Q4 2021 American Eagle Outfitters Inc Earnings Call
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Greetings and welcome to the American Eagle Outfitters fourth 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. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn this conference over to your host Ms. Judy Meehan. Thank you Ma'am you may begin your presentation.
Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer, Tim Boyle, President Executive Creative director for AE, and Aerie, Michael Ram Powell, 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 company's 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 basis.
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 www Dot eight yellow Dash, Inc. Dot com and.
The Investor Relations section here you can also find the fourth quarter Investor presentation, and now I'll turn the call over to Jay.
Good afternoon, and thanks for joining us today.
21 was a remarkable year well exceeding our expectations.
We're grateful to our associates, who work.
Mostly through.
The years macro challenges to deliver outstanding results.
2021 you've got a number of significant milestones, including crossing $5 billion of revenue for the first time now.
Your record revenue has increased $1.3 billion or 33% from 'twenty to 'twenty. Additionally, compared to pre pandemic 2019 revenue grew 16%.
And we achieved significant margin expansion of profit flow through we saw greater consistency across the business and growth across brands channels and geographic regions. This wasn't a terrific result, and reflects the financially strong agile customer focused and efficient organization.
Yeah.
Fueled by strong demand for our brands improve product margin and cost efficiencies, we achieved adjusted operating income at $603 million.
This included additional freight cost related to factory closures due to Covid, which had largely in the fourth quarter.
Spite these pressures 2021 was what is our best profit results since 2007.
Without additional freight cost profits, where they would have had an all time on.
Momentum is strong demand continue in the fourth quarter driving record revenue of $1.5 billion as I mentioned profit flow through was constrained by elevated freight costs.
Proud of these results, particularly in light of the supply chain challenges that hit the retail industry.
With momentum across our business and key strategies working we exceeded our 2000 Twenty's, where your financial targets, which were communicated back in January of last year.
We now have our eyes set on a new target of $800 million and operating profit, including five 8 billion in revenue and a 13, 5% operating margin.
Our real power real growth plan is delivering structural improvements to our business.
That is enabling us to fuel growth with greater agility and focus.
With Aerie once again, we posted a record year.
During the fourth quarter, marking the 29th consecutive quarter.
Double digit growth.
Operating profit more than tripled from pre pandemic 20019 levels as are you reached a turning point in its growth plan.
Our activewear expansion offline is hitting it out of the park.
But for the Aerie real no man is on batch and we see significant opportunity to continue to grow aerie as we penetrate key markets.
And American Eagle that transformation has been nothing short of incredible.
Under Jim's leadership, we're running a stronger more focused and more profitable brand.
Number speak for themselves with operating profits up over 50% from 2019 at revenue up 2% exceeding our plan.
Our product Assortments have been strengthened and inventory optimization is enabling us to prep riots wise.
Our best selling products.
We've also made early progress in our real estate optimization strategy closing unproductive stores and energizing the business around high quality stores and digital.
Supply chain innovation has been a key enabler of our strong performance across brands the acquisition of their Terra and quiet logistics are part of the transformation that will solidify many of the benefits cost savings and efficiencies we have seen in our P&L today, while providing a new growth platform.
For the company.
Michael will speak about this more but we are very excited about this opportunity and the interest we're seeing from other retailers.
Lastly, social responsibility has always been woven into the fabric of video as we work to build a better world. This is evident through our purpose led values charitable, giving and our commitment to fostering a workplace culture, where everyone is respected and empowered.
In 2020 , one eight youll, let charitable donations of over $16 million our highest.
Over the last several years, we pledged to sell.
Celebrate sustainability efforts across our operation.
And we're making great progress, we look forward to greater disclosure and transparency of our ESG practices in 2022 to highlight our work and measurable impact in these important areas.
I like to thank our teams for their excellent execution and unwavering focus on driving our business for banks.
Thanks to their efforts, we have entered 2022 a stronger company.
The macro environment remains challenging, which we are taking into account in our plans for the year.
Yet we expect our results to reflect meaningful progress over prior years setting a new baseline for profitability with that I'll turn it over to Jeff.
Thanks, Jay and good afternoon, everyone.
It's been a truly sensational year for AGL are leading brands Aerie and AE continue to be a favorite with our consumers. This.
This year, we saw a significant gain in active customers, reaching our highest level ever.
And we are winning more wallet share.
For the year Aerie reached one 4 billion in revenue up 39% to 2020, adding over 500 million since 2019.
We saw strong profit flow through with annual operating profit over 200 million and margins in the mid teens.
Ares fourth quarter revenue marked another new record.
What's spectacular rising 27% on top of a 25% increase in fourth quarter 2020.
This was <unk> 29th consecutive quarter of double digit growth, marking new highs.
Sales metrics were healthy across the board the AUR was up in the low twenties and this was driven by higher full price selling more strategic promotional activity and mix shift into higher ticket items.
Demand was strong across core aerie apparel intimates as well as offline activewear, which is showing great momentum just a year and a half into the launch.
I'm very encouraged by the customer response, and I look forward to expanding aerie and offline store footprint and reaching new markets.
As we previously discussed Ares fourth quarter profit margins were constrained by industry wide supply chain disruptions disruption in South Vietnam, where are you had a greater presence we took on higher airfreight costs to get our product here on time, and we also experienced uneven inventory flows and are high.
A man leggings business, which of course is one of our higher margin categories.
Additionally, delayed new store openings due to labor and building material shortages also had an impact these factors present opportunities for us in the coming quarters.
Aerie enough brine are supported by rich brand platform, which changed the industry forever, we focus on individualized innovative marketing campaigns that peak to real women.
Authenticity and positivity or at the very heart of everything we do we are a true 360 degree view of our customers and now with the addition of offline we were offering a more complete lifestyle meeting their needs across cozy comfy inactive.
Needless to say I'm very optimistic about our future and I remain focused on fueling further momentum as we build to our new 2.2 billion revenue target.
Turning to American Eagle, what a difference a year makes new product assortments stronger advertising and messaging together with inventory and real estate optimization are having a meaningful impact.
Oregon Eagle posted a terrific year with record revenue up 30% in 2020 and up 2% to 2019.
We are reactivating shoppers, attracting new customers and seeing significant improvement in retention rates.
Demand in the quarter was strong across genders, our mens business has seen tremendous growth as.
As we've refocused the assortment in our core best selling items.
The women's business also had a great quarter supported by our signature denim category and focus on outfitting.
With our strategic emphasis on reigniting profitability, we saw a significant recovery in margins and profits posting the highest margin since the mid two thousands.
As marketing evolves, a he remains committed to being a leader in testing and learning through new mediums.
In the fourth quarter. This included ticked up challenges partnering with Snapchat and augmented reality shopping the launch of our first an empty digital apparel collection and new partnerships in the gaming World.
As I look ahead, I'm excited with emerging fashion trends and the continued appetite for casual and active apparel. This benefits both of our brands spring looks strong across brands with seasonal goods checking and we expect to have a positive spring season.
To the AE and Aerie teams none of this would have been possible without your hard work and dedication and a special thank you to the AE bottoms team for reaching the $2 billion Mark what an incredible effort.
I'm so grateful for the energy you bring to the organization every day and I'm. So excited for another great year in 2022.
Thank you and now I'll turn the call over to Michael.
Thanks, Jen and good afternoon, everyone first let me start by saying that 2021 was a remarkable year for.
It's clear that the strategy, we laid out last January and our learnings over the past two years has truly changed how we are managing the business.
I am, particularly proud and impressed with how the team delivered through a highly disrupted supply chain environment, especially in the fourth quarter we.
We successfully met robust holiday demand and achieved record revenue combined with strong AUR.
We were pleased with the business across channels in the fourth quarter store traffic continued to rebuild rising in the double digits and driving a 32% increase in store revenue.
Mainline in factory outlets, both saw a healthy growth and profit improvement, reflecting strong demand as customers returned to stores.
All regions in the U S saw double digit growth with our international markets also seeing very positive results.
Digital revenue declined 3% from the fourth quarter 2020, yet was up over 30% from fourth quarter 2019, we've added nearly $600 million in annual ecommerce revenue since 2019, with our digital penetration growing from 29% to 36%.
We have scaled our business across channels with both stores and digital seeing revenue and profit growth over this period.
We continue to prioritize enhancing the omnichannel experience by testing new tools and technologies in stores, we successfully piloted a new mobile point of sale solution.
I've seen a significant increase in curbside pickup orders.
Online, we introduced a new instant credit feature for returns, which had a tremendous impact on sales recapture.
Approximately 75% of qualified customers opted for instant credit with the bulk of them using it within two weeks.
Additionally, we've also expanded our after pay capabilities to the App.
It's been incredibly exciting to see our mobile app grow into such a strong shopping portal for our customers.
Driving approximately a third of our e-commerce sales and traffic in the fourth quarter.
At base customers are most engaged digital digital shoppers spend.
Spending two and a half times more annually than our web customers and transacting with US three times more throughout the year.
They are also more likely to be multichannel and multi brand shoppers.
Our customer data in the fourth quarter was also incredibly strong we achieved our highest ever active customer accounts and our highest average annual spend the relaunch of our loyalty program last summer is continuing to pay off.
We're attracting new members and driving higher retention.
On the operational side, we're transforming the business in the fourth quarter, we enhanced our return capabilities doubling our processing rate per hour. This has resulted in better merchandize restock rates improved product availability for customers and higher full price selling.
Additionally, as delivery and fulfillment costs rose across the industry.
Our in market fulfillment model with quiet logistics continues to fuel savings for a O.
Delivery costs leveraged 190 basis points this quarter driven by a significant reduction in shipments per order.
We also shipped orders faster within approximately 35% reduction in delivery times.
Bringing benefits to both our customers and our operations utilizing.
Utilizing quiet logistics to place inventory in the edge fuel these efficiencies and as we continue to expand the node network, we expect to see even greater savings.
The combination of quiet logistics and air Tara also creates a state of the art supply chain platform that we will look to monetize by growing its third party customer base.
Since announcing the acquisition we've received tremendous interest from retailers of all sizes and.
And as the business expands we expected material revenue and profit stream for <unk> and we're looking.
Looking forward to sharing more about the long term value creation opportunity.
In closing I'm incredibly proud of the quality of our execution this quarter and I'm excited to build on the structural improvements we've made to our business.
And with that I'm going to turn the call over to Mike.
Thanks, Michael Good afternoon, everyone.
2021 was a pivotal year for <unk> as we embraced our real power real growth strategy.
I'm very proud of the results we achieved.
In an operating environment that presented many challenges throughout the year we.
We delivered record revenue of over $5 billion and exceeded $600 million and adjusted operating income outperforming our 2023 profit targets two years ahead of schedule.
As I reflect on the past 12 months I can confidently say that we are a stronger company and we reset the bar on long term profitability.
Got it by our continued commitment to product innovation and quality.
An emphasis on inventory discipline are clear.
Your real estate strategy focused on supporting area of significant expansion and optimizing a path for profitable growth and.
And strong operations fueled by investments to improve the customer experience and build an industry leading supply chain.
Our fourth quarter performance is a testament to these initiatives.
We posted record revenue of $1 5 billion adjusted operating income of $92 million and adjusted EPS of <unk> 35.
This was a strong result in the face of industry wide supply chain disruptions, which led to roughly $80 million and elevated freight costs in the quarter.
Approximately $60 million of this was air freight specific to Vietnam factory closings.
Without this the fourth quarter would have marked our highest operating income since 2007 underscore.
Underscoring the significant underlying profit improvement in our performance.
Consolidated fourth quarter, net revenue increased 216 million or 17% versus fourth quarter of 2020 and was up $193 million or 15% from 2019.
Sales metrics were very favorable cross brands strong demand pirate full price sales and fewer promotions drove the average unit retail up 17% and if you want a double digit increase in our average transaction value.
This marked our seventh consecutive quarter of AUR growth and round out two years of consistent growth in our average transaction value.
By our focus on product innovation across brands and inventory optimization at <unk> in particular.
From a brand standpoint, Eric continued its industry, leading multi year growth.
Revenue rose, 27% from fourth quarter of 2020, and almost 60% from fourth quarter 2019.
<unk> adjusted operating profit was $23 million in the brand operating margin was five 3%.
Jen discussed elevated airfreight costs of approximately $31 million in the fourth quarter translated to an over seven point headwind two areas operating margin.
Though we anticipate markup pressure into the new year, we expect margins to improve meaningfully meaningfully from the fourth quarter.
Moving to American Eagle's brand performance.
In the fourth quarter revenue grew 11% compared to 2020 and operating profit jumped 25% with the brand adjusted operating margin coming in at 17, 5%.
This included a roughly $29 million headwind to operating profit or almost three point headwind to the operating margin from elevated airfreight costs.
As I've said in past quarters, there's been a clear shift in priorities within a.
Our renewed emphasis on inventory discipline and real estate optimization is yielding material profit unlock.
Our strategy of doing more with less is working and this is evident in our results.
Fiscal 2021 brand revenue was up 2% from pre pandemic fiscal 2019 levels and adjusted operating income was up 51% all.
All with 40% lower SKU in choice counts and 69 fewer store locations and we still have plenty of optimization opportunity across the brands.
Total company consolidated gross profit dollars rose, 11% compared to the fourth quarter of 2020, reflecting a 32, 4% gross margin rate.
Strong product demand and efficiencies in our distribution network you would leverage in delivery.
The margin rate also benefited from inventory optimization promotional discipline and higher full price selling.
As discussed this was offset by close to four points of elevated airfreight costs.
SG&A Deleveraged 60 basis points. The dollar increase of 58 million was due primarily to higher wages for store associates in hours to support the recovery and store operating capacity compared to last year.
This was partially offset by leverage on advertising expense.
Okay.
Looking into 2022, we are prioritizing SG&A efficiencies over.
Over the past few years, we've been driving improvements to our gross margin.
As we continue to focus on those areas. We're also turning our attention to optimizing our expense structure.
We will update you as we see progress are targeted at 23% annual rate of SG&A to revenue in 2023.
Adjusted operating income of $92 million reflected a six 1% operating margin.
<unk> and approximately four point headwind from gross margin pressure related to airfreight.
Scott.
Adjusted EPS was <unk> 35 per share.
Diluted share count was $203 million and included 32 million shares of unrealized dilution associated with our convertible notes.
As a reminder, we will move to recognize full dilution from the convert in our share count beginning next quarter.
This is in line with the required adoption of a new accounting standard impacting all convertible issuers.
As a result for 2022, we anticipate a fully diluted share count of 227 million shares with the impact to earnings partially offset by approximately $17 million and lower interest expense.
Ending inventory at cost was up 37% compared to a 9% decrease last year.
By product costs drove over half of the increase due to product mix and higher transportation costs.
Total inventory units were up 14%.
The increase also reflected earlier deliveries of spring shipments as we manage through longer and more unpredictable transit times.
Our balance sheet remains healthy and we ended with $435 million in cash.
Cash generation was strong throughout the year, providing sufficient liquidity for us to raise our dividend.
On their acquisition of quiet logistics and maintain a healthy cash balance.
As Michael and Jay both discussed we are very excited about the quiet acquisition, including the benefits it brings to our brands and our long term growth potential of the third party business.
Capital expenditures totaled $90 million in the quarter and $234 million in fiscal 2021.
With regards to our real estate strategy, we are investing in areas of market expansion prioritizing areas, where we see the greatest opportunity.
In the fourth quarter, we opened 45, new aerie doors, including a mix of new stand alone and side by side formats with roughly half being offline doors.
For <unk>, we have made steady progress towards our long term target of right sizing the brand store footprint.
In North America, we've closed over 70, AE doors since 2019, reflecting a high single digit reduction in gross square footage for the brand.
Store productivity is up significantly versus 2019, despite lower traffic supported by AUR gains in Avs games.
We maintain significant flexibility to adjust our footprint further with 40% to 50% of our fleet coming up for renegotiation is every year and we'll continue to leverage data centric approach as we look to maximize brand profitability.
Moving to our outlook for 2022, we're encouraged by the continued underlying strength of our brands and the pace of business. So far this spring.
Our strategies are delivering and we are a stronger company. Following the structural changes we've made over the past two years.
We're also cognizant of the environment, we're operating in including rising inflation, which has implications for our business and our customers lapping.
Lapping the strength from last spring as we cycled stimulus continued disruption in the global supply chain environment and the war in Ukraine.
Against this backdrop, we are taking a cautious view for.
Our 2022, we expect operating income in the range of $550 to 600 million on revenue growth in the mid teens.
This reflects the structural improvements to our business and significant growth from pre pandemic 2019.
Posted adjusted operating profit of $314 million.
The new logistics business is expected to contribute roughly five to six points of the mid teen revenue growth and breakeven on profitability.
In terms of quarterly cadence, we expect the year to be a tale of two halves with operating profit down materially in the first half followed by a recovery in the second half with.
This implies the operating margin building for mid to high single digits in the first half to low double digits in the second half.
Our outlook, primarily reflects three things the timing of stimulus lapsed in the spring.
Our logistics business shifting from being dilutive in the first half to accretive in the second half as we fully integrate and ramp up the business and easing cost pressure through the year as product and freight inflation, partially offset by the absence of elevated air freight due to factory closures in the second half.
In closing I'm really pleased with our performance in 2021.
Longer company today than prior to the pandemic.
Made material structural improvements in the way, we run our business and have established a new baseline of profitability.
Our real power real growth strategy has positioned us well for long term revenue and profit growth.
And I remain confident we can achieve our new 2023 targets of $5 8 billion in revenue $800 million operating income and 13, 5% operating margin.
With that I'll open it up for questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You may start to move your question from the queue for participants using speaker equipment. It may be necessary for you to pick up your handset.
Before pressing the star keys, please limit yourself to one question one moment, while we poll for questions. Our first question comes from the line of Adrienne <unk> with Barclays. You May proceed with your question.
Yes, thank you very much and well executed throughout a very challenging year, so kudos to the team.
Mike I appreciate the guidance on an annual basis. So I was wondering you gave some first half second half some color there, but can you shape the quarters for us. Most importantly, the nearing quarter sounds like February is off to a nice start to the sector.
How are you thinking about because of the comp guidance for Q1.
And then if you can give us some color on gross margin shaping throughout the quarters as well as the SG&A that would be wonderful. Thank you very much.
Thanks, Adrienne appreciate the comment on the fourth quarter and that's a very good question Theres a lot going on this year with its tough to put in prepared remarks.
It's definitely would be a tail. If you have we've got some P&L nuances.
And especially as we include the logistics business this year so.
First I'll start by reiterating that I think we all said it but.
It's worth saying again that we have.
The benefits we've seen to our gross margin from the end market nodes are locked in with the purchase of quiet logistics and we're going to continue to work on efficiencies from here as Michael said so.
So I'm really happy about that I think we're also excited about the opportunity we have.
To create incremental value from this new business and we're ramping up to be profitable next year. So again.
The exciting things for us.
So, but let me get to your specifics there in the first half and second half so in.
In the first half we're forecasting a 37% gross margin rate on.
On a low double digit revenue increase.
So we continue to have pressure from product and freight costs and that's worth about 200 basis points to that rate.
And then there's another 200 basis points from our logistics business and that's just building revenue.
With a projected loss in the spring so mostly a mixed impact sorry, a mix impact from the increase in revenue.
And Additionally, we're expecting higher markdowns in the spring season against a historically low rate.
Last year, driven by the stimulus demand that started in mid March and continued into early Q2, So thats gross margin for the first half.
In the second half, we see gross margin flat to last year are flat to 'twenty one.
That's on a mid to high teen revenue growth.
But a little bit different between quarters of gross margin decline in the third quarter and an increase in the fourth quarter.
The mix of that is it's improved IMU as we lap the fourthquarter airfreight, but then offset by the impact of logistics business again, as we grow revenue further.
But achieve a profit in the fall.
For SG&A than in the first half will be up in the mid teens, that's driven by a continuation of what I just said on the fourth about the fourth quarter.
Our stores are at full capacity, we are up against constraints last year still.
Not that we're not anniversarying increase in the average wage yet and then advertising is also incrementally last year in the spring.
That will impact SG&A in the first half.
I've said in the remarks as well that SG&A is an opportunity for us this year, we expect.
That growth in expense to lessen each quarter with the back half only up in the high single digits, then and there.
We are still set on targeting 23% for next year.
So altogether, if you put all of that detail together that brings us to the $550 million to $600 million operating guidance for the year.
And thats, reflecting around a 10% rate so.
Happy about that still in the double digits on this guidance.
And then the difference to the 12% that we just achieved in 'twenty. One is a pretty easy walk, it's about 100 basis points of product cost pressure.
Incremental to 'twenty, one and then 100 basis points of impact from the logistics business and that's just the mix impact of revenue with no income.
From there so I'd say I think we think the opportunity is in our guidance from there better than expected product cost as we get to the back half of the year.
And then additional timing benefit from the SG&A expense reductions that we're targeting so.
So a lot there hopefully that the lay out of that detail helps answer the question.
That was super helpful. Thank you very much and best of luck for spring.
Thank you I appreciate it.
Our next question comes from the line of Paul <unk> with Citi. You May proceed with your question.
Hi, This is Kelly crago on for Paul Thanks for taking our question.
Just a follow up.
You provide for us what the corrugate.
Comps are looking like.
And if so could you just you haven't yet could you do sell by you give us a little bit more color by brand.
Yes.
We're plus mid teen ROE in February I guess I'll quote you that.
And it's a great start to the quarter great start to the season I think the thing where basically what I just laid out stimulus benefits really started mid March and continue through the rest of the quarter. So we're.
We're up mid teen right now, but we're giving guidance that our brand revenue basically we'd be up in the mid to high single digits and then we have like four points or so from the logistics business on top of that.
So based on that were you can tell we're expecting a bit of a bit of a decline in the trend against last year as we get up against that stimulus impact in the back half of the quarter.
Got it.
And then just moving over to Arie margins.
You called out the $31 million.
Airfreight impacting area and in the fourth quarter could you give us a little bit more color about what the underlying margin rate looked like excluding freight.
How did the promotional cadence look at aerie in the fourth quarter and how should you be how should we be thinking about that.
In 2022, thank you.
Now look our markdown rates remained healthy so I think this margin pressure that was really all driven in all freight cost driven.
Our weekend, we got promotional level throughout the season was actually down we pulled back on promotions early in the season as we all talked about demand getting pulled up before Thanksgiving because of all the media coverage of supply chain issues out there. So we were able to kind of reduced level of promotion and not only just.
Promotional rate, but the number of days that we're promoting and that that was pretty healthy through the quarter. So this pressure is all really immune product related product costs related with the freight cost within our product cost I'll call. It that.
Good luck.
Okay.
Our next question comes from the line of Matthew Boss with Jpmorgan. You May proceed with your question.
Great. Thanks.
Maybe one for Jen at Aerie.
Aerie and American Eagle.
A way to maybe parse out what you're seeing in demand. If we think about it by category and February driving that mid teens, maybe just early reception to spring at either concept and are you seeing any pushback at all any of your early pricing tests.
That's a great question, Matt look I'm really excited with the continued momentum I mean as you can see we had a great Q4, I'd like to say our likes to.
We are up against higher lakes and both brands than.
Than most competitors. So I think we really pulled out a nice quarter in Q4 moving on to February .
One of the highest well this let me say this that the lowest markdown rate I think I've seen in history in February which bodes to the fact that we did not carry over a lot of messy inventory, we were cleaner in our clearance levels in both brands and when I went to the mall, that's what I thought I saw incredible assortment.
And they just got better today, we just launched our biggest both for both brands. We just launched our spring two deliveries and their amazing. Please go online and check it out and <unk> just launched their incredible marketing campaign that is so much fun.
And we just launched it today and I can talk about that later, but look the product categories are still checking genes are still on fire and I have a little bit of.
And note two everyone on denim, what I like about what I'm seeing in denim is some of our tried and true fits are still working.
So as we see all of this incredible momentum and new fits we're maintaining our old business I E. Jeggings are still checking for it and that's such a nice maintain margin business for US you saw that we got to $2 billion in denim in Q4, and I am excited to build on to that and you know as we approach 2022 and beyond.
So really excited about denim early seasonal products are checking shorts are doing great across both brands swim incredible early start and we barely even in fact, we were lighter in some cases on our assortment in.
February in swim and Theyre just building throughout each week I mean, the numbers are incredible again, we just released our biggest assortment today, so I think theres more to come there.
Cited about obviously offline I mean near and Dear to my Heart. This business is on fire and we left money on the table in Q3, and Q4 that I hope as Mike said, you know we faced some headwinds earlier, but you know we really hit it out of the ballpark in Q1 and Q2 in both brands last year and I look forward to some of those <unk> as we head into.
Q3 and Q4.
Great.
Mike maybe just as a follow up at Aerie I think what would be really helpful is a brand level bridge, if that was possible, meaning you outlined low twenty's to EBIT margin in 2023, and embedded a roughly 30% EBIT flow through rate how do we bridge the mid teens EBIT margin this year to the low.
2020 three at Aerie, it sounds like nothing's changed but just maybe the best way to bridge would be really helpful.
I think there's a quick answer on especially the.
The elevated airfreight in Q4, we're definitely as he cost pressures as I just described in the spring, but if.
Can you reconcile some of which has happened, especially in.
Vietnam shutdown related kind of I'll call it self inflicted but we made the choices that choice.
Execute on significant airfreight Europe area is really closer to the high teens as the rate in 'twenty, one we're planning it to be.
High teens close to 20%.
Result in fiscal 'twenty, two with that flow through rate you just quoted at 20% to 30%. So you've got another 25% to 30% on the <unk>.
Growth that we're expecting in 2023, you're in that low 20% range.
Great Best of luck.
Thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Jay sole with UBS. You May proceed with your question.
Great. Thank you so much I have another question on Aerie just can you just talk about some of the stores. The new stores that were added this past year, how are those stores performing and where some of the signs that you are seeing that the stores are going to meet your targets.
I can start Jen, yes, we are.
Really pleased with how they look out of the gate.
We haven't been open that many in the back half of the year a bunch of the Hudson did slide from intended to be opened in the third quarter into the fourth quarter. Some of the new area in offline, especially the offline doors that we're adding so we don't have a great run rate on offline yet, but the ones. We've seen are out of the gate at pro forma or better.
We're seeing incremental instrumentality in the mall, if especially in the in the places where we're adding offline to the mall, where <unk> already existed.
So we're getting more out of that center between brands from an increment Audi perspective.
So it's encouraging us that we're on the right path to what we're going to add in fiscal 'twenty two here.
No signs of we're not seeing any signs any reason why we should be concerned about.
The four wall.
Results from those locations and the return on the capital we're spending in that two to three maybe call. It.
Two to four year payback period.
Yeah, and I just wanted to add on one fun little tidbit.
<unk> opened up eastern are like Mega store, it's an AE.
Outline an aerie side by side completely renovated and gorgeous. The initial reads are incredible I think theres opportunity thinking about our business this way in the future.
Maximizing square footage and showing up with all of our categories. It's like many department store I Love. This.
Format and the teams are thrilled with the visuals look strong dollars per square foot are incredible so really proud of what we did there is a team.
And maybe if I can just add on just related to the last question about just ramping in the flow through I mean, how do you see the productivity of those stores.
Increasing over time, I mean relative to a mature store.
We definitely from a historical perspective, there is a maturity curve that we've seen and we plan them that way.
We project them over the course of their lease term with that ramp so we usually see.
Kind of high teens to even 20% kind of first year comp than something more in the low to mid teens or even that you are double digit.
Maybe mid single to high single in the third year and then it kind of settle in at whatever the trend is so theyre, adding new stores, it's contributing to the kind of from a mixed perspective to the comp from stores. But then there is always that digital halo effect that we see six to 12 months later and that is the strategy or we're adding area in offline stores to where we're underpenetrated market.
It's to really generate that full omni growth in the market.
Got it okay. Thank you so much.
Our next question comes from the line of Marni Shapiro with retail tracker you may <unk>.
Recede with your question.
Hey, guys, Congrats and Gen stores look absolutely beautiful, it's such a significant change so if we can actually touch on that.
<unk> business pre Covid that you were still generating a lot of volume.
And I know there was a lot of pressure on margin. If you could just walk us through.
I know my category by category, but sort of where are the biggest chunks of opportunity margin wise and improvement in our sales wise is it on the mens side is it denim is it tops.
Is it fashion is at Aerie, just so we have a good sense because again, even prior you were doing a lot of volume, but now it looks like youre doing a lot of volume at a much more profitable and structurally sounder way of doing business my seeing that right.
Yeah. That's a great question Marni look I love, how we delivered the year right really strategically.
Generating incredible Bottomline results in both brands for AE, just I've never seen margins like this just incredible year, and just really proud of how that team leverage of the business.
As I think ahead, when I think of the category breakdowns look.
We blew it out of the water in mens and they had a great year. There was a lot of low hanging fruit there and we went after that that was an easy get aerie well, we're going to continue to build that brand.
I believe if the teams can deliver 29 quarters of double digit growth. We can continue to grow and operate this brand.
And that's what I think we're doing well right and really bringing in that omnichannel customer and aerie has been a win for us and the teams are delivering incredible results, there and thinking about that business tucked inside of it we still have a lot of intimates growth marni.
Growth in Aerie and now we have this incredible opportunity and offline rooted in leggings, which we're going to continue to build on and grow the opportunities are still there considering marnie, we're still not in all markets. So I love that we still have opportunity and we're testing new things in those markets Marnie, we're doing side by side locations.
<unk> and side by side.
We've done an offline side by side to American Eagle all the results have been better than expected and our pro forma actually in Aerie is in offline. My apologies is beating expectations by I believe 26%. So those stores are doing great and now let's move on to where I think we still have some low hanging fruit denim obviously.
There is a cycle here and we're excited about it I mentioned, we can build on our core and we are building on how we assort the business in both brands and I Love. This we're really trying to deliver more gross margins stabilizing products. So that we can manage some of these headwinds that we're facing and we're mixing that way and we're thinking.
Really strategically.
And then just thinking about womens look we have a new designer in town. We're really just getting the momentum going we are highly focused on delivering incredible fashion in womens and Trust me I had been rolling up my sleeves with the teams personally.
Really have been I've been in the trenches with them and I can't wait for spring 2023. It is incredible so yeah, I think we have more opportunity in women's.
What we're going to put on the table, we're going to manage that business and chase it profitably.
But I just I love, what I'm seeing the team really put together a good show in concept so.
For 2023, I also sat aerie needless to say and that's another spectacular concept that I just can't wait to attack for next year. This is great.
Follow up with you in mind.
Sure Jim.
When you do explain one other thing.
We were counting on opening 35 more stores 30 points for aerie stores in the fourth quarter because of material shortages and cozy, we werent able to open those stores, yes true Jay good great Great point, and Theyre, just opening up and we're seeing nice results. So we're happy with that and can I just follow up on more on the gross margin question because I think.
This is really good color, but if I think back to 2019 and that holiday season in 2018, and maybe the pendulum has swung all the way to one side on promotions I think at that point all your centers with $25 in the box things like that and if COVID-19 in this last year, where inventories were very lean and promotions are at all time low levels.
If.
Your go forward promotional activity should fit somewhere in between there is it is.
Is it 25% more than what we're seeing today not all the way swung back I mean, how do you think about that because you are coming from a very high promotional level not like an average promotional level to a very clean promotional 2019.
In 2019.
A lot of inventory.
We werent happy with some of the inventory.
It is.
And there is more promotional we learned to lock a ear and the lessons that we've learned these last two years, we've put in and we're learning how to do more with less and to maximize and give the customer more gas and less choices, but more depth and more key items.
Yeah, I think Marty how does that like.
<unk> been describing in all of our other investor calls and meetings that our markdown rate as the company is still in the mid Thirty's I mean, that's still not anywhere near being historical best.
So we look at that as being a healthy level of promotion.
Weekend week out with Jay is describing the benefit.
Markdowns in gross margin more so yes, we're definitely selling more at full price.
Pulling the needle out here and there on promotions, it's not a drastic change in terms of week in week out, but the cleanup of the inventory and especially in AE, where were down 30% to 40% and inventory were down 30% to 40% in SKU counts in choice counts.
<unk> said, it we're buying deeper with less breadth that benefit and markdowns is coming like ended season permanent markdowns clearance markdowns write off of inventory.
So the weekend, we got POS Ray we feel is really healthy and we don't think theres any reason from a competitive standpoint that this isn't going to continue.
It's really that cleanup of just really unproductive inventory with too much inventory that's the <unk>.
Bigger margin benefit I think if you look at the brand detail, we provide now 2019.
If you look at the AE brand were up for the year 2021, we grew 70% we grew revenue by $75 million.
From 2019, but we grew profit by $270 million.
And Thats when we talk about the fundamental changes from.
This acquisition of quiet the node network delivery cost benefits.
Actually mark that markdown benefit because we're putting less inventory in stores and trapping it there because we were able to fulfill closer to those stores.
Again, just doing more with less inventory that's the benefit of skip came through really is in a huge way and the AE brand definitely benefiting aerie to with what we're doing.
But we're not planning on giving that back.
Our next question comes from the line of Oliver Chen with Cowen You May proceed with your question.
Thank you. This is John on for all of US closing for taking our question just curious about your pricing strategy.
You, obviously saw strong AUR growth I'm always lots of quarters.
If you think about next year do you have room for increasing pricing to potentially offset any pressure any color will be helpful. Thank you very much.
Yes, I think Jay and I are going to tag team on this.
Look.
We've been testing new pricing in every category and in particular one's denim and leggings, where we're not seeing a lot of resistance as long as the customer understands the quality and the price value.
But you know we are going to protect our opening price points. That's important the lipstick of any category gets it gets the order going in and that is something we will constantly look at and we will keep the chart prices.
No.
Where we believe we want to compete but we definitely have a strategy where we.
Build or build our plans and the way we assort Jay said it in the way, we distort to a good better best strategy I'd like to say, we're leaning into better and best but we certainly arent going to isolate.
Customers, new customers that may want to get into our brand and understand who we are certainly categories like socks and underwear a great place to do it.
And you know I Love I Love. Our strategy is look we've spent a lot of time I'm looking at our pricing looking at the costing for.
For the future knowing that there could still be some logistics and supply chain issues and I feel like the plans are in a great place.
Jay I didn't know.
Yes.
And add to what Jan is saying.
To me the sign of a healthy company is the ability to have higher price points on new items and be able to do something it will introduce higher higher prices.
Key items and drive sales and we've been able to do that again, and we were able to use we're able to introduce $89 $99 denim higher price points.
<unk> and drive and drive very good sales on it and Thats. The key the company because we're not limited to a certain price points, we have the ability to keep the keep layering layering on top of that.
We're very excited about that we have the ability to drive that.
And also we're very proud of is that people want the American Eagle Bank, we see more demand for our name on products and American Eagle, we see more demand for our logo people want it we're not just selling June selling genes, we're selling American Eagle Jeans American Eagle product and we're very proud of that and.
Youll see in the campaign. This year you will see American everywhere, we are.
We're very excited.
Our next question comes from the line of Cory <unk> with Jefferies. You May proceed with your question.
Hi, Thank you for taking my question you had mentioned a improvement in retention at core American Eagle.
Just curious as to what's driving this and you had also discussed witnessing the highest ever I believe active customer count and the highest ever annual spend as well what in your view do you believe is the core to.
This development and how sustainable do you believe this trend is thank you.
That's a great question.
The marketing teams have really dissect it our customer base in one of our strategies was getting our customers back the reactivated growth, particularly in American Eagle I mean the numbers.
It's outstanding up I believe 61%, so I mean pretty amazing.
Reactivated customer rates same for aerie very healthy huge numbers, there and that was one of our focuses but let's not forget I really think that the way we are approaching our product assortments, we're attracting a wider demographic now so we're not just focused on the teenager necessarily we certainly need to appeal to.
Them.
Because they are they shop no matter, what the conditions are and the environment their shoppers, but we also are seeing that we're getting some.
You know widening our age demographic to the older side, which I think is phenomenal. It speaks volume I think its really when.
When you think about denim our denim fits we have more variety there we still have our core as I mentioned and now we have fashion.
So we're seeing incrementally there and I do really believe it's the product assortments.
We sort of emulated what we're doing in aerie.
Some of those offerings think about legging, you know, an 11 year old or a 60 year old, whereas the legging.
Theres, some ubiquity and those product offerings and I think we're approaching it the same way and American Eagle.
And just again and being very disciplined about our inventory disciplined about our promotional cadence.
While we are still competing on a great price value equation.
And the quality is just outstanding so really proud of what the N. Gen.
And Jim I guess, what Youre, saying, we're very proud of but we're consistent and it's probably the best fit and the industry.
That's for sure absolutely.
Our next question comes from the line of Dana Telsey with Telsey Advisory Group you May proceed with your question.
Afternoon, everyone. As you think about the two new businesses that you acquired air Terror and quiet logistics, what do you see them, adding in 2022, when do they become a sales and profit driver as you expand those businesses and is there any model of what we should think of their contributions over the long term.
Thank you.
Hey, Dan it's Michael.
Michael Rampell I'll answer the first part and then I'll.
See if Mike wants to provide any more any more detail but.
Look for me and I should say I'm really extremely proud of the delivery performance for the American Eagle.
Business.
And that delivery performance I don't think theres another retailer in the country, that's lowering their delivery cost lowering delivery as a percent of <unk>.
Of revenue and delivering to customers faster and making their inventory more productive at the same time. It is a huge accomplishment. The team has done a phenomenal job and its a great win and the reason I mentioned that when you are asking about quiet air tariff. It's a direct result of the work that we've done quiet an error terror those businesses are fueling the <unk>.
<unk> that we're seeing in American Eagle and.
That's why we acquired them we saw the opportunity in our business and it's very clear to us that in order to compete going forward all retailers are going to want and need these kind of capabilities, they're going to need the efficiencies of operating at scale of being close to the customers of making their inventory more.
Octave of accessing new kind of delivery.
Partnerships and capabilities and that's what this enables so.
Look we're only two months into the acquisition, it's a little early to give too much color too much guidance, but would but we do plan on giving it later this year.
What I would tell you is.
Our initial conversations with other brands and retailers are extremely positive I'm very encouraged by what I'm hearing I'm very encouraged that we're going to get significant brands and retailers to want to sign up and join us in this cause.
Because they see the value and they see the opportunity.
Yeah.
And.
And.
Mike Mike gave a little bit of color earlier, but we do expect.
It'll be a few hundred million dollars of revenue this year.
Likely a breakeven business as we're investing.
Early on we just hired a new CTO for the business is named Charles Griffith, He's really a world class player. He was in a leadership role at Amazon, where he built a lot of their transportation capabilities.
He's bringing an extremely talented team and again, we all know how how critical technology is in the success of our business and certainly running inefficient supply chain.
And.
These businesses are allowing us to attract talent that we likely would not have otherwise been able to attract.
And that's certainly a huge value to American Eagle, but it's also going to be a huge value to all of the all the customers that we serve today.
And that we're going to serve in the future. So.
I expect that in 2023, this is going to be a profitable business for us I said in earlier calls that it was going to be accretive to our business and accretive to our margins and I certainly know that it's going to be that way.
J J, Michael like that just to add one thing Dana I always tell Michael.
This acquisition is going to be the.
Maybe they have to Amazon.
It's going to give the ability for us and other retailers to be able to compete against the Amazons the targets and the Walmart.
In the future.
Thanks, Shannon I think Dan I'll just add.
Provide some specifics because its really embedded in that kind of tale of two halves story I was trying to tell at the beginning at the beginning of the Q&A session here, but I mean, we gave guidance of four to five points of topline from it. So that implies Michael said is $250 million to $300 million of revenue not including the revenue from our own brands, it's actually higher if you throw that in.
So the company elimination, but so external or third party revenue would be $250 million to $300 million, that's incremental to our P&L.
We're expecting a loss in the first half as Michael said, we've only owned it for two months two teams hard at work ramping up the business, we're making investments in people and other services et cetera.
The loss in the first half and that's been that spring is around a $20 million loss for the spring season, and then we guided breakeven for the year, so $20 million will pick up that $20 million in the back half as the plan, especially in the fourth quarter.
And that sets the business ought to be profitable in 2023 as Michael said.
Exciting thing that will provide more color on that in terms of two.
2023 specifics and within the targets that we've already provided.
Laura I think we have time for one more question.
Our final question comes from the line of Susan Anderson with B. Riley you May proceed with your question.
Hi, Thanks for taking my question and thanks for all the details.
Was curious it doesn't sound like you've seen any pushback on the higher price points, but just curious if theres any at all from the consumer particularly on the denim wear.
I think some of those you know those higher end price points, if youre seeing any pushback there.
Yes, I mean, we always invest accordingly, you know.
We've tested and scaled some of these price points and so far so good obviously theyre more of the fashion oriented fits.
Where the customers willing to pay and that's how we're doing it right in every category right. So.
Broaching it cautiously.
We still want great genuine pricing that is so important we are a mall based retailers. So we'll be smart there, but I do like the quality and the innovation that I'm seeing the innovation is just <unk>.
Incredible with this design team. They are just not stopping I mean I can go through every category but.
Looking at denim leggings.
Just new fabrications and qualities, we've already delivered so much in mens.
So where we can get paid we will and.
That's it.
That's a wrap I guess, but.
Really excited in.
I look forward to.
See what this next delivery.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Jay Schottenstein for closing remarks.
Okay. Thank you.
I'd like to summarize.
<unk> has undergone a tremendous transformation over the past two years 2021 was one of our Aam's best years on record, we achieved over $5 billion.
Revenue and that was a first for us.
Andy Andy standards that we had a spectacular year with operating profit of over $600 million best results. Since 2007 has not been incremental freight costs as a result of factory closures and supply chain disruptions that we had been our best year ever and over the past few years, we've made many key structural changes to our business and driving.
Higher profitability.
We set a new baseline of profitability for the company confident into 2020, 'twenty three targets of $5 $8.800 billion of operating profit and a 13%.
13, 5% operating margins, we appreciate everyone's time.
And investment in our company and thank you for joining joining us. This afternoon. Thank you.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation or the rest of your day.
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