Q1 2022 American Eagle Outfitters Inc Earnings Call
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Greetings and welcome to the American Eagle Outfitters first quarter 2022 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 <unk>.
Accordingly, I would now like to turn the conference over to your host Judy Meehan. Please go ahead.
Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein Executive Chairman and C E O.
Jen Foyle, President executive Creative director for AE, and Aerie, Michael <unk>, 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. The results 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.
And now I'll turn the call over to Jay.
Thanks for joining the call today. This was a complex quarter with many macro variables to navigate through.
Total revenue increased over last year, but was well below our expectations lapping stimulus payments and pent up demand.
Buying with rising inflation and higher gas prices weighed on our results.
Adding to these pressures the weather was unseasonably cold dampening sales of spring goods higher freight expenses deleverage grows.
And operating.
Profit result that was well below plan and what we are capable of delivering in hindsight, our buys and we're all plans were too optimistic with the current environment.
We are taking swift measures to reset.
We were clearing through spring goods in the second quarter and be in better position for the second half of the year.
We have adjusted our forward inventory plans reflect the board measure demand outlook. We're also looking after expense base and a more meaningful way.
Despite near term challenges I want to emphasize that our brands operation and organization or on solid ground.
Aerie revenue increased 8% in the quarter and has more than doubled since 2019 operating profit is up over fivefold compared to 2019.
Aerie continues to present incredible growth prospects for the future and highly desirable product categories with a strong brand platform, we see exciting potential as we reach more new customers brand expansion has been successful with a positive reception to new aerie offline locations innovation is at.
The core of the creative team and we look forward to new product introductions. This fall.
American Eagle as a destination for you it's loved by our customer base and consistently shows up as the top brand in our demographic.
Well over a decade. He has consistently ranked as a top favorite brand in the Piper Sandler.
<unk> stock and Teen survey.
<unk> brand remains highly profitable and extraordinary cash flow.
Now as we look to rebalance Assortments and Reits had plans for the current environment I'm confident we will see improvement over the past few years, great work has been done to optimize the real estate portfolio and strength in project product margins.
And that work continues to generate underlying benefits.
Regarding our new logistic business quiet platform has been actively signing up new customers. We are excited to announce new accounts, including fanatics and Saks off fifth.
Mike Michael will provide more details in a minute by embry optimistic about this business, we have hired amazing talent into the business from some of the best technology fulfillment and logistics companies in the World. We are extremely pleased with the benefits quiet for buying into our brands and see this as an exciting growth vehicle.
Now amount no met on ESG, where we continue to advance our progress in the second half of this year, we look forward to introducing more real good products across our brands demonstrating our commitment to environmentally responsible and sustainable design to production I'm also happy to share that we are exceeding.
Several of our water reduction goals ahead of schedule and we look forward to sharing more about progress when we release our ESG report this summer.
Before I turn the call over to Jack I wanted to underscore our laser focus on resetting, our plans and making improvements across areas of opportunity.
Likely in the near term environment will remain volatile I believe that every challenge creates an opportunity. That's what has enabled this company to endure for the long term.
Been through challenging periods in the past, we've always come through a stronger company with that I'll turn it over to Chad.
Thanks, Jay and good afternoon, everyone.
In the first quarter across brands, we faced difficult comparisons as we lap extremely strong demand last year.
Shifting macro trends and the cold spring created additional challenges, making it tough to nail down a consistent trend.
As March and April played out our plans proved too optimistic and demand fell short.
Despite this aerie delivered good results, especially factoring in the outsize growth in 2021.
First quarter revenue grew 8%, reflecting a strong 27% three year CAGR.
Swimwear was weak we believe driven by weather, excluding swim aerie revenue grew 15% with intimates leggings apparel and beauty Oh and also accessories also posting growth versus last year.
Offline by Aerie grew in the strong double digits lapping of triple digit growth as it continued to scale its assortment and customer base.
I'm also pleased to highlight that aerie continued to grow its customer count.
Aerie rich platform and marketing investments are resonating our spring campaign promoting happiness was a huge success, making hashtag aerie real the number two trending hashtag on tech tuck <unk>.
Our happy spot event generated almost 8 billion views and 2 million videos.
As the leader in women's Inclusivity and empowerment, we continue to push the envelope on innovation and we ensure our customers feel our passion for our great product and the best customer experience and a brand that they can be proud to shop.
In the near term as weather has improved we've seen seasonal categories pick up. However, we in fact, we expect the environment to remain a bit choppy. We also have excess spring merchandize and are focused on clearing through it during the second quarter.
This will position us for an improved second half when buys will be better aligned with demand.
For the fall season, we have exciting new product launches.
And these are excellent additions to the Aerie collection.
Looking out longer term I remain extremely confident in the area and the offline potential growth.
Shifting to American Eagle.
As we cycled a terrific season last year sales trends were a bit more challenging.
Revenue declined 6%, reflecting a negative 2% three year CAGR as we refocus our assortment and real estate footprint.
Although we had a number of good performers, including dresses accessories jeans and men's overall demand fell short of our plans.
In addition to right sizing the inventory, we also see an opportunity to strike a better balance across our key styles.
We are making those adjustments for the fall season.
I continue to be proud of our leading jeans business, which is up double digits across both genders compare it to the first quarter 2019.
Investments to re energize the brand and messaging are working well.
We are reactivating legacy AE customers and raising engagement in the first quarter, we relaunched our new members always campaign with it ticked up catch hashtag challenge that garnered almost 3 billion views.
He continues to be at the forefront of the meta versus marketing lunching on roadblocks with a remarkable 10 million visitors today.
And I'm. So pleased to note that AE was recognized as the best in use of media and social by did you did.
With a new team in place we are now starting to see new processes and energy fused together to drive the business sport.
I love, what I'm seeing for future seasons, including just coming back to school and I believe this new leadership team and structure will set us up for success.
Across brands, our teams are rolling up their sleeves to innovate test and learn and to use all the learnings we've had over the past years to get stronger better and faster.
We've been hard at work kind of fighting the season.
We are adjusting plans for the balance of the year to be better aligned with demand levels.
Although the environment could remain choppy, we are excited by the new trends in fashion and we are prepared to deliver a strong fall season to our customers.
Thank you and now I'll turn the call over to Michael.
Thanks, Jen and good afternoon, everyone in the midst of current challenges, we continue to manage our operations well.
We are focused on innovation to ensure a week, we can deliver the best customer experience, while also driving operational efficiencies and mitigating cost increases wherever we can.
Channel performance this quarter reflected continued migration back to stores and solid digital results compare to outsized growth over the past few years.
Store revenue increased 2% did.
Digital was down 6% against a 43% increase last year and 9% growth in the first quarter of 2020.
Digital penetration grew in the quarter for a 237% from 30% in 2019.
Our mobile App continues to show strong momentum driving more than a third of e-commerce sales and traffic in the quarter.
As we've indicated in the past mobile customers are most engaged digital shoppers.
We're also continuing to invest in new ways to drive better engagement and increased personalization.
This quarter, we introduced shop, the look enabling customers to browse and shop head to toe looks curated by our style.
We're very encouraged to see strong conversion with this tool that is double that of other site visitors.
Additionally, we also enhanced our search capabilities to return more relevant results and prioritize best sellers for our customers.
Now moving to supply chain clearly this environment remains challenging.
Costs remain elevated versus history, and although lead times have improved slightly in the quarter. There are also still longer than any prior history.
That being said, we do currently expect that freight costs for the fall and holiday seasons, we will benefit from lower Ocean and air freight rates.
And regarding product costs, we've been successful at keeping costs in check there were a number of mitigation measures, including platforming fabric.
First defining production facilities and leveraging our scale to find efficiencies.
However, beginning in the fourth quarter, we expect to see some pressure from product input costs.
Pacifically higher cotton costs.
This will be more than offset by relief on the freight side, primarily lower airfreight usage.
In this dynamic and inflationary environment, we are regularly reviewing our pricing strategy than our promotional activity to optimize both sales and margins and we do believe that there is good opportunity for us in the second half of the year.
Now regarding quiet platforms, we continue to drive efficiency using our innovative approach to delivery and fulfillment through the use of local distribution nodes in.
In the first quarter, we saw further reductions in our number of shipments per order and shipped our digital orders faster with a 13% reduction in delivery times.
We are extending these benefits through our third party quiet platforms business to customers through a shared supply chain services network. We've been really encouraged by the level of engagement, we've seen from other brands and retailers, who have who share our vision for the future of the supply chain Jay.
Jay highlighted a few of our significant new customers in his comments and we're looking forward to adding more in the coming months.
We believe that edge fulfillment share distribution and shared logistics.
Is going to be as transformative to retail.
The shift to omni channel was a few years ago.
It's going to help drive efficiencies and improve service that quiet platforms is already helping us to realize in our brands.
Although we are still in the early stages of this I'm very encouraged by our momentum and the potential that we see in this business and with that I'm going to turn the call over to Mike.
Thanks, Michael Good afternoon, everyone.
As a team as indicated in the top line was well below our expectations, while our plans baked in an impact of cycling stimulus and pent up demand from last year.
We underestimated the magnitude.
Shifting macro environment created additional challenges with added pressure from unseasonably cold weather throughout the quarter.
As a result of the topline this expenses deleveraged driving an operating profit result, well under our plan.
We also faced headwinds from freight inflation and the ramp up of quiet platforms as we discussed in our fourth quarter conference call.
Based on our first quarter performance and the current macroeconomic environment. We have moved quickly to reset our plans for the rest of the year.
This includes meaningful adjustments to both inventory and expenses, which I'll discuss throughout the call today.
First let me review the details of the first quarter, we posted consolidated revenue of $1 1 billion.
The revenue increase of 2% included approximately three points of growth from our supply chain acquisitions.
<unk> revenue declined 1% below our expectation of a mid to high single digit increase.
Compared to pre pandemic 2019, total revenue was up 19% and brand revenue was up 16% or $141 million.
Consolidated gross profit dollars declined 11% compared to the first quarter of 2021.
Gross margin rate of 36, 8% contracted 540 basis points, primarily reflecting headwinds to merchandize margins from higher freight costs of approximately 340 basis points.
As discussed last quarter, the integration of our supply chain acquisitions also adversely impacted the gross margin driving 120 basis points of deleverage.
Additionally, lower revenues drove fixed cost deleverage.
Compared to first quarter 2019, merchandize margins can continue to reflect the markdown and promotional discipline.
Rent dollars are down versus 2019, and leveraged as a percentage of sales, reflecting our measured approach to store openings and closures.
Turning to expenses SG&A, Deleveraged 270 basis points compared to the first quarter of 2021.
The mid teens dollar increase was in line with the guidance, we provided last quarter led by higher wages for store associates in hours to support the recovery and store operating capacity compared to last year.
Additionally, increased corporate compensation advertising and professional services were partially offset by lower incentive accruals.
Resetting our expense base is a major priority.
We are identifying savings well beyond the 60 million opportunity I discussed last quarter major.
Major areas of focus include store payroll and hours corporate compensation professional services and advertising.
Beginning in the second quarter expect year over year dollar growth in the low to mid single digits.
First quarter operating profit of $42 million reflected a 4% operating margin.
This included approximately $35 million of impact from higher freight costs, and a $12 million loss from our supply chain acquisitions.
$133 million of operating profit in 2021 and $49 million in 2019.
EPS was <unk> 16 per share consistent with the new accounting standard for convertible notes, our diluted share count of $220 million recognized as the fall of $49 million of shares of the unrealized dilution associated with the converts and our EPS includes an interest add back to net income of $3 million.
Breaking down the individual brand performance Aerie revenue increased 8% and comparable sales declined 2% falling outsize growth last year.
Operating profit was $43 million, reflecting a 13, 4% margin.
This was well below last year as we lapped a near perfect period of strong demand, while experiencing higher freight cost and expense deleverage related to the sales Miss.
Despite headwinds in the quarter on a multiyear basis areas growth trajectory remains intact growing revenue at a consistent and 25% plus CAGR and 20% plus profit flow through.
As I said earlier, we are adjusting our forward plans to be more consistent with these long term trends and remain very confident in Ares path from here.
AE brand revenue declined 6% operating profit was $104 million was 15, 2% operating margin.
This was well below an exceptional period last year mirroring the headwinds I just discussed to Ares profit results, including higher freight costs.
Compared to pre pandemic 2019 levels, the operating profit and margin was stable, reflecting the benefits of our more focused brand strategy.
We have downsized, our north American store footprint from 891 stores in the first quarter of 2019 to 815 stores in the first quarter of 2022, reflecting a mid single digit reduction in gross square footage.
As we right size and rebalance as inventories and kind of operating expenses I expect to see improvements to operating profits for the second half.
Consolidated ending inventory at cost was up 46% compared to last year.
Higher costs drove roughly half of the increase.
From a brand standpoint, Aerie and AE also drove half of the increase.
Total inventory units were up 24% due to higher in transit and on hand inventory, including seven points of growth related to aerie and offline new store openings.
Based on current demand trends, we're resetting inventory for the second half and will clear through excess spring goods in the second quarter.
We ended the quarter with $229 million in cash and total liquidity of $581 million.
Capital expenditures totaled $58 million in the quarter.
The full year, we expect capital expenditures to be approximately $275 million.
Turning to real estate, we continue to be pleased with our returns on new aerie openings with first year returns of approximately 50%.
In the first quarter, we opened 12, new aerie stores, including a mix of Standalone and aerie offline side by side formats.
For <unk>, we continued to make progress towards our long term target of right sizing the brand store footprint.
Looking ahead, we maintain significant flexibility to adjust our footprint further with 40% to 50% of our fleet available for lease action each year.
While first quarter brand performance has played out differently versus our original plan as I noted earlier, our results continued to show meaningful progress on key strategic pillars outlined in our real power real growth value creation plan.
We're committed to preserving and building on these improvements.
For the second quarter, we will be intently focused on clearing out excess spring inventory.
We expect top line growth to trend similarly to the first quarter, we expect higher markdowns as we clear through excess inventory combined with continued freight inflation and the impact of our supply chain acquisitions resulted in gross margin rate of approximately 33%.
As we said earlier, we're accident expense reductions and expect second quarter SG&A to be up in the mid single digit range.
As we reset to shifts in the macro environment, we're lowering our outlook for the full year.
Using 2019 as engaged we expect to deliver operating profit above the full year profit of $314 million.
This anticipates total revenue growth in the low single digits with brand revenue down slightly.
Back to enter the second half better align with demand with a more balanced inventory position and leaner expense base driving improved margins and profitability relative to the first half.
In terms of our longer term outlook, we will provide an update as we see greater visibility into our business and the macro environment.
With that I'll open it up for questions.
Thank you.
At this time, we'll be conducting a question and answer session. If you'd 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 press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys one.
Please while we poll for questions.
Your first question comes from Matthew Boss with Jpmorgan. Please proceed with your question.
Great. Thanks, So maybe John just to dig a little deeper on the magnitude of the of the <unk> top line Miss relative to the initial plan.
How would you break apart the topline underperformance at each of the concepts. If we were thinking about the shift in category spending whether is it inflationary impact on your core consumer is there a change in competition.
Just any help in terms of the magnitude of the first quarter Miss.
Sure.
We mentioned in Aerie as we think of the offline business, how exciting that businesses and it's still obviously in its infancy stage. So we're pretty excited about that category and that and I think we're ready for some fierce competition there as we roll out stores and build on that business.
And and.
Let me just take a step back and just say that in total I think it was a little macro right.
Kids one experience is weddings are happening again, so certainly there's that occasion dressing.
You know I think you can see in some of our competition, where dresses have trended really nicely.
But going back to Aerie I'm really pleased.
No it was fairly isolated in the swim business, where we saw some myths and.
And if you think about that business, it's definitely more penetrated on the direct side.
Where we do most of the business are in direct business was softer than stores, so again fairly isolated which I like because we're almost through the Sim. This wind season, and we're pretty excited about some of the launches that are coming your way for Aerie I just reviewed our back to school launch and it is more than exciting.
I don't know what to say I, just think like we're going to continue to forge ahead.
You know this launch is a very isolated and are you now.
Goto business and like I mentioned all of those businesses in Aerie, They're nice you know they did great. So hopefully that points to a turnaround in Q3 and Q4, where we definitely left some certainly margin in Q4 on the table. So I'm excited about that.
Thinking about AE look the denim business remains strong we are up against you know our biggest year last year, but if you look back to prior years, it's still our second best.
Volume season, so Q.
Do you want to you know past Q1, so pretty excited because we know how important that business is.
Eagle and certainly is a.
Category that we look forward and we re merchandise to for Q3 and Q4 like we had some learnings in Q1 and I think the team did a knockout job re penetrating the right fit and the right watches for Q3 and onwards, so excited about that.
There were some softness in tops and look we're learning and we're moving ahead. So that's really the answer that I can say I walked I had the pleasure of walking Michael repelled through.
Our delivery today some of our future deliveries are concepts for summer and some of the spring. Good then.
That's what we're doing we're looking ahead, we can learn there's always a learning and retail and.
That's how we're thinking about the business I love, the new claim and American Eagle, They're just getting going so I think there's a lot that comes down the pipe.
Great and then Mike maybe in terms of the looking ahead, what exactly is the composition of the excess inventory, what's the timeline to clear through the spring merchandise and then on the EBIT outlook to be above 2019 to 314 million base just any additional parameters you could provide I think would be helpful.
Yes, sure Matt I'll start with inventory I mean, I think we all know there are several factors to our ending inventory in the quarter freight costs are elevated I'm talking about it for quite some time now so thats in our cost inventory on the balance sheet as we all know.
Looking at the 24% increase in units I will say that a couple of things one we're coming off of last year's March April Hyperstimulus period. So from a unit perspective, we were down more than planned selling through more units than expected.
As we said a few times now coming into this year that we should expect that point in time balance sheet inventory at the end of each quarter to be almost a complete apples to oranges comparison this year.
We know where we're bringing in inventory sooner than typically planned with.
And the big seasonal change periods, just because of the supply chain length, it's planned that way so to compare to last year's tough.
But at the end of the day, we as we said as we said in prepared remarks, we plan to hot so on that plus 24% in units could gauge about a third of that is just missing the plan and having to clear through spring and summer goods as we talked about that we will do here in Q2.
The gross margin rate at.
33% accounts for.
Clearing through those goods, we're going to do it in a profitable way we've seen it over promoting is not paying for itself. So we are.
We have a good plan in terms of how to get to those units to be cleared for back to school.
Then I did forget one other piece of that inventory, we do have quite a bit of new aerie and offline openings that we have inventory on hand for as well as you know we've got a big sort of non comp base, it's new to last year.
Those are ramping up into the second quarter in terms of new stores will have 90 non comp stores as we get toward holiday.
So there is an inventory component of.
The plus 24 in units included that as well on.
On the EBIT front, yes, I mean look that's that's essentially agenda did a great job answering our trend line.
We are on this multiyear trend where aerie is looking.
To double to 19 to double from three years ago.
Nominal still that 25% plus CAGR, we're planning the inventory in the business to achieve that for the rest of this year.
He was down mid single digits and to.
<unk> 19, we're looking at that being semi consistent through the first quarter. So we hope that's conservative, but we're planning the business that way. So this EBIT guidance is counted.
<unk> four.
Continued freight pressure.
Accounting for that revenue trend line, that's seven eight points off of at least through the first four months of the year here at 708 points off of what we thought when we came into the year.
Again, very macro impact that we believe so if we roll that through the rest of this year with some of those cost pressures.
That's the guidance the other piece that entailed as with that also.
<unk> also said in my remarks expenses. So we are we're very aggressively resetting the expense base around this trend.
Does SG&A guidance of low single to mid double digit and incorporate some of that work.
I think for the back half of the work, we expect to see impact or benefit the back half a lot of the work. We're doing is to make sure going into 2023, we have that expense base reset to where we wanted to be going into next fiscal year. So we will get some benefit from here through the rest of the year.
And that guidance of hitting or exceeding 2019 is a good place to start we hope we can exceed that but for now.
The prudent place to be.
Okay. Thanks best of luck.
Our next question comes from Jay sole with UBS. Please proceed with your question.
Great. Thank you. So much my question is if you can just give us a little bit more information about how the quarter trended because February comps are pretty strong and if you can help us would have thought was what happened in March and April you can give us a sense of Mei.
Maybe you can give us a sense of how youre thinking about Q2, and then also back to school assuming back to schools get impacted July business, given youre lapping the child tax credit from last year.
And maybe some pent up demand because there wasn't a lot of in person school in 2020, how are you thinking about the July business is back to school begins thank you.
Yes, I can start J.
So yes February the trend last year was stronger we planned it that way we were up mid teens I think we said that on our fourth quarter call, but again that was prior to lapping stimulus. It really hit mid March and through April in terms of the benefit from the stimulus last year's we planned March down significantly.
But then we planned April with the Easter timing being later than we had hoped or we believe that April will bounce back.
Somewhat positive way, even up against stimulus with some of that holiday shift timing, we know weather did not help us there and quite honestly I think we've learned now that the.
The macro impact to the business from where we planned it is a little different.
Planted higher playing wrong and now we're going to reset our plans around that.
That's been consistent very consistent through the first quarter and even now into may as our multi year trend line and I think we all hate continuing to do this but we're still talking about 2019, because it is a grounding point.
Knowing that the volatility of the last couple of years in 2020 one.
So aerie has been very consistent on this doubling 19 trend, 25% CAGR over the three years, we're going to plan the business that way to drive profitability.
<unk> down in mid single digits has been consistent too. So again, that's why we're setting these plans up for the remainder of the year. This way we did see some pops as we got into May and we did see some weather benefit finally in early may so a little bit of a change in trend there which is somewhat encouraging.
But again, we're planning the business for the brands on this trend line that we've seen on this multi year basis through the first three and half months.
So you answered your the answer to your question. Your July I mean that is really essentially what we're doing for the remainder of this year with.
Hope that there's some potential upside to that but it's.
Again, the right place to position inventory.
Okay got it thank you so much.
Your next question comes from Janet Kloppenburg with J J K Research Associates. Please proceed with your question.
Hi, Hi, everybody.
Just a couple of questions on the repositioning of the Assortments.
Was there enough time to get the back to school and holiday Assortments.
Better positioned perhaps.
The weakness that youre seeing in the tops business.
Or do you.
Do you anticipate that there'll be further margin pressure as we go through that period. It seems like you too given the EBIT guidance Love you to talk through where you were able to make changes and if we should see greater progress in aerie or at American Eagle and then Jim If you could address for me something that's confusing.
He is lumpy.
Nothing assortments at aerie, but they seem to be.
Overlapping a lot with a lot of the women's Assortments at Eagle and I'm wondering if you're contemplating any cannibalization there and how we should think about that thank you.
Yeah Janet.
Nice to hear you I'm, sorry, Janet I'm thinking about something else does as you speak.
That night.
Yeah.
I feel really great about how we'll be re assorted back to school and our famous for categories like I mentioned in my first <unk>.
Spots are set up to.
To go and you know so for instance, using denim as an example, not only did we look at our Washington are fit and making sure that we had the right qualities for both men's and women's.
And distorting there we also really like how our price positioning is so we definitely made sure that we have the good better best pricing Assortments.
And I feel really strong that sort.
Only that the teams really well balance that whole denim assortment tops gets stronger Janet I mean with Janet we don't have an issue actually in men's men's has been very strong and women's like I said. This is the most important thing. We're just getting going we have a brand new designer brand new lead merchant and a new head of marketing essentially and I.
What I am seeing for the future, we're going to get really psyched around these assortments I feel really good Janet I really do.
I mean do you identify can you identify what went wrong in women's tops at equal because I thought they had been okay. Two last year and there has been.
Okay.
Or just about the balance of the inventory really it's just about how we planned it I think makes up that up well we.
We were just too aggressive I think that's all in and we reset them and we reset our inventory levels that are I think we're going to really reap the benefit there look I like the profit margins in American Eagle I mean, our gross margins.
And we're not knee jerking. During this time, we made the decision not to overly promote which I think was a very smart strategic long term decision. Our markdown rates are at all time lows.
And we're going to ride. This wave. This is what happens during these times, it's our job to get through it and the most profitable way and I I like where our inventories are positioned.
Mentioned in Aerie.
<unk> are a great.
Great businesses get stronger in the back half offline, which we've seen great results.
Let's get bigger and stronger with new launches. So it's really it really gets swim you know Mike mentioned, the number would have been up 15% without that category. So as that seasonality take hold I think I feel really good about where we're headed in aerie.
You know in Canada.
Yeah, I get that question a lot.
And you know what I Love I Love that I can actually see all the Assortments now and.
And when I mention that you know that was another thing that we put in place we used to see the American Eagle line at a at a very different timeframe than I saw aerie. So not only do we have a new team in place. So we have a whole new process, where we actually I can see the various lines during similar weeks, which I think is.
Huge advantage that said I will say when there's a trend there was a trend there was a trend I look at that as our opportunity to gain market share.
And we see it all the time.
Police depending itself both in American Eagle Womens and in Aerie now my job is to make sure that the differentiated enough. So that we can go through increments holiday. So that's what we're working towards but American Eagle really is about Janet slow and steady wins the rate I'm not getting too aggressive making sure that we're protecting the margin.
Building assortment in setting up the plan to be that's really how I'm thinking about the business and of course, you've heard the aerie numbers I still feel very passionate that there's growth there, particularly with offline.
Thanks, Shannon and lots of luck.
Thank you Janet nice to hear from you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment. Please while we poll for more questions.
Your next question comes from Marni Shapiro with retail tracker. Please proceed with your question.
Hi, everybody.
And Jim I actually thought the tops worked really night. So they were a great improvements over last year.
But Jay I actually have a Pos safely marni. Thank you were working hard.
I mean compared to 2019 also unbelievable, but Jay I actually have a big picture question for you because we have been through periods like this before.
But I feel like as a company American Eagle has just done so much work.
Operationally and <unk>.
Technology that you're coming into this tough period, a very different company than you were in the past.
And at the same time.
You have a fashion trend in denim, that's playing to your company's strength. So I guess am I seeing this right or is there something else going on because it feels like.
Compare to past times, when we've had these moments with the consumer or inflation or anything else. The company is much better positioned here, you're starting from a stronger point to fix what is going wrong.
Yes.
So.
Right.
Is this a question like address Mi or is it or is it yes Jan Okay no.
To you because you've been through enough of these ups and downs in business, but look I've been through these ups and downs since our since been involved with the company since early 90 said.
And look one thing as we consistently make money no matter what the story is.
We got a little surprised this first quarter.
<unk>.
And the teams and the teams the teams. The team has made a lot of adjustments we feel very good about the surge in the fourth quarter and we think we're in good shape I think like you said, we put a lot of money in our technology.
We're making investments in our supply chain.
We're making investments in the stores, making it easier for the customer to shop.
With the experience.
On line better.
I think you know.
I think we're in great shape, there might be a hiccup this quarter, where the company is in great shape with great team I think we're the best.
You know like the best team out there period.
I'm not worried you feel good it felt very strongly very strongly about the company.
And look.
We are opportunistic and.
There'll be there'll be a lot of opportunities for out for for us out there also disruptions.
Patrick Best of luck for the summer season.
Thank you.
Rich.
Your next question comes from Dan Stroller with BMO capital markets. Please proceed with your question.
Hey, good afternoon.
Let's ask about the omni channel, our omnichannel capabilities and channel profitability I think traditionally you've mentioned that store and E. Comm profitability has been relatively in line with one another so I was just curious if that diverged at all and if so how do you get more bogus order or is it a drop in store transactions.
Yeah, Dan. Thanks, if I can start with that question I think the way I've described this before is.
I mean, obviously, we look at the channels in terms of productivity both in top line trend and then the profitability flow through coming coming through remote channels.
At the end of the day, though.
I don't like to talk about channel profitability, all that much because we are looking at delivery efficiencies. We're looking at store labor efficiencies, we're looking at.
Really the cost of a transaction we've reduced rent costs. So it's really about efficiencies through the P&L because as we know our customers don't really shop channels. They just shop us.
A lot of times, they're shopping on their app as they're walking into the store, we're fulfilling orders from the store.
To directly to customers homes, So channel profitability in general is not that different and we're working through the expense line items the attached to each transaction to find optimal to find ways to optimize.
I guess, the best way to answer that question without <unk>.
Getting into a lot of accounting because there's a lot of our accounting around channel profitability as allocations, which.
No we don't like to get into so it is just finding efficiencies related to every transaction in the cost of every transaction is the way we like to think about it.
Got it makes sense, thank you and best of luck.
Your next question comes from Corey Tarlow with Jefferies. Please proceed with your question.
Hi, good afternoon, and thank you for taking my questions. Firstly, just a point of clarification on the inventory is the expectation that it will be completely worked through by the end of the second quarter and then if so how should we expect the remainder of the gross margin.
To cadence throughout the rest of this fiscal year.
Yeah. Thanks, Yeah, So I think from a spring and summer perspective in terms of how we plan the business, we expect to be clean going into back to school and when I say clean we have reset our plans multiple times now for the back half.
So that our average inventory is in line with these trend expectations and the trend we've been seeing from for almost four months now.
So on average for those seasons.
We're really happy with the way inventory is positioned against our current trend line.
At the end of each quarter on the balance sheet, you may again, youre going to see some apples and oranges comparisons in terms of just timing of inventory.
So we feel really good about that from a gross margin perspective, we provided a 33% for the second quarter, which is where we think will be to get through the good we own right now.
When we look to the back half we do expect to see improvement Q3, I think we gave previously previous guidance to be in the low <unk>.
We do expect to be at a very healthy gross margin and the muster it will be exactly at that rate with just the top line trend change, but I would think targeting 40 is the right place to be for us in that third quarter timeframe Q4, we typically again we.
No more promotional it's just the nature of the holiday period.
And we in January is when we.
Since you cleared through all of our fall and winter and holiday goods gross margins typically a little lower but we do expect to see significant improvement to last year's rate because of that $60 million impact from air freight and I think Michael it in his prepared remarks, we do not.
I expect to.
Incur.
Much airfreight at all in the fourth quarter compared to that $60 million number.
Got it and then in an environment, where freight costs continue to increase can you highlight some.
T takes as it relates to your how your supply chain businesses performed in the quarter and then maybe what to expect going forward.
Sure.
Yeah.
Hi chain business actually I think I think what Mike said in the prepared remarks was performed a little bit better than expected in Q1.
We're clearly in a very disrupted supply chain environment and to me.
That only makes the impetus for need for people needing this kind of service greater.
Clearly positioning inventory closer to customers being able to get supply chain efficiencies.
Being able to have fast and efficient delivery.
It is it is the future. It is the way that retailers are going to want to operate.
I said earlier to me, it's the same as when retailers all decided to go omni channel or most decided to go omni channel a few years ago.
We're going to look back at this moment and we're going to look back at the changes that quiet leading in the industry and we're going to say positioning inventory on the edge using shared capacity to do that is as transformative to the retail landscape as you know.
Omni channel changes were years ago. So we're pleased with how the supply chain business performed at acquired significant new customers J J mentioned, Saks and fanatics were excited too.
Have them join in for me what I'm excited about is when we talk to new customers they get it.
Want to operate this way they see this as the way in the future and I'm very optimistic for where that business is headed.
Great very helpful. Thank you very much and best of luck.
Yeah, great. Thanks.
Your final question today comes from Rebecca Duval with Bluefin Research partners. Please proceed with your question.
Good afternoon, and thank you for taking my call.
This equates to one two questions. The first is you guys seem to be pretty disciplined in terms of your SKU count on markdowns, particularly in comparison to 2019 levels and so I just want to understand how youre thinking about obviously you have some inventory youre going to move through here in Q2.
But then should we think that your goal is obviously to get to that SKU count reduction again in terms of markdown.
And then the second question is on raw material inflation obviously.
Part of the business.
And we've been paying attention to where cotton is going and I was just wondering.
No where you guys stand on that and if you're able to you're hedged.
Thank you Pat.
Yes, how are you regarding SKU count we continue to look at our Cc counts.
We definitely have reduced a tremendous amount in American eagle since I started really rationalizing denim, we were way over skewed and.
And like I said, you heard the numbers I am very pleased with the result, but looking at two.
2019, and the volume that we were able to drive in bottoms just way more productive.
I think that's going to bode well for the future for our margins as well.
Look we're in the business of having edited well defined assortments.
One thing that I really.
I think is what we do best in both American Eagle and Aerie. So again, we're going to continue to optimize there's some more opportunity in denim as we move into Q3.
Aerie when it.
We pretty much always been really disciplined there some learnings in offline as we've expanded that assortment and that was really from back in Q3 last year, that's really where we.
Awesome opportunity and we worked on that as a team and I'm feeling like we're in a really good place there.
Yeah, and hey write back.
Yeah got it.
Michael and Paul how are you.
On.
Raw material inflation.
We had platform fabrics I had mentioned last year very aggressively all the way through back to school this year.
So we had cost product costs locked in through back to school.
I expect markups are receipt mark up is up.
In Q3 and.
Really at pre pandemic levels in Q4, we do start to feel cotton price increases.
But more than offset by.
The transportation benefits that we're going to get and actually when you look at the receipt IMU in Q4, it's really very close to what pre pandemic levels were also.
Wow that's great.
Okay. Thanks, a lot and Rebecca is one more point quickly just to be clear because the current inventory levels have nothing to do with SKU count in choice counts were still down well over 20% for the 2019 levels. This is just we just bought to a higher level of sales demand that's really.
That's really what we're cleaning up its not not anything in terms of choice or SKU counts.
<unk> again, and becoming on discipline thats not thank Jen said it just want to make sure that was clear.
Yeah, I was thinking more like a SKU count on the markdown basis, like it's still pretty clean compared to 2019 levels and maybe that's a reflection of the fact that you do have less skus.
And so we can expect that to stay the same thing.
Yes.
Perfect. Thank you guys. Good luck.
Alright take care.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Jay Schottenstein CEO for closing remarks. Please go ahead. Okay. Thank you operator challenges unveil opportunity, we have a very strong business with leading brands.
We're using learning from this quarter to Reits that our plans to deliver improved performance in the back half of the year. Thank you for your time and investment and look forward to updating you on our progress on the next quarter call. Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you all for your participation.
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