Q3 2022 American Eagle Outfitters Inc Earnings Call
To 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.
My pleasure to introduce your host during the him senior Vice President corporate Communications and IR. Thank you Judy you may begin.
Good morning, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer, Jen Foyle, President Executive Creative director for AE, and Aerie, Michael Ram Powell Chief operating officer.
And Mike Matthias Chief Financial Officer.
Before we begin todays call I need to remind you that we will make certain forward looking statements. These statements are based upon information that represents the companys current expectations or beliefs.
So it's actually realized may differ materially based on risk factors included in our SEC filings.
The company undertakes no obligation to publicly update or revise any forward looking statements, whether as it felt 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.
Reconciliations 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 <unk> Dash, Inc. Dot com in the Investor Relations section here you can also find the third quarter investor presentation.
Speaker 1: The one thaton J that J.
And now I'll turn the call over to Jay.
Good morning, Thank you for joining us today I.
I am pleased that we delivered third quarter results well above our expectations. Despite current macro conditions and tough comparisons as we lap significant pent up demand and stimulus.
Speaker 2: Greetings and welcome to the American Eagle Outfitters third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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.
Down to last year's record performance revenue of $1 2 billion, whereas our second highest third quarter in history, and our operating profit of $118 million.
<unk> the third quarter of 2019.
I'm also pleased that our profit margins reflected a material improvement compared to the first half of the year.
Speaker 2: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Judy Meehan, Senior Vice President, Corporate Communications and IR. Thank you Judy, you may begin.
Our aggressive actions to reset inventory and reduce expenses are paying off we continue to make progress and entered the fourth quarter very well positioned.
Speaker 3: Good morning, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer, Jen Foyle, President and Executive Creative Director for AE and AE, Michael Rempow, Chief Operating Officer, and Mike Mathias, Chief Financial Officer.
Our brands are strong and customer engagement continues at a healthy pace area remains a standout in the industry and I'm very proud of the multi year growth. We've achieved I'm also encouraged with the performance of our new aerie and offline stores, which demonstrates strong acceptance by our customers.
Speaker 3: Before we begin today's 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.
<unk> profits and margins improved compared to the third quarter of 2019, reflecting strong product assortment as well as the team's focus on rationalizing unproductive.
Speaker 3: The results actually realized may differ materially based on risk factors included in our SEC filing.
Skus and closing unprofitable stores comp sales relative to 2019 were flat and as Jen will review, we have plans in place to improve the trend.
Speaker 3: 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 the law.
Quiet platforms, providing significant operational efficiencies and needed capacity for our brands as Michael will review.
Speaker 3: 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. Reconciliations 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.aeo-inc.com in the investor relations section.
The third party customer base is ramping up as other brands look to upgrade their supply chain operations and drive efficiencies to better compete in the current retail environment.
I remain also excited about the potential for quiet as we evaluate go forward plans, we are exploring different options to support future growth.
Speaker 3: Here, you can also find the third quarter investor presentation.
Speaker 3: And now I'll turn the call over today.
Overall, our third quarter was a strong step in the right direction, yet we remain highly focused on driving further improvement in an uncertain macro environment. We are leveraging the strength of our operations to control what we can best position ourselves to respond effectively to changing <unk>.
Speaker 2: Good morning. Thank you for joining us today. I'm pleased that we delivered third quarter results well above our expectations.
Speaker 2: despite current macro conditions and tough comparisons, as we lap significant pent up demand and stimulus. While down to last year's record performance, revenue of 1.2 billion was our second highest third quarter in history and our operating profit of 118 million exceeded the third quarter of 2019.
Road conditions.
As the supply chain environment continues to normalize we are using this to our advantage we are planning inventories tightly and exercising our capabilities to chase into demand.
At the same time, we're also reducing expenses and capital expenditures with a firm focus on improving the bottom line and driving stronger free cash flow.
Speaker 2: I'm also pleased that our profit margins reflect a material improvement compared to the first half of the year.
Speaker 2: Our aggressive actions to reset inventory and reduce expenses are paying off. We continue to make progress and enter the fourth quarter very well positioned. Our brands are strong and customer engagement continues at a healthy pace. Area remains a standout in the industry and I'm very proud of the multi-year growth we've achieved.
As we navigate the near term, we will cautiously invest across key strategic initiatives that provide a competitive advantage and allow our business to emerge from the current environment, even stronger I wanted to thank our teams for their hard work and dedication over the past several months.
We were Swift and took decisive actions across the business. Now. This is now showing up in our results. Looking ahead, we will remain focused on disciplined our brands remain incredibly strong I am confident we will continue to make great progress now alternatives it yet.
Speaker 2: I'm also encouraged with performance of our new ARRI and offline stores, which demonstrate strong acceptance by our customers.
Speaker 2: A profits and margins improved compared to the third quarter of 2019.
Speaker 2: reflecting strong product assortment as well as the team's focus on rationalizing unproductive
Thanks, Jay and good morning, everyone, although we faced difficult comparisons to a stellar year in 2021, we made good progress across our brands.
Speaker 2: SKUs, and closing unprofitable stores.
Speaker 2: Top sales relative to 2019 were flat and as Jen will review we have plans in place to improve the trend.
During the third quarter demand levels improved from either as we cycled past peak weeks of a record back to school season last year.
Speaker 2: Quiet Platform is providing significant operational efficiencies and needed capacity for our brands, as Michael will review.
Despite a less robust macro I am pleased that we delivered results ahead of our expectations.
We also saw a meaningful recovery and profit margins compared to the first half for both AE and aerie.
Speaker 2: The third-party customer base is ramping up as other brands look to upgrade their supply chain operations and drive efficiencies to better compete in the current retail environment.
Earlier this year, we took very deliberate steps to adjust forward receipts and clear through spring and summer goods.
Speaker 2: I remain also excited about the potential for quiet. As we evaluate Go Forward plans, we are exploring different options to support future growth.
As a result inventory is in much better shape, which enabled us to control promotional levels in a highly competitive environment.
In fact, we achieved our second best third quarter AUR down just 5% for last year's record high and up nicely across brands for 2019.
Speaker 2: Overall, our third quarter was a strong step in the right direction.
Speaker 2: yet we remain highly focused on driving further improvement.
Speaker 2: In an uncertain macro environment, we are leveraging the strength of our operations
As I step back and look at the business. Our brands are very healthy given the current environment. There are clearly different dynamics at play by brand.
Speaker 2: to control what we can and best position ourselves to respond effectively to changing macro conditions.
Aerie remains on a strong multiyear growth path.
Speaker 2: As the supply chain environment continues to normalize, we are using this to our advantage.
Since the third quarter of 2019 revenues have nearly doubled growing roughly $170 million.
Speaker 2: We are planning inventories tightly and exercising our capabilities to chase into demand.
Record profits have more than tripled since 2019, and also increase to last year.
Speaker 2: At the same time, we're also reducing expenses and capital expenditures with a firm focus on proving the bottom line and driving stronger free cash flow.
New store expansion and great brand affinity are fueling increased awareness and I'm excited to note that Aerie cross two new milestones this quarter hitting 10 million customers for the first time and achieving an all time high AUR.
Speaker 2: As we navigate the near term, we will cautiously invest across key strategic initiatives that provide a competitive advantage and allow our business to emerge from the current environment even stronger.
Compared to last year core intimates and apparel showed up well I.
<unk> continued to be extremely pleased with our with the expansion of offline, where new stores are performing very well.
Speaker 2: I want to thank our teams for their hard work and dedication over the past several months.
Speaker 2: We were swift and took decisive actions across the business, and this is now showing up in our results. Looking ahead, we will remain focused and disciplined. Our brands remain incredibly strong. I am confident we will continue to make great progress.
Ares cult like following and leggings is driving momentum and has given us the ability to expand into adjacent categories like sport bras inactive top all are seeing great results.
We expanded our winning real me legging franchise, introducing a new holdup technology to our lease them.
Speaker 2: Now I'll turn it to Jen.
Speaker 4: Thanks, Chang. Good morning, everyone. Although we face difficult comparisons to a stellar year in 2021, we made good progress across our brand.
We incorporate the fabrication into our sport truck and have seen amazing results for matching sets, which are a big trend.
Speaker 4: During the third quarter, demand levels improved from August as we cycled past peak weeks of our record back to school season last year.
For the holiday season, I'm really excited for the new campaign I want aerie or.
Our broadest campaign positioning aerie as the gift destination.
Speaker 4: Despite a less robust macro, I'm pleased that we delivered results ahead of our expectations.
Turning to American Eagle pressure was anticipated as we cycled last year's record results, yet we did better than expected.
Speaker 4: We also saw meaningful recovery in profit margins compared to the first half for both AE and ARIE.
Our actions to intentionally reduce inventory contributed to a nice profit improvement from the first half.
Speaker 4: Earlier this year, we took very deliberate steps to adjust board receipts and clear through spring and summer goods.
As noted at last year's Analyst meeting, we have been focused on resetting the brand, reducing SKU counts and promotion and selectively closing unproductive stores.
Speaker 4: As a result, inventory is in much better shape, which enabled us to control promotional levels in a highly competitive environment.
As a result of these efforts we are seeing profits improved with operating income up 14% to 2019 and better margins across channels.
Speaker 4: In fact, we achieved our second best third quarter AUR down just 5% to last year's record high and up nicely across brands to 2019.
Rationalizing excess F. Skus is providing greater focus we are making adjustments to address emerging fashion trends and feel really good about the newness, we are bringing into the customer for example, the stringent denim collection launched last quarter and is doing very well with.
Speaker 4: As I step back and look at the business, our brands are very healthy. Given the current environment, there are clearly different dynamics at play by brand.
Speaker 4: Area remains on a strong multi-year growth path.
We've also shifted our assortment to emphasize new trends and woven bottoms, such as courts, cargos and wider silhouettes, Paul R, which seeing nice demand.
Speaker 4: Since the third quarter of 2019, revenues have nearly doubled, growing roughly $170 million.
Speaker 4: Record profits have more than tripled since 2019 and also increased to last year.
As the supply chain environment continues to improve we are becoming more nimble, we're getting back into a test and chase rhythm, which is a meaningful positive as we plan ahead.
Speaker 4: New store expansion and great brand affinity are fueling increased awareness, and I'm excited to note that Aerie crossed two new milestones this quarter, hitting 10 million customers for the first time in achieving an all-time high AUR.
With new fashion fabrics, and silhouettes, all emerging on the horizon and a renewed agility to respond to near term shifts in consumer demand. We should have a great setup going into 2023. We are also excited to launch a new sub brand and then bringing innovation and newness to our men's business prelaunch test.
Speaker 4: Compared to last year, Core Intimate's fleece and apparel showed up well. I continue to be extremely pleased with the expansion of offline, where new stores are performing very well. Aerie's cult-like following in leggings is driving momentum and has given us the ability to expand into adjacent categories, like sports bras and active tops. All are seeing great results. We expanded our winning RealMe Leggings franchise, introducing a new holdup technology to our waste bands.
Have been very encouraging.
We continue to leverage social commerce to explore new ways to engage with our customers our efforts across ticked up in the meta versus continued to drive strong engagement.
Additionally, this quarter, we became the first major fashion brand to launch on derail.
Speaker 4: We incorporate this fabrication into our sports rods and have seen amazing results for matching sets which are a big trend. For the holiday season, I'm really excited for the new campaign, I Want Aerie, our broadest campaign positioning Aerie as the gift destination. Turning to American Eagle, pressure was anticipated as we cycled last year's record results, yet we did better than expected. Our actions to intentionally reduce inventory contributed to a nice profit improvement from the first half. As noted at last year's analyst meeting, we've been focused on resetting the brand, reducing SKU counts and promotions.
So while the macro is certainly not easy my confidence in our brands and overall consumer affinity for great casual wear is stronger than ever.
We remain intensely focused on innovation and seeking opportunities to drive profitable growth across our businesses a.
A big thank you as always to the Aerie and AE team for staying focused and forging ahead.
I'm incredibly excited for our holiday collections and I look forward to updating you on our performance next quarter.
And wishing everyone, a safe and healthy holiday and now I will turn the call over to Michael.
Thanks, Jen and good morning, everyone. Overall I'm pleased with how we manage the business in the third quarter, particularly as we navigated through an unpredictable environment.
Let me start with a review of our channel performance. This year, we faced a more constrained macro environment, then amplified pressure from tough compares.
Store revenue declined 4% to last year, while digital revenue declined 5%.
Over compared to 2019 pre pandemic levels I'm really pleased with what we're seeing in the business. For example brand revenue was up 14% with growth across both store and digital channels.
Our digital business in particular has grown 35% over this period with digital penetration expanding to 33% from 28%.
We continue to invest in the speed and functionality of our digital platforms. Our mobile App business continues to be a powerhouse driving strong engagement for both brands and approximately 40% of total digital spend.
Investments in digital capabilities is going to remain a strategic focus.
As we noted last quarter, we've brought together store and digital operations, creating greater efficiencies and better integration of the customer experience I see incredible opportunities as we ensure our go to market strategy is best aligned with how customers are shopping lifestyles have changed dramatically over the past several years.
Ears, and shopping behaviors continue to evolve, including the dramatic shift to digital the need for speed and how where and when customers are visiting stores.
Connecting the experience across all channels and creating a more seamless view of customers our top priorities.
Our new mobile point of sale system is a great example of innovative technologies that we're leveraging to further elevate the customer experience all U S stores have now upgraded to the new system and they are seeing improved transaction speeds and shorter checkout lines. This.
This is going to be especially beneficial as we come up on the holiday rush the new system's flexible it provides a compelling mobile checkout experience and in incorporates several new capabilities, including a much more seamless integration of our loyalty program.
We have an exciting roadmap to build out the customer engagement capabilities in 2023.
This holiday AE and Aerie, we will be offering virtual shopping sessions through shop lives.
New platform connecting customers to our talented store associates for one on one style advice from the comfort of their homes.
And other one to many livestream shopping experiences that we're testing with aerie.
We are also focused on updating and modernizing our most productive stores relocating in some markets to ensure we're in the best locations.
Leveraging data to customize our assortment and inventory levels by market.
Continuing to close our least productive stores, where we can confidently consolidate sales to other stores or transition to ecommerce.
And investing in new technology, and leveraging artificial intelligence to improve inventory visibility placement and ultimately productivity across channels.
There is significant value to be unlocked by all these focus areas by approaching our physical store footprint from a variety of angles. We believe we can truly maximize our brands elevate the customer experience and operate with a more efficient cost structure.
Turning to supply chain the environment has continued to improve.
Although some volatility still remains lead times have normalized and factory capacity is freed up.
This presents a dramatically different planning environment compared to the constraints we were operating under this time last year.
We have far greater agility in our operations, which is giving us the option to buy lean lean more open and chase into demand.
On the sourcing side cost continue to stabilize.
Cotton pricing has eased and freight costs are down significantly from levels seen over the past 12 months, which is going to provide a significant tailwind in 2023.
On the outbound side, our investment in quiet platforms continued to fuel efficiencies and cost savings.
I really want to underscore that the quiet new network provided much needed capacity to AE and aerie over the past several months, enabling us to seamlessly handle higher inventory levels.
Digital delivery cost in the third quarter were down to last year, as we fulfilled orders more cost effectively and with fewer shipments.
We're also leveraging quiets advanced fulfillment capabilities located near customers to further reduce delivery times with approximately 80% of online orders, reaching our customers within three business days following checkout.
Our third party customer base service with the client nodes continues to expand interest from prospective customers remained strong as awareness of the business continues to grow.
We are also signing new transportation fulfillment and technology partners onto the platform, which is further expanding our capabilities.
As Jay mentioned, we believe quiet as a very exciting business that is early in its growth curve and it has the potential to transform our industry.
By approaching our physical store footprint from a variety of angles. We believe we can truly maximize our brands elevate the customer experience and operate with a more efficient cost structure.
Thanks, and with that I'm going to turn the call over to Mike.
Thanks, Michael Good morning, everyone.
Third quarter results exceeded our expectations across both revenue and profitability.
Turning to supply chain the environment has continued to improve.
As the team noted actions to reduce inventory levels clear through excess spring goods in the second quarter and lower expenses resulted in a profit recovery from the first half of the year.
Although some volatility still remain lead times have normalized and factory capacity has freed up.
This presents a dramatically different planning environment compare to the constraints we were operating under this time last year.
As we continue to manage through the current environment, we remain focused on improving profitability cash generation and the health of our balance sheet.
We have far greater agility in our operations, which is giving us the option to buy lean lead more open and chase into demand.
Third quarter consolidated revenue was $1 2 billion down 3% to last year, including two points of growth from quiet platforms.
On the sourcing side cost continue to stabilize.
Brand revenue declined 5%.
Cotton pricing has eased and freight costs are down significantly from levels seen over the past 12 months, which is going to provide a significant tailwind in 2023.
The gross margin rate of 38, 7% was ahead of our expectations of mid thirties, due to better demand and lower than anticipated markdowns.
As noted last quarter, we ended the third quarter in a better inventory position with fresh fall goods.
On the outbound side, our investment in quiet platforms continues to fuel efficiencies and cost savings.
As a result of our inventory actions, we were able to control our promotional activity while successfully moving through units.
I really want to underscore that the quiet new network provided much needed capacity to AE and aerie over the past several months, enabling us to seamlessly handle higher inventory levels.
Ended the quarter with more progress on inventories as I'll review in a moment.
Compared to last year, the gross profit dollars declined 15% with a gross margin rate down 560 basis points against a very strong rate last year.
Digital delivery costs in the third quarter were down to last year, because we fulfilled orders more cost effectively and with fewer shipments.
Higher markdowns and increased product costs drove approximately 400 basis points of the decline.
The integration of acquired platforms drove approximately 70 basis points of incremental deleverage.
We're also leveraging quiets advanced fulfillment capabilities located near customers to further reduce delivery times with approximately 80% of online orders, reaching our customers within three business days following check out.
<unk> been warehousing also increased as a rate to sales offset by lower compensation costs.
SG&A dollars declined $3 million compared to last year due to lower incentive accruals and expense actions announced earlier this year.
Our third party customer base service with the quiet nodes continues to expand interest from prospective customers remained strong as awareness of the business continues to grow.
We continue to make progress in resetting our expense base.
As noted last quarter. These actions should result in over $100 million in annualized expense reductions from our original plan.
We expect SG&A to be approximately flat in the fourth quarter.
We are also signing new transportation fulfillment and technology partners onto the platform, which is further expanding our capabilities.
Although operating profit was below third quarter 2021, it was up to 2019.
Operating profit of $118 million, reflecting a nine 5% margin.
As Jay mentioned, we believe quiet as a very exciting business that is early in its growth curve and it has the potential to transform our industry.
This included a $10 million loss from quiet platforms as.
As volumes ramp up into the holiday selling season, we expect quiet bottom line to improve sequentially.
Thanks, and with that I'm going to turn the call over to Mike.
Thanks, Michael Good morning, everyone. The third quarter results exceeded our expectations across both revenue and profitability.
EPS was <unk> 42 per share included a $1 million interest add back to net income linked to the outstanding convertible securities.
As the team noted actions to reduce inventory levels clear through excess spring goods in the second quarter and lower expenses resulted in a profit recovery from the first half of the year.
Our diluted share count was $196 million down from $205 million last year.
Now I'll provide some color by brand.
Because we continue to manage through the current environment, we remain focused on improving profitability cash generation and the health of our balance sheet.
Revenue increased 11% driven by new stores.
Comparable sales declined 3% following a 19% increase last year.
Third quarter consolidated revenue was $1 2 billion down 3% to last year, including two points of growth from quite platforms.
Aerie achieved an operating margin of 16, 2%, marking a solid recovery back into the double digits as plan.
Brand revenue declined 5%.
Compared to 2019 total revenue nearly doubled with operating income more than tripling to $56 million.
The gross margin rate of 38, 7% was ahead of our expectations of mid thirties, due to better demand and lower than anticipated markdowns.
Continued strong growth combined with higher merchandize margins are driving improved profitability for aerie.
As noted last quarter, we ended the third quarter in a better inventory position with fresh fall goods.
This combination creates a durable path of profitable growth for the brand.
As a result of our inventory actions, we were able to control our promotional activity while successfully moving through units.
Additionally, our new stores continue to ramp up we're seeing improved productivity.
Ended the quarter with more progress on inventories as I'll review in a moment.
American Eagle comps declined 10% following a 21% increase last year fueled by an exceptionally strong back to school season.
Compared to last year, the gross profit dollars declined 15% with a gross margin rate down to 560 basis points against a very strong rate last year.
AAC has an operating margin of 21% also showing improved profit flow through relative to the second quarter.
Higher markdowns and increased product costs drove approximately 400 basis points on the decline.
Markdowns were more controlled reflecting more appropriate inventory levels.
The integration of acquired platforms drove approximately 70 basis points of incremental deleverage.
As Jen mentioned, our continued focus on initiatives to improve profitability is driving results.
And warehousing also increased as a rate to sales offset by lower compensation costs.
While revenue was down 4% compared to third quarter 2019, I am pleased to note that operating profit was up 14% over the same period in brand operating margin expanded 330 basis points to 28%.
SG&A dollars declined $3 million compared to last year due to lower incentive accruals and expense actions announced earlier this year.
Yeah.
We continue to make progress in resetting our expense base.
Consolidated inventory at cost was up 8% compared to last year with units up 7%.
As noted last quarter. These actions should result in over 100 million in annualized expense reductions from our original plan.
This reflects a meaningful improvement from last quarter's increase of 36% as we work to bring receipts more in line with demand.
We expect SG&A to be approximately flat in the fourth quarter.
Although operating profit was below third quarter 2021, it was up to 2019.
Inventory is current for the holiday season.
We continue to expect sequential improvement with fourth quarter, ending inventory planned down to last year.
Operating profit of $118 million, reflecting a nine 5% margin.
This included a $10 million lots of them quite platforms as.
We ended the quarter with $82 million in cash and total liquidity of $423 million.
As volumes ramp up into the holiday selling season, we expect quiets bottom line to improve sequentially.
Capital expenditures totaled 71 million in the quarter and 199 million year to date.
EPS was <unk> 42 per share included a $1 million interest add back to net income linked to the outstanding convertible securities.
For the full year, we continue to expect capital expenditures of approximately $250 million.
As mentioned last quarter, we've made significant strategic investments to support the future growth of our business.
Our diluted share count was $196 million down from $205 million last year.
Yeah.
This includes 85, new area in offline stores over the past year, which should provide comp benefits and pure fuel profit expansion in the area in the coming years.
Now I'll provide some color by brand.
Revenue increased 11% driven by new stores.
Comparable sales declined 3% following a 19% increase last year.
As we focus on absorbing and growing into these investments, we expect annual capex to be significantly lower in 2023.
Every tease an operating margin of 16, 2%, marking a solid recovery back into the double digits that's planned.
Before I move onto our outlook I want to highlight that our third quarter operating margins for both American Eagle and Aerie surpassed pre pandemic rates achieved in the third quarter of 2019.
Compared to 2019 total revenue nearly doubled with operating income more than tripling to $56 million.
Continued strong growth combined with higher merchandize margins are driving improved profitability for aerie.
As we think about the opportunity for margin expansion in the long run. This is a notable point.
The quarter, we just completed was far from perfect.
This combination creates a durable path of profitable growth for the brand.
Product and freight costs, while easing were still elevated compared to third quarter 2019.
Additionally, our new stores continue to ramp up we're seeing improved productivity.
We have a significant number of new area in offline stores that are still in the process of ramping up to reach average fleet profitability.
American Eagle comps declined 10% following a 21% increase last year fueled by an exceptionally strong back to school season.
We're operating in an intense promotional environment as the industry works through historical levels of excess inventory.
<unk> achieved an operating margin of 21% also showing improved profit flow through relative to the second quarter.
Additionally, we still see significant opportunities to improve inventory productivity.
Markdowns were more controlled reflecting more appropriate inventory levels.
Assessing these factors I'm confident that our third quarter margin performance, while reflecting a nice improvement from the first half of the year is not our ceiling.
As Jen mentioned, our continued focus on initiatives to improve profitability is driving results.
Now onto our outlook with key holiday selling weeks still ahead, the bulk of the quarters yet to play out.
Revenue was down 4% compared to third quarter 2019, I'm pleased to note that operating profit was up 14% over the same period.
With what is likely to be a highly promotional season and the broader market.
Operating margin expanded 330 basis points to 28%.
We're guiding fourth quarter brand revenue down mid single digits.
Implies brand comps trending similar to the third quarter.
Consolidated ending inventory at cost was up 8% compared to last year with units up 7%.
We expect fourth quarter gross margins to be between 32% and 33% on the higher end of our prior outlook of low thirties.
This reflects a meaningful improvement from last quarter's increase of 36% as we worked to bring receipts more in line with demand.
While we've made significant progress in right sizing our inventory position, we're taking a cautious view given the factors I just discussed.
Inventory turn for the holiday season.
We continue to expect sequential improvement with fourth quarter, ending inventory playing down to last year.
Our tax rate assumption is in the high <unk> and weighted average share count of approximately $196 million.
We ended the quarter with $82 million in cash and total liquidity of $423 million.
We've made significant progress over the last two quarters and resetting our business and will continue to prioritize profitability and cash flow improvement moving forward.
Expenditures totaled 71 million in the quarter and 199 million year to date.
For the full year, we continue to expect capital expenditures of approximately $250 million.
Additionally, as the team noted we've regained the agility in our supply chain and we intend to use this to our advantage for.
As mentioned last quarter, we've made significant strategic investments to support the future growth of our business.
For 2023, we're planning expenses and inventory tightly.
Knowing we have the ability to read and react to the demand signals as they evolve.
This includes 85, new area in offline stores over the past year, which should provide comp benefits and pure fuel profit expansion of area in the coming years.
I look forward to providing more detail on our 2023 outlook on the next call.
That I will open it up for questions.
As we focus on absorbing and growing into these investments, we expect annual capex to be significantly lower in 2023.
Okay.
Thank you we will now be conducting a question and answer session.
Before I move onto our outlook I want to highlight that our third quarter operating margins for both American Eagle and Aerie surpassed pre pandemic rates achieved in the third quarter of 2019.
If you'd like to ask your question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Press Star two if you'd like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star kids.
As we think about the opportunity for margin expansion in the long run. This is a notable point.
The quarter, we just completed was far from perfect.
One moment, please while we poll for questions.
Product and freight costs, while easing were still elevated compared to third quarter 2019.
We have a significant number of new area in offline stores that are still in the process of ramping up to reach average fleet profitability.
We're operating in an intense promotional environment as the industry works through historical levels of excess inventory.
Thank you. Our first question is from Matthew Boss with Jpmorgan. Please proceed with your question.
Additionally, we still see significant opportunities to improve inventory productivity.
Great Thanks, and congrats on a nice quarter.
Assessing these factors I'm confident that our third quarter margin performance, while reflecting a nice improvement from the first half of the year.
Thanks, Matt Thank you Matt.
Maybe one for John could you just elaborate on the bold inventory actions that you took in the third quarter across both brands and maybe any early read on holiday trend and just how do you feel your assortments are positioned into the fourth quarter and holiday to potentially take market share in this competitive.
Not our ceiling.
Now onto our outlook with key holiday selling weeks still ahead, the bulk of the quarters yet to play out.
With what is likely to be a highly promotional season and the broader market.
<unk> fourth quarter brand revenue down mid single digits.
This implies brand comps trending similar to the third quarter.
Drop.
Of course, thank you Matt look we really did move swiftly as we mentioned in the commentary starting back and actually even back as far as Q1 and as a reminder, in the AE brand just remember what we've been up to we've been rationalizing skus for over two years right now.
We expect fourth quarter gross margins to be between 32 and 33% on the higher end of our prior outlook of low thirties.
While we made significant progress in right sizing our inventory position, we're taking a cautious view given the factors I just discussed.
Our tax rate assumption is in the high Twenty's and weighted average share count of approximately $196 million.
To ensure that we are just very highly focused on what the items are and what we want to stand for.
We've made significant progress over the last two quarters and resetting our business and will continue to prioritize profitability and cash flow improvement moving forward.
Certainly denim and bottoms at the helm of everything we do there but back for both brands. We just you know we knew what was coming and we certainly took.
Additionally, as the team noted.
Regained its agility in our supply chain and we intend to use this to our advantage.
Serious action on getting our inventories in shape.
For 2023 were planning expenses and inventory tightly.
Like what I'm seeing in holiday, it's still early Mike mentioned it it's a little early right now we have a big week ahead of us.
Knowing we have the ability to read and react to the demand signals as they evolve.
Alright.
I look forward to providing more detail on our 2023 outlook on the next call.
Just went to other models, we saw our competition and we are certainly playing in our own terms I'd like to say it that way, while we want to be competitive as you can see by our earnings performance. We are certainly ensuring that our promotional our promotions are strong but.
That I will open it up for questions.
Thank you we will now be conducting a question and answer session.
If you'd like to ask you a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Like I said on our terms, we don't you know we want to stand in this as a long term strategy, Mike mentioned, it and I think were really living up to what we told analysts a few years back on a couple of years back I should say on what our strategy is and that is to deliver bottom line results I feel good about our inventory positioning that because at.
Press Star two if you'd like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
At the end of the day I think we're going to be cleaner coming into January less clearance inventory and that should.
Okay.
Really help us.
Thank you. Our first question is from Matthew boss with J P. Morgan. Please proceed with your question.
Position earnings again, where you now and we feel confident about that.
And then maybe maybe just a follow up for Mike So with your with your fourth quarter gross margin guidance more or less flat to a year ago could you just elaborate maybe on the puts and takes if we're thinking about markdowns versus sprayed versus quiet logistics and I guess, even more so if we think into next year is there any reason.
Great Thanks, and congrats on a on a nice quarter.
Thanks, Matt Thank you Matt.
Maybe one for John could you just elaborate on the bold inventory actions that you took in the third quarter across both brands and maybe any early read on holiday trends and just how do you feel your assortments are positioned into the fourth quarter and holiday to potentially take market share in this competitive.
And why you Couldnt see merchandise margin expansion as we lap these inventory actions.
Yes.
Thanks, Matt.
Back drop.
Yeah for the fourth quarter.
Of course, I think Matt look we we really did move swiftly as we mentioned in the commentary starting back and actually even back as far as Q1 and as a reminder, in the AE brand just remember what we've been up to we've been rationalizing skus for over two years right now to to ensure that we are just very.
<unk> with our revenue guide of the brands being down five.
As Jim just mentioned, we are being strategic and competitive with our promotions, but not being overly promotional but we are ready to be competitive where we need to be and then on our on our revenue guide and with negative comps implied.
Highly focused on what the items are and what we want to stand for.
B O W. Deleverage that we would expect again in the quarter and then quiet.
Certainly denim and bottoms at the helm of everything we do there but back for both brands. We just you know we knew what was coming and we certainly took serious action on getting our inventories in shape.
A similar drain on gross margin as well so a few pieces.
Current aspects together, that's where on the high end of our higher end of our previous low Thirty's guide, but.
I like what I'm seeing in holiday, it's still early Mike mentioned it it's a little early right now we have a big week ahead of us.
Feel good about that cautious stance at the moment.
And then for next year, something Michael and I can both maybe tag team here I think we actually see.
But I you know, we just went to all the models we saw our competition and we are certainly playing in our own terms I'd like to say it that way, while we want to be competitive as you can see by our earnings performance. We are certainly ensuring that our promotional our promotions are strong but.
Some tailwind going into next year has just to recap where we've been for the last.
Four or five quarters, we know last year was the the.
In the fourth quarter was the start of the.
The significant impact of product cost both in Ocean Ocean freight and air freight rates.
I said on our terms, we don't you know we wanted to stay on and this is a long term strategy, Mike mentioned, it and I think we're really living up to what we told analysts a few years back up on a couple of years back I should say on what our strategy is and that is to deliver bottom line results I feel good about our inventory positioning that because.
Incurring that airfreight in the fourth quarter to get our goods here everything we've talked about for a year now.
As we look forward now with our chase capabilities back in place.
I think freight costs look like they could be a tailwind into next year product costs in general looking beneficial.
At the end of the day I think we're gonna be cleaner coming into January less clearance inventory and that should really.
We think we can get back to almost pre pandemic.
Types of.
It really helped us.
I am use which would be a benefit to gross margin next year, Michael I don't have anything to add.
Our position our earnings again, where you now and we feel confident about that.
And then maybe maybe just a follow up for for Mike. So with your with your fourth quarter gross margin guidance more or less flat to two a year ago could you just elaborate maybe on the puts and takes if we're thinking about markdowns versus sprayed versus quiet logistics and I guess, even more so if we think into next year is there any reason.
No you said it well I think I think merch margin should be better.
Next year, we have we have <unk> benefit.
Supply chains are much tighter so we could run the business leaner and chase into demand and.
We're up against a year, Matt that was really unprecedented it had very long lead times.
Why you couldn't see merchandise margin expansion as we lap these inventory actions.
We're going against stimulus fueled demand and next year, we're up against a much more normalized environment. So between IMU benefits and ending this quarter in a very good inventory position.
Thanks, Matt.
Yeah for the fourth quarter.
<unk> with our revenue guide of the brands being down five.
As Jim just mentioned, we're being strategic and competitive with our promotions, but not being overly promotional but we're ready to be competitive where we need to be and then on our on that revenue guide and with negative comps implied Ah got B O W. Deleverage that we would expect again in the quarter.
And being able to react to the business next year, which is something we couldnt do this year.
Absolutely absolutely believe that we're going to have higher merch margins next year.
That's great best of luck in the holiday.
Thank you.
And then quiet. So this will have a similar drain on gross margin as well.
Thank you. Our next question is from Jay sole with UBS. Please proceed with your question.
So a few pieces different aspects together, that's where on the high end of our higher end of our previous low thirties guide but.
Great. Thank you so much I have two questions. My first question is that you made some comments about area and the opening prepared remarks sounded really bullish.
So feel good about that cautious stance at the moment.
You talk about what gives you conviction behind that bullish just given the comp was negative in the quarter and then secondly for Michael can you talk about the logistics platform, a little bit and maybe give us an idea of what is.
And then for next year, I mean, something Michael and I can both maybe tag team here I think we actually see.
Some tailwind going into next year has just a recap where we've been for the last.
Developed over the last 90 days and kind of the path to profitability as you see it if it's next year or beyond thank you.
Four or five quarters, we know last year was the fourth quarter was the start of the.
Yeah, and Mike said it well.
The significant impact of product cost both in Ocean Ocean freight and air freight rates.
Jay I think we believe that when we start to anniversary these new store openings.
Incurring that air freight in the fourth quarter to get our goods here everything we've talked about for a year now.
We're going to gain market share in those particular markets and then.
We're just.
We believe that that's going to be something that we're gonna annualized next year, and we really feel good about that.
As we look forward now with our chase capabilities back in place.
I think freight costs look like they could be a tailwind into next year product costs in general looking beneficial.
There's been a lot of commentary about slowdown on casual wear but.
We're definitely not seeing it in Aerie look we have this offline brand that is really.
We think we can get back to almost pre pandemic.
Types of.
It's amazing the early on results here.
I am uses which would be a benefit to gross margin next year, Mike I don't know if you've anything to add to that.
For a business that we launched during Covid I've never seen anything like it to be perfectly honest feel really good about that prada.
No you said it well I think I think our merch margin should be better.
Product offering our leggings and is the following I said that in my opening remarks, I mean, its true. These leggings are best in show and that team is innovating our year over year I feel so good about the innovation there.
Next year, we have we have <unk> benefit.
Supply chains are much tighter so we could run the business leaner and chase into demand and we're up against a year, Matt that was really unprecedented it had very long lead times.
And it is something new to talk about to our aerie customer. So we feel strong about these categories, we're not seeing a softness in some of these more casual type businesses.
We're going against stimulus fueled demand and next year, we're up against a much more normalized environment. So between <unk> benefits and ending this quarter in a very good inventory position.
And aerie really as a cornerstone there so.
Not only a cult like following on our lagging, but just the brand and what we stand for so.
And being able to react to the business next year, which is something we couldnt do this year.
We're just going to continue to deliver and innovate and we're doing that in both brands honestly Jay.
I, absolutely believe that we're going to have higher merch margins next year.
Some of the newness in AE I'm, so proud about we're pivoting into the right new bottoms categories.
That's great best of luck in the holiday.
And just some of those qualities and new ideas I think are like no other and I also feel really good about our new launch that we're going to have an early spring spring one.
Thank you.
Thank you. Our next question is from Jay sole with UBS. Please proceed with your question.
Can't say, what it is but pretty excited around that as well so.
Great. Thank you so much I have two questions. My first question is that are you made some comments about area and the opening prepared remarks, it sounded really bullish.
Yes, and Jay just.
For Aerie building on what John was saying I just wanted to make sure. It's it's totally clear that.
Talk about what gives you conviction behind the bushes given you know the comp was negative in the quarter and then secondly for Michael can you talk about the logistics platform a little bit maybe give us an idea of what is <unk>.
We've opened a ton of new stores in the last in the last year or so I think Mike said in his prepared remarks.
That all of those openings.
Developed over the last 90 days and kind of the path to profitability as you see it if it's next year or beyond thank you.
We're a.
Headwinds for comp.
Yeah, and Mike said it well.
Over the over the early part of this year and even through third quarter, starting with fourth quarter that becomes a tailwind.
Jay I think we believe that you know when we start to anniversary these new store opening.
We're going to gain market share in those particular markets and then you know like were just we believe that that's going to be something that we're gonna annualized next year and we really feel good about that a second of all you know theres been a lot of commentary about slowdown on casual wear but we.
So as these stores anniversary themselves they become more mature those stores should provide actually those new stores.
If history repeats itself and we believe it will based on what we're seeing those news new stores should provide a multiyear comp tailwind for aerie.
We're definitely not seeing it in aerie and look we have this offline brand that is really.
Starting in the fourth quarter and as it relates to quiet yet we continue to be really excited about about quiet.
It's it's amazing the early on results here.
For a business that we launched during Covid I've never seen anything like it to be perfectly honest feel really good about that.
It's third party.
Customer revenue is planned to be up significantly I think it's up in the neighborhood of $60 $70, 80% this year.
Offering our leggings. It is a cult following I said that in my opening remarks, I mean, its true. These leggings are best in show and that team is innovating our year over year I feel so good about the innovation there.
And.
And when you look at our results you look at the American Eagle results.
For the quarter, we had a lower cost per order.
And it's something new to talk about to our aerie customer. So we feel strong about these categories. We're not seeing a softness in some of these you know more casual type businesses.
And fewer split shipments in our results.
Again those results in retail I think are incredibly unusual they might be unprecedented.
And I think and you know area really has a cornerstone there so not only a cult like following on a lagging but just the brand and what we stand for.
<unk>.
And as we're talking to other brands of the retailer's other people in the industry everyone wants this kind of benefit in their business. We've proven the business case for it and in the pipeline for new customers for quiet is extremely healthy. So we will have more new customers that we'll talk about at the end of the fourth quarter, but.
So.
We're just going to continue to deliver and innovate and we're doing that in both brands honestly Jay.
Some of the newness in AE I'm, so proud about we're pivoting into the right new bottoms categories and just some of those qualities and new ideas I think are like no. Other and I also feel really good about our new launch that we're gonna have early spring spring one I can't say, what it is but pretty excited around that as well so.
Again, it's a business that's delivering results for American Eagle and providing very unique benefits in the industry that.
We're confident that other brands and retailers are going to want to take advantage of.
Mhm, Yeah, and Jake just.
For Aerie building on what what Jim was saying I just want to make sure. It's it's totally clear of that.
Got it thank you so much sure.
Yeah.
We've opened a ton of new stores in the last in the last year or so I think Mike said in his prepared remarks.
Thank you. Our next question is from Paul <unk> with Citi. Please proceed with your question.
That all of those openings.
Hey, Thanks, guys just wanted to follow up on the response to last question about Aerie.
We're a.
Headwind for Com.
Being a drag all of those openings being a drag through the first three quarters of this year I guess curious what the plan is in terms of openings for next year and if you would expect a similar drag from from a new class of openings.
Over the over the early part of this year and even through third quarter, starting with the fourth quarter that becomes a tailwind. So as these stores anniversary themselves they become more mature those stores should provide actually those new stores.
Also would love to hear if you can give any detail about standalone performance severity versus the side by sides and then did you mentioned product cost.
If history repeats itself and we believe it will based on what we see those news new stores should provide a multiyear comp tailwind for aerie.
Going to be a tailwind curious how that looks first half first second half of 'twenty three.
Starting in the fourth quarter and as it relates to quiet yeah. We continue to be really excited about about quiet.
Thanks, Paul.
I'll start and Michael can maybe.
Add onto your or answer your product cost question, but for the Aerie stores, Michael just said a few things and let me add onto what.
What we said about prepared in my prepared remarks, we have 85 stores over the last year, but if you actually look back across all of 'twenty, one and all of 'twenty two there'll.
There'll be over 130 stores.
As we've talked about for quite some time are.
Digital Halo impact effect and what happens within the brand as we as we invest that aggressively.
Your typical typically see a digital impact with all that new store growth in cases, where we're adding stores to existing markets you see an impact to the stores that were already there. So.
Over a six to 12 month period, then we see a bit of a comp.
A negative comp impact sometimes in markets and then as we're describing after that six to 12 month period, you start to see the total market lift.
So we play that out over these past two years as Michael said as we head into the fourth quarter, we actually believe that.
The comp performance and area could improve we talked about some guiding to similar comps, but depending on the mix of business within area, we could actually see a positive comp.
Or a better result in the fourth quarter and then as you play this forward into 'twenty three we're only contemplating opening maybe 30 locations next year. So you won't have to say any.
Really any significant comp impact from macros. Many of these 130 plus stores coming around in 'twenty, three and ramping up their maturity. So that's what we're talking about in terms of the tailwind into next year and beyond as some really aggressive openings really aggressive investment in the brand and Thats next year, we're excited about what that means.
Overall growth in comp growth.
Stand alone and side by side performance I think you asked about I don't think were seeing a significant difference between formats right now.
I think you can assume that.
And then Michael on product cost and mix in the next year you can pick up.
Yes, Paul.
Question was what are we seeing first half second half.
We really haven't.
It's too early to comment on the on the second half of next year.
On the first half we certainly see.
Mark up being better than than it was this year.
<unk>.
And actually we're seeing a lot of we're just seeing a lot of benefit in the business I think the fact that.
In the fourth quarter with inventory.
Okay.
If it of a weaker demand environment as we're sourcing spring and summer product so.
I'd say mark up better than.
2022.
Okay.
Please proceed.
Great.
Okay.
Yes.
Sorry about that.
2019.
Thanks, Michael and good luck.
Thanks, Bob.
Our next question is from Janet Kloppenburg with J J K Research Associates. Please proceed with your question.
Hi, everybody and congrats on the improved results.
Ken can you just talk a little bit about what kind of levels of promotional activity, we should see in the fourth quarter on a year over year basis inventories are in great shape and Youre excited about the product and the comparison is relatively easy. So im wondering what we should be watching for in the fourth quarter.
On SG&A.
As we look out to next year.
Are there any investments that were put off for this year that we should consider for next year.
Lastly, Jay if you could.
Lighten us on your thoughts about consumer spending next year and how that May impact your business. It would be terrific. Thank you.
Hi, Janet how are you good how are you.
Very well.
Look I think what youre going to see is we're going to remain competitive through these next couple of weeks are big weeks for us and we want to.
Step up or a game for sure. So we will be competitive, but then what I.
Hopefully through my Crystal ball.
I do believe that we have opportunity in December to run better businesses. If you recall last year aerie definitely add opportunity on the margin side.
Q4, so we're definitely going to step that up and make sure that we're protecting that and December we believe.
That's our opportunity, including January like I mentioned, where we don't have the inventory levels that some of our competition is at.
And it will allow us to really pull back on.
Promotion in January when it's a highly liquidation period as you know.
And set us up for success for an early spring I just approved the spring stores that they look phenomenal thats when youll see our new surprise in men and.
Yeah, we're just going to keep on trying to deliver our newness Janice again, Janet and so we can compete on our terms.
And on SG&A.
Doug with Dan, we're very pleased with our progress to date and that's been our focus since the beginning of the year. Thank the teams cross functionally for all their efforts.
We achieved flat or even slightly down in Q3, we believe will be flat again for the fourth quarter, but the work's not done its still work in progress working through plans for next year.
We.
The.
I think the other factors that we're not it's not just an SG&A focus even though is what we tend to talk about the most and you asked you guys ask the most questions about SG&A, but it's really only half of our expense base.
So as we look at plans for next year.
Longer term basis, even for the next few years, we're looking across every category in every area.
That impact gross margin down through SG&A, and even depreciation impact so.
Work in progress, we'll talk more next quarter about expectations for 2023 and beyond.
And just know we're not done.
As Janet Hi, Janet how are you.
In this business you have to be an optimist or otherwise you can't be in the retail business.
And I am excited excited about lot of things I think some of these new product launches that Jim was talking about that could be very exciting for the company.
We have the ability as Michael was saying earlier, we see our cost coming down we see the cost of freight going down.
Back to the 2019 levels. So there is reason for optimism, we see we have the ability to to work closer to need and be able to chase some merchandise. So everything is.
Pretty positive and we can only control what we can control, but I'm optimistic I think theres a lot of good signs.
I was reading that mortgage rates you start coming down.
Interest will follow that and I think it should be better than people expect.
Yeah.
Happy Thanksgiving Jay Okay.
Thank you you too.
Thank you and our next question is from Dana Telsey with Telsey Advisory Group. Please proceed with your question Hi.
Good morning, everyone almost afternoon nice to see the progress as you think about the <unk> of some of the freight expenses.
With cotton costs, and what you're seeing how do you see that unfolding in the margins and then on the Aerie business Jen very exciting about the new spring launch anything we should be watching for as we go through the holiday season. Besides the leggings that could indicate even a further pickup in sales go.
Forward in terms of levels of demand and then just on the core American Eagle business denim trends in particular for men and women any differentiation that you are saying thank you.
Okay Dana.
The trends with <unk>.
Freight going downtime going down it's all positive.
That's good news the last two years. It was the opposite I remember eight months ago, everybody was forecasting freight to keep pointing up cotton to keep going up commodity keep going up and everybody was positive eight months ago prices were going to keep going higher and higher and so on the opposite way.
So I think things are positive I think also.
We just don't compete against stores like in the United States. It.
It's a world market and I think that the factories that we deal with so other countries other continents softer in Europe softer around the world and that gives us advantage of buying our products at better cost.
That's a positive shot to be able off and one thing I'm proud is that we give the customer a great selection.
We have the one of the best lineups in retail.
Quality is a number one and our values number one.
So we're very excited we think.
The designers and the buyers and our team has done a great job.
<unk>.
I know that I know.
As far as far as was planned for next year, it's very exciting and I think Jen will talk about that later.
I think it's all positive.
Yes, and Dan Great, Jay and Dana as far as how it unfolds.
I see it getting better throughout the spring season so.
The reason I keep saying ending our ending inventories clean is so important is I think if you're a retailer and you're carrying over it.
Inventory from this year into next year, youre going to be carrying that the higher transportation costs and cotton costs with it as it flows through the P&L.
Yes.
We will have very little of that so we have some fabric platforms that will work through.
In general we're seeing obviously, a huge benefit in transportation costs nice benefit as Jay was saying in product cost and as the spring season builds we're going to start spring season, with a market benefit and as it builds that market benefits should grow throughout the season.
Michael I, just want to add one thing.
Talk about cotton.
We play by the rules.
We're very careful.
We use we're very careful where we manufactured goods.
And we expect our competition to follow the same way too.
And I think in fairness to the retailers in America.
It should be a level, playing field and I think that certain retailers, who are not base here, who did advantages not paying tariffs shipping their goods in.
Not being responsible where theyre doing their sourcing.
And not found by the rules should be punished for it.
I think it's wrong, what's going on.
I think the Congress should wake up and make a level playing field for American companies.
Period.
And I think you as analysts who follow should be writing that debt that's not fair for American companies to play by the rules and other companies the company in this country violate the rules and get away with it.
Well that was well said Jay that's a tough act to follow there.
Yeah.
Dana just let's start with American Eagle I do want to be make sure that I was clear on my prior answer.
We have a new launch in the American Eagle brand, specifically in Mems for the spring one delivery. So we're pretty excited about it we've had early reads on.
What we're about to launch and the early results have been great.
And certainly we're going to do it with integrity and caution to ensure that we're not going to overdrive, our new business, but we're pretty excited about what we're seeing.
Regarding denim denim is the heritage of our brand, but so is bottomed and we're definitely seeing a shift into new bottoms silhouette cargo cord.
And some wider silhouette silhouettes and with what we've been up to as far as rationalizing our denim skus, it's allowing us to be more flexible and getting into those businesses as we ride out a slightly softer trend that we're seeing but we strongly believe in denim is here to stay as Jay mentioned, we're an American brand.
And certainly denim will always be.
At the helm of everything we do and American Eagle and we're really proud of that category and we have newness there as well data that we're excited about you'll see that in early spring.
For Aerie.
We're just getting going with offline it is.
As you know, it's a it's a fairly new business for us. It's a couple of years old where Jeff I mean are legging innovation is like no other and where we're focused on that and offline, but we also have incredible other categories our fleece categories.
They're like no others out there I'm, so proud of that price value equation that we offer in aerie.
And we're certainly not seeing any softness there so.
Excited about that category and newness again, it's a constant evolution of we're looking at new ways to deliver the business and marketing.
We really talk about it but our marketing campaigns in aerie.
They are so innovative and so fun and I think it really sets us apart in the mall.
There's a lot more to come there I just like I said for both brands I just approved the spring.
Early sex and Oh, My Gosh, I mean is it fun and new and just that skills.
And I Hope believe we're going to stand out in the mall and stand for what we do on each brand intimate certainly again in Aerie is not an oversight we're continually innovating in our broad I like what I'm seeing on the go forward. So hopefully we can.
And delight, our customers as well because that's what we're up to you.
Thank you best of luck in the holiday season, Thank you Dana.
Dan.
Thank you. Our next question is from Adrienne <unk> with Barclays. Please proceed with your question.
Great. Thank you, let me add my congratulations well done.
Then just to go back to your enthusiasm you sound as the best you sounded.
In a while so I'm really excited about that but it sounds like the supply chain is back to a level, where you are able to test and reorder as well as the case.
So I guess my question is as you go into the spring season, how much are you buying upfront versus leaving on the table to be able to do that and read demand.
And then for them.
Michael or Mike on inventory can you remind us.
It was up 37% at the end of <unk> 46, and then you get to happen again in Q1, and Keith can you remind us what portion of that was in transit because it.
We see or your inventory numbers down double digit and it was all in transit I just don't want people to get worried that you can't comp right because it was unavailable for sale. It wasn't very high utility and de facto you in my opinion, I think youre not going to order excess inventory. So I just wanted to make sure that.
<unk>.
Part of it's clear thank you.
We're constantly evaluating our inventory to sales relationship and ensuring that our sales positioning depending.
Depending on the plan is certainly <unk>.
Positioned higher than our inventory positions. So that's what we're up to that is what we've been up to it.
It's definitely a best practice for our both of our brands.
And roughly we need we leave about I mean, I would say I'm going off the top but roughly about maybe 25% open.
And as Michael said, we're just way more flexible right now, where we're able to get good tier faster and more swiftly and we're certainly taking advantage of the supply chain.
And we're leveraging that so.
I would like to say that you know what youre seeing for holiday and we just released as far as our inventory you'll see more of the same on the go forward and with some of the new technologies. We believe we can get even more efficient with our inventory so.
Hmm.
I hope that answers your question.
Yes, it does.
Okay perfect perfect.
Thank you happy holidays.
Happy Thanksgiving.
Yeah.
Thank you. Our next question is from Kimberly Greenberger with Morgan Stanley . Please proceed with your question.
Great. Thank you so much John I wanted to follow up on what Youre seeing.
On the trends in the business.
If you could just sort of frame the changing consumer preferences, if youre seeing any this year compared to last year and.
And how are those ebbs and flows and what consumers are gravitating to how is that informing your buying for 2023. Thanks.
Sure.
I think I've said this before in my past.
For both brands were up to comfort soft and you know that in conjunction with our price value equation and our quality I think is like no other.
So we're I do you are hearing this conversations out there and there has been some shift into going out that was earlier on this year.
<unk> some of those categories, but at the end of the day.
Our core demographics, they want comfort.
We haven't seen a shift in fleece, we're seeing uptick there for both businesses.
They just it.
American casual comfort is not going away.
And I think that's the most important thing any brand can do is stand for what they do.
What they represent both both brands.
<unk> fit intensive so our bra category to an aerie and our denim bottoms categories and AE, it's so important.
Our customers want to look good and in their clothing, and that's where I think we stand apart we focus on the best fits in the industry.
Comfort like I said and on the go forward I think we're just.
We're going to continue to deliver what our customer expects from us where a bottoms base business and American Eagle were shifting underneath the covers there and in Aerie, we're still gonna samphire, our intimates business, but we like some of these new categories that we're adding and the thing I like about areas.
<unk> are demanding more from US every day I mean literally if they.
They want more categories for Mary.
They love, what we stand for they love the platform and they want to be part of that community.
Okay.
Great. Thank you.
Thank you. Thank you. Our next question is from Dan Stroller.
Hey, good morning, guys and congrats.
Eric.
Yes. Thank you.
I think it was brought up in the prepared remarks AUR versus pre Covid was that quantified at the brands and if not I guess, where is it and where do you think opportunity may exist. Thank you.
We didnt cover your prepared remarks, but it is up to pre pandemic.
<unk> levels for both brands.
We don't have specifics for you right now.
Yes, AUR is healthy and up in both brands.
Got it okay.
Yes.
Okay Alright.
We can take one more question.
Thank you our next question will come from Joanna.
Joanna Kim with Cowen. Please proceed with your question.
Thank you for taking my question just one question on marketing costs, we are seeing some elevated cost for customer acquisition curious if how youre managing your cost at the moment and what your plans are for next year. Thank you so much.
Thank you, yes, yes, youre correct. There is definitely some headwinds in terms of advertising and marketing costs.
We've got a lot of different moving parts within our advertising spend so we are prioritizing that spend to make sure that we can offset those costs not incrementally incur expense for the company, but then redirect spend where we need to for customer acquisition and retention. So the teams are hard at work at that.
So kind of week to week month to month conversation in terms, where investments are made and then kind of preseason planning basis.
That's definitely the focus they have looking into next year.
But we believe we can spend to similar similar levels in similar rate of sales to generate what we need to from an acquisition and retention perspective without incrementally incurring expense.
And as the opportunities we are uncovering.
Alright, and on that note as Mike has said.
We are intently focused on improving profitability and cash flow.
And we will maintain strong discipline around inventory expenses and capital expenditures.
Our brands are healthy our operations are resilient and I am confident we will emerge from the current macro is stronger.
And I look forward to updating you on our continued progress and wish everyone, a happy and safe holiday season.
Personal note go Buckeyes.
[laughter].
Thanks.
Love It.
Yes.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.