Q4 2022 American Eagle Outfitters Inc Earnings Call
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Greetings and welcome to the American Eagle Outfitters fourth 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.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Judy Meehan. Thank you Ms. Meehan you may begin.
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 <unk>, Chief operating Officer, and Mike Matthias Chief Financial Officer.
Before we begin todays call I need to remind you that we will make certain forward looking statements. These statements are based upon information that represents the companys current expectations or beliefs.
So it's actually realized may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise except as required by law.
Also please note that during this call and in the accompanying press release certain financial metrics are presented on both a GAAP and non-GAAP adjusted 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.
H E O Dash, Inc. Dot com in the Investor Relations section.
Here you can also find the fourth quarter investor presentation.
And now I will turn the call over to Jay.
Good afternoon, thanks for joining us today.
2022 was a dynamic year with numerous external crossroads.
The outstanding results in 2021, we face a difficult macro environment with rising inflation higher interest rates continue supply chain disruption.
Promotional retail environment.
I am proud of how our teams executed throughout the year early on we took swift and aggressive actions to reduce inventory levels cut expenses and capital spending this contributed to a significant recovery in profitability and free cash flow during the second half of the year.
We also posted our second highest revenue periods on record in both the fourth quarter at $1.5 billion in the year at $5 billion, our fourth quarter results exceeded expectations and adjusted operating income of $96 million was above last year.
We strengthened our financial position and exchange nearly all of our outstanding convertible debt.
To end the year with a healthier balance sheet and improve liquidity.
Moving to the American Eagle brand I'm incredibly proud of the work the AEP has done over the last several years to improve profitability rationalized unproductive skus.
Clothes Rosemont margin stores as a proof 0.4th quarter adjusted operating profit for AE was up 36% to 2019.
Jan has made great strides refresh the brand re energizing assortments to capitalize on the trends, while delivering better profitability.
A strong and healthy brand.
I'm encouraged by how customers are embracing new styles and I look forward to our continued progress.
Aerie has demonstrated exciting multiyear growth with fourth quarter revenue and adjusted operating income up over 70% 2019.
The lack of success of offline our extension into activewear underscores the strength of Ares powerful brand platform, we have significant potential as we reach more and more consumers and I cannot be more excited about the future.
Our international business performed well in 2022.
We will continue to fuel sales and profits pursuing a multi year strategy to optimize key company owned markets and expand our license business.
In 2022.
Pleased to publish our first ESG report highlighting over two decades of actions, we have undertaken to build a better world.
As noted in the report we have made tremendous progress across our water goals and continue to be new submissions yesterday responsibility is embedded in our brands and company culture and deeply intertwined with our corporate strategy.
As we grow our brands and markets real estate discipline and focus on profitability.
Inventory management remains a key focus and where are we.
Here's the strength and agility of our supply chain to chase demand. Additionally, we have launched a formal program to further reduce expenses and efficiencies and prioritize high ROI projects.
Given the highly volatile environment, we've been operating in over the past several years now's the time that we said our business well.
Last year, we made good progress good opportunities remain as we strive to break out of the mid single digit operating margin range.
On quiet platform, we continue to see interest from prospective customers that.
Optimistic about the long term opportunity yet the demand has been pressured this past year.
As Michael will review, we are adjusting our go forward plans to strengthen profitability.
Although the macro environment remains uncertain.
We entered 2023 better position I've.
I see no shortage of opportunities for this company.
Harnessed the power of our brands and industry, leading operation operating models to drive growth and find efficiencies and processes and capabilities I'm confident with focus and discipline. We can strengthen our bottom line. We're committed to returning cash to our shareholders and are very pleased to reinstate our quarter.
The dividend with that I'll turn the call over to Jeff.
Thanks, Jay and good afternoon, everyone.
Over the past few years, the dynamic macro has battled tested us in many ways.
In 2022 was another rollercoaster every year.
In this environment American Eagle and Aerie displayed resilience maintaining their status as fan favorites within our core demographic.
In a year, where customers pulled back on discretionary spending we grew our loyalty customer file further strengthening our relationships.
Even in a highly competitive promotional environment fourth quarter results exceeded our expectations with.
With inventory back at healthy level, we brought exciting new innovation to our customers in stores and controlled markdowns.
Our second highest fourth quarter AUR. This was down 7% to last year's record high yet up over 20% across brands to 2019, highlighting our focus on controlling promotion and building brand equity.
Aerie reached a milestone at one 5 billion in revenue in 2022, new stores continued to expand awareness.
Since 2019 revenue has nearly doubled with operating profit up close to 150%.
I am pleased with this accomplishment, especially given the unprecedented macro volatility.
For the fourth quarter Aerie continued to see good growth yet came in below our expectation.
Core apparel showed up well and we achieved our best sweater season in the brand's history, while also continuing positive growth in fleet.
Our activewear extension up line by Aerie remains a standout performer led by our leggings franchise.
Leggings continue to be a powerful driver of new customer acquisition, and we are seeing nice momentum across fashion and performance style.
Intimates was a bit softer than expected and as we look forward to 2023. Our plans include launching more newness and intimate to build greater awareness and engagement.
As we continue to scale Aerie, we're leveraging creative marketing touch points to drive excitement in the fourth quarter or I want Aerie holiday marketing campaign centered on gifting with a strong success.
Additionally, this spring we launched a new find your wonder campaign with a throwback to why teekay fashion, including real life and digital experiences.
Turning to American Eagle demand in the fourth quarter exceeded our expectations as we evolve our assortment with engaging fashion trend.
We are seeing a nice reception to new silhouettes, such as wide leg and cargo.
And renewed excitement and lease and knit tops I look forward to capitalizing on new fashion trend as we move through the year.
Over the past several years, we have been intently focused on improving the health of the AE brand tightening our assortments pulling back on the value destructive promotions and selectively closing unproductive stores.
These changes are driving better margin.
As we maintain our focus on profitability. We are also actively exploring opportunities to drive growth on.
On that note in January we launched a 24 seven a new mens sub brand focused on the fast growing activewear category.
Early reception to our limited initial assortment has been very encouraging and we look forward to scaling the collection later this year.
Last month, we also relaunched $8 77, as a premium sustainable capsule within the AE brand.
[noise] introduced with limited denim choices for now the Assortments span, both men and women and will be available predominantly online with brick and mortar presence in select stores.
The reception has been very encouraging and I look forward to building on the early success.
I'm pleased to note that Ae's customer file grew in the fourth quarter as we retained and reactivated more customers.
On the marketing front, we collaborated with the cast of the summer I turned pretty a gen Z favorite show launching a limited edition collection that fully sold out.
Well it is around E is continuing into spring last month, our newest denim silhouette dreamy great went viral after an organic posts by Alex Earl one of tick tock fastest growing influencers.
We have also launched an exclusive spring collaboration with the outer banks crew, which is off to a good start drawing in new customers with great reception across social media in fact, a recent post by one of the stars on the show became our number one Instagram post of all time.
Entering 2023, while the macro remains uncertain emerging trends and casual wear continue to provide new avenues to drive growth across our brands innovation.
Innovation is our strength.
We will lean into newness and continue to deliver excitement and high quality on trend styles to our customers.
Thank you as always to the AE and aerie team for their tremendous effort. This past year with every season, we are making progress and I remain very excited about what's to come. Thank you and now I'll turn the call over to Michael.
Thanks, Ken and good afternoon, everyone as Jay noted the past few years have been extremely volatile for the retail industry highlighted by shift in consumer spending and operational challenges.
And advocating through this period has not been easy yet I'm very proud of how we've responded with both agility and speed.
We've added significantly to our capabilities and increased our use of new technologies.
Each are driving benefits to our operations and the customer experience.
As we continue to manage through a dynamic landscape, we will lean into these capabilities as we strive for productivity improvement and even stronger profitability.
Fourth quarter channel performing largely reflected the ongoing macro volatility.
It's notable that customers are returning to in person shopping store revenue was flat to last year and up 5% to 2019.
Since taking responsibility for stores last fall I've had the opportunity to visit numerous locations and spend considerable time with our incredible store leadership.
We have a powerful suite and truly a world class field team and I've been very impressed with just how well we service the customer and leverage tools and technologies to drive store productivity.
For example, this quarter I am pleased to note that we were tied for the number one specialty retailer for customer satisfaction in the Acs side customer satisfaction survey.
I actually had the largest year to year improvement of any companies surveyed.
Our new point of sale system is providing a better shopping experience.
Reducing average check out times by 50%.
We expect it to drive improvement to sales per selling our as we focus on further efficiency gains.
I'm also very excited to share that we will start rolling out in innovative RFID and AI based technology capability across our stores later this year.
Our pilot test this holiday proved highly successful providing visibility into inventory availability and placement at over 99% accuracy.
I am very enthused about the sales opportunities inventory productivity improvements and labor efficiencies, we can unlock moving forward.
As I indicated last quarter. We are also focused on updating and modernizing our most productive stores and relocating certain stores to ensure we are in the best locations.
Last month, we consolidated our store footprint in Manhattan.
Moved Aerie from Spring Street to the second floor of our AE Soho Broadway location and introduced our full offline collection to this market.
We will also be testing a handful of off mall locations, which are smaller lower cost stores and emerging neighborhood outlets.
And this summer we are testing a new American Eagle store design, introducing a fresh and modern take on both the aesthetics and functionality that he'd stores.
As we introduce these changes we're dissecting all facets of the store channel to optimize how we operate as.
As we sharpen our focus on store productivity and profitability. This is revealing further opportunities, particularly within our labor model.
As a result of channel shift and unnatural builds from Covid digital revenue was down 9% to 2021 yet.
<unk> revenue was up 19% compared to 2019.
Digital is a healthy channel representing 36% of total brand revenue and it continues to be highly profitable.
This quarter I am happy to say, we are hiring new talent to the team.
Welcome and David <unk>, as our new Chief Digital Officer, David brings vast experience and building successful digital commerce and we're looking forward to his contributions.
Now turning to the supply chain after three years of unprecedented volatility in inflation on the inbound side.
We're entering 2023 and a much more stable supply chain environment.
Lead times are essentially back to pre pandemic levels and product costs have normalized.
As we manage through an uncertain macro we are using that to our advantage planning cautiously in chasing into demand.
<unk> for the spring season are down to last year and a significant portion of our fall still remains open.
On the outbound side, our investment in quiet platforms continues to provide much needed capacity flexibility and speed for our brands combined with cost savings.
Digital delivery cost in the fourth quarter were down to last year, we're making progress in reducing fulfillment costs and the number of shipments per order, which resulted in a lower delivery cost per order.
As Jay noted, although quiet third party revenue has grown significantly to last year.
Acquiring new customers has been slower than anticipated due to a tougher macro for.
For 2023, we are focused on reducing expenses to better align with growth trends.
We will streamline the investments in the platform and look to leverage <unk> capabilities to continue to drive benefits.
For our brands and for all of quiet third party customers.
And now I'm going to turn the call over to Mike.
Thanks, Michael Good afternoon, everyone.
You had mentioned in response to changes in the environment, we took early and aggressive actions to reset our plans.
We reduced inventory expenses and capital expenditures, which enabled us to deliver a meaningful improvement in profit and cash flow in the second half of the year.
Margins rebounded and we generated adjusted operating income of $213 million in the second half.
Compared to $56 million in the first half.
We also returned to a positive free cash flow position and further strengthened our balance sheet.
Full year consolidated revenue of $5 billion was second only to last year's record result.
And adjusted operating income was $269 million.
Fourth quarter results exceeded our expectations, reflecting improved demand and stronger margins consol.
Consolidated revenue $1 5 billion declined 1% for last year's record result included one point of growth from quiet platforms.
Brand revenue was down 2% coming in ahead of our outlook for a mid single digit decline.
This included our second highest holiday sales results in the history of the company with positive momentum continuing in January .
Compared to pre pandemic fourth quarter 2019, consolidated revenue was up 14%.
Adjusted operating income of $96 million reflected six 4% margin and was up 30 basis points to last year.
60 basis points in 2019.
Quiet platform has produced a $13 million loss, excluding a $4 million impairment and restructuring charge.
Demand was lower than anticipated.
Well reviewed with macro challenges continuing into this year, we've adjusted plans to reflect a more measured pace of growth for <unk> platforms and reset expenses aimed at improving profitability. This year.
The gross margin rate of 33, 9% in the fourth quarter was ahead of our expected range of 32% to 33% due to stronger demand and lower markdowns versus plan as we leveraged our healthy inventory position to control promotions.
Compared to last year gross profit dollars increased 4% to $507 million with the gross margin rate up 150 basis points.
Merchandise margins were higher reflecting lower product and freight costs with a partial offset from higher markdowns.
Lower compensation and delivery costs also had a positive impact on margins offset by higher distribution and warehousing costs and higher rent.
Quite platforms had an 80 basis point impact as that business continues to scale.
Despite a highly promotional operating environment markdown levels were significantly healthier relative to 2019, reflecting our multiyear focus on improving brand equity and driving profitable growth.
SG&A dollars were approximately flat to last year in the fourth quarter, reflecting our ongoing focus on controlling expenses.
As Jay noted we are currently undertaking a companywide assessment to look for additional savings and efficiencies across our entire cost structure.
<unk>, our culture to focus on innovation and investment discipline.
I'll report on progress over the course of the year.
Adjusted EPS was <unk> 37 per share our diluted share count was $197 million down from $203 million last year.
Shifting to the brand's aerie revenue increased 8% driven by new stores.
<unk> sales declined 2% following a 17% increase last year.
The adjusted operating margin of 12, 2% reflected a significant recovery from the fourth quarter of last year.
Aerie remains a strong multi year growth and profit story as.
As we move past tough comparisons and new stores ramp up along the maturity curve, we anticipate comps returned to positive territory. This year.
American Eagle revenue declined, 8% and comps were down 9% following an 11% increase last year.
<unk> was ahead of our expectations and reflected a sequential improvement from the third quarter.
I am, particularly pleased to see a significant improvement in the health of the brands in 2019.
While revenue was down 7% compared to the fourth quarter of 2019, adjusted operating profit was up 36% over the same period and brand operating margin expanded 510 basis points to 16%.
Consolidated ending inventory at cost was up 6% compared to last year with units up 4%.
Inventories reflect current spring product and earlier than expected deliveries.
<unk> continues to normalize.
AE and aerie inventory across the U S and Canada is down to last year with a consolidated increase driven by expansion in Mexico, where we're experiencing growth well into the double digits.
We ended the quarter with $170 million in cash and total liquidity of $862 million cap.
Capital expenditures totaled $61 million in the quarter and $260 million for the full year, which is down significantly from our plan at the start of the year.
As we focus on strengthening free cash flow and capitalize on the investments made over the past several years, we are reducing annual capex to the $150 million to $190 million range in 2023.
We plan to open approximately 25, new Aerie stores next year with net closures at AE of approximately 25 stores.
As I reflect on the fourth quarter performance. Despite operating in a highly dynamic environment I am pleased by the multi year improvement and the health of our business.
We continue to see opportunity to drive growth and profit improvement over the long term.
Moving onto our outlook as we enter 2023 as the team has discussed our brands are strong and inventory is healthy.
The global supply chain environment continues to normalize providing improved costs and greater agility.
And we are in a companywide focus on expense reductions and operating leverage.
That said visibility into the macro and overall consumer spending behavior is still limited.
As a result, we're taking a cautious view.
Regarding the current quarter, while we've seen good trends in February with a favorable response to new merchandise the environment remains choppy.
<unk>, it's early in the quarter with our most important weeks still ahead.
At this point our outlook for the first quarter is for revenue to be in the range of flat to up low single digits and.
For operating income to be approximately flat to last year.
For the year, our outlook reflects annual revenue growth in the range of flat to up low single digits and operating income in the range of $270 million to $310 million.
With that I'll open it up for questions.
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One moment, please while we poll for questions.
Thank you and our first question is from Jay sole with UBS. Please proceed with your question.
Great. Thank you so much maybe just two part question one just first on aerie it sounds like Theres a lot of.
Exciting things happening just in terms of fashion I mean, I think in the slide deck talked about until you see it as a $2 billion brand can you just talk about the longer term opportunity to continue to see with Aerie and then maybe Mike just on the guidance that you gave for first quarter. It sounds like February has started strong and youre looking for flat to low single digit growth.
Oh sure Hi, Jay how are you.
As we heard you know Mike mentioned it as we start to hurdle. These new store openings, we feel like there's definitely some comp growth in these stores because as you know we go into a new market, we have to get the digital side of the business up and going in.
And we're already seeing some new and results.
As the quarter starting in Q2, our quarters from a comp perspective, we are increasingly getting gotten better. So I think its proof of the pudding there that there's some upside as we hurdle these new store openings and really like let those businesses mature. So we're excited about that regarding just the product side, Jay I mean, we.
Could not be more excited.
We have so many new categories, one being offline.
This business is on fire, let me just say that in.
Q4 delivered incredible results over last year.
We've been hurdling, an incredible launch them year over year of the of the crossover flare. It's our it's our first new <unk> coming and it's our best and nobody can comp this item because we own it and it's ours.
The one thing I want to say about Aerie and this is true our customer awareness, so our customer awareness about its up 25% year over year in Q4.
It speaks volumes that means that these store openings are really starting to take hold.
Introducing the brand to new customers don't forget we're still in expansion mode.
We're about 500 stores right now we're opening about 20 more this year. So all of these new stores hopefully pay off as far as brand awareness from a product standpoint.
We're all over it you know we're excited about offline that is presenting growth for us a new businesses, including fleece, which we've owned but I really think we're dominating there from a.
Competitive standpoint, and then for the future, we're really going to double down on intimates, we feel like that's a category that we can pull.
And on and really innovate our smoothies launched this year was incredible in fact, some of those frames have really taken hold for us and we're really going to reinvent that business so more to come.
As you know, we're never going to stop innovating this team.
I can give you a little insight next year is Ares 10 year Aerie real anniversary. So everyone can be excited to see what's to come because the creative team is not stopping.
Great and then sorry, I think I got cut off there. The second my question, but just for Mike just on the revenue it sounds like for Q1. It sounds February has been good you said choppy youre looking for flat to up low single digits can you just talk about if your quarter to date trends. So far is above or below that and then secondly on gross margin. How you feel about gross margin in Q1 sort of up or down.
Year over year.
Hi, Jay Thanks, Yes, just to confirm the cadence of revenue.
Applies to our Q1 guidance so coming out of December .
Hey at ICR, we talked about quarter to date at that point, we were.
Negative 3% brand revenue.
But we did message that January we saw some uptick in trend at that point.
That continued through the rest of the months netting us to a minus 2% brand outcome for the fourth quarter.
And then.
That trend actually has continued through February so the combined January February result, here because it had some consistency to it which is giving us confidence in is flat to up low single low single digit guidance.
And then for gross margin, yes, we're looking for.
He had a range of similar till last year were not range, but our guidance of similar to last year income on that flat to low single digit revenue implies some gross margin improvement I think we're still looking at some freight headwinds from last year that we recaptured obviously the airfreight in Q4, and some other and freight headwinds.
<unk> some of that to come through in the first quarter again so.
Definitely some improvement a bit of improvement assumed in our gross margin.
And that's similar to last year.
Income guide.
Got it okay. That's very helpful. Thank you.
Our next question is from Matthew Boss with Jpmorgan. Please proceed with your question.
Great. Thanks, Jen maybe could you elaborate on early spring selling trends that youre seeing across categories, maybe if we touched on both the American Eagle brand and also aerie.
Sure Hi, Matt how are you.
As I mentioned.
On my last answer it's nice to see comps in both brands.
We're getting better quarter over quarter, starting in Q3, so I'm excited about that.
Look it's early on in February , but I have to say that theres a lot of encouragement.
The teams AE.
I'd like to reflect on American Eagle for a minute first of all.
We've really assembled a world class team here I'm very proud of the work they've done and we've been up to really right sizing that business and during these tough times that allowed us to do so while also protecting our bottom line as you can see them, but we've been up to building a profitable base.
Healthy customer base I think that's the most important thing I can articulate right now in the American Eagle side.
You know we had a lot of customers in the past that only came to our brand once and they were promotional customers were up to getting the best customers in our brands and so starting with American Eagle I think we're really here I think we've right side decided the business and now we're looking for growth opportunities. So early on that we launched 24 seven.
And another new line 77, but let me take a step back to say that women's we're starting to see a nice turnaround here.
I think we're getting into the right balance of the Assortments and I, just really want to highlight that it is about the balance.
Denim had been a little softer, but we saw their trends happening out there another bottoms and I think the teams did a nice job adjusting and really going after and we're starting to see some nice results there.
As well as just outfitting now we're seeing great tops.
Come to life, our tops business has turned around and womens which is so exciting to see.
And then in mens just going back to we're learning.
Since you know that customer is a little slower to take off but I like some of the early reads in our new 24, seven athletic business as well as 77 is a little bit of a surprise its premium denim.
We really worked on it we wanted to perfect that line, we believed and Uh huh.
Higher priced business, we own denim as a company and why not service a new customer and early reads have been spectacular so we.
We have two new potential growth vehicles for the company as well as its just nice to see women's that business round out Matt.
And all I can say is because of our test and scale in our new <unk>, you know our logistics platform and in our in our.
Our ability to get goods here, we're pretty pleased on how we can chase these goods and get back into the business on the American Eagle side, and then Aerie look it's a little early to read swim, but we've seen some nice momentum starting in February but coming out of the end of February some really nice results there.
I can't even talk enough about the apparel side and what we're up to is really going after intimates for the future.
Great and then maybe Mike as we break down your full year operating margin guidance could you just help bucket the embedded assumptions, if we're thinking markdown rate versus IMU recapture maybe relative to just potential offset.
To consider on the expense front.
Sure, Matt I think.
Definitely assuming freight cost recapture so we saw it in Q4.
We will start to see here in Q1s are our guide for the year includes the assumption that.
We know that product costs are improving.
Speed and agility in the supply chain is here now we're back to chase mode, We're leaving significant open to buy so that should allow us to.
Since it will allow us to ensure inventory levels are appropriate for the full year.
So both freight cost recapture and then not repeating that charge we took in Q2.
Associated with cleaning up the first half inventory.
The offset then would be some expense growth some level of incentive assumption that's.
We did not incur at all in 2022, and then just some typical annual annual wage costs that we're looking to offset.
Some other just annual expense growth categories.
What's embedded in our assumptions.
Great Best of luck.
Thanks, Matt.
Thank you and our next question is from Paul <unk> with Citibank. Please proceed with your question.
Hey, Thanks, guys I'm curious if you could talk about the performance of Aerie new stores from this most recent year.
Compare that to previous years, just what youre seeing in terms of new store ramp and then also curious if you could size for us the size of the.
The offline business then.
Aerie and just what are you counting on that business to do in terms of growth for 23% versus the rest of that aerie business. Thanks.
Yes, well I can start with the Aerie new store productivity I think we're actually really pleased with the new stores out of the gate.
We I think we've described it as they're achieving pro forma expectations, which ties to our typical typical guidance or communication around two to three year payback on those investments.
And that's what we've seen out of the gates I think I'm throwing this last in the back half of the year recent quarter and what we're continuing to see here in the spring as we've described and others are to a return to stores. So I think that's actually having a positive impact on the performance of these new stores.
Store traffic is healthy in general.
As we know.
Business coming through stores, a little a little.
More right now than digital digital traffic is under pressure, but stores are really healthy.
Oh, it's contributing to that area performance.
And offline side of the business, John I don't think I'll take that.
That piece of the question.
Just about sorry, I might have missed that I fell off the line for a minute. So offline, meaning are we encouraged by the early results absolutely.
Just the size contribution.
As of the business jet side.
Business contribute tribute Gary Let me, let me just say it feels like Aerie and early days, we're growing at a very rapid rate.
We are learning about the business, we have some different store formats.
So that we can really learn to leverage its interesting our new stores, we're feeling very encouraged by but we still have a portion of the business inside of the Aerie you know inside of select Aerie stores.
Whether there is an offline store in the mall or not we still are learning in the aerie stores, what that you know.
<unk> me is that as we build out offline, we're looking and testing new businesses inside of the Aerie store because the only thing I can say is that every day I get a letter from a customer asking why can't Aerie do this category or why don't we have more than this intimate business or why are why so I'm pretty excited.
About having a new business that we can really scale.
And I think.
If I look at the run rates.
If its not faster, it's equal to aerie extreme quarter over quarter double digit growth year over year.
Are you getting into the pandemic and even during some of those years with I mean, the pandemic years, we still did great.
The business is.
About 30% of Aerie and.
More to come but we are testing new categories every day.
And what's great about our offline business and the way we set it out it's not only just lifestyle, they're really starting to trust us and the performance side of the business. So again that really opens up new opportunities.
And.
Paul This is Michael <unk> I, just wanted to stress what Jen said earlier I think it's <unk>.
Really important for the conversation, which is we've seen sequential comp improvement in aerie stores, each quarter from second quarter and even here at the start of Q1.
And what that really does is it supports our hypothesis that we opened over 130 aerie stores in the last two years those stores as they mature.
They're going to.
They're going to start Comping, they are going to start a multiyear trajectory of comp which is what all our data in all our history tells us.
And theyre going to bring new customers into the brand and grow not just the store comp, but also the digital comps.
Early signs if you look at the last few quarters and you look at these stores as we're anniversarying them are very positive that what these stores are doing for the business is going to mirror history, which is going to give us multi years of growth and we got into these stores obviously during COVID-19.
At a very advantageous time to get long term deals done for that brand. So it's very encouraging what we're seeing right now in the aerie business.
Got it thanks, guys. Good luck.
Thanks, Paul.
Yeah.
Thank you and our next question is from Adrienne <unk> with Barclays. Please proceed with your question.
Great. Thank you nice end to the quarter, everybody, Ken I'll start with you.
So kind of in and other kind of conversations theres been talk about the teen consumer.
Tight wallet, there and a level of price sensitivity. It does not seem like that that is necessarily impacting your customer in fact, youre pulling back on promos. So just wondering.
I'm sure it's the product so that's first.
First and foremost, but what are you doing differently to engage and create that loyalty and then how much higher our the AUR is versus 2019, how much of that promo versus initial retail. Thanks, so much and the stores look great by the way.
Thank you.
Our English or <unk> or do you mean on the year or in the quarter, Mike can get a little bit more specifics for you, but regarding what we are doing differently first of all we've been highly focused on loyalty customers our loyalty.
Files up.
But again in total but again, it's about the health of our five right because they're our best vendors they come back the most to our brands.
And we want more of those customers. So that's why we're just incredibly focused on our loyalty program and you'll see there we have some really great findings and how we can even build that program stronger and better.
Adrian I'd like to say that.
First of all as I mentioned Aerie doesn't quit like we've been going after that brands year over year, inventing reinventing newness and as I mentioned.
As you can see that the our customer base is growing at an incredible rate in fact, they just looked at a chart I I believe it's over 10 million tests.
H M like quadrupling the base, it's incredible what we've done in Aerie and it is about building that brand awareness as I mentioned and getting into new markets.
And learning about those customers and building that community Adrian.
We do this grass roots in both brands and I'll get to <unk> in a minute, but we havent bachelor's and those tentacles and sunny and the store teams have done an amazing team using our associates to reach our customers and Michael said, it even best REIT like.
Our store.
Our our store experience and our customer experience you heard those results.
They're like no other and that's a winning edge for us and it's a place that we're not going to quit so.
The Aerie story in AE as I mentioned, we were sort of reversing the brand sort of pulling back to go forward, we're seeing new opportunities now and then.
In doing so I'd like to say we kicked off.
January with our new launch of a 24, seven but let's not forget what we're up to okay. Some of the new stats are saying over the past two years more recently so January into February we are seeing Gen Z take a greater hold on the AE brand I'm, saying this and I mean, there's like.
The outer banks, we just did a collab without or banks. It's the it's the number one teen show out there.
The products sold out we're gonna do co lab. So we are going to get this customer into our brand and what we've been doing so great Adrian as they're living with us. They are staying with US. We've mastered that now what were up to us getting this customer into American Eagle seeing the new Aerie American Eagle seeing all the work that we've done and the trends.
We're liking what we're seeing.
We just had a gene.
That just went viral on tictac with.
I mean, the number one check doctor out there Alex Earle.
Every girl watches or in this gene is on fire. It reminds me of the old days of the crossover.
You know lagging in Aerie, we are chasing that gene.
And you know what I love about it most the most important thing is if you can get organic winners into your brand.
Organic customers and organically organic social media all of that means more to our customers and what our brand stands for which is 100% where authentic that's what we stand for aerie real aes authentic and if we can get more of those customers and we can get that buzz that's what we're doing so.
Tens of positive signs, we have collabs youre going to see left and right back to school, we have another great collab.
We just have some really exciting things coming and we're going to now use this new base in AE to kind of launch ahead and move forward.
That is super helpful.
Go ahead, and Adrian just answered the second part of your question on AUR or you are just still up over 20% in 2019.
I think we've talked about that being a combination of controlled promotions more targeted promotions versus full box offers some structural changes in our loyalty program.
In terms of.
Giving away free jeans, and historically that we eliminated during the pandemic, which we don't plan on going back to.
I think targeted increases in ticket, where we have not seen price resistance in where we can see the customers willing to pay for it.
That's a continued strategy, we built up that brand equity through the pandemic and our plans are set to not give that back.
Thank you very much Super comprehensive and Super helpful Best of luck.
Thanks Adrian.
Thank you and our next question is from Alex <unk> with Morgan Stanley . Please proceed with your question.
Great. Thanks, so much for taking my question.
I know last year, you guys had mentioned this path to kind of $6 billion in sales in a low teens EBIT margin and obviously, that's very different from where you guys are landing. This year just given what's happened in the last year or so so just taking a step back or are those numbers still in play at all or how should we think about those targets and the revenue and margin trajectory longer term.
Thanks.
Thanks, Alex So I think at some point, we'll come back out and talk about longer term targets. We're obviously very focused on just navigating the current environment and our guide for 'twenty.
<unk> 23 includes that.
We've got the firepower in the company and across our brands to get to $6 billion over time.
Again, we can discuss later will provide maybe more color when we think that's possible.
And then double digit operating margin is still our goal.
The guidance, we just provided for this year is keeping us in that mid single digit range call. It 6%, maybe six to seven.
But as Jay noted in our prepared remarks and in our was in our press release, we're embarking on a project here this year to really unlock across our entire cost structure.
The opportunity for us to leverage that continued revenue growth in a different way than we've been able to.
In the last few years or in our history, so more to come on that project.
It's a it's it's geared toward exactly that some structural changes to our operating model that will allow us to leverage revenue in a different way and path towards that 10% or double digit goal.
Okay.
Great. Thanks, so much.
As a reminder, it is star one if you would like to ask a question.
Our next question is from Marni Shapiro with retail tracker. Please proceed with your question.
Hey, guys. Congratulations on a great end to the year and Jen that gene that gene.
Whenever we're looking at that scene Arnie its the best we have.
Just got a new delivery in that team.
But Jay I actually have a big picture question for you.
I completely understand the caution about 23.
Yeah, there are still some headwinds out there in comparing to 2022 was not which wasn't a normal year by any stretch.
I appreciate it reviewing the cost for the.
In 2023, but you know.
You did reinstate the dividend, which suggests you and the board have a level of confidence about the business I'm curious from your vantage point what are you seeing that's maybe not yet in the numbers that you can share with us.
Yes.
We see good momentum going the right way.
As we said like last month was a good month.
We feel very.
Yes.
Yes.
EBIT, even though we don't know what the future's going to look like we are.
Very optimistic.
It was very interesting this past week, we had our international partners in I got a call from one of our major partners and certainly I've been.
Coming from.
Like 10 years and this is the best I've seen the line book.
We're very optimistic I mean, I think our.
Jim was saying we developed a new 877.
We're getting good traction on that with $24 seven we think can be very big.
So it's basically it's mostly product base, which is really where you guys shine anyway.
Yes.
It could be private space. So this will help drive it and at the same time.
As Michael was saying it Mike Matthias was saying we see we're looking at we're looking at the real estate strategy a little different.
Don how we take each market separate and where the best locations in those markets are.
And our goal is to make sure that we have stores in the best locations.
And those given markets.
It makes the last one and then John if I could just ask one quick follow up to the AE jeans situation.
You've had some very big hits in the store that I've seen.
And I'm curious is has the market opens up enough that you can chase back into that product I'm not calling out the product in the public forum for a reason, but I do have that ability to chase, what I'm seeing selling out very quickly.
Yes, absolutely and.
We've really changed our testing process.
And American Eagle, so that we can be a little bit more nimble.
And we can be a little bit more flexible not only with silhouette, but with wash.
I've learned a lot in my couple of years in American Eagle and it's not just about one thing in a gene you know sometimes it's about wash, sometimes it's about a new fit and that's where I think we can really dominate because of the way we test and go to market.
We are seeing a lot more agility, there marni to your point.
And we are seeing trends improve in denim, which is good news at least an American eagle.
Albeit we're offsetting it with newer ideas at this stage and that was intentional.
We sort of forecasted. This so we have other new ideas to help offset but I'm looking forward Jim never go away.
That was the funniest commentary I could actually quote Roger Martin Currie, Australia.
[laughter] Brinci and fifth T shirts in America ever go away. It just they soften and then we have to be prepared for the next trend and I think this team did an outstanding job with the spring assortment, making sure that we're leveraging the new trends in bottoms, where we do do an incredible job and and now as I mentioned Marni we have.
New tops and other things that are working and that we can really try and chase. So look there's good news here it's early on.
We like what we saw in February but I also like.
Our ability to react and what we're reacting to and and the nimbleness, So theres more to come here.
And.
Hopefully you'll hear this enthusiasm with me at the end of Q1.
Well. Thank you so much guys.
Also Jim.
So generally we have other businesses do that we're very excited what we have are Todd Schneider business, which is growing very strongly.
We're very excited about that unsubscribe. We're excited about we have a lot of good positive things going on.
Thanks, guys.
Thank you. Our next question is from John Kim with PD Cowen. Please proceed with your question.
Thank you for taking my question just curious about the quiet logistic platform and how youre thinking about long term you mentioned that the revenue growth and profitability of revisiting that 423.
What sort of euro assumption, there and how it do you still think about the long term trajectory.
In terms of the aerie comp growth how should we think about the cadence as we start to lap the impact of new store formats.
Yes, you're talking about quiet it was a very.
Cable like acquisition.
We need the capacity to be able to fulfill our orders for our brand and quiet gave us quite gave us quite gave us the efficiencies and speed and at the end of the day, we still believe.
That if you don't if you don't win it at the logistics you are not going to win the model and specialty retail in order to compete against everybody.
So we're still committed to that.
We wanted to.
We want to get we want to get like a better bottom line, there and Michael a rebel could talk about that for a second.
Yeah, no. Thanks, Jay I mean, you really can't separate the two issues. So one is quiet provides tremendous support for our brands that our business.
It gave us capacity like Jay mentioned faster delivery times and of course we've.
We've consistently reduced our delivery cost per order to customers over the last couple of years, which is pretty unique in retail.
But like I said, the third party business, just hasn't ramp to our expectations and saw great growth that grew almost 40%, but that was below what we expected and it did it at a margin that was below what we expected so well.
While we're not giving up on the business at all we still think it's going to be a very valuable business someday.
We are resetting our plans.
And we're going to pull expense out of that business, we're going to.
Eliminate unprofitable.
Service lines in that business, and we're very committed to reducing the loss on a full year basis. So.
From a year on year basis, its going to go from something that was a headwind in 2022 to something that provides.
Benefit in 'twenty, three and again over time, we still believe this is going to be a successful and profitable business for us.
Was there a second part to the question.
Yeah, just on the fifth.
Yep.
Yes, I think if you think about the minus 2% for fourth quarter. John I think we've talked about the fact is all of that non comp of 150 stores that we added over the last couple of years to 60, we added.
This past year, even more specifically as those anniversary that comp gap that can do the math on Q4 was a 10 point gap with total revenue up eight comp minus two.
That's going to close even further into Q1 as we anniversary some of the Q1 openings last year. So on a similar kind of.
Total growth rates, we do expect aerie comps to turn positive as early as this first quarter and definitely positive for the year. Michael described earlier, how that ramp is going to impact the business as a whole.
But from a GAAP perspective, just to kind of give you that specific.
A metric we use the comp the total growth versus comp gap will close and we'll be in positive range in 'twenty three is our expectation.
Got it thank you.
Thank you. Our next question is from Janet Joseph Kloppenburg with J J K Research. Please proceed with your question.
Hi, everybody.
It's nice to see the improvement going on.
I'll be quick.
I wanted to ask Jen.
What her overview is on the intimates category.
To be softness across the industry. Gen. So maybe you could tell me what's going on there.
So on basic leggings black leggings.
I'm starting to see a lot more promotions in the industry and I'm wondering.
Our customers gravitating more to fashion leggings, and just lastly for Mike.
Given your guidance for <unk>.
Flattish revenues this year.
So flat to up low single I think.
Should we expect inventory to track in line with that thank you.
Yeah, Hi, Janet how are you hi.
Good thanks.
You know.
So it's been a little volatile I will say, we're holding our own as far as market share.
But it hasnt been it has been a little up and down.
With the launch of smoothies as I mentioned, we're learning new things in the business that I think gives us.
The gateway into new ideas and honestly, that's what we really need to do I I think the team is up for new challenges and new innovation in intimates and its something Youre going to hear me talk a lot about in the future.
It has been a little bit interesting. It's the tale of two cities. There is sort of a built up business. That's happening again, but then it's really almost nothing so.
And what we want to do is play in what is meant for aerie right, what's right for our business and I think we've learned some things over the last year and I think you'll see us start to pick up momentum in some of these new ideas and really.
Attacked what we own and.
What I think we are famous for including <unk> being one of the businesses that I would like to say we really.
Well one of the first to really dominate in that business. When it comes to black leggings. Yeah. There are a lot of black leggings.
You're right.
And I think.
We are starting to see more fashion interestingly.
Not just in black leggings or leggings, but in other parts of the offline business.
And I do want to congratulate the team Abient team for really going after some new ideas in that business, you'll start to see us really marketing to them.
The early reads, we're feeling really good about it so again.
And then how do we reinvent the black leggings, we have new launches coming forward.
In Q3, a really exciting launch in Q4 that I think will definitely definitely separate us.
From our competition and we're going to continue that.
To build on all the equity that we built on in both brands as far as building our AUR is building.
Building that quality.
And because.
The customers willing to pay we're seeing that because.
They trust us.
I think that's when it comes to the Legging business. That's what we have to just continue to work on so and get that dress and.
Hopefully they'll grow with us the way we they already have those customers. So thanks Janet.
Okay and.
Hi, Janet on inventory by the time, we get the end of the first quarter as we talked about total inventory is projected to be down.
As we sit today and actually at the end of the fourth quarter, AE and Aerie U S and Canada inventory was down high single digits.
Expecting that to actually by the time, we get to the end of Q2 to be down even further which really it should be right. We were against the elevated inventories last spring that we had to clean up you would expect us to be down pretty significantly on this guide of flat to low single digit revenue increase.
When you get to the back half of the year.
Knowing all the actions we took last year to write that inventory for the back half, which drove the positive results. We saw in Q3 and Q4 in general.
It would be really just philosophically back to inventory growth being below sales growth expectation similar to below and Thats what were planning as of now.
Okay, we're running up on time now so I'll turn it back over to Jay for some closing remarks.
Okay entering 2023, we are in better position.
Our brands and operations are healthy.
Given macro uncertainties our outlook is cautious we will stay disciplined on expenses and inventory if demand is stronger we will strive to deliver better results. Thank you for joining the call and I look forward to updating you on our progress next quarter. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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