever in fleece and graphic.
We plan to lean into this momentum in the back half of the year as bottoms of all we have the opportunity to delight, our customers with new styles across tops and greater outfitting.
Just 6 months into rewriting our strategy. The success, we've seen reinforces my excitement for our longer term opportunity the.
The team is energized and I can't wait to share what's in store for AE in the coming quarters.
Lastly, I can't say enough about the great work our teams continued to deliver.
The dedication and drive of the Aerie team is simply amazing of them. They strive for greatness quarter after quarter, it's been terrific to work with the 18th as well over the past several months, we have extraordinary talent and I look forward to driving our vision together, thanks, and now I'll turn the call over to Michael.
Thanks, Jay and good afternoon, everyone I'm really proud of how quickly on enthusiastically our teams embraced our real power of real growth value creation plan. The results out of the gate in 2020, 1 of our tremendous and they affirm that we are positioning our operations in the right way to few of our next chapter of growth.
At the heart of our operating strategy is the truly customer centric focus the investments we've made in our systems our data analytics.
On the channel and supply chain are yielding results.
I firmly believe that the strength of these capabilities and our ongoing investment our unique competitive advantage.
Today, I'm going to talk about 3 important areas of our business, our selling channel or customer focus and our supply chain transformation.
Let me start with digital which continues to post remarkable results.
Our revenue rose, 57% from 2019, producing incremental revenue of $150 million in the first quarter.
Online traffic and transaction transactions increased well into the double digits.
We achieved strong of you ours and significantly higher margin.
Further fueling an already highly profitable channel did.
Digital penetration increased to 40% of total revenue up from 30% in 2019.
As customers continue to embrace online shopping we are delivering an ever improving the experience.
For example, we recently introduced the new tab structure to provide greater ease of shopping across brand, while enabling more immersive brand experiences. We also introduce more personalization and enhanced curbside and in store pickup features which yielded great results.
We improved our mobile experience and redesigned our app, resulting in 70% increase in revenue from total mobile.
George has improved in the first quarter. Despite continued COVID-19 related traffic pressure.
Lead optimization work is underway and we are pleased with the initial transfer rates from recent store closures, which are running well ahead of our 40% goal.
Proactive customer engagement has been a driving factor on retaining customers transitioning them to nearby stores or online.
Our customer base is extremely healthy and growing nearly 1 million new customers have been added since 2019. The average spend per customer is up in the double digits with a greater number of customers shopping across both brand.
Speaks to the quality of our engagement our product our marketing and technology enhancements.
The reason why on some of our loyalty program last summer, it's been highly successful not only in attracting new customers, but fueling more frequent engagement more purchases and an improvement to margins.
Across the board our operational teams delivered exceptional results this quarter as I've discussed before we are highly focused on supply chain transformation aimed at improving inventory productivity.
Liver and the efficiencies and better and faster customer experience. This work is yielding results.
For example, we reduced SKU counts across the assortment to focus on the most productive styles, which resulted in faster turn and a meaningful increase in product margins in the first quarter, our regional fulfillment nodes of resulting in better placed the inventory, creating efficiencies and enabling faster service.
The stores and the customers.
In the first quarter, we leveraged the ecommerce delivery expense had fewer shipments per order and delivered to customers, 1 and a half day faster than in the first quarter of 2019.
Our supply chain team anticipated and successfully managed through shipping delays with very minimal disruption to our business we.
We also successfully executed chase strategy to replenish high demand items and supported the outperformance of aerie offline swimwear and a variety of fashion choices. This really speaks to the strength of our team our capabilities and our vendor partnerships.
Now as I look ahead, we're staying in front of ongoing supply chain challenges. We've continued to see favorability in our product costs for the remainder of the year.
In light of our strength in the operations focus on driving higher margin inventory optimization as well as our well positioned and growing brand I'm very confident that we're positioning the ear for continued success.
And with that I'm going to pass the call over to Mike.
Thanks, Michael and good afternoon, everyone.
I'll start by saying we are obviously extremely pleased with the first quarter.
During which we had a number of all time highs of milestones.
The results were well ahead of our expectations across the board.
Our strategies are clearly working and we're making great progress on our real power real growth plan.
This performance reflects a few major factors our brand is strong and our merchandise and demand feeling very healthy sales in kpis.
Our inventory optimization initiatives are working resulting in lower promotions.
Growth in our merchandise margin.
Both of our selling channels are delivering positive results.
And our investments in our supply chain capabilities are effectively supporting our growth.
These factors plus a favorable environment led to record first quarter performance revenue of over 1 billion and operating income of 133 million marked all time highs for the company the.
Demand for Aerie continues at a rapid pace driving significantly higher sales margins and profitability.
Eagle saw slight topline growth and experienced 1 of the brand's highest merchandise margin rates on record with more runway ahead.
As Judy mentioned I will review first quarter of 2021 against the same period in 2019.
Consolidated first quarter net revenue increased 17% across brands and channel sales metrics were exceptionally strong with our average unit retail up over 20% fueling of healthy transaction value.
Conversion rates across channels were also favorable.
Digital revenue rose, 57% with Aerie up 158% and AE up 20% the <unk>.
<unk> growth reflects the benefits of our multi year investments to capitalize on the customer migration to digital and omni channel E Commerce.
Online sales for the quarter represented approximately 40% of our total mix increasing significantly from 30% in the first quarter of 2019.
Store revenue was flat a nice improvement from the fourth quarter addition.
Additionally, U S stores posted positive revenue in the quarter with our stores in Canada affected more by lower traffic and store closures related to COVID-19.
At the brand level AE revenue increased slightly to $728 million strong demand lower promotions, along with inventory optimization initiatives led to a record merchandise margin.
He's operating profit jumped 39% of $151 million and the operating margin expanded 570 basis points to 28%.
These results are a clear proof point of the margin opportunity for AE, which we reviewed back in January.
While the quarter showed great progress the work continues.
<unk> reviewed the progress on the product side, and we still have opportunities to maximize inventory productivity.
Are you had another standout quarter with growth accelerating revenue increased 89% the $297 million.
Operating income of 70 million of rising over 700%.
The operating margin expanded to 23.5 per cent from 5.3% in 2019.
As of highlighted quite a few times now area of that an inflection point in its growth trajectory.
We will continue to realize significant flow through of incremental sales to the bottom line.
Total consolidated gross profit dollars were up $111 million or <unk> 34 per cent compared to the first quarter of 2019, and gross margin expanded 550 basis points to 42, 2%.
Merchandise margin expanded significantly reflecting continued promotional discipline and benefits from our inventory optimization initiatives.
Our product Assortments were well received which enabled higher full price selling.
Rent dollars were lower and leveraged significantly as the result of negotiated savings store closures and benefits from impairments.
Offsetting this we saw higher delivery distribution and warehousing costs as well as higher incentive compensation.
SG&A leveraged 40 basis points as the rate of sales the dollar increase of $34 million from first quarter of 2019 was due to compensation in line with our performance based incentive program, an increase in corporate salaries and higher variable selling expenses, partly offset by lower travel expense.
Operating income of $133 million increased 170% compared to $49 million and adjusted operating income in the first quarter 2019.
The operating margin of 12, 9% expanded 730 basis points, marking of 14 year high for the company.
Corporate unallocated expense increased 29% to $88 million, primarily due to incentive compensation.
As a result of historically high profit delivered this quarter incentive accruals are higher than normal and up against the minimum accrual and the 2019.
Adjusted EPS was <unk> 48 per share in the quarter, marking a record first quarter outcome for us.
Our diluted share count was 207 million and included 34 million shares of unrealized dilution associated with our convertible notes.
Ending inventory was up 2% compared to the end of the first quarter of fiscal 2019 America.
American Eagle inventory was down 15% due to continued inventory optimization initiatives and a significantly reduced clearance level.
Areas of inventory increased approximately 50% versus 2019 supporting the strong sales growth new stores and product expansion, including offline by area.
Our cross brand inventories well positioned and below current demand levels.
As Michael said, we're comfortable with our ability to receive goods through our supply chain and have successfully taped into strong items.
I'm very pleased with our liquidity and the health of our balance sheet, we ended the quarter with $792 million in cash and short term investments.
Even excluding proceeds from the convertible bond issuance, our liquid cash balances up $36 million versus 2019.
Capital expenditures totaled $37 million in the quarter.
For 2021, we continue to expect capital expenditures of $250 million to $275 million in line with the average annual target we shared at our Investor meeting.
Spect us to be back half loaded given the timing of area on offline new store openings.
Regarding our store fleet, we are pleased with the transfer rates of recently closed locations and continue to expect incremental closures this year.
We've had productive negotiations with landlords have continued the secured lower rents and build flexibility into the portfolio.
The vast majority of our 2020 renewals of our short term.
The thing at almost 450 leases coming to term in 2021.
This year, we plan to open approximately 60, aerie stores and over 30 offline by Aerie stores, which will be a mix of standalone and aerie side by side locations.
Now as we look ahead, we are encouraged by our continued trend the early in the second quarter. Both brands continue on the healthy pace.
There is still uncertainty ahead, but as we reflect on our 2023 targets provided back in January of $5.5 billion in revenue of 550 million of operating profit. We believe we are on pace to achieve the profitable this year.
Obviously, well ahead of expectations.
We're excited about this prospect and what it could imply for our future profitability as we continue to implement and execute on our long term growth strategy.
As a reminder, our reported second quarter 2019 results included a $40 million benefits of revenue and $38 million benefit to operating profit from the termination of our licensing partnership where the third party operator in Japan.
We're extremely pleased with the speed and success with which we're putting a real power of real growth plan of action.
As I said back in January I believe we're headed into the most exciting period in our history, our brand is stronger than ever our business model of sound and our first quarter results Bear Testament to the quality of our strategy and the strength of our execution.
With that we'll open it up for questions.
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Our first question comes from Matthew Boss with Jpmorgan. Please proceed with your question.
Great Thanks, and congrats on the momentum.
So maybe 2 maybe.
And maybe the kickoff Jay I guess, how best to characterize the magnitude of business momentum acceleration that youre seeing in the second quarter relative to the 17% growth in the first.
Then I think larger picture.
I don't know I'm, just curious your view of how sustainable in your opinion of this demand recovery for overall apparel and just any thoughts then on the potential for of denim led fashion cycle on top as we think forward.
Okay, Okay first of all.
Everything is still rolling as strong as it did in the first quarter.
So part of the month of May we're very pleased.
Look I'm very optimistic.
I think our best days.
Are ahead of us.
We see great potential I see great potential in American Eagle by itself.
Areas of on fire.
Goal.
It was in 'twenty.
2023 would be of $2 billion of Aerie company.
And I think we'll be there within the next 12 months.
It's very strong offline starting a great. We think offline has the potential like the bid.
To be like another area. So we're very optimistic.
Thank God that we think is 1 of the right way.
We are.
It's not just 1 area of the business.
It's not just merchandise stripes of business you have to have strong logistics with it you have to have strong sourcing.
Every area of strong right now.
We're gathering more and.
More customers on loyalty programs getting bigger and the.
We're very excited I mean, this is probably the greatest side of this company's history.
Wow.
And then just maybe a follow up on the accelerated operating margin target commentary to be clear.
And as we think about being ahead of the schedule.
Just kind of making sure as you talk about being ahead of schedule, you're also not citing the target as the ceiling. So maybe what do you see as high on the sky or any structural impediment as we look back 2012 was 14% operating margin.
Just kind of maybe any thoughts on where could use the operating margins for this company over time.
Thanks, Matt It's Mike.
Look I think we just gave guidance that we think we'll hit the 500 and we will hit the $550 million. This year that we put out just 4 months ago before the end of 2023. So we couldnt be more excited about that and then what that would mean in terms of the probably rerolling plans and talking to you at the end of this year about.
With the new new targets for 2023 should be.
And within that guidance, we're not talking about the revenue line of hitting the $5.5 billion for a reason, it's not completely out of the realm of possibility, but I think the things that really have to kick in the back half of the year to hit that number. So we are basically saying, we will be of 10% or double digit company. This year.
There's a good chance that that could be we just hit almost 13% in the first quarter.
The first and third quarters are a little higher.
Operating margin because of the second and fourth quarters are sort of inventory and the season right down periods, but not out of the realm of possibility, we could actually of double digits every quarter of this year I think so we're basically saying that this year double digit that 2023 go also met with the $550 million target.
And I guess, the other thing I will say and I don't know if anyone else is doing the same math, we're doing here on <unk> flow through but.
If you go back of January we talked about the aerie target for 2023 implied about a 20% flow through of very revenue because of the bottom line I think you and others asked if that was conservative and do you think it could be higher we just generated over 40% flow through in the first quarter and I'm not saying that's going to happen every quarter. That's something we should expect the happen every quarter, but.
The flow through of Aerie, and the impact to our operating margin.
Basically out of me to answer your question directly I'm not really sure how high is high.
So I think those will be things will address later in the year of and come back around with targets, but.
We're going to be in the double digits. This year and I think just it just means that was we rolled 2023, 10% going to be way too low.
We'll see what we'll see what double digit means and we'll talk about that later.
Alright, great best of luck.
Thank you.
As a reminder, please limit to 1 question and 1 follow up question. Our next question is from Jay sole with UBS. Please proceed with your question.
Great. Thank you so much I guess, if you could just elaborate a little bit and take us through some of the categories at Aerie maybe.
Maybe if you the intimate apparel and then some of the other swim is more seasonal stuff tell us all of those did that would be super helpful. Thank you.
Yes, Hi, Jay.
Look I'm sitting here looking at this incredible spreadsheet.
And looking at the numbers and I have to proudly say that every category in aerie delivered high double digit comps if not triple digit comps.
We're just seeing such great acceleration in this brand I mean think about it we picked up $150 million.
Essentially over the past you know looking at 2 L y.
Just this incredible momentum and.
You know everything is green I love when I see Green right. We're just you know.
It's Inc. It.
It's incredible and this team is just working so diligently I wasn't kidding when I said in my script.
That we continue to drive harder mm fab.
Faster and smarter and that's what we can do to stay on our lean and look ahead of them I do want to hit on swim though.
Who would of thought I still don't think we're fully ready for spring break and I have faith that next year, we're gonna even of a better spring break because people will be vaccinated and we sold spirit of swim like it was our best swimming forever the.
<unk> were the highest ever in fact in all of our categories margins were the highest ever still outpacing our inventories.
In sales and swim just was exceptional the team really delivered there and I'm proud to say 60 per cent of that line of sustainable so.
So we will continue to grow that business.
And the greener hue and just.
It's incredible what I'm seeing and don't forget about offline.
That business you know, we only have a few stores out there, but the momentum that we're seeing.
On.
Again, we're in the triple digits zone here and there's so much more work to do it's the immature.
Immature brand and we just the opportunity out of us.
Got it if I could just ask 1 more most of you gave us a lot of great color on the <unk>.
The year in terms of getting to your goals ahead of schedule sort of.
The color you can give us on second quarter.
Gross margin SG&A, just to just to round out the guidance a little bit more to give people a feel for kind of what youre seeing in the near term.
Sure I think let's start with SG&A first I think the growth in SG&A will be similar.
We're about mid teens in Q1, obviously sales trajectory variable expenses.
Incentive compensation will probably be part of the story again, so it would be similar from an SG&A growth perspective in the second quarter on gross margin in the 42.
Plus that we per cent per cent that we just hit in the first quarter I think the improvement over 19 could be similar but.
That would imply like a 39% plus something more in that range again second quarter being the end of season come spring inventory write down period for US, we'll see how it progresses here into the quarter. The rest of the quarter July is the big month for us, but similar gross margin improvement, but the 42%.
We're not expecting to hit that probably something more in the high <unk>.
Got it okay. Thank you so much and I think the flow through to operating margin. Jay then when you think about.
I think there is SG&A leverage implied there significant gross margin improvement I think the operating rate commentary I. Just gave earlier, we have our sights on double digit again Phil.
Understood. Thank you so much.
Thank you. Our next question comes from Adrienne <unk> with Barclays. Please proceed with your question.
Good afternoon, I have to add my congratulations.
Can the stores both of those concepts of great.
So John I actually wanted to talk to you about this of talked about now the silhouette shift going from big over little to little over Big we're seeing a lot of it.
We knew that was happening right in 17, 18, 19, but it seems like it's really coming into the mass adoption phase. How strong are you seeing that trend emerge now and what percent of the debt I'm offering is currently in kind of wider leg of non skinny bottoms.
Thanks.
Hi, Adrian how are you.
I feel I'm just.
Just incredibly excited about the denim opportunity back in September we are seeing the shift are wider.
The wider looser denim fits a more fashion accelerating I'd like to say he said my timing was of the essence because in September we immediately we immediately shifted into the silhouette. We've seen these bodies in both mens and womens and we can't forget about men's there they're active swim is doing great.
But mostly predominantly women's we're really seeing the shift again.
We were able to react. This team is just an amazing amazing test and scale of strategy in denim.
We just the diligence there and our ability to respond and react to this trend is like no other and we've been capturing at the denim trend.
Certainly exceeded expectations in Q1, because of this and we're going to continue to drive that business. As we look ahead of them. We've we've completely shifted our mix, we feel really great about it everything were seeing on paper.
<unk> is telling us that back to school should be great and there'll still be some tailwind there with the new incentives for customers spend. So we're looking forward the back to school look our mix of I'm not going to share that secret I can't share of that.
But I will tell you that it's definitely penetrating higher than we've seen in years and we're pretty excited about it Adrian so and think about the opportunity in out of outfitting now too.
And we're doing things that we've never done before of testing the outfit testing what goes back to the denim we're fitting with the tops. We're doing all of the things that are right now and so that she can go out looking perfect and that's the work that's underway right now and and I can tell you I think that's only going to continue I'm sitting in the office right now with an incredibly excited America.
And Eagle team I.
<unk> reviewed spring, our men's and women's Assortments.
And.
Boy, we've got some great things in store, so it's up to us to continue to to learn remain humble and and go for it when the Timing's right.
Excellent then Mike really quickly on just on inventory.
Just a clarification of the down 15% was what period of time and it sounds like you're very comfortable with supply.
You know the supply going into the back half of the year, you've managed through the supply chain disruptions quite nicely in the first half of what gives you the confidence that you'll have visibility and access to all of the inventory that you need from the chase perspective, instead of just weighted.
Better.
Yes, Thanks, if I can hit the specifics on the inventory at the end of the quarter, Michael can take the second part, but inventory was down 15, and the American Eagle brand at the end of the quarter then area was up 50 with.
With the result, being plus 6 in total.
So I think thats, the net fields, but that's versus 2019, yet so thats. The if that's your question you are asking everything we're talking about here is against 19.2020 on a whole lot of relevant compares to talk about anything so AE brand down 15 against 9.2019.
On the flat revenue results are inventory up 50 against 2019 on the plus 89% revenue Yep.
Clean food.
Yes.
Adrian I would just say on the on the inbound side.
Like I've said before our team our team is reacting very quickly very aggressively.
Worked with our factories and diversified our carriers.
So while we do have longer inbound transit times, we have had fairly predictable inbound transit times.
We see a very clean flow of product.
Coming in for summer and back to school.
And I expect the way we're operating the way, we are booking and with the agility that the teams executing with.
We're not anticipating delays to get.
To be an issue for us at all in fact, the ports that have more or less clean cleared up.
And the flow of goods now is better than it's been all year.
Great to hear the best of luck.
Thank you.
Thank you. Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Hi, good afternoon, and congratulations on the nice progress 1 of the things that you had been talking about is S. S. SKU rationalization, where are you in the SKU rationalization and where do you see that developing I think you had once mentioned net around 95 per cent of revenues at AE comes from 40% of the.
Skews, how do you see that transitioning this year and the progress there and then any further update on the logistical improvements the supply chain and you're getting the inventory that you need when ordering for the upcoming back to school on holiday. Thank you.
Hey, Dana Thanks for the question, it's Michael So I'll take that first of all on SKU SKU rationalization of the great question.
If you look at if you look at the first half of the year.
What our team has really done brilliantly is reduce the number of customer choices, we have in the business.
If you look at what's happened within the inventory mix with hidden is that we reduced customer choices about 25%, but yet bought the choices that we did buy 25% deeper.
Okay, and what that means is we cut we cut out of hugely unproductive tail of.
Of choices that had lower markups lower maintained margin and funneled into the items that Jen and the team are most passionate about that we had the best costing on debt.
We knew we can maintain good in stock levels on and that's part of what fueled our results in the first half and.
We see a ton more opportunity to do this in the back half and to tie it into your question about logistics, it's really driven by the confidence we have in the new logistics capabilities that we built so I've talked before about the fact that.
During 2020, we unveiled the new playbook for supply chain transformation we.
<unk> opened these distribution nodes in the fourth quarter, we implemented new systems, we brought in new talent.
And we've positioned inventory closer to the customer.
In doing that we actually pulled 3 weeks of supply out of stores.
And we're able to.
Maintaining socs, while really having a lot more flexibility with that inventory. So the inventory that we bought we made way more productive.
Replenish store as much faster, we shipped to customers about 2 days faster, we reduced our delivery costs because of our E. Commerce shipments were coming from local markets in some cases using regional carriers.
And in all cases, we reduce the number of shipments that we were sending.
For each order on a customer place. So I know, it's a lot I could go on all day about supply chain transformation, but the inventory rid of I guess the point is the inventory reduction and the changes we made to supply chain are structural and there there are capabilities that we deployed last year.
We expanded in the first quarter, we're going to be able to build on throughout the year.
Thank you.
Okay.
Thank you. Our next question is from Janine Stichter with Jefferies. Please proceed with your question Hi, Congratulations and thanks for taking my question wanted to ask specifically about the American Eagle brand I think in the outlook that you've given youre talking about Eagle revenues being flat with 2019, but now we're starting to see the brand grow again, so just curious.
How you think about maybe the upside potential for the the Eagle brand and then I would also love a little bit more color on the quarter to date trend I think you said that business has accelerated so just kind of curious if you said opine on what might be driving that it would seem that may results with the kind of the cleanest performance, we can get without any sort of impact from stimulus. So just some thoughts on.
What you think of shopping that acceleration. Thank you.
Sure.
No we set of planned back during our Investor day, and with the AE and I feel like it's a really solid plan I mean, and we're over delivering to this plan, which is really nice to see it was about bottom line growth and American Eagle and accelerating the Aerie brand now that said it doesn't mean that we're not going to try.
The continued to grow AE I love, what I'm seeing.
The first of all we've assembled the team much talent already existed here and I'd like to say now we have some new additions, including a new head of design with the team that we're going to continue to innovate and develop the best product out there in the marketplace.
I can tell you right now I said it on my last answer I I.
I am seeing spring 'twenty, 2 as I sit here in the office and this team over delivered to my expectations. So now it's all about measured a measured approach with our inventory taking those incredible learnings that we've had from the pandemic post pandemic as we head into 2002, how are we going to be smarter with our.
Inventory, we have such great learnings and then how are we going to grow these categories that we potentially underpenetrated in the smart and thoughtful way while we are.
Of course at anytime maintain our margins that we've just developed that are incredible in today's world. So that said as I look ahead.
You know, we do have some nice improvements even as we look into my shorts and some other categories have improved and we.
We you know we continue to work on our marketing strategies, and we're going to market better than ever we had 1 of the best marketing strategy is actually we've had.
And in fact, the best day.
The bank's campaign with American Eagle.
Much brand awareness.
Incredible social awareness to our brand I'd like to see what I'm seeing in retention.
The customer spend is through the roof here. Our AUR is up. So this is what we have to think about for the future and continue to deliver that product.
They want to see quality first always on and.
And continue to.
Look ahead in the future so I'm excited about what I see.
Okay.
I think I'll add to that Jeanine is just that Matt asked about targets and I talked about total company in aerie.
I think what you would take with Jen said in AE is targeting the updated too.
So that's something we'll be talking about again later this year.
Okay, great and thanks for the color.
Thank you. Our next question comes from Oliver Chen with Cowen <unk> Company. Please proceed with your question.
Hi, Thanks, you've made a lot of great progress on supply chain optimization, just would love your view on key catalyst there going forward and then at the AE brand would love to hear about the men's product and what innovations of HUD and where you would say it is relative to where you want to be a tops and bottoms.
<unk>.
Alright.
Hey, Thanks Oliver.
As far as supply chain optimization like I said I really believe although we are of great start and we're delivering results. We're really just scratching the surface on what the potential is.
So.
Making our inventory more productive improving service to our customers.
And reducing the cost of doing business.
Is something that Jay myself, our head of supply chain, we're extremely focused on.
And we think there's there's a lot more opportunity to expand the distribution presence improve the systems, we have and we're looking at some other pretty interesting capabilities that I can't talk about now, but perhaps on the next call.
Net debt, we think are going to add.
Both scale and ultimately cost savings to what we're delivering and supply chain. So.
There's a lot more opportunity I expect that we're going to see continued improvement throughout the year.
And the second the second part of the question was.
It's about the rebound.
Yes, yes tie all of or how are you.
Hum.
As I mentioned, we continue to.
Outpace [laughter].
The best Evers and genes are at their of its incredible Oliver we've seen such an incredible business of men's jeans as well as women.
So really proud of that momentum look our focus is on getting those outfits rate fleet.
<unk> certainly had an incredible quarter graphic tees are really hitting of resurgence and we've really focused on that for the go forward.
Deliveries and we keep on innovating there, we're really we're taking that business, Tim what I would say more of a 3 dimensional business.
Our teams have been really out performing incredibly well and we're focusing on new qualities. There for the future. So I guess my point here is we still have some opportunity here and we're going to we're going to certainly deliver and again piece of our inventory so that we can outpace.
Outpace the sales with the with the under pacing our inventories and that that's where we're going to continue to win them with just this incredible.
Our business model that we've developed so.
More to come here I think youre going to be really excited with what you see for back to school and I hope our customer loves it as much as we do.
Hey.
Oliver just to come back to that supply chain question, 1 more time, but 1 thing I wanted to mention that we haven't talked much about but I do think of the huge strategic strategic lever.
Our business is we're looking at returns and the opportunities around returns.
Actually the big strategic opportunity for the company. So obviously with digital sales increasing many retailers of dealing with increased returns.
Our challenge is how can we make that a great experience for the customer how can we refunded money quickly how can we get that inventory returned quickly and back into the spot where we're most of most likely to sell it our team on board the new partner to help us help us meet some of those challenges we implemented some new.
Technologies in the quarter and we're seeing that.
Both digital returns as a percent of sales go down as well as we're getting that inventory back into a position, where we can sell it much faster than ever in our history and I think as the business growth that's going to be an increasingly big opportunity for us.
Very helpful of Gen. Just the last question body positivity and authenticity of you've been a real leader there of.
What do you what do you think's next to stay innovative and whether what are your customers want as you continue to evolve the strong sense of community across the banners.
You know I think in both both brands and we have opportunity to continue to drive it that the that side of our platforms AE with individuality and aerie being aerie real I mean, when we think of the term real there's there's endless opportunities and Oliver we're really trying to stay ahead of the curve there because as you can see competition.
As you know following close behind and look we were their first so we owe it to our customers to continue to excite her in new ways from a marketing perspective. This last real campaign that we launched Oliver It was incredible 8 billion impressions from our customers from our community.
Coming into our ARY business and no surprise that our.
Customer acquisition was up 40%. So that's how we have to stay ahead of our competition right, we need to get new customers into our brand and the aerie on <unk>.
<unk> customers in the American Eagle is a huge strategy for us as we get these new customers into the aerie.
That's how we're accelerating the top line.
And as Jay mentioned, we're going to hit this $2 billion.
You know it.
Nothing else sales out there and the we can continue to deliver with what were doing earlier than said I think it's because we are attracting new customers, we're going into new markets, where we're turning your on with our platform the platform that we own and erring on.
And the platform that were certainly proud about but we certainly have new ideas in the store Oliver I can't share of them, but we're pretty excited about what we're about to see here.
Hey, Thanks, Jay and thanks, Michael.
Hey, Jay if I can add 1 thing.
It was the only 3 months ago, we had of celebration and January celebrating our $1 billion Mark in Aerie.
Here, we're talking about the next 12 months, the celebrating $2 billion Mark the major accomplishment and the new brand that we launched in the pandemic.
I, just you know who would've thought.
It just it speaks volume that how this team is so dedicated to our platform.
On to a business that certainly is.
Is like no other and I think there's just so much in store and let me just say what I am seeing an American eagle on starting to see that passion the heritage come back to that brand and that just drive to deliver newness uniqueness of quality Cui.
Polity over quantity the quality of the sales the quality of our product.
I think I think that's where we're going to win all of her.
Okay.
Thank you. Our next question comes from Paul The was with Citi. Please proceed with your question.
Hey, Thanks, guys.
How are you thinking about gaining share in denim.
Take advantage of the trend.
And how do you think about share versus targeting margin improvement both the near term, but also on the second half on beyond and then I think you said the.
<unk> was up 50% at Aerie, how does that breakdown between lower markdowns versus mix, and just where merch margins at aerie now versus Eagle, sorry, if I missed that.
I don't know if I caught all your questions.
First of all of it I mean in both AE and Aerie, our promotional cadence was.
Non existent I would like to say, we took the biggest risks ever and a time period, where competition will be fierce as you can see by the numbers out there there.
There are some tailwind for all of the brands out there and that's the great thing for the retail sector I can only say that we stand apart, though I'd like to say with the numbers that we just delivered.
It is about the mix, it's about being smart about the way we mix the business, but the AUR is up 50% certainly are impressive and I'd like to add debt and AE or <unk> were up 23%.
As I think about denim and the future of denim look it's our job to maintain our market share in denim.
We talk about this daily.
We want to be the go to denim destination not only in this country, but in the world lots of opportunity out there and as we deliver new fits and new categories and denim.
They trust US right they come to us for our fits for our quality for our price value equation. So you know, we're not going to walk away from the market share overnight, it's something that we continue to focus on as I mentioned.
Women's wear of the number 1 in all ages and the mens we said number 1 in our age demo so opportunity there that's something that I am excited about them as we deliver some new washes that might be a little bit more long term for an older customer I think we'll see new customer acquisitions, there as well so.
Pretty excited about that and again talking back to just the outfitting opportunity with this denim business on the rise and we're seeing this acceleration.
Certainly there is opportunity in tops in both genders, so I hope that everyone's going to be excited about what they see about the with these upcoming deliveries.
And Paul the those things are not mutually exclusive to us. So we're very confident that we can grow market share in genes as well as grow margin in jeans.
We believe we prove that in Q1 and look it's a great setup for the back half of the year knowing.
How strong the denim trend is that the.
We're the number 1 denim retailer in America.
We're gonna Jan has the beautiful and the teams created a beautiful assortment, we're going to we're going to sell a lot of games and we're going to get paid for the product. So.
We feel like it's the perfect setup for us to both gain share.
And grow margin.
And Paul.
I don't have in front of me the exact mix between or the exact.
Contribution of EUR from mix and AUR the AUR.
And both brands when you look at 20% AE and 50% in the area from on a dollar basis the similar increases.
So both brands contributing significantly to total company merch margin expansion and gross margin expansion.
I'll say that the penetration of offline to aerie.
The nice add to AUR and margin mix. So as online continues to penetrate higher with the contingency benefits there and I can say that actually the merch margins are similar area in the first quarter was actually a little bit higher merch margin rate the Navy.
Thanks, guys I appreciate it thank.
Thank you Alex we can take 1 more call Hello. Thank you.
Final question is from Janet Kloppenburg with Jay JK Research Associates. Please proceed with your question.
Hi, everybody and congrats on the great quarter.
I wanted to ask.
About the cost structure of the lower wins, how much more opportunity is now on the favorable input cost items are seeing some pressure. So I'm just wondering.
To what extent those advantages.
The fifth on the remains of the here and.
And on churn.
Was wondering if you could just give us a glimpse of that.
Offline in house warming and whether you say honestly on the wellness, whether you're thinking Inc.
As the big distinction between performance within the store as the purchaser it as a standalone. Thanks, so much.
Alright, let's start with the rent piece of it the rent rent dollars were down in the quarter and the first quarter, we're expecting which meant significant leverage in our buying and occupancy costs and then a big piece of the expansion of gross margin was rents were expecting the same thing to continue in the second quarter and quite frankly, all year with rent dollars per the year being the.
Lower than 2019, I think there's still room reported more to be more to be had we definitely as we as we've talked about evaluating the closures from this past year, we will be closing more stores. So as we look at this in the future of we do believe rent dollars will continue to be.
Tailwind for us and rent leverage.
Continuous contribution to gross margin opportunity.
And Janet on the.
Markup in the the input costs, we do we do see higher input costs, but.
Like I said, we of markup benefit in the first quarter.
And we're expecting market benefit of all year, our sourcing teams did a great job negotiating we platform fabrics and yarns very aggressively and very early.
The assortment strategies like I was talking about we just again, we cut off the tail of inventory that was a lot less productive had lower markups had lower maintained margins.
And we're leaning into the stuff that has higher markups in March so that's working in our on our in our favor.
And finally area of just the growth of Aerie provides natural markup benefit for the business. So the more we get economies of scale on that business.
The more we're going to see the markup markup benefit for the company. So I'm expecting a benefit that's able to overcome the raw material costs and the higher inbound freight costs all year.
And Janice.
Yes, Hi, Janice how are you.
Many of them now.
I'm doing well Janet.
So let me just say that you know we tested.
Various store formats, and all of them exceeded our performance on our expectations. We've been in the same malls Azeri offline in aerie it only allowed us to actually.
Build the bigger and more robust assortment in aerie and really allowed us to leverage some of our tried and true business is an area I E Bras Undies fleece.
So we could actually add dimension, there and then with offline in the same mall you know we saw it.
Same Thompson Aerie as we did it and on the average base and then again like I said offline just exceeding our expectations. So we're.
We're opening 60 stores this year combined of flying roughly 30, some of those will be side by side Janet So.
Obviously, we like what we're seeing and the.
Of the concert you know incredible and we've had some viral activity I'm not sure. If you saw that tick tock.
It was amazing and we can't keep that legging in stock and we built that franchise business into other categories as well.
And it's just been a breakaway for aerie the.
This quarter, and we're certainly going to accelerate that into the next but our leggings are like no other honestly the quality price value equation.
And think about just the market cap opportunity in Activewear I think we you know we launched it at the right time, we are ready to go and now we're going to continue to accelerate.
Thank you ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Jay Schottenstein for closing remarks, okay. Thank you operator, operator, I'd like to reiterate we're really thrilled with the momentum we're seeing across our business and as Mike said, we're on track the cheap.
550 million on operating profit goal for the total company. This year ahead of expectations coming off of a record first quarter demand for our brands remains very healthy with business accelerating quarter day.
In the second quarter on a real power real growth value creation plan to improve profitability at AE.
A few areas of expansion is driving results and we know we have the right strategy and as you can hear the path.
And the people in place to win.
Thank you for your support and your investment in AE O I hope everyone stays healthy and look forward to updating you on the strength of our business next quarter. Thank you.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation have a great day.
Yeah.