Q2 2021 American Eagle Outfitters Inc Earnings Call

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Greetings and welcome to the American Eagle Outfitters second quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

I'd like to ask a question you May press star one on your telephone keypad, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Ms. Judy Meehan. Thank you Ma'am. Please go ahead.

Good morning, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer, Jen Foyle, President Executive Creative director for AE, and Aerie, Michael Room, Powell, Chief operating Officer, and Mike Matthias Chief Financial Officer before we begin today's.

Carl 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.

So 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 adjusted basis.

A reconciliation of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at eight Oh Gosh, Inc. Dot com in the Investor Relations section.

Here you can also find the second quarter investor presentation.

As a note our second quarter fiscal 2021 results are primarily compared to second quarter fiscal 'twenty 'twenty with comparisons to the second quarter of fiscal 2019 included where applicable.

And now I'll turn the call over to Jay.

Thank you Judy and good morning, everyone I'm very proud to announce a record second quarter.

Fueled by strong customer demand for our products and brands financial results exceeded our expectations revenue increased 35% over last year on a comparable basis revenue increased 19% to 2019.

Sales of $1.2 billion in profits of $168 million.

In our history.

With our renewed focus entering this year, we are running the business better than ever across the board.

As I said in January we have the best talent in the industry and these results are a clear evidence of that so I'd like to start by thanking the entire <unk> family for this.

Significant accomplishment.

Shouldn't tallied and commitment are taken our brand and company to new Heights.

As I also said at our January Investor meeting, we are on offense emerging from 'twenty 'twenty with strength and focus our real power meal growth plan is our guiding light.

I'm very pleased that we were making swift progress on our pillars, putting us ahead of schedule on our financial targets today. The team will take you through the details of our performance, but I'd like to start with a few highlights.

It really just continues to deliver exceptional multi year growth.

Is it brand of scaling we are seeing significant profit flow through.

This quarter it wasn't one more proof point of the excitement behind this brand.

I couldn't be more optimistic about the potential ahead as we make our way to the next billion dollars in revenue.

American Eagle is simply proving to be a powerful brand we always knew it once its dominant market position combined with a fresh focus on inventory management.

Hold it in the best margin and profit for years.

Under Jim's leadership re energize product and marketing are yielding results and the timing couldn't be better.

The number one jeans brand, we are well positioned to capitalize on strong demand fueled by emerging trends.

Across channels stores and digital.

Firing on all cylinders and driving meaningful profitability.

Our multi year investment to improve our customer shopping experience and enhance our supply chain are delivering strong returns.

Are there any new customers and the relaunch of our loyalty program has been a success.

Las operations, we are creating efficiencies, increasing our speed and agility.

Change delivered great results, even in the face of headwinds, while we made great progress we are just hitting our stride.

Thank so much opportunity for us to generate incremental value moving forward.

Our focus on ROI is also evident in the second quarter, we drove incredible margin recovery and cash flow.

Our balance sheet is healthy and we're operating from position of financial strength I'm pleased that in Germany, you raised our quarterly cash dividend by 31%, reflecting our comprehensive strained.

Sustainability of future cash flow.

Everything we do at E O is done with purpose.

We learned our day to day business and keeping with our values to build a better world.

And we're making great progress on creating more sustainable profit.

This year, we have more than doubled the number of our most sustainable real good styles across all merchandise categories watery energy reduction and responsible sourcing remains top priorities.

I'm extremely pleased by recent recognition from that.

Anti Semitism Dot org, alright dedication to combat racism by creating an inclusive and diverse corporate culture.

So suddenly we strive for every day through innovative associate programs designed to build a collaborative environment.

This spring we have raised over $1.7 million.

And causes including bring changed her mind and it gets bedroom two organizations are making impact uplift youth and support mental health.

I am really proud of all the work we're doing to strengthen the long room within our company and our communities.

Tip top talent is the Keystone of our Great company.

Last month a year.

I am too fast company's best places to work for innovators and distinctions that recognizes our deep commitment to encouraging innovation across the organization.

As a pet it dammit continues our top priority is to keep our people safe.

Our leading health and safety measures remain in place across all facilities.

We have consistent communication support and education for our associates and strongly encourage vaccination.

Before I turn it to John I want to reiterate how pleased I am with our performance year to date and how excited I am for Watsco, we continue to execute well across all areas of the company.

Although the current operating environment is presenting challenges from the ongoing pandemic.

Fly changed disruption, there's a lot within our control.

Very pleased with current business trends, we continue to see strong demand for our brands.

Macro backdrop is favorable consumers are spending and new fashion trends or a positive way.

Our focus on leveraging the agility, we gained last year and the strength of our capabilities to liberate who our customers are posted a strong second half with all this in mind on confidence in our ability to achieve operating income of $600 million. This year.

With that I'll turn the call over to Jack.

Thank you Jay and good morning, Wow, what a great quarter.

And H E. R. Two of the biggest brands in the market and are delivering truly exceptional results.

We are making incredible progress towards the goals, we laid out in January in fact, well ahead of my expectations were.

We are attracting new customers and they are spending more than ever and I'm happy to see those trends carry into the third quarter.

Let me start with Aerie, our leading brand platform combined with product that continues to delight and excite our customers.

Delivering strong consistent performance Rev.

Revenue in the second quarter rose, 34% on top of 32% growth last year.

I'm proud to say this marked our 27th consecutive quarter of double digit growth.

Sales metrics were very healthy.

Demand led to significantly higher full price sales and we strategically remove promotions. We're also mixing into higher ticket with higher margin items.

I'm pleased to report broad based strength across all product categories, which were all up in the double digits.

Core intimates and apparel and swimwear saw strong demand.

We continued to gain meaningful market share and some of them there is areas, becoming a true destination in the category.

In May we launched our love the swim you're in ticked off campaign, highlighting all the ways to rock your Aerie swim.

The content was extremely well received driving incremental visits and strong conversion.

Aerie signature broiler and leggings are showing incredible growth and also very pleased by the success of our offline activewear brand, which continues to gain traction.

Year to date Aries customer file has expanded over 20%.

Existing customers are transacting more frequently and spending more.

On the marketing front, we continue to focus on giving our customers their own platform and new and innovative ways.

We just launched a real voices campaign amplifying the love of our brand and product through our customers' own stories.

The campaign has already generated a ton of Piper.

Generating close to 1 billion impressions in the first week, bringing the aerie real movement to more people than ever before.

Market expansion is progressing with 16, new stores across the U S and Mexico, and our first store in Hong Kong.

As Mike will review, we look forward to further growth as we better penetrate existing markets and expand into new ones.

The profit unlocked from Ares growth has been explosive I'm. So proud of what this team has accomplished momentum has continued into the fall season as customers embrace our amazing brands and Cozy Comfy collection.

I'm highly encouraged by our results and excited for upcoming season, we remain focused on driving consistent double digit growth and improving profit flow through.

Now on to American Eagle and.

I'm, absolutely thrilled with the progress we're making SEC.

Second quarter results clearly demonstrate the growth and value creation, we are looking to unlock sales.

Sales rose, 35% compared to 2020 and demand was positive versus 2019.

Brand and product updates along with a laser focus on inventory optimization and promotional discipline drove strong AUR growth and significant merchandise margin expansion.

Operating profit more than tripled and was up over 30% to 2019.

We are running the business with a clear agenda to true up brand profitability excite our customers and seek further growth.

While results to date have been tremendous we are still early on this journey.

Ae's position as deep denim destination could not be stronger our jeans collections continued to deliver great results across genders, we believe the current trends and shifts in silhouette will be a tremendous win for the AE business.

In the quarter, our women's business reached new highs led by ongoing strength in bottoms across both fashion and comfort silhouette.

Growth in the men's business was also strong.

Our focus on great outfitting with updated fits and fabrics are certainly resonating.

Together, new imagery and messaging AE remains the number one gene brand within our demographic and the number one women's brand across all ages it.

It is clear that our customers are choosing us and silhouettes transition with the new denim cycle.

He's new back to school campaign, featuring some of the biggest cultural influencers of the moment, including Chase Stokes and Madison Bailey of Netflix number one show outer banks and Ticktock creator Edison rate has already become the most organically viewed video in the history of our brand.

We also launched our first digital clothing line unfit mucci.

Has that generated a staggering 1 billion try on to date.

Looking ahead I am excited about our fall and holiday collections.

Our team had had a lot of fun, bringing this AE iconic heritage to light and I think our customers are really going to love what we're doing.

Yeah.

Earlier this year, we welcomed lids bring them or eight years, new head of design. She has hit the ground running the team is energized and I know, we are better positioned than ever to leverage our strong brand position.

Want to thank the team for springing into action and driving such strong progress in such a short period of time.

There is a renewed excitement around D and I think we are at the very beginning of a great new chapter.

Thanks also to the aerie team for being Rockstars quarter end quarter out we have a great slate of talent between these two teams and I look forward to sharing the results of their amazing work with you in the quarters to come.

And now I'll turn the call over to Michael.

Thanks, Jen and good morning, everyone. Our record second quarter results clearly demonstrate the power of our brands and products.

It was the strength and agility of our operations.

Thanks to our outstanding team of Associates and global partners, we were able to successfully navigate through a highly disrupted environment I can say with confidence that we're running our business better than ever investments, we've made to strengthen our operations technologies and overall capabilities are yielding material efficiencies and <unk>.

Contributed to our record profit performance importantly, I believe these benefits are sustainable and we're going to continue to build on them over time.

Beginning with our laser focus on the customer experience. This spring it was great to see customers returned to stores.

Willing at 73% increase in store revenue with strong selling across brands, we saw strength across formats as both our factory outlets and mainline stores.

Healthy growth.

Our stores team did a terrific job welcoming our customers back and fueling record high conversion.

Digital demand also remained very strong increasing 9% following a 48% increase last year.

This channel continues to expand to new heights in both revenue and profitability as we leverage our multi year investments.

Consolidated second quarter digital revenues are up approximately $150 million compared to 2019 with both brands seeing solid expansion.

Digital represented 35% of total revenue up from 25% pre pandemic longer term. We continue to believe that digital is going to represent 50% of ourselves we.

We are continually looking for new technologies to drive better engagement and connect customer shopping experiences across our channels.

As consumers reestablish their shopping rhythm post pandemic, our business model is going to remain flexible in meeting them wherever and however, they choose to shop.

For example, our mobile sales more than doubled in the quarter as we continue to enhance the customer experience.

We're thrilled to see very strong customer data, especially as we head into our key back to school season.

We have added over one 5 million new customers across brands. Since this time last year and over 2 million in 2019.

The relaunch of our loyalty program last summer has been extremely successful customers in the loyalty program are spending more they are staying longer and the average customer spend is up in the double digits. This speaks to the quality of our engagement our product our marketing and the technology enhancements, we've made and we.

Still see opportunity for continual improvement and we're planning to experiment with new and interesting ways to better engage with our customers and to build the loyalty program going forward.

As I discussed back in January transforming our supply chain as a major priority in the past six months have truly underscored the importance of strong partnerships as well as leading capabilities. We are continuing to prioritize investments in these areas.

During the second quarter, our product arrived without major delays and we were able to chase into high demand items from a logistics standpoint, our hub and spoke model with regional inventory positioning and regional fulfillment is working it's part of what's fueling efficiencies, allowing us to drive substantially greater sale.

The margin on far less inventory.

We are delivering product to customers faster and despite industry wide cost increases are delivery expenses leveraged as a percent of sales.

Needless to say I believe our supply chain platform truly has a competitive advantage. The investments we've made to date are paying off.

Global supply chains continue to be disrupted this is creating opportunities for us to become even faster more agile and more efficient.

On that note I'm excited to share that in the quarter, we acquired our tariffs.

Innovative logistics provider with this acquisition. We are also excited to welcome an experienced leadership team with deep expertise in logistics and a shared passion for rethinking the status quo.

We will run the air Terra independently as it supports <unk> business as well as provide services to other retailers.

On the product side, we feel good about our ability to maintain strong margins investments in our brands and product over the past several years are supporting our ability to successfully compete in higher ticket product.

As we focused on innovation quality and value, we have selectively raised prices with very little resistance from our customers.

In conjunction with strong inventory management, we have confidence in our ability to sustain high margins and offset inflationary pressures.

There's no doubt that the global supply chain remains high.

Hi, Lee disrupted port shutdowns and factory closures are leading to longer delivery times and higher transportation costs across our industry.

As Jay touched on we're very focused on the things that are within our control.

We're working closely with our partners and we're moving production wherever possible to minimize disruption.

Of course, we also will leverage the significant structural improvements we've made over the past several years and we believe that we're going to be well positioned during the second half of the year.

In closing I'm very pleased with our performance year to date, our results are outstanding and our teams are executing really well in all sorts of adversity.

I am confident that the changes we are making to our supply chain logistics and operations are also setting us up to succeed well into the future with that I'm going to turn the call over to Mike.

Thanks, Michael and good morning, everyone I am pleased to report another record quarter, bringing our year to date financial results to an all time high.

Our brands continue to demonstrate incredible momentum driving substantial profit to the bottom line.

As we navigate through macro shifts related to Covid. Our success has been fueled by the initiatives outlined in our real power real growth planned back in January.

Strong focus on our brands and product innovation inventory and gross margin optimization and real estate and supply chain initiatives are all having a positive effect on our growth and profitability.

Second quarter revenue $3.0 billion operating income of $168 million and adjusted EPS of <unk> 60, Smart second quarter Records for the company.

The operating margin of 14, 1% was our highest in 13 years. We all saw also saw a nice growth across the business compared to the pre pandemic 2019 period.

Consolidated second quarter net revenue increased 35% versus second quarter 2020, and on a comparable basis increased 19% to 2019.

The reported revenue increase of 15% included a $40 million benefit to revenue in 2019 from a change in our Japan license agreement.

Our cross brand sales metrics were favorable or average unit retail was up over 20% led by overall strong demand higher full price sales and fewer promotions.

This fueled a double digit increase in our average transaction value.

As customers returned to stores, we saw a material increase in traffic trends, which drove drove a 73% increase in store revenue versus last year.

Even with the meaningful shift digital demand increased 9% hurdling last year's very strong online demand growth of 48%.

Note the second quarter reported digital revenue declined 5% as we lapped elevated sales due to a timing shift in shipments from the first quarter into the second quarter last year.

Our digital platform combined with our strong store footprint as a competitive advantage and the investments we've made continue to pay off.

As Michael pointed out logistics are a key differentiator and give us the ability to more effectively manage our business, while generating meaningful efficiencies.

From a brand standpoint, aerie is multiyear growth trajectory remains strong with revenue rising 34% from second quarter, 2020, and almost 80% from second quarter 2019.

<unk> operating profit rose, 132% compared to second quarter, 2020, and operating margin expanded to 21%.

As I've consistently highlighted aerie is now at an inflection point in its growth story with strong sales performance translating into significant operating leverage that is exceeding our expectations.

Put some numbers around it second quarter operating profit of $71 million more than doubled to $30 million. We realized in 2020 and was over seven times the level of operating profit in the second quarter of 2019.

Moving to the American Eagle brand performance healthy demand low promotions and inventory optimization drove another strong result across both revenue and profitability.

We were pleased to see topline growth of 35% from 2020 and on a comparable basis, an increase of 5% from 2019.

A brand reported flat revenue versus 2019 included the 2019 benefit from the change in our Japan license agreement.

<unk> operating profit jumped 234% from second quarter 2020 with margins building to 23, 5% a proof point of the significant margin opportunity for AE, we reviewed back in January.

I'm proud of the transformation, we have driven and how we are managing the business today.

We have redefined what success means for the AE brand with clear direction and focus on consistent profit and cash generation.

This is driving improved sales trends as tighter inventory controls enable higher full price sales and greater emphasis on the best selling skus work.

Work here continues and we see additional opportunities.

Total consolidated gross profit dollars were up 89% compared to the second quarter of 2020 and gross margin came in at a very healthy 42, 1%.

Inventory optimization and refreshed product assortments are supporting promotional discipline and higher full price selling this.

This is driving healthy merchandise margin expansion.

Right and leveraged significantly as a result of negotiated savings store closures and benefits from impairments.

As Michael discussed earlier delivery also leveraged reflecting efficiencies enabled by our distribution and fulfillment nodes.

As a result of strong sales, we saw SG&A leveraged 70 basis points versus second quarter of 2020.

The dollar increase to $70 million was due primarily to the reopening of our stores.

We also saw increased advertising as well as incentive costs due to the strong profit growth.

Record operating income of $168 million reflected a 14, 1% operating margin our highest second quarter rates since 2008.

Adjusted EPS was <unk> 60 per share in the quarter and marked a record second quarter outcome for us.

Diluted share count was $209 million and included 36 million shares of unrealized dilution associated with our convertible notes.

Ending inventory was up 20% compared to a 21% decline last year.

<unk> inventory was up 10% and aerie was up 16% compared to second quarter 2020, as we as we positioned inventory below current demand levels as part of our ongoing efforts to optimize inventory buys.

As Michael mentioned, we feel confident in our ability to navigate ongoing supply chain challenges and secure product for our customers.

I'm very pleased with our liquidity and the health of our balance sheet, we ended the quarter with $824 million in cash and short term investments.

This compares to $899 million in second quarter, 2020, which included $200 million from our revolving credit facility.

We subsequently repaid in the third quarter of 2020.

Capital expenditures totaled 49 million in the quarter.

86 million year to date.

For 2021, we now expect capital expenditures to be at the low end of our previously communicated $250 million to $275 million guidance range, reflecting cost savings on our planned projects.

With regards to our real estate strategy as I mentioned last quarter with 450 leases either come to term.

<unk> action in some way this year, we have significant flexibility to manage our store fleet to support our revenue and profit agenda.

We're making steady progress towards our long term goal of right sizing of your store footprint.

For Aerie, we are focused on markets with the greatest opportunity and are on track with our store opening schedule.

Focused investments in our international business are also helping us gain traction in key markets, where we see compelling long term growth opportunity.

Mexico is a good example of this where our omni channel selling strategy of driving healthy growth and profitability in the market.

All in all I couldnt be more pleased with our performance year to date as we look ahead into the back half of the year supply chain disruption is creating some challenges and uncertainties.

We're putting our customers first and prioritizing product availability.

While there will be incremental transportation costs, we believe we can offset a significant portion of the <unk>.

One of our brands is healthy our inventory optimization is enabling promotional discipline and our supply chain transformation, creating cost efficiencies.

Based on our record first half results and the current strength in the business, we feel confident in our ability to achieve operating profit of $600 million this fiscal year.

This is well ahead of our financial targets that we presented back in January.

We continued to execute on our real power real growth value creation plan with speed and confidence are.

Results year to date are a clear proof point that we are focused on the right initiatives positioning us well to drive continued strong financial results and returns to shareholders.

With that I'll open it up for questions.

Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time.

<unk> total indicate your line is in the question queue.

Press Star two if he would like to remove your question from the queue.

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In the interest of time, we do ask that you. Please limit yourself to one question and one follow up.

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Last question is coming from Oliver Chen of Cowen. Please go ahead.

Hi, Thank you good morning revenue growth was really solid but it was below.

What elevated street expectations, what are your thoughts on inventory availability across both brands and where there are there pockets where you.

You may not have had enough and how are you thinking about the ability to chase between back to school and holiday depending on trends.

Another follow up on air Terra It sounds very innovative would love your rationale for four.

Purchasing that in terms of timing and how it may impact your financial algorithm longer term. Thank you.

Yes, Thanks, Oliver it's Mike I'll take the first part of that.

Your description of maybe somewhat elevated revenue and I think theres a couple of reasons for that one.

I know everyone's facing things on 2019, but theres a couple of points there.

Back to school shift of the July business and tax free events shifting out of July and August I think Thats us and others I think felt that in July our business definitely accelerated into May and June and in the back half of July.

I think you can attributed to a back to school shift.

From an inventory perspective, we are really happy with where we're positioned right now in the third quarter.

Pleased with what we saw in August with inventory being positioned well and we think we're in a good position for the rest of the quarter and the rest of the year.

I turn that piece of it over to Michael in terms of where we are for the rest of the season and the <unk> part of the question.

Right Hey, Oliver.

Clearly theres a lot of a lot of challenges in supply chain.

There is port slowdowns, we have some factories that are closed transportation less predictable our team.

Has done a tremendous job there I mean supply chain transformation has been a huge focus for us and we're very focused on controlling everything that we can and there's a lot that's within our control. So we're moving freight faster than ever we've added carriers. We've secured our capacity we've moved production out of closed.

<unk> wherever possible.

And we've diversified the ports were coming into and domestically, we've sped up our supply chain by almost a week and a half.

Versus how it was previously and versus how a lot of our competition is our goods are coming in they're going directly to markets and out to stores or to customers. So.

Our supply chain speed is better than ever.

<unk>.

As far as as far as chase, we really booked a lot of.

A lot of holiday product early based on the insights that we had.

From spring summer and the test that we did for holiday and we feel good about the assortment that's coming in so there is volatility, but we're managing through it.

We expect that we're going to get all the freight that we want.

We're going to we're going to have enough product to have a robust holiday season and.

We were still chasing product. So we chase product as late as last week, and we expect that we're going to get it for holidays. So there is variability, but we're managing through it and we feel like we're set up for a great season as.

As far as air Terra, we're extremely excited to acquire Tara and to welcome their terrific management team into the AE family.

Our air Tara if you think about it it's really a relatively small purchase that has huge potential for us. It's a company that's focused on the middle mile and it's really focused on bringing economies of scale and the benefits of speed and costing and diversity to shippers of all sizes and previously.

These benefits were only available to the largest shippers to the amazons or targets or Walmart.

And we looked at it as a company we wanted to use for the American Eagle business.

And as we look further we thought it was a great acquisition opportunity. So it completely fits with our strategy of leveraging scale and innovation to help us manage costs and improve service.

And.

They've shipped their first few packages for other customers and for us.

And quite honestly, where were blown away by the amount of interest we've had in this business. So they have a tremendous pipeline of brands and retailers large and small that all wanted to use air Tara the more people that get on it helps to build the <unk> business as well as support the American Eagle business, providing a.

<unk> scale and transportation benefits for us.

And and.

And we think this is the big idea, it's something that we're going to be talking about in the coming weeks and quarters and we expect that it's going to be incremental to the profitability of the company.

Thank you very much best regards.

Thanks Colin.

Thank you. Our next question is coming from Paul especially of Citi. Please go ahead.

Yeah.

Hi, This is Kelly crago on for Paul Thanks for taking our question.

Thanks for the clarity on the shipments with back to school just curious if you could provide a.

A little bit more detail on what you're seeing quarter to date from the lab.

For back to school trends Papa John's looking.

And then just secondly on the $600 million in operating income to feel that's very impressive, but it does imply a step down in EBIT margin expansion in the back half of the year versus the first half. So just curious if that's coming from play or are you assuming a more promotional environment any color there would be helpful. Thanks.

Hi, Kelly, it's Jim and <unk>.

Just let me know if everyone can hear me greetings from London, and the UK I'm over here.

So I hope everyone can hear me well look.

We're really pleased with the results certainly if you look into the back to school season, It's a tale of two stories last year AE.

Delivered their new goods for September and Aerie had a new delivery starting with the launch of offline in July now keep in mind, all the shifts that are happening Aerie for instance.

Has more of a northeast and eastern coast penetration. So they were impacted more by some of these shifts into August and certainly the later labor day.

Really able to ride this storm and from what I see in both brands IC strength.

American Eagle, we dominate in that I've never seen a better assortment and certainly I havent seen a better team executing to our strategy that I think is top notch, our denim looks phenomenal.

Got out of the testing meeting last week.

Into the future. This is a team that doesn't stop when we look ahead, we dominate in denim, we've certainly executed to the new trends and these are all tailwind bras were currently driving new.

Fashion silhouettes in both mens and womens and look they're checking and we're going to get more aggressive there as we look ahead.

You saw the holiday.

Review for some of the new shoots in American Eagle and Aerie.

It is very optimistic and it's addressing what these customers want.

And just moving on to Aerie, let's do I need to reiterate twenty-seven exact hemi consecutive quarters of double digit comps.

Do the math, it's almost seven years.

Don't see a lot of retailers delivering comps like that I mean this team is firing in all cylinders and certainly we were prepared for the back to school shift.

We have two deliveries this year versus one last year.

Because we knew that it was going to happen later and wanted to delight our customers even more as we have to face the headwinds into September lots of newness coming in to help us get through that month, it's a big month.

He too has a great strong delivery, but I think this strategy was really.

Smart for the Aerie team and how we approached it and the goods are checking.

If I reflect back into Q2, all of our key categories gained market share in aerie.

The offline business continues to thrive.

In a very competitive environment out there I think we stand out topline is a very unique approach to athletic apparel.

The innovation, there and certainly the store experience is winning.

All categories, an area really checking for us as we speak, especially on the bra, let and legging side of the business and I you know.

Look we tend to get through Q3, we're always going to remain humble and hungry.

We weren't getting goods here for holiday.

And you know more to come we have you know a few more months here to get through the balance of year, but look I like that $600 million number. It's far ahead of our what we told the street.

And here we are to.

To deliver it so that's what we're going to do.

Yes, Kelly, just expand and expand on the 600 million totally freight related nothing to do with the slowdown in demand has nothing to do with anything else. We're executing in terms of gross margin expansion our operating rate expansion.

We would have been higher if not for the freight and transportation costs that we're embedding into the back half of the year here.

We're being aggressive we're going to incur these costs to make sure that our customer doesn't feel any difference during holiday to their experience.

We believe its definitely short term and will be coming out in January with our longer with what we think will be a significant increase to our longer term profit targets.

Thank you. Our next question is coming from Jay sole of UBS. Please go ahead.

Great. Thank you so much.

Maybe John can you just talk a little bit about aerie and some of the different new category opportunities you mentioned offline, but just can you give us a little elaborate a little bit more about where youre seeing the growth whether it's obviously the core of.

Underwear or just beyond thank you.

Yes, yes sure.

Mentioned.

Can you hear me now sorry, I had a little technical difficulty hi, Jay.

Yeah for sure as I mentioned all categories in Q2, we saw restocking.

We saw gains in every category in fact, all categories delivering on double digit.

Constant growth, so I'm really pleased with those results.

You know certainly brought less our key category for us and the good news is they are not only working them in the wearing them out now.

You know, we're definitely addressing that trend as we look forward.

These are trending nicely, we've continued to pull back.

On our promotional cadence and 90.

And we're seeing strong results there.

Police and sweat, especially when you look at our matching that that's still trending for us.

So we're going to continue the dress that address that trend.

And look leggings are our core in the offline business.

And keep in mind, we still sell that product within aerie as we grow offline.

You know, we will start to sort of separate the results, but right now.

Klein leggings sold underneath the aerie umbrella and there definitely are number one category are up there.

After intimate so we could not be more thrilled with that business and we're going to continue to dominate there.

Innovate there we have some really great.

Ideas for the future.

This team continues to strategize around the offline business.

And how again, we can differentiate because that will be key.

<unk> really been top of mind for our customers in the future.

So the trends are looking solid and again you know for our business.

To continually drive comp seven years, almost double digit year after year, we have to ride with the change right. So.

I know everyone's very curious about an outside trend that's happening and people going out again.

Look we've managed to write those storms as well in aerie and where we dominate on some of our other categories swim for sure is.

Is it go to destination for Aerie and I've seen the Assortments for spring and summer they are strong.

And that's the goal that's almost like what our girls wearing out.

You know in the spring and summer season, So again, we're going to continue to navigate and and drive what's working in our business for the future and remain nimble.

Got it thank you so much.

Thank you. Our next question is coming from Marni Shapiro of retail tracker. Please go ahead.

Hey, guys. Congrats on the it sounds like great denim start to back to school.

Jay can we talk a little bit about denim you guys are now you know took us depending on the category the number one or number two denim player.

I guess, how would you think about growing that business further from where it is you know with this error terror Youre working with third parties would you consider wholesaler white label of your denim business to support a third party would you consider a premium line or premium brand under the ABL Inc.

Banner I'm just curious what your thought is because Europe, clearly a very powerful player in denim. So strategy wise, how do you take that to the next level beyond just American Eagle.

We always said.

And the statistics show it.

We are the number one brand between the 15 to 25 year old we are the number one brand for ladies denim in the country.

If you look at our lineup Youll see that we keep introducing new and new washes, new finishes and new higher price point goods to a better quality.

It's a little premature, but we'll have a probably announcement.

We are weeks about a new denim brand.

Okay.

Sure.

Because you asked the question we are working on a new denim concept that will be introduced in the next weeks.

That's very exciting it seems like the right thing given the denim platform.

But this is something that we've been working on for the last 12 months, we're about to open our.

First test stores in the next 30 days.

Great Congratulations looking forward to seeing that.

Yes.

And the good news about our denim as we.

We have plenty of debt and Michelle.

We don't see any any any any problems for the fall for getting all the data.

All the factories produced our denim or running we're getting shipments on a regular basis, we have plenty of air capacity one thing we've done.

He has in the last two years.

Internal model of this company has been logistics logistic logistics, we've invested in our logistics system as Mike was talking about we have other investments.

It may but they're also being made as we're talking.

I think we put together a world class not a good question Michael didn't go into People's backgrounds. We think we have some of the best logistics people in the United States.

And what we've accomplished with the most amazing thing is.

Is our cost of getting the goods to our stores.

Last several months has been less than it was a year ago two years ago I don't know of another retailer, we can make that statement that the cost of getting the goods to their stores.

Is less than it was before with all the current cost today and all of the cost increase to be able to bring in people that Scott is amazing accomplishment.

Our logistics team is world class and have done that.

So we're very proud of that.

We've done things that other retailers have been done because we know the future.

This is going to be not just the marketing and the merchandising and running great stores is going to be how you operate.

The whole the whole flow.

And if you don't do it efficiently you'll get beat.

Pandemic is just speed it up that we think a lot of these things that we put in were in work before the pandemic started but it speeded it up.

And at the end of the day, if you don't win in the handling of the merchandize and your cost you did beat by everyone.

And we realize that we have to be able to control as much as we can and we have to be the best of them and one thing I'm very proud is that we put together a great team whether it be marketing whether it be our merchandise team whether it be our design team store operations.

Operations and definitely are.

Our logistics team.

We're very proud of another thing, we're very proud of them as we're able to attract great talent to the company fast company. Just just just rated US as one of the 25 best companies like <unk>.

Innovation.

Well attract great people.

Our human resource area.

And the whole company, we have great great strides being made everywhere and really a great culture and great morale everybody in this company.

<unk> focus and and one thing we've done is we've been following our strategic plan, we don't get off track. When we stayed focus focus focus and I'm very proud of that.

That's fantastic and you know maybe just a follow up on that conversation about your logistics with the Tara.

Acquisition does that allow you guys to step up your <unk>.

Buy online pick up in store and that element of the business. So you could even further integrate your online business with your in store business is that part of the strategy here and to make that more.

More efficient.

Yes. It is.

This past year, you talked about at our notes.

A couple of years ago. They came with the concept of show me what he thought the future should look like and all of a sudden independent demick started within four weeks, we have probably been more re established.

It's amazing job.

We do this it gives us the ability in many markets be able get same day delivery to the stores. The same day delivery to the customers enable to respond right away.

We're testing technology that we're working out right now that in our stores. We can follow every item if something's missing.

We'll know immediately and be able to fill it the same day.

Please be a 100% in stock levels.

Your next question is coming from Matthew Boss of Jpmorgan. Please go ahead.

Great. Thanks, So maybe on gross margin. So both both first and second quarter more than 500 basis points above 2019 is there anything structurally preventing similar performance in the third quarter and Mike do you view this as a baseline for gross margin for which to build on as we think about this year.

Or are there any areas of give back for us to consider as we think about gross margin beyond this year.

Yeah, Thanks, Matt I'll answer the second part first yes.

Describing and accurately this is the new baseline to start from.

So I think if you go back to our target for 10% operating margin, we talked about gross margin being in the high <unk> right and I think we're exceeding those expectations. So I think yes, as we talked about our targets again in January and are probably what our new operating rate target will be which will definitely be higher than 10% probably more like the mid to high mid to.

Low to mid <unk>.

Teens operating rate I think the new gross margin baseline is this 40% now on an annual basis. So yes, we've exceeded that the first couple of quarters.

We don't see any structural reasons why this is a one quarter or two quarter and done phenomenon and it's going to be something that is the new baseline go forward.

Great and then maybe just a follow up on the top line as we think about back to school timing and the shifts that you mentioned just to be clear in relative maybe to the second quarter, which was up mid teens.

Relative to 2019 is it fair to say that August is accelerated it seems like that's what you're speaking to and then maybe just any color on the third quarter, meaning sales growth maybe relative to mid teens growth that you saw in the second quarter and any way to help on August and third quarter.

Yeah, Let me hit the first half of the year again, so I think we were up 17% in Q1 to 2019, if you normalize for that Jim Mccann payment.

Compared to <unk> 19 for the second quarter were actually up 19%. So we actually did pick up a few points from Q1 to Q2, the bigger point I'll make though is that if you go back in history.

The revenue our revenue number in 2019 was a record for the company.

But I think at that point, we werent happy with the profit we're generating from that revenue and that all goes back to unhealthy inventory levels.

Too many skus too many choices we bought revenue.

So we are as much as where folks were looking at the same compared to 2019. You are we're not focused on that because we I think we are creating a new revenue baseline as well and we are focused fully on profit generation and cash flow generation on the revenue. We're seeing we're focused on flowing through these phenomenal aerie growth that'll be a continuation that'll be baked into our targets we come back out with in January.

So I guess to answer the August question.

A little bit apples to oranges.

We're very we're happy with what we saw in August its on path.

So we're expecting it's built into our guidance.

I said earlier the guidance would have been higher without this incremental freight and transportation costs. So we're focused on profit will focus on operating rate.

Revenue was obviously part of that but these maniacal compares to us.

Through history that probably doesn't matter as much anymore is something we're not focused on as much.

Thank you. Our next question is coming from Dana Telsey of Telsey Advisory Group. Please go ahead.

Morning, everyone.

You mentioned logistics and the strength of logistics do you see other acquisitions coming into the fold going forward that will continue to enhance your logistics abilities and potentially even drive the operating margin higher and then just lastly, as you think about the holiday season with the extension of back to school.

Or how do you see the timing and planning for the cadence of holiday. This year. Thank you.

Okay to your first question yes.

It's about the acquisitions, yes.

What kind of framework would you want their what are their what.

Other qualities would be beneficial.

[laughter].

We are working on something I can't go into details.

But there'll be announcements.

Probably the next couple of months.

Got it.

And then just.

Dana Dana we're looking for.

Everything we're doing is focused on.

Providing scale and speed and cost benefit and customer service benefit for the American Eagle business.

But clearly there's a lot of opportunity with what's happening happening in supply chain today, Theres, a lot of disruption, but with that disruption creates a lot of opportunity and like Jay was saying.

Used to be that just if you had great brands and you had great products you won.

In today's world that's not that's not the case there is a bifurcation happening in retail where it's not just great brands. It's not just great product products, but you need incredibly efficient agile fast operations.

So air Tara fits that mold.

It is going to service the American Eagle business, well its going to service other retailers well, it's going to be a very successful profitable.

Profitable company on its own.

And we are looking for other opportunities of companies that fit that mould.

Got it and then the cadence of holiday, how youre thinking about it.

I can answer that if you want and well I think we keep on leaning on logistics here because I think it's mission critical.

I'm getting the goods, where the customer demand is in today's world you know.

We're looking at countries you know thinking about shutting down again, we could go into a lockdown again, who knows God forbid.

So again the demand could change.

Direct or in stores and that's what we're prepared to address has a team where our customers that we're going to provide a product for them certainly with a little bit of a later shift back to school I think we're going to feel a little bit of that you know as we move along month to month, and then I would say, though I do think.

You know gifting could happen early again.

With all this in mind similar to last year. So I think the team is ready to address that yes, yes.

Yes, John and also I'll also add something to be gained.

We believe that this would be an earlier Christmas shopping your holiday shopping.

What we believe is that from our standpoint.

We'll have plenty of merchandise.

We'll have a lot of great new merchandise.

Merchandise to choose from but we believe that there are going to be problems out there for other retailers.

We see there could be shortages of goods out there for you.

Not just for apparel, but you go out today.

Anything you want to buy cars do you have a shortage of cars right now you want to buy furniture, the shortage the shortage of furniture out there.

So anything you want to buy out there there are shortages.

Do you want to go build a house it takes longer to build a house and a collection of a lot more money.

So for those people.

Retailers, who were able to get their merchandise on a timely basis.

It's going to it's going to be a big opportunity and we feel we're in great position.

We're going to have great selection or a store.

And it's going to be exciting places to shop, it's going to be a great online experience.

Do you think will be the first introduced in the United States why retailing on their App is being used right now so we're very optimistic and we feel in a position.

As far as the inventory is going to be it's going to be it's going to differentiate us from everybody and it's going to be a big opportunity and we're going to get more money for our goods because it's going to seller.

Is that could be as promotional which is good.

I think what you could sell merchandise and get paid for your efforts and get good value to the customer.

Great project.

It's a win for everybody.

And we will have goods.

And that's the key.

The right merchant actually having goods, we will have goods.

When Michael was talking about talking about logistics, we already have reserved airplanes that we bought up.

So if there is excess air freight will be selling it.

Yes.

Thank you. Our next question is coming from Adrienne <unk> of Barclays. Please go ahead.

Yes, good morning.

My question is this is such a different company today versus two years ago, and I know you've gone through all of the reasons why but as we look at that sort of the early look toward the low to mid teen I mean, we haven't seen those types of margins for pre 2008 and I'm. Just wondering you had last two quarters, you've kind of started in la.

Line with street expectations, and I'm wondering if the street from our perspective needs to appreciate on a two year basis at 14% over 19 at 7%.

Each year, how should we think about the algorithm of topline growth should it be mid to high single digits.

Low double digit EPS.

Gross leverage growth to the bottom line because it really sounds like you are driving this business for quality of sales.

Higher and higher profit and then Mike My second follow up question is can you quantify in basis points. The freight impact Q2, what's embedded for the second half and how much have you been able to offset that with AI or increases. Thank you very much.

Thanks, Adrian I think you've just told the story for me a bit but yes. So I think the it is a different company a different focus.

We're not chasing revenue targets.

We're very focused on I.

I guess, what I can say is if you think about the two brands. We're looking at aerie at a 30% plus CAGR continuously.

Some modest growth that we saw we saw a plus 5% increase in 2019 in the second quarter again normalizing for that.

Payment.

Mike you saw tremendous growth in margin dollars at American Eagle side, So that's where I'm headed so I think when I.

Talk about 2019 baseline and the fact, we drove a lot of unhealthy sales. It was the AE brand. It wasn't area. So we are we've changed the business model, we're operating differently.

Inventory is healthy topline so to be honest with you that hit of 5% over 19.

For the AE brand, but that is a new record again, because 2019 was a record I am actually ecstatic about the fact that we're driving similar to higher revenue with this income flow through that we're seeing.

<unk> baseline that we're creating here.

So for the go forward I think we're looking at probably modest topline growth in AE, 30% plus CAGR and are you continuing to focus is the flow through on both the revenue from both brands. So when you think about operating margin go forward I think will be coming out in January talking about and this is just round numbers, 40% gross margin low to mid <unk>.

Three to four points of DNA and a new target that's in the low to mid teens for operating rate.

And maybe exceeding that as we continue to optimize how we're flowing through especially areas revenue growth.

And we had some other growth stories will probably be telling to we hit on Mexico a bit.

And in our prepared remarks, and we think theres. Some other international opportunity that we can flow through at a very healthy rate as well.

On the freight cost Adrian Thats, a moving target every day, we think we have in our guidance accounted for everything.

Everything we know to date.

Could get better so we're going to see how that comes to fruition, but as we all know we've all been saying our intent is we're going to be aggressive on getting our product here.

And making sure the customer does not feel any difference from us in holiday and I think that can be a competitive advantage. We all do.

But it is a bit of a moving target. So it's hard for me to give.

To give you the exact basis point, so I'll just say, it's embedded in our $600 million for now and again could get better.

Great. Thank you very much and best of luck for holiday.

Thank you.

Thank you at this time I would like to turn the floor back over to Mr. Schottenstein for closing comments.

Okay. Thank you.

First of all.

Wanted to say I'm very proud of.

Have a great team there.

That we've been able to assemble whether it's in the marketing whether it's in the merchandising design store operations logistics side, we have world class players. So that we were able to attract and still attract.

That type of caliber. So we're very excited about that.

As we said early.

We worked hard to make better product okay.

Get better selection to the customers.

And.

Yeah.

And we can see it in the improvement of the performance, whether it be American Eagle and as Jen to emphasize 27 straight double digit comp quarter increases for aerie.

Don't know another retailer go back seven eight years almost eight years. So can say every quarter, a double digit comp growth and still growing double digit comp growth, so and have a new exciting brand like offline like to introduce now too and they have the potential to grow like aerie.

So we're excited about that we're very excited about the other brands that will talk later about what Todd Snyder.

Unsubscribe, whether it'd be the new denim concept.

See a lot of opportunities for us.

And then the other thing is we had our Investor day.

Last January we gave a three year strategy and a little bit we realized when we gave that three year profit strategy that in the same year.

We had already breaking the three year strategy.

It puts us almost three years ahead, and we will have another invested another investor day, probably next January.

We set the goal for the next three years and we're very optimistic and.

And as we said, we're very well positioned for back to school, we liked the way it might be once it started like the way September starting.

We're very excited for the second half of the year and we think that the systems that we have in place.

And what we have going on for us will differentiate us from everybody else and at the end of the day, we have to be different than everybody else, we have product that customer loves.

We have great brands with great loyalty.

We didn't talk about it.

We really didn't drive this back.

But our strategy and marketing and the relaunch of our loyalty program. We have the largest enrollment of loyalty members and this company has ever seen in the last few months. So we're very optimistic about the second half.

Thank you everyone for their support.

And I guess just.

You have to tell you. This team is laser focus.

And like John says we're humble.

We just know we got to keep driving that driving it and keep it.

And keep the innovation with technologies and be able to put it all together and we push ourselves. This is a great team we have.

Thank you for all your support.

Ladies and gentlemen, thank you for your interest in American Eagle Outfitters, you may disconnect. Your lines at this time and enjoy the rest of your day.

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