Q2 2022 American Eagle Outfitters Inc Earnings Call
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Greetings and welcome to the American Eagle Outfitters second quarter 2022 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 at this time your presentation.
Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer.
Jen Foyle President executive Creative director for AE, and Aerie, Michael 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 companys current expectations or beliefs.
The results actually realized may differ materially based on risk factors included in our SEC filings.
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 H E O Dash, Inc. Dot com in the Investor Relations section here.
Here you can also find our second quarter investor presentation.
And now I will turn the call over to Jay.
Good afternoon. Thank you for joining US today. This is clearly an unprecedented time in retail we.
We are cycling extraordinary even demand patterns brought on by stimulation COVID-19 over the last few years and we are navigating through a highly volatile macro environment.
Our second quarter results reflected these challenges as revenue came in below our plan and markdowns weighted on profit margins.
The first quarter call. We highlighted the actions we were taking in response to changing demand and to reposition our business for an improved second half. This included a firm goal to write.
Size, our inventory and reset our expense base to be more aligned with demand in the second quarter significant progress was made across both these initiatives.
On the inventory side, we cleared all excess spring and summer goods and entered the third quarter with better inventory levels and fresh at back to school and fall merchandise the OXXO action expense reductions across the organization.
As Mike will review, we are taking further steps to drive improved profitability and cash generation.
Lose a hiring freeze and further reductions in noncritical expenses and lower capital spending.
We also paused our quarterly cash dividend.
We have returned to our $65 million in cash to shareholders through a combination of dividends and share repurchases, marking our highest level of reinsurance since 2015.
While we will take the rest of this year.
And our cash position, we are committed to continuing to return cash to shareholders is a fundamental principle.
On a separate note we made strategic changes to our leadership structure to enhance focus on consumer experience and our growth initiatives.
Goodbye in store and digital operations to enable a more holistic and cohesive view of the customer.
The new structure will create efficiencies.
And the brand experience as we execute seamlessly across channels.
This includes more focused on our international business, where I see tremendous opportunity for our brands.
Please with the positive momentum building.
Building over the past few years.
This change will facilitate a more strategic approach as we further optimize key markets, including Canada, and Mexico, while fueling our licensed partners for continued expansion over the long term.
As we navigate through the near term macro challenges, we have not taken our eyes off the strong potential for future growth areas incredible brand platform continues to see exceptional multiyear growth with.
Second quarter revenue reflect the industry, leading 25% three year compound annual growth rate I remain extremely bullish on the outlook for aerie and offline and their future potential.
American Eagle is a dominant brand and the go to destination for us.
With very strong brand affinity and recognition.
Innovation, new products fueling new fashion trends and further global expansion are key areas of focus to drive profitable growth.
We continue to invest in bringing our customers, a seamless and engaging shopping experience across digital and stores.
Our logistics business quiet platforms.
Binding significant benefit to our operations, while also expanding its third party revenue base the offering innovative.
And more cost efficient logistics solutions.
The growth in our business South Park confirms our initial investment thesis on quiets value proposition.
Differentiated fulfillment model I am encouraged by the business and excited about that.
Our long term growth potential.
I'm proud of the continued progress we are making on our ESG initiatives. We look forward to publishing our first ESG report next week, introducing standardized reporting and increase transparency.
Our brands are healthy and our business is Brazil.
Comparisons will eventually stabilize the supply chain landscape continue to improve restoring the agility in our operation.
In the meantime, we will stay conservative and focused on the core fundamentals.
Our success in the past.
Creating great products.
Fatality marketing.
Building unique brands with strong customer connection and chasing into demand.
The actions we have taken to reset this year is significant.
Significant undertaking.
I'm thankful to our teams for acting quickly that purposely.
Yet we know there is more to do in these unprecedented times, we are focused on driving continuous improvement across the business.
With that I'll turn the call over to Jack.
Thanks, Jay and good afternoon, everyone. This was clearly a challenging quarter as we manage through the current environment. We remain focused on adjusting our assortments and right sizing inventory.
I am pleased to note that we entered the fall season with fresh and current assortments across brands.
We have significantly pulled back on fall receipts and continue to adjust for inventory to be more in line with shopping trends.
Clearly lapping enormous demand from last year has also been a hurdle yet I see no letup in the consumer affinity and love for casual comfy enacted where it's a lifestyle not a trend and it's in demand.
As we see comparisons to last year seen I'm confident momentum will come back to us and in fact looking forward. There are great new trends emerging around silhouette colour and fabrication that we're creating even more excitement around the lifestyle.
Now, let me provide some second quarter details by brand.
<unk> revenue increased 11% compared to last year, driven by new store openings.
Comparable sales were down 6% following a 25 comp increase last year.
Swimwear remain soft.
While overall demand was below our plan the majority of categories posted increases to last year.
These leggings apparel and accessories, all posting positive growth.
Additionally, offline continues to show incredible potential and demonstrates strong customer acceptance.
I'm also pleased to see that area's multiyear growth trajectory remains intact.
Since second quarter of 2019 revenues have nearly doubled growing almost $170 million.
Our customer file has expanded by almost 2 million shoppers.
We continue to focus on delivering innovation and newness to our customers.
Moody's is our new collection, a favorite first layers that we call anti shapewear.
She has been extremely successful driving incremental traffic to the brand and nearly 6 billion impressions to date.
Our new Bra is froth features revolutionary technology, Reestablishing, our authority and bringing newness back to the business.
We will continue to build out our smoothies collection and upcoming season on.
On the marketing front, we launched we are real campaign amplifying inspirational messages from women within the Aerie community with a strong customer response.
Now shifting to American Eagle.
Revenue declined 8% to last year.
Comparable sales were down 10%.
This followed 39% comp growth in 2021 <unk>.
Category trends were challenged as we cycled exceptional growth last year in a tougher macro environment.
Our best categories included menswear overall women's dresses shirts fleece and accessories.
We've been highly focused on making adjustments to our buys to ensure we are better positioned for future seasons.
In addition to resetting overall inventory levels to be more in line with demand, we are making adjustments across all categories.
As we make the transition into new denim silhouette and fashion trends in bottoms we.
See an opportunity to better allocate our investments.
Additionally, we are beginning to see pockets of improvement in tops as our focus on outfitting yields result.
Here, we are rebalancing our buys to emphasize the trends that are working very well.
We are also pleased to see the supply chain begins to normalize.
This is creating better inventory flows shorter lead times and enables us to reestablish our best in class test and Chase practice.
And he remains number one in jeans and the number two favorite brand for females and number three for meal and our core demographic.
As the dominant player AE is continuously bringing newness to the category. This quarter, we launched our new stretch it collection and.
An industry first stringent genes Mary the latest in fashion trends with our unwavering commitment to comfort.
<unk> continues to be a leader in social commerce, and the new realms of meta versus.
As we explore new ways to engage with our customers in the second quarter, we partnered with Twitch on a gaming tournament, which drove strong traffic to our site separately or roadblocks experience has become the second most popular experience on the platform.
Second only to Gucci with 35 million unique visitors to date and exceptional engagement metrics.
As I said earlier cross brands my confidence is stronger than ever we are focused on delivering innovation and distorting engine new trends, while maintaining a cautious near term view.
We are ready for the upcoming holiday season, and spring is right around the corner with plenty of exciting trends to leverage.
I want to thank Gary and the AE team for their hard work and being quick to adapt in a very dynamic macro environment.
And now ill turn the call over to Michael.
Thanks, John and good afternoon, everyone as we navigate a challenging retail environment, we are leaning into the strength of our operations. We've invested in our supply chain, which is yielding greater speed efficiency and cost benefits.
We have amazing brands and our selling channels are very strong.
We operate an industry, leading store fleet in a truly best in class digital capability.
In the second quarter channel performance reflected macro pressures across retail.
In stores lower traffic in a lower spend drove a 9% comp decline.
Digital sales were down 6%.
Down to last year, our digital business has seen significant growth over the past three years with revenue up 60% to second quarter 2019.
Digital penetration has also grown to 33% from 24%.
Our mobile App had another strong quarter and is now our largest source of revenue in the direct channel.
This is a key positive its app customers are most engaged and valuable omni channel customers.
We are continuing to invest in the latest new technologies to enhance the customer shopping experience in the second quarter, we introduced a new mobile point of sale system across our North American store base.
Giving our customer our customers the flexibility to checkout our return items.
Our store associates anywhere in the store.
We expect it to improve transaction speed or minimize wait time, especially as we head into our peak fall and holiday selling season.
As Jay mentioned the organizational changes we have made will allow us to operate with a more integrated and channel agnostic customer strategy, and it's going to create efficiencies and cost savings.
We are continuing to rationalize AE store base and closed seven more stores across the North America fleet in the quarter, bringing our regional store count to 858 stores.
This is down from 931 at the end of fiscal 2019.
We also added approximately 20, new aerie and offline locations in the second quarter, bringing our total openings over the past 12 months to approximately 100 new stores.
Aerie store expansion strategy has been very successful in building brand awareness.
After significant investment over the past few years, we are slowing down the pace of openings as we focus on maximizing these investments as we've noted in the past new stores grow at an accelerated rate in years, two and three before approaching the comp store average in year four.
So as new stores ramp up we expect to see very nice returns from our investments, including both the sales and profit generated within the four walls as well as the digital Halo created for our online channel.
Our typical payback period on Aerie stores is less than three years with returns that well exceed our cost of capital and reflect the company's highest rois.
Moving on to supply chain after a highly challenging year I'm very pleased to see inbound supply chain improvement shipped.
Shipping delays and bottlenecks are easing transit times are shorter and freight costs, although still elevated to pre pandemic history have come off substantially from highs reached last year.
As a result, our lead times have narrowed dramatically from their peak last November .
Importantly, this is bringing back our ability to be more agile and responsive to changes in demand.
On the inbound freight side, we expect to see Mark up relief in the back half of the year as we anniversary $70 million in higher airfreight related to factory disruptions in Vietnam last fall. This.
This is going to begin to benefit the P&L in the third quarter and build significantly into the fourth quarter and into 2023 as we cycle peak usage.
Cotton pricing has also moderated from peaks this past spring and I expect we're going to see product cost look favorable into next year.
Now moving on to quiet platform, our localized fulfillment model now handle the third of our direct orders across the AE and Aerie brand and is continuing to drive efficiency.
We are fulfilling orders faster and with fewer shipments our Casa fulfilling orders are down to those last year and to 2019.
The resulting savings are helping us to contain delivery costs, even as rates remained elevated across the industry.
Faster delivery times are contributing to a much better online shopping experience for our customers with approximately 75% of online orders, reaching customers within three days of checkout in the second quarter.
We even see room for this rate to move higher as quiet platforms expands its footprint to service additional markets next year, which should enable nationwide next day services.
Over the past eight months, we have made significant progress in scaling quiet platform.
Since closing the acquisition last December we've added significant amount of new customers and entered new markets.
We expect the momentum is going to continue in the second half as.
As new customers are entering the platform, they're realizing efficiencies in their operations, resulting in greater engagement and additional business.
While Mike is going to highlight the impact of the business on our consolidated financials I want to note that it performed in line with our plan with improved results from the first quarter.
I remain very encouraged by all the interest we have received in this business as it continues to expand.
As we look ahead, our focus remains on capturing even greater share of the market opportunity and.
And with that I'll turn the call over to Mike.
Thanks, Michael Good afternoon, everyone.
As Jim mentioned, we're taking numerous steps to improve profitability and cash flow, which I'll discuss throughout my remarks today let.
Let me start with a review of the quarter.
Consolidated revenue for the second quarter was $1 2 billion. This was flat to last year included two points of growth from our supply chain acquisitions.
Brand revenue declined 2% following record revenue supported by an exceptionally healthy consumer environment last year.
Consistent with what others have said, we saw a slowdown in demand this summer.
For the quarter <unk> revenue was up 11% and American Eagle declined 8%.
Compared to pre pandemic 2019, total revenue increased 15% and brand revenue was up 12% or $130 million.
Gross profit dollars declined 26% compared to last year, the gross margin rate of 39% contracted 1120 basis points higher.
Higher markdowns drove 750 basis points of the decline.
I want to emphasize that as we clear through inventory in the second quarter, our priority was to maintain the pricing integrity and brand equity built over the past few years.
Our AUR in the second quarter was the second highest achieved in the history of the company down only 4% to last year.
We leaned on end of season sell off to fully clear out all excess spring and summer goods, which was roughly one third of the markdown pressure in the quarter and had a $30 million impact to profitability.
Higher freight costs were a 200 basis point headwind to the gross margin rate and the integration of our supply chain acquisitions drove 60 basis points of incremental deleverage.
Turning to expenses SG&A, Deleveraged 110 basis points compared to the second quarter of 2021.
Mid single digit dollar increase was in line with guidance provided last quarter led by higher wages for store associates, New store opening expense as well as increased corporate compensation advertising and professional services.
This was partially offset by lower incentive accruals and expense actions announced last quarter.
We remain laser focused on resetting our expense base.
Since our last update we have expanded the scope of our expense reductions as we continue to target store and corporate compensation professional services travel and advertising.
We've implemented a hiring freeze and pause noncritical spending.
With these actions, we now expect $100 million in annualized expense reductions from our original plan ahead of the $60 million discussed last quarter.
This translates to SG&A dollars approximately flat to last year in the second half compared to prior guidance for low to mid single digit growth.
Okay.
Second quarter operating profit of $14 million reflected a 1% operating margin.
This included a $30 million impact from incremental end of season inventory sell offs mentioned earlier.
And a $25 million headwind from higher freight costs.
It also included a $9 million loss from quiet platforms, reflecting a sequential improvement from the first quarter as planned and previously communicated.
Margin pressure was felt across brands due to their Mr plan.
Ares margins were more impacted as a result of several factors. There you saw a larger variant the plan, which was based on outsized growth over the past few years.
This resulted in a larger impact from sell off to clear inventory and in season promotions fell mostly acutely in the second quarter due to the timing of various seasonal clearance activity.
Additionally, we saw some pressure on margins due to higher number of new store openings, which are still in their ramp up period.
As inventory resets and newer stores continue to build we expect <unk> margins to show a meaningful recovery back to double digits in the second half.
Adjusted EPS was <unk> <unk> per share included a $1 million interest add back to net income.
Our adjusted diluted share count was $207 million.
During the second quarter, we took steps to strengthen our capital structure, we exchanged $342 million or approximately 80% of the principal associated with our convertible note and Upsized and extended our ABL facility.
This provides additional liquidity under more favorable terms.
We also completed a $200 million accelerated repurchase program.
In the second quarter, we repurchased 17 million shares as part of the program.
With the full benefit of these actions, we expect a third quarter weighted average diluted share count of $198 million.
Consolidated ending inventory at cost was up 36% compared to last year, reflecting a 10 point improvement from first quarter levels.
From a brand standpoint, aerie and AE each represented half the increase with approximately 20% of the increase driven by black leggings, a core item that <unk> strong year round demand.
Total inventory units were up 22%.
This reflected higher in stocks as we lap supply chain disruption last year earlier.
Earlier receipts of back to school and fall goods, reflecting improved lead times and higher units to support new area in offline store openings.
Quarter end inventory is current and fresh for the fall season.
Clearance levels are in line with last year, and we do not have pathways.
Given ongoing macro challenges we've taken further action to reduce inventories for the second half of the year.
As we make additional progress we expect to end of third quarter with inventory up in the mid single digits in fourth quarter, ending inventory down to last year.
We anticipate promotional intensity remained high across retail in the back half of the year.
Although we will not be immune to this with inventory plans more aligned with demand, we're better positioned to navigate through it.
We ended the quarter with $98 million in cash and total liquidity of $453 million.
Capital expenditures totaled 69 million in the quarter as.
As mentioned earlier, we have paused all uncommitted capex spend for the balance of the year as we absorb and grow into our investments.
For the full year, we now expect capital expenditures of approximately $250 million. This is down from our prior guidance of $275 million with work being done to reassess investment needs for 2023 as well.
Now onto our outlook demand remains challenging, especially as we cycle, an incredibly strong and record back to school season last year with brand revenue down in the high single digits quarter to date.
Assuming current trends continue we expect third quarter gross margin to be in the mid thirties and fourth quarter in the low Thirty's. This reflects higher markdowns as a result of the current demand environment and our seasonal clearance cadence, which is more weighted to the fourth quarter.
We are also anticipating freight relief as we lap significant use of air freight linked to the Vietnam factory closures last year, especially in the fourth quarter.
As I noted earlier SG&A dollars are expected to be relatively flat in the back half.
Our tax rate assumption in the high Twenty's and weighted average share count at approximately $198 million.
2022 is clearly shaping up very differently from what we had originally anticipated.
As Jay noted, we're prioritizing liquidity and financial flexibility in the near term and pausing, our quarterly cash dividend of <unk> 18 per share.
American Eagle Outfitters had a long history of returning cash to shareholders through dividends and share repurchase we.
We remain committed to maintaining this precedent in the long run.
In the midst of the challenges we're facing this year. We're also working hard to position 2023 for improved profitability solidifying work across expenses Capex and inventory.
As Jay noted our brands and operations remained strong and I'm confident this will come through in our results next year.
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 press star two to remove your question from the queue for practice.
<unk> been using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys.
The interest of time, please limit yourself to one question.
One moment, while we poll for questions.
Our first question comes from the line of Jay sole with UBS. You May proceed with your question.
Great. Thank you so much I wanted to ask about Aerie and if you could just talk about where in the quarter, maybe the projection differed from what played out was it that you are.
Your view on the macro was optimistic was it some of the styles isn't didn't resonate with some of the categories. Maybe that you thought would trend didn't versus other categories. You can just sort of dive in a little bit and talk about where the differences were.
In that business versus your expectations that would be great. Thank you.
I can start John I'll, just hit some of the trend progression you can at the product side of the Jays question. Thanks, Jay by the way. So if you go back to the first quarter call may 24th we talked about the consistency of the sales trend that we're seeing through the first quarter.
Up in the mid to high mid teens to high teens for 2019 is what we're talking about then and we saw that very consistently February through April actually it may open to the call. We actually saw may accelerate to that trend a bit which made us confident in kind of grounding ourselves in that.
But what happened really mid to late June just as others have talked about we did see a deceleration to trend as we got into summer.
That's really continued the continued through July continued into the sort of early mid August through back to school peaks.
We've definitely seen some improvement in recent weeks here of these kind of got into September and this past labor day weekend.
But we're still guiding conservatively and we're assuming that high single digit the guidance. We're providing is assuming that negative high single digit trend continues that we've seen quarter to date so far.
So that's what really changed it was really that mid mid June late June timeframe, and it feels like across the industry.
It's been consistent in terms of a bit of a slowdown.
That occurred at that point, Jamie even if the category, yes, Thanks, Mike and you said it well.
Really it was isolated and the slim category to be honest Jay.
We saw really incredible results in all of our other categories.
And you know you heard from Mike Hal.
That really impacted from a seasonality standpoint, but what I like what I'm seeing like left we look forward. We look ahead. We just had one of our best launches ever smoothies launch, which is highly rooted in intimate apparel, which is season less so I love that category and.
Leggings are off to a great start and again now.
We don't take a lot of markdowns on legging theyre highly isolated and black they do the majority of the business. So early on and you know it is early to say, but we're very pleased with the results. So far for back to school. So like I said going back to Q1 and Q2 very isolated in swim.
But other categories saw nice results.
And Jay maybe the last point that too.
And for Aerie, specifically, we still saw almost doubling the 2019 results look like.
At the end of the quarter. So from a from a go forward perspective, now we feel like inventory is reset very appropriately.
These new stores that are still in their ramp up period Michael described.
Kind of where we think those are headed we got over 100 stores.
For non comp or knew going into the back half with inventory reset.
Very bullish on area for the back half an hour in terms of where we're going from here knowing that the macro environment is still uncertain, but as we as we go forward. The rest of this year and into 2023. There is a lot of optimism in terms of areas bottom line top line growth and bottom line results that were focused on.
Got it okay. Thank you so much.
Our next question comes from the line of Matthew Boss with Jpmorgan. You May proceed with your question.
Great. Thanks.
John could you speak to demand shifts that you're seeing across categories. What changes are you, making across the assortment at aerie and American Eagle in the third quarter and is there a way to think about the timeline needed in your view for inventory completely across the board to be fully reset at this point.
Sure Matt.
<unk> mentioned it we certainly get in a great position as we move into Q4, and then as we're looking out to 2023 as far as inventory is concerned I mean, the teams have worked tirelessly to make sure that we are in good position, but also making sure that we distort in the right categories look I love, what's happening out there right now we just.
Actually chase something within 19 days, we have deliveries here so Michael in Perl said it well.
And we're starting to get best in show again, I would like to say we are you know the testing and the chase that we're capable of doing in this company is remarkable I mean I learned it 12 years ago, when I joined the company and its nice to be in a position where logistics are freeing up for us and we're able to.
Sort of move a little bit more seamless seamlessly Tom there are some category shifts happening, but I just you know.
It's funny the team we're talking today, how we are just so dominant in bottoms and now thats happening in area as well from leggings to denim to other bottomed.
We are seeing some new shifts in silhouettes in denim.
And the teams.
Like I said, we're moving fast and getting into some new categories. There from the bottoms perspective, and an area certainly offline being a new business for us we're seeing great results in that business and I think that that holds a very promising outlook for the company as far as a growth vehicle.
And certainly you know as we've been able to shift the categories and American Eagle I like what I'm seeing in outfitting, it's taken a little time, a little longer than I thought, but early on for back to school and some of the women's trend that we're seeing we're able to chase I mentioned that 19 day Chase.
Our ability I mean, that's pretty impressive and we're.
We're going to continue to test and scale.
Mostly I would like to say that this team has responded fast we've worked tirelessly we're not quitting.
From the marketing to production to the product categories to the innovation.
But I'm seeing from this team.
We're not quoting here on that so.
I'm really I'm really proud of the team.
Great and then Mike could you just speak to the magnitude of the recent EBIT margin contraction that we've seen at aerie.
Maybe if you could just elaborate on some of the drivers of double digit margins in the back half and has anything changed on your multiyear view of profitability for aerie or how do we maybe break down the structural versus transitory elements of the profitability of aerie today relative to previous plans.
Sure. Thanks, Matt the Q2, specifically it really first half I mean.
<unk> had some challenges obviously when we talk go back to the supply chain disruptions last fall the airfreight that we experienced mostly in Q4 that some of that carried into Q1 elevated freight costs in general hitting the brand in Q1 and Q2 on beyond the airfreight.
We talked about that being a 200 basis point impact to the quarter area was.
About half of that I think so $20 million to $25 million in total you could take $10 million to $15 million or being an area of impact.
If you think about the.
Resetting inventory for Q2, and the $30 million charge I described.
Area was over half of that so the combination of those two factors plus the.
Mike will talk about the 20 stores, we opened in the quarter and the ramp up of the.
New stores, we've opened in general those three factors you could take areas operating rate from 3% to double digit in the second quarter alone. So as we get into the back half now inventories reset we don't expect any impact from from inventory or the us over planning the business like we did in the first half freight actually normalizes, we will anniversary elevate.
Ocean freight from last year as we've described we think there's actually some light at the end of the tunnel in terms of freight costs and freight and transportation coming back in line or maybe even some benefit versus last year.
And now we will have these new stores carrying into the back half and not really not much impact from new store opening costs. So those three main factors really go away for the back half, we think inventories reset.
And we're focused on the profitability of.
All of these new stores in the business in general So we were very confident in being double digit in the back half and we are looking.
Looking forward to 'twenty three already.
Benefiting from all of this growth, 30% plus square footage growth from the 100 locations and focusing on a lethal mid teen operating rate if not better.
Our plans for next year.
Helpful color best of luck.
Thank you.
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 curious.
With the branch sale running down high single digits versus.
Last year's quarter to date versus the down.
Super thing you saw in Q.
I'm wondering if you could help us.
Think about that that deceleration by brand and then I'm just curious given the inventory position has improved so much is is it kind of a function of having less clearance sales available that might have drove some of the sales in <unk> and you're just not expecting that.
Just any thoughts there would be great. Thanks.
I get it to me at the last part of that question first.
30 million impact.
The impact to the second quarter profitability to get ourselves rates at inventory devalue that inventory, it's really down to.
Bringing summer goods into August historical clearance level. So we still have I'll call. It I'll just leave it at that description.
In line and we think we're in good place in terms of typical historical clearance levels coming into August and the sales related to those units.
As far as Aes trend because I think that was the first part of your question. Yes, I think we expected coming into Q3 on top of a very high for back to school season last year with.
Yes, we're really not having a 2020 back to school stimulus checks out there again, starting in July last year.
Does that pent up demand and the amount of money that came to us during back to school in the brand because we are such a back to school destination, we knew AE AE lapping that period was going to be tough so we actually planned.
The plan for Q3, a bit of a deceleration versus the plan for the first half already.
As part of the plan initially so.
Not necessarily surprised by that.
Based on the macro conditions out there knowing what kind of back to school, we are lapping last year.
And I think we're maybe Jan can take on the product side, what we're seeing so far during fall and what were expecting go forward, but we're expecting that to normalize a bit knowing we come out of that hyper back to school period here, It's after labor day.
I think you said it well, Mike just really after coming off of the swim a little bit of a hangover with the swim business in aerie in summer and honestly you know obviously, both brands had incredible tailwind last year.
But as just getting going this is a fairly new team and we did have you know.
A little bit of that benefit last year with the stimulus and lapping that the tailwind is that a lot of retailers benefited up but I like what I'm seeing on the AE team.
We're very conservative we're sticking with our strategy.
Like I said, we're testing and scaling new product categories. We have some excitement coming up for spring 2023, I can't tell you might secrets, but.
Some new launches in the AE brand and.
You know, we're not going to stop there and like I said, it's a fairly new team and I like what they're doing they're turning into a very well oiled machine.
And the Aerie team again, where we have so many new ideas. So many new categories. I mean, I mentioned that we just launched that smoothie category.
Let me just say in one day, we thought we saw a 30% increase in traffic to the direct site that one day when we launch that.
That campaign, so again.
We have to keep on challenging ourselves to come up year over year, whether it's marketing product production, but that's what we're that's where we're into right now and that's what we're thinking about 2023 and beyond.
Thanks, I guess just to clarify there.
So the American Eagle brand is is kind of driving the deceleration in brand sales quarter to date Wellcare QQ more than aerie.
Do you mind repeating that sorry, you faded out a little bit during your question.
Sure I guess it seems like the <unk> the American Eagle brand is driving the deceleration in brand sales quarter to date relative to what you saw in the second quarter, it's more coming from the American Eagle brand versus Aerie.
I think it's just based on their likes if youre looking at last year. So Arie has.
Year over year quarter over quarter like that or.
High double digits Aes are nice benefits last year as I mentioned from the stimulus. So I think if you just sort of looking at last year that might be what you're comparing but.
Like I said, we're looking at the business on the go forward and you know.
It's really interesting and I'm going to pivot here for one second but there are there are a lot of conversations out there whats happening in retail whether it's getting all dressed up and certainly the luxury sector is seeing some benefits of <unk>.
Weddings and what have you.
But I have to tell you the casual lifestyle apparel is not going away with our sector.
I watched my daughter everyday goes to school in Switzerland, and a hoodie and.
It's here to stay and I think American Eagle and Aerie does it best as far as comfort casual lifestyle, where and.
That's what we're up to and that's what we're focused on in the future.
Alright, thank you.
Okay.
Our next question comes from the line of Marni Shapiro with retail tracker. You May proceed with your question.
Hey, guys.
I'd actually like to take a little bit of a step back and say I wanted to address this to you because we've been through I mean, certainly you've been through periods of time, where the customer has pull.
Pulled back for a moment in time.
But it sounds like there is a lot of confidence still here at the company you cleared out inventory you're positioning for the back half I guess broadly speaking knowing what you know knowing what you've been through what gives you the confidence for the back half of next year is it the brand's spring and I guess, how do you think about holiday.
And further into 2023.
Okay.
So let me ask you what was that question that Gen or is that question.
Or would you ask that see you I mean, you've been doing this as long as I've been doing this.
Look I've been around like if you go around here.
We have a great team at American Eagle the people, we have the merchants we have.
Top notch.
Hey.
They didn't go bad one day.
They are top notch.
Jen said that in America like we've put some new designers and it takes time for people.
Do you feel like that.
To get acclimated with the brand, but the stuff that I see in the stuff that I see that Jan and the team is working on.
For the holiday season, and for the spring spring of 'twenty, three which we're excited and and also.
Introducing.
New concepts into the brand not just not just introducing more again, but introducing some additional a fresh product and.
And some new type of product.
Would you be very exciting.
We emphasize that this past quarter, we opened.
As our biggest hoping I like Gary stores, which we should get the benefit in the future.
Okay.
We're seeing it.
Today.
I don't want to get too excited because.
Say, something all of a sudden and something else pops up somewhere else.
No.
As far as far as like the rest of the world but.
I feel very good about the company.
Hey.
The freight rates are going the right way.
Our time is coming back on this past two years.
Everything got out of sync.
We had countries close up on us.
We had.
We had to put stuff on containers.
Or is all of a sudden you got backed up in ports.
It's been a strange year like John said.
She was smiling because she was able to chase a product can get into 19 days, we haven't had that happened to us since since the beginning of 2020.
So that's a very good sign for us to get.
I'll get back in sync.
That's great best of luck. This fall I think the company is doing is going to be a great day.
And is he the way that you know investors, Gary Arne I can't control that noisy I can control control is what we do and we are a great company.
Great vision.
We're very innovative whether we're in the data that merchandise whether we're in a beta of our technology I think if you walk into the malls, where the best looking store in the malls.
Figure out more efficient ways of getting the merchandise to the customer and answered the stores. So I think we're doing a lot of stuff right.
Got caught up in this past year going against last year's figures, but for the future I think I think it will be one of the big winners out there.
That's great. Thank you.
Okay.
Our next question comes from the line of Adrienne <unk> with Barclays. You May proceed with your question.
Great. Thank you very much.
Actually David might still be for you, but anybody who wants to comment on it can you talk about the changing competitive landscape I know that we have always talked about kind of SaaS fashion than theirs faster fashion with another hyper fast fashion with competitors such as <unk>. So I'm just wondering how often do you.
Kind of in your research, how often do you compete against them and what does that do to the overall kind of pricing pressure and then for Mike When you talked about a pause in the dividend.
Is that would that imply a pause in repurchase activity as well or are those two distinct event. Thank you very much.
Hey, I can take that if you want as far as fast fashion and competition. There's always competition I mean, that's what our job is right to compete.
And to try to do it better than anyone else out there and certainly we're humble.
And we certainly pay attention to the new up and comers gene being one of them and look.
We look at building our brand where brand builders, we protect our brands both American Eagle I mean, certainly American Eagle is something to be proud of and in aerie.
<unk>, yes.
What we're up to.
We're up to building our brands protecting our brands not turning on a dial I think slow and steady wins the race.
Brand building and how we think about our business and but we think long term alright. So you know obviously the retail sector has been hit a little bit.
More recently, but we're in this for the long haul and I like what I'm seeing in the future Jay already said it I mean, you said Theres innovation out there that's coming we have new ideas every day, we have some really new exciting concepts that we're going to launch in.
Yep.
We stay focus we stay in our lane and it's something I tell our teams every day is just stay in your lane.
Stick with our brands and look ahead and make sure that we're innovating and competing on our terms.
Yes.
And Jeremy you talked about concept, we have Todd Schneider.
No.
Which is on.
On fire.
Mike you want to talk to that a little bit Michael rebel.
Yes, sure I mean look.
We're not just we are we are working on American Eagle and Aerie and obviously doing.
Some great innovative things there, but we're also incubating new brands and new businesses. So.
One of the things we're proud of as a company is we're not resting on our laurels we're not.
We're not solely dependent on one business to drive the company, but we're looking for ways to grow it into the future. So we have Todd Schneider, which is which is up well over 50% this year.
We're expanding its footprint opening more stores, it's still an 80% digital business, it's going to be profitable growing nicely. We're incubating, an unsubscribe, which is an exciting new concept.
<unk> and team launched quietly last year that has about five stores open and is doing very nicely and of course, we're investing in quiet which is a.
A business that not only is it providing benefits to American eagle, but we're very excited about where that's headed and the potential in that business.
That's very helpful.
That can handle the <unk>.
On your question on the dividend I think look our priorities are the same.
Yes.
Nothing back into the business first which we've done pretty aggressively in the last two years.
And continuing our continuing this year, we've talked about the 100.
Aaron offline locations and we continue to invest in our digital and supply chain capabilities. This year with other projects.
On top of that we've already returned $265 million back year to date to shareholders between $65 million of dividend and then the.
200 million ASR that was strategically tied to that early convert settlement offset the dilution of the shares we issued there.
$265 million is the highest we've returned to shareholders in any year since 2015, I think Jan and I. Both said in our prepared remarks. So at this point now we're looking at.
Improving profitability in the back half generating positive free cash flow in the back half into next year, and then I'm confident we'll get back to some level of appropriate dividend and investing back in the business first, but where we see where it's where appropriate some level of appropriate dividend and opportunistic.
Opportunistic share repurchases the way we've approached it but we will definitely we've ever had.
History of returning cash to shareholders and we will definitely get back to that once we bolster our cash position a bit here.
Fantastic all very helpful Best of luck.
Thank you.
Our next question comes from the line of Kimberly Greenberger you May proceed with Morgan Stanley .
Great. Thank you so much I wanted to just check on inventory if.
If you could talk about how much you expect inventory to be down at the end of the year.
That would be great.
I'm just cognizant that at the end of fourth quarter last year inventory was up around 24% compared to 2019, but looking at you.
The revenue run rate here in the second quarter revenue total revenue was up only it looks like about 15%.
Compared to the second quarter of 2019, so I'm just wondering if.
How much you think you could cut.
Inventory by the end of the fourth quarter and what would your preliminary plan B for.
How much you.
You would expect inventory to be down next year. Thank you. Okay. Thanks, Kimberly I think the fourth quarter right now I mean, a lot of volume to go a lot of business to be had our projections as we sit here today, we would be down in the double digit range. So.
<unk>, probably low double to maybe mid teen.
But that's again, our preliminary projection, we'll refine that as we go.
And then for next year, we're going to continue to plan conservatively. This is.
Still uncertain environment I think the great thing. We're excited about is that we're back to from a timeline perspective, Michael talked about it being able to chase again, so we're not committing to inventory.
Three to six months earlier like we had to in the past 12 months, that's part of our part of our issue in the spring season seasons, how early we committed to those plans and didn't have much flexibility. So.
We're looking at spring as we speak we've had some initial conversations some initial an initial peers have been placed but we are keeping a lot open to between keeping ourselves flexible now that the timelines are back to some of the historical flexibility that we're used to.
That's really great color. Thank you for that and on the $70 million in freight relief in the back half I'm wondering if you could help us understand how that.
A portion to out between Q3 and Q4, you also alluded to some savings do you anticipate in the first half of the year next year.
Any numbers you can help us with on that that would be great. Thanks.
I believe I'm looking I think it was $10 million in Q3 and $60 million in Q4 was the our furnace right Mike Yes, yes.
Yes, it was $10 million in Q3, Kimberly and $60 million in Q4 for the airfreight and some of that airfreight carried over into Q1, a bit with goods that we so that's when we incur the expenses when we actually sell the units. So some of that impacted Q1 as well.
See some benefit there we believe too.
Okay, that's great color. Thanks, so much.
Our next question comes from the line of Janet Joseph Kloppenburg with J J K Research Associates. You May proceed with your question.
Hi, everyone. Good evening.
I was wondering John if you could talk a little bit about the shifts in denim. We're hearing a lot of mixed reads on them right now.
And maybe some disappointment in back to school performance, if you could talk about that and if there's a shift towards.
Something throughout the year or maybe paths and how American eagle might be.
And for that and as we look to the future when you talk about introducing new concepts.
Just wondering if some of this dress up trend that we're seeing a prevalent today. It is something that American eagle can participate in and perhaps with some of your new concepts are built around that or.
If you think the dress up trying to is just a temporary moment. Thank you.
How are you <unk> by the way.
Doing well doing well.
I like I said I think the casual trend is here to stay and certainly our generation and the generations to come love casual comfortable sportswear, which I'd like to say, we do best when it comes to denim. There is definitely some shifts Janet and were certainly reacting to it we've been working on the inventory that was a big piece of the inventory.
Three.
Rationalization that we needed to do from an AE standpoint, and we've been working on that but inside of denim. There are some really some great hot spots that we're seeing that we're able to now go in and distort some of these bag ear fit that youre definitely seeing out their flare.
And then we always have our staple in <unk> and then there is a shift for sure into some other bottoms that were starting to see and certainly we're.
We're testing all of the silhouettes as we speak again, and we've actually instigated like we've initiated a whole new test and scale not even just based on you know the timelines that we're getting now based on.
Just the logistics freeing up we're actually trying new testing scenarios that are going to make us even more smart or smarter or I should say for the future. So those are in play right now we're going to get results very soon and we're going to be able to as Michael Mike and Michael said, we're going to able to implement those tests for spring and an on the go.
So.
And there are some new exciting trends happening in bottom. So we're excited about that and then when it comes to our new idea I can't tell you, but it's very exciting.
And.
It will be launched for spring 2023.
And.
It's a new concept for us and I'm pretty excited about we've already had some early reads and some of the product categories.
Very well received very well received so more to come there I can tell you on secret it's in the American Eagle brand.
So very.
Very exciting.
Okay, Laura I think we have time for one more question.
Our last question comes from the line of Dana Telsey with Telsey Advisory Group you May proceed with your question.
Good afternoon, everyone. As you think about the aerie business and the rate of growth can you talk a little about store openings, obviously, you've opened a lot of stores over the past few years. How do you think of current store metrics and how do you think of the growth of existing stores and what youre doing and adding on the product front. Thank you.
Sure.
John should answer part of it but yes. The part of it also is very.
We're very excited about Aries and offline offline is a new concept for us it's being very well received we think it's a big opportunity there too.
Mike what do you want to add.
I can just say I think it's a good question Dana is very it's something we're very focused on not just in the back half, but we were really I think it's a major opportunity for US next year in terms of improved profitability, obviously for the brand, but then impacted the company as well so.
We know that when we open these minutes this may be as many stores. We do have a short term comp impact because as markets absorb these new locations in digital shoppers in those markets kind of go into the new stores and then we see a ramp up of customers in what we call our digital Halo effect six to 12 months later, so if you think about the 100 stores, we just opened.
<unk> in the back half.
Get our plans right set around them.
On that into 'twenty three in that digital piece of it kind of kicks in and you can do some math on just the implied revenue growth from these stores and if we we believe inventory has been positioned to conservatively, but appropriately to drive the right margin rates expense focus we can be mid to high teen operating rate and that will be our goal.
For the brands so.
Off of this year's kind of guided profitability. It means significant impact next year in our minds and Thats where were.
We're already focused on that.
And for next year for next year as we talked about look we're going to we want to grow in these investments. So we have $250 million in capital last year $250 million capital. This year a lot of it tied to these area in offline stores.
So from a cash flow perspective.
Sort of a philosophy that we want to generate positive free cash flow and focus on the profitability of the investments that we've made.
We're probably going to look at a relatively smaller new store count for next year, just so we can focus on that but.
But we still believe theres runway into alternative store growth over the next three years I think there's just a lot of benefit to focusing on the profitability of what we've already invested in over the next four to six quarters.
Alright, thank you.
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 for joining us today and hopefully next.
Next earning calls.
I'll have more positive news.
Okay.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your day.