Q3 2023 American Eagle Outfitters Inc Earnings Call
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Greetings and welcome to the American Eagle Outfitters third quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the call over to your host Judy Meehan. Thank you 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, and Mike Matthias Chief Financial Officer.
Before we begin todays call I need to remind you that we will make certain forward looking statements. These statements are based upon information that represents the company's current expectations or beliefs.
No. 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 statement, whether as a result of new information future events or otherwise except as required by law.
Additionally, you can find our third quarter investor presentation posted on our corporate website at Www Dot a Oh Gosh, Inc. Dot com in the Investor Relations section.
And now I will turn the call over to Jay.
Good morning.
Overall, I'm pleased with our third quarter performance, although the macro environment remains highly dynamic we are seeing encouraging trends all brands remains stronger than ever and our strategic priorities are propelling us forward.
Those customers are at the center of our strategy driving constant innovation that enables us time and time again to deliberate exciting collections.
And this fall was no exception. Additionally, we provided industry leading customer experience.
And our investments in data driven insights and operational excellence with the launch of our profit improvement program.
Actual initiatives to drive growth and higher barges are taking hold now.
Now a few financial and strategic highlights from the quarter.
Third quarter revenue hit a record of $1.3 billion, driven by 5% comp growth.
That the growing brand momentum and terrific fall merchandise collection.
Our market, leading brands are true lifestyle destinations for our customers and that was evident this quarter.
We returned to double digit revenue growth.
And they generate a positive revenues and costs.
We also saw significant strength across digital and stores with new merchandise and strong execution driving improved traffic across AE and aerie.
The digital channel was a star performer.
<unk> raised a 10% growth.
We're seeing great momentum here.
Leadership of our new head of digital David J, you have introduced innovative customer engagement tactics and hats or use of data and analytics to drive stronger Kpis. This work has yielded a remarkable improvement in our e-commerce business, where we see plenty of runway ahead.
Doors were also positive in the quarter. We are pleased with the early early results from new store designs, including our gateway store in Soho.
The store accomplishes all of our collections across AE Aerie offline.
77, 824, Sabic and are unsubscribe seamlessly I remember one.
New Aerie and offline stores are also coming out of the gate positive expectations.
Turning to profit.
We achieved our second highest third quarter gross margin and operating income in over a decade. This was all these second only to 2021 when stimulus field exceptional results across the industry.
Margin expansion last year was driven by improved markup as well as numerous structural changes in line with our ongoing focus on profit improvement a few highlights of his work and clean.
Any type of inventory and promotional discipline.
Thank you and our clearance strategy to yield higher profit scale.
Scale in the area and shifting our product mix into higher margin categories.
And I think our delivery network can reduce costs and optimize it as real estate footprint.
As we continue to drive strong demand in Belmont met him on this work we are raising our full year operating income guidance to the high end of our prior range.
We now expect to be in the range of $340 million to $350 million from 325 to 350 million prior.
Lastly, our capital allocation priorities remain unchanged, we are committed to investing in our brands and continued growth while returning capital to shareholders. Our balance sheet is resilient and we maintain a healthy liquidity position.
We ended the quarter with $241 million in cash and nearly $900 million in total liquidity with no debt.
Looking ahead, we remain intently focused on advancing our long term strategic priorities to drive consistent growth across our portfolio of brands and to generate efficiencies and cost savings for improved profit flow through.
We continue to advance towards our priorities and are investing in talent, which further positions us for future success.
During the quarter as part of our C O O Michael Pal succession planning.
Two key leadership appointments, we're excited to welcome Sarah Clark, our new Chief supply chain Officer, who is responsible for ensuring operational excellence across our global supply chain from sourcing through distribution.
And welcome to Valerie bad crop.
Our new head of bread operations.
We created to drive greater collaboration and Saturdays across AE, and Aerie squad and profit plan.
Sir and Valerie nicely coupled that our teams.
Experienced executives and excellent bench division leaders and associates.
There's a high level of focus and energy across the organization around our profit improvement project.
We've had strong engagement from our leadership team with great support from our board of directors.
We're harnessing our innovative spirit to rethink how we operate every day.
With work streams focus on locking both revenue growth and efficiencies moving forward.
We intend to host an investor meeting in spring of 'twenty, 'twenty, four where we will unveil specifics on our go forward strategy and provided long term financial targets.
In the near term with incentives embedded in our 2023 expense base. It really benefits from our profit improvement initiatives I'm confident of our ability to leverage expenses.
Given our modest growth in 2024.
Hey, Yo has enduring brands robust operations and strong talent.
I'm confident.
That with our strong foundation and.
Our new strategic direction, we have the right recipe in place to build revenue and profit from here and deliver shareholder returns with that I'll turn the call over to Jim.
Thanks, Jay and good morning, everyone.
As Jay noted, we had a strong quarter with sequential improvement across brands and channels fall collections were well received and I am proud of how the team executed on our brand strategies.
It was incredibly exciting to see American Eagle returned to growth with revenue and comps of 2% we.
We delivered a winning assortment that showcased our incredible brand heritage and an exciting customer experience.
He lives was particularly strong where we wrote positive comps across tops and bottoms.
We're seeing strong demand for fleece, tees skirts and newer bottoms, such a swell cargos and wider leg.
Men suffering and Ts sweaters, 12 items and shorts.
<unk> also delivered strong operating profit growth up 6% to last year aligned with the strategic plan. We laid out in 2021, we have made significant progress in improving the health of the AE brand over the last few years.
We stepped away from low margin sales rationalize skus to eliminate unprofitable offerings and optimized our brands real estate footprint.
As a proof 0.3rd quarter brand profit is up 20% relative to third quarter 2019 levels with revenue modestly down 2%.
With profit restored to a healthy level as discussed in prior quarters, we are strategically focused on growth.
Early initiatives have been highly impactful and I'm pleased to note that AE returned to growing its customer file this quarter.
Casual wear is a lifestyle that continues to evolve providing exciting new trends for us to drive and play into it.
We are focused on expanding our dominance in denim leveraging our industry, leading fits and fabrics to deliver newness.
At the same time, we are also making investments to better penetrate categories and occasions that are important to our customers with collections like a 24, seven and mens activewear and <unk> 77 or premium capsule.
We are also continuing to invest in our store fleet to improve.
Productivity and ensure we put our best foot forward.
We have seen a positive response to as new store design with remodeled stores delivering significantly improved comps.
Based on the success of these initial tests, we are expanding our remodel program next year to include additional stores, while continuing to close and reposition low productivity locations.
We are also focused on improving inventory allocation and replenishment to better serve our customers.
And lastly, we continue to leverage and innovate marketing campaigns and amplify excitement around the AE brand.
This fall we collaborated with the Ziegler sisters, and a limited edition capsule to showcase key fashion items for back to school season.
This included our O M jeans event.
Howard will take over on the high line in New York City.
And immersive installation that stopped many new yorkers in their tracks, we showcase the quality and versatility of our iconic denim assortment under scoring and our strong heritage and dominance in the category.
The campaign outperformed our expectations driving strong sales both online and in stores.
Now turning to Aerie, we had an exceptional quarter with revenue and comps up 12% and profit expanding 34%.
Newness in our assortment changes in our core intimates business drove a nice sequential recovery.
We grew market share and had our best ever third quarter performance in court abroad.
We also continued to see rapid growth in our core apparel business with particular strength in fleece sweaters, where new collections are resonating very well.
In our Activewear collection offline also had a great quarter, achieving double digit growth.
Area seen incredible expansion over the last few years growing into a beloved destination for exciting fashion and comfy cozy fits in intimate apparel swimwear and activewear.
Since 2019, we have doubled our sales and quadrupled our profit.
We are gaining new customers every season with our total customer file now over 10 million yes.
Yet with just a low single digit share of close to $80 billion.
It'll addressable market, we are just scratching the surface active.
Activewear in particular provides an attractive opportunity fueled by strong demand for athleisure.
We see a unique opportunity to build share here with offline Eric.
Aerie is vibrant and playful take on activewear as we continue to develop the assortment.
We are focused on continuing to build brand awareness as we leverage investments in our store fleet and innovative marketing strategies to grow our customer base and share of wallet.
New store performance remains strong providing a positive lift to comps as they come into the comp base. Additionally, offline openings are exceeding plan.
On the marketing side every fall campaigns, we're focused on elevating the brand as the go to for high quality fashionable uncomfortable intimates and apparel.
We set up a process season with an array of notable influence their talent and programs.
This included our first to market partnership with the popular dating App bumble encouraging users to find their company match with Aerie.
We also hosted the hidden gems marketplace, a fun interactive customer event in New York City that generated strong marketing kpis.
We have two of the best brands in retail for over a decade, we have consistently ranked in the top three brands in the Piper Sandler taking stock of Teen survey.
AE is the market leader in denim and the aged 15 to 25 cohort the number two brand across all ages and the number one brand for women in particular.
Aerie is one of the most exciting brand platforms and fashion celebrating body positivity and empowering women to feel their best selves everyday.
It's a strategic priority to profitably grow our portfolio of brands and I see meaningful opportunity ahead.
Before I turn this call over to Mike a big Thank you to the AE and Aerie team for their hard work in delivering a strong quarter, our brand category and channel strategies are gaining momentum, which is a true testament to this talented team.
And with that I will turn the call over to Mike.
Thanks, Ken Good morning, everyone as Jay mentioned third quarter result, Smart continued progress on our strategic priorities to grow our brands and set us up for improved profit flow through.
Strong brand momentum combined with actions taken on our profit improvement initiatives.
Resulted in improved gross margins and operating income year over year.
We entered into the quarter with momentum that continued into the early holiday season fueling.
Fueling our strong top line result.
Consolidated revenue of $1 3 billion was up 5% to last year and comparable sales also rose 5%.
Operating income of $125 million reflected a nine 6% operating margin.
Gross profit of 544 million increased 64 million, representing a gross margin of 41, 8%.
Mm 310 basis points to last year.
As Jay noted, we achieved some of our highest merchandize margins on record, reflecting strong demand lower cost and a number of benefits from our profit improvement initiatives.
Inventory discipline resulted in lower markdowns as we maintained healthy promotions.
With the change in our clearance model announced last quarter, we continue to sell through end of season merchandise at better margins.
We also saw leverage on rent, reflecting our focus on strengthening fleet productivity at AE and the ramp up of new Aerie stores.
Well as delivery distribution and warehousing costs with efficiencies across several key metrics, including lower shipments per order and lower cost per shipment.
SG&A expense of $362 million was up 16% to last year and in line with guidance.
Consistent with strong business trends roughly half of the increase was driven by incentive expense after zero accruals last year.
As discussed last quarter incentives are weighted to the back half of this year.
So our payroll also increased largely due to higher wages.
Depreciation was up year over year and in line with guidance provided last quarter, primarily reflecting our investment in new stores.
As noted previously we have reset incentives to reflect improving business performance, but.
With incentives now in our base and an ongoing focus on cost efficiencies, we're well positioned to leverage our expense based on modest topline growth next year.
EPS for the third quarter of <unk> 49 per share.
Turning to our brands every revenue and comparable sales increased 12% in the third quarter.
A positive non comp lift from new stores was offset by lower third party fell off.
Putting greater inventory control and our shift to a more profitable clearance model.
<unk> operating margin of 19, 3% hit an all time high expanding over three points to last year as the brand continued to scale and we saw improved markups lower markdowns and early benefits from the Clinton shipped.
American Eagle revenue and comps increased 2% with the operating margin expanding 70 basis points to 21, 5%.
As we've discussed on numerous occasions, our focus over the past several years has been strengthening the profitability of the AE brand.
I'm extremely pleased with the progress we've made expanding profit margins by 400 basis points in the third quarter of 2019.
We're now turning our attention to growing the top line with a sharp eye on profit flow through.
Ending inventory at cost was down 4% compared to last year with units down 3%.
Inventory levels remain healthy and controlled as we maintain buying discipline in case of met.
We ended the quarter with the balance sheet in a strong position, including $241 million in cash and total liquidity of $875 million, including our revolver.
Capital expenditures totaled $43 million and we continue to expect full year capex to be in the range of $150 million to $175 million.
Our plan for our consolidated store count in 2023 remains roughly flat to last year, reflecting approximately 25, new aerie store openings offset by approximately 25 net closures for the AE brand.
Before I move onto our outlook I'd like to provide more color on our ongoing profit improvement work.
Last quarter, we made an important change to our clearance model.
This is tracking in line with plan to generate $25 million in savings in 2023 and $50 million in savings on an annualized basis.
As we continue to lockdown efficiencies that are supported our gross margin expansion. Other significant work streams within SG&A have also been identified and are being action done.
We are instilling, an internal culture around continuous improvement and expense management.
The results of which are incorporated into our 2024 plants.
As a result next year, we expect to drive continued gross margin expansion leverage on SG&A and depreciation.
Operating rate expansion.
And healthy earnings growth structuring the business to deliver that that low single digit revenue growth.
A more positive trend would drive incremental leverage and profit flow through.
We will give further details in future months as we provide our specific expectations for 2024 and beyond in the spring.
Quarter to date, we're seeing sustained momentum across our brands with revenue up in the mid single digits. Additionally, we continue to make good progress in executing on profit improvement initiatives.
With this as background, we're raising our full year outlook for operating income to the high end of prior guidance. We now expect to be in the range of $340 million to $350 million.
This reflects revenue up mid single digits with comps up low to mid single digits.
For the fourth quarter. This implies operating income in the range of $105 million to $115 million with revenue up in the high single digits, including a four point tailwind from the 50 <unk> week comp.
Comp sales are projected to be up in the mid single digits.
SG&A is expected to be up approximately 20%, including a five point impact from the 50 <unk> week.
Previously discussed it also includes higher incentive accruals, which are skewed to the back half of this year.
As Dan mentioned, we look forward to providing more color on our long term strategic priorities and financial goals at our spring Investor meeting.
With that I'll open it up for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before.
Pressing the star keys to allow for as many questions as possible. We request that you each keep to one question. Thank you.
Our first question comes from the line of Matthew Boss with Jpmorgan. Please proceed with your question.
Great. Thanks.
So Jen could you speak to key areas of acceleration at Aerie in the third quarter and just how you see the brand position for holiday and on the return to growth at American Eagle. This quarter, how do you view sustainability with positive comps of this concept moving forward and then Mike could you just elaborate on the profit and.
Proven project and maybe the modest topline to leverage SG&A next year.
Just taking a step back how that compares to historical flow through in the model.
Sure and I'm happy happy Thanksgiving to all of them by the way.
I'm going to take a small victory lap here.
I just loved what we saw in Q3.
And let me just say one thing this team Okay My team.
J C.
All of our American Eagle team.
Team. They were owned stores last week, we saw almost 20 stores in basically two and a half days. This is what my team commits to we're in this for the long haul that's all I can tell you.
To grow year over year day over day quarter. After quarter, you have to have a long term strategy and I'd like to say, we're delivering on it.
I'm really proud of what we accomplished in Q3 women's in particular in AE, we did double down there their comps definitely superceded the men's comps.
And we're going to continue that and I love, what I'm seeing for spring more fashion.
A more nods to.
What I think is relevant in today's trend.
You know, we went back and we decided that we needed to get famous for our our near in categories and we've been up to that for three years now and now it's time to jump off and American Eagle and well do I like what I'm seeing in the future for trends.
And in Aerie.
Well I think this is long overdue you know keep in mind aerie held their market share in bras.
In a declining business, we held our own in Q3.
It's an 80 billion dollar opportunity for us to grow into that category.
And the teams up to it.
What I'm seeing early on.
Q4, you know it's still we have many weeks ahead of us and as you know I'm the big weekend had heading.
Heading into what we call Green Friday not black.
I think we're ready to go.
Like I said, we're in 18 stores almost 20.
Two and a half days and we are ready to compete on our terms and as Mike alluded to we're going to talk more in the spring season, when we speak to you all about our long term growth plans.
But I can I can I see it I see what's happening here and.
We're going to deliver in and build.
This incredible brand strategy.
And Jan you know like when you were in the stores you.
You would agree there are stores, where the pet.
Like the best looking stores out there too.
I think so I think you know the way we operate it.
It's one thing to grow your business. It's another thing to deliver operational excellence and that's what I have to say.
Okay and on profit driven work Matt.
You know the third quarter was another proof point on where we've had to focus which has been expenses.
And margin improvement generating in providing that makes sure that gross margin expansion.
So now for three quarters now we've seen gross margin expansion, we've leveraged the expenses in gross margin.
In the fourth quarter, we will do it again.
As we talked about this work is sort of a multiyear journey and the SG&A pieces of that would take a little longer as we've.
Looked at Labor models services things tied to contracts and vendor vendors that were negotiating either reductions to current rates or looking to consolidate or new vendors that work. We have line of sight now that we have.
Into 2024, and we know what the benefits look like.
So on top of the gross margin expansion that we believe will continue next year now we've got the opportunity to leverage SG&A at low single digit revenue growth next year, if that would be the resolved anything better than that with even higher leverage against our historical model.
That's great color, Thanks, and good luck with Green Friday.
Yeah.
Thank you. Our next question comes from the line of Paul Lajoie with Citi. Please proceed with your question.
Hi, This is Kelly Osborne Paul Thank you for taking your question.
Could you just talk about how the clearing strategy change impacted the P&L this quarter or was it a headwind to sales and how much of a benefit was what does the gross margin at <unk> and how do we expect how do you expect that to impact <unk> 24 from both a sales and marketing perspective, and then I have a follow up thank you.
Okay.
The I think the headwinds revenue was one or two points in the quarter just based on the sell off revenue not being booked which is unprofitable.
And Thats the story around this improvement of $50 million annualized benefit that will happen over a 12 month basis historically.
Our ratio of hits in Q2, and Q4 for the most part.
Selling off clearance versus clearing and ourselves now which is what we're doing so we will see this benefit across a 12 month period.
That's a benefit in Q2, there is some benefit in the Q3 results.
Does that benefit is markdown management inventory management in total and then leverage of our expenses and gross margins in Q3, and then Q4, we will see another slight benefit but again theres other pieces are bigger than the clearance benefit.
So it's a 12 month model now versus sort of a.
Q2, Q4, selling off model, you will see that $50 million.
You are live across a 12 month period.
Sure.
Alright, and then just on the SG&A.
They got into the fourth quarter, I think coming into today, we you sort of had that in.
SG&A up mid teens in the fourth quarter, So I guess trying to understand what's driving the I.
The.
The greater growth in fourth quarter relative to your previous expectations is that all accrual of incentive comp or.
On that I mean, we've been you've been talking about sort of finding cost savings for a while now just wondering why we wouldn't be seeing more offset.
Thank you.
Yes, I think the plus 20% includes five points from the 50 <unk> week that gets you back to sort of mid teen growth, which was similar to Q3.
Less than half of that is based on change.
Change and change of the incentive accrual.
Having a mid teens of the incentives the other half other expenses.
Again, the work we talked about on SG&A, we knew would be a longer path. There are some benefits embedded in there, but not what we're expecting now in 2024 that we got to a line of sight to some of those work streams within the work completing as we speak the teams are embedding that into 2024, we've always said the SG&A benefits would come more next year than it even.
In the 25, so theres a couple of different components that continue past, even this coming year.
So we're not you know the gross margin focus is what's coming through the P&L in the back half really pleased with the proof point that that's providing.
Of all the work that the teams are executing next year is when SG&A and depreciation leverage kick in.
Just to follow up on that so the mid teens guidance. Prior did not include 50 <unk> week.
It includes a 50 <unk> week in the new guidance include some movement in the incentive accrual between quarters.
Got it thank you.
Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisor Group. Please proceed with your question.
Good morning, everyone. As you think about the store Remodels and I was in the one on downtown on Broadway on Sunday, and it was busy and it look good with all the concepts together, how do you think of the Remodels what type of lift are you getting and how much of Capex would that play into it but when you think about the digital and store channel performance.
By brand this quarter biggest differences that you saw and how you're planning promotions for holiday in each channel. Thank you.
I'll start Mike and then you can take over.
You know that the gateway, we're calling it the gateway as a reminder, it's the first suicide that you see as you enter Soho and this incredibly talented team came up with them and they did some research and that's the name of the gateway.
And you know what a place to highlight our all of our brands and all the work were up too so I could not be more proud of them that delivery.
And theres more to come there and there's learnings that I think we're going to leverage for the future that said as we think about the new store design, there's more out there American Eagle has this incredible new lived in store design.
And I mentioned it in my comments.
Those comps are.
Exceeding when I say exceeding.
The average sales comps in the brand so.
So many learnings there and we're going to.
You know, we're going to test and scale, but we love we love this new design, it's so fun and you know it's been a long time coming for the American Eagle brand to show up the way, we deserved so I love what I'm seeing there as.
As we fast forward there there's so much good in play here.
The learnings that we've had over the past three years in American Eagle in particular, we have you know we've definitely rationalize this brand we've closed stores, we've done everything and now it's time to forge forward and get what we deserve back and I love what I'm seeing from the teams I just looked at.
Spring concept and our windows and the product that's coming in and like a good bottle of wine that gets better with age you know theres a lot to hurdle out there, but I feel really proud of what this team is doing aerie and that's a whole other story, it's about time.
We had that Halo effect.
On the comps with the new stores and we did say that in prior calls we acknowledged that that it takes time to Halo a new a new.
Stuart is our new store opening and learning from that and well here. We are so we love what happened in Q3, and then on direct well well so everyone talks on me, but I think the best retailers.
Look at each channel and drive what they are best at and this is what the direct teams up to you heard the comps are up 10%.
But you know I want to say that this company is very modest in its AD spend and so we do it with a lot of return.
And I love what this team is up to David and team have tested and we have so many new ideas that we can launch.
And we're going to do this over time, so that we see steady growth.
That's what we're up to them. Thank you.
Just to add a little bit of color on Remodels agenda that we've got.
At a location level, we're seeing out of that story, but we also have four mall based locations that we've remodeled. We're reading early indications are that we are seeing we are seeing significant and positive sales lift from that from these locations as well.
We're gonna be coming out and talking about.
The detailed planning around the AE brand growth strategy in the spring, but part of that will be remodeled supporting a lot of other things John and team are doing to grow the brand preliminary number now which will refine as we get closer around 50 more remodels is where we're looking at into next year or two to help fuel that growth strategy.
Thank you.
Thank you. Our next question comes from the line of Jay sole with UBS. Please proceed with your question.
Great. Thanks, So much John you mentioned Youre excited about the spring product assortment, sorry about swim a little bit what youre seeing that category. How you think it you were expected to perform versus last year and then maybe just Mike I believe the company has a business in the middle East through some of its franchise partners can you just talk about how that business trended since October and if that has an impact.
On a quarter or your guidance for fourth quarter. Thank you.
Right.
Yeah.
Yeah.
Yeah.
I'm, sorry, I got disconnected swim.
Interesting category for sure a lots of learnings here, it's still it.
Great business for Us high margin business.
I would like to say that the teams have taken away how to.
Think about the business on a more profitable growth trajectory for the future. My teams are just in Brazil actually coming back with what I think are the best trends out there and we're certainly putting them into play.
And near in and we're definitely doing a little bit more test and scale there and for sure. We're looking at you know what's interesting we have American Eagle and Aerie and American Eagle Womens in Aerie, which is the women's brand and so as I think about.
You know our opportunities as a company we take that into play right, we're better together.
That's what I was you know as we talked about the gateway stores you see all of our brands House together and guess, what we're seeing growth in both women's business Arie offline, but both area offline and then E. So it's amazing what we can do if you just think about the business that way so as I think about.
Swim or as I think about trends not only do I think about aerie or offline I think about American eagle too and what are the women wanting and how do we position our company for growth in all of the categories and that's I think a competitive edge.
So going back to swim as I think about that.
That's the way, we're thinking about the business and certainly we're making sure that we don't over pitched the plan again high margin business and testing and scaling there and I think we have other businesses that we can live leverage in all brands. So more to come there spring looks great.
And I hope, we can continue to deliver.
Okay I'll take the question about the middle East.
You know like we have a strong international business. There there you know like the first couple of weeks.
A little whack, but they'll ask last couple weeks it is coming back pretty strong. So we're very optimistic there and we're praying for PC.
You know like as far as like down the road.
Area.
In that region.
Okay. Thank you so much.
Thank you. Our next question comes from the line of Simeon Siegel with BMO capital markets. Please proceed with your question.
Thanks, Good morning, everyone I just want to say a quick thank you for your show of support and your time square store that's a lot.
Can you so any color you can add on to speak to the gross margin drivers into next year would be helpful. And then congrats on the nice growth in the brand level EBIT dollars any color on how you just to think about that growth in general corporate expense dollar for we should think about going forward. Thank you.
On gross margin expansion, we've got line of sight into our first half buys we see tailwind still in our initial markups, so benefiting margin on that front.
Theres still annualized Asian, a lot of the benefits that we're seeing through expenses in gross margin.
So our shipments per order cost per shipment. We've got line of sight into the first half is still as well see some of those benefits continuing through the expense buckets. We are.
So rent delivery distribution warehousing, we still see benefits that we're capturing that will have an annualized effect into next year on top of the expansion of the markup that we have at least half half of the year.
Embedded in our plan at this point.
Yeah like we also see like an opportunity like the international part of the business still growing.
We see that as a great growth vehicle to international Barb too.
Great. Thanks, and then just the corporate expense dollars.
Yes, it's again just tied to everything else, we've talked about from a profit improvement perspective.
Pieces being embedded into our plans as we speak for next year really across all areas of the P&L.
Just expanding on the gross margin opportunity that still exists and then corporate expenses that really straddle both gross margin and SG&A.
Making changes to labor models into next year services line items maintenance line items, those things are being embedded all the benefits we're seeing from the work happening as we speak of embedded being embedded into the next year's plan.
Yeah also Mike I think.
I also think Mike is also saying that he doesn't see really the SG&A.
Increasingly for next year.
Okay.
Yes, yes, great. Thank you Ed and then just a quick one the 12, how should we think about the right total sales comp spread for area at this point.
It's only a few points now I think as we anniversary all of that store growth in 'twenty, one and 'twenty two that comp spread.
Definitely lessons digital Wisconsin, we're only opening 25 stores. This year, so really to get past. This year you only have those 25 in the non comp.
So it's a maybe a point or two it's probably low single digit spread.
Great. Thanks, a lot guys best of luck for holiday and happy Thanksgiving.
Thank you.
Our next question comes from the line of Christopher <unk> with Bank of America. Please proceed with your question.
Thank you.
Two questions.
First could you clarify how comps are trending quarter to date for each brand specifically and then as we think about next year. How much do you think operating margins can expand and is this low single digit sales growth. You mentioned is that your base case for next year or is it more of a point that you can still leverage costs on that level of sales growth.
Thanks.
Part first yes, it's more of a point, we're not providing specific revenue guidance in that color. It's just to make the point that we can expand operating rate leverage expenses on just that level of modest sales growth next year based on our plans are coming together and then quarter to date comps are similar so we're providing guidance is similar on top of the 5% we just.
<unk> in Q3 right now we're only a few weeks into the quarter we got.
Only about 20% of our revenue in the big weeks really it's starting now.
We're within the guidance expecting similar type results for the brands.
And I think on operating leverage.
This year this.
This year on the low to mid single digit comp that we're guiding to the year.
To expand operating rate by 100 to 150 basis points.
As we get to early next year to provide color and guidance specifically for 2024 and March will provide some level of expected leverage on varying revenue results, but again. The initial color is just to make the point that we see.
Opportunity to leverage and expand.
Expand gross margin expand operating rate by leveraging expenses across the P&L and not just in gross margin like we have been able to do that in the back half of this year.
And that's again just an early indications from early color on what we have our line of sight into 'twenty four it will provide more specifics.
Okay.
Okay. Thank you.
Thank you. Our next question comes from the line of Jonna Kim with TD Cowen. Please proceed with your question.
Hi, there this is katie on for Jonah.
Wanted to dig in a little bit to the intimates category and how.
Are you thinking about Aries brand positioning there as well as the performance within instruments I know you mentioned.
Market share was pretty consistent across process I believe and then.
Just just briefly I'm sorry, if I missed this but can you talk a little bit about traffic trends to the quarter. Thank you.
Okay.
Great question, you know I mentioned, we're holding our own in the intimates category as far as market share.
You know, it's it's an $80 billion opportunity and we're only just scratching the service surface here.
I will say that when we launch new ideas. So smoothies is now a cornerstone of our business and we added onto that category. In Q3, we went right. So the customer trust us in this category they loved the way it feels on their body. It totally represents our brand platform.
So more to come there I think we have now a jumping off point to really sort.
Sort of compete on our terms and it just again it totally fits the bill as far as what areas up to on a day in and day out you know this is what we do right. We make women feel great about themselves and smoothies does that so more to come there look the bra business has changed it's not.
What it used to be and the one thing I can promise you is the design team and the merchant teams are constantly thinking of new ways to entertain this customer and we have so much in store for the future that I really believe that we're going to really compete again on <unk>.
That's what counts how it fits into the build of our brand platform and how we show up with product categories and more to come but I can't share all my secrets, I guess, that's what I'm, saying, but I think theres lots of opportunity as far as the market space its been underserved and where.
And to serve up to our customers what she's demanding.
Traffic was healthy throughout the quarter, we saw positive traffic across brands and channels, both in stores and digital.
And this is sort of kudos to the team within our profit improvement work, we're not looking at reducing marketing expense, but we've done a ton of work to optimize how we're spending media to drive healthier and more qualified traffic.
And then we're actually seeing significant benefits to digital conversion, especially really conversion in both channels, but to work that.
David and team are doing on the digital side to convert that traffic and making a b testing making continue.
<unk> to our customer journey, and how we're messaging to customers who are seeing the digital benefits. So we got a lot of work happening on driving healthy traffic and then a lot of work happening on converting that traffic and we're seeing those benefits through the back half and believe thats going to continue into next year as well.
Thank you so much happy holidays.
Sandy effects.
Thank you. Our next question comes from the line of Corey Karla with Jefferies. Please proceed with your question.
Great. Thanks.
Ken you talked about.
Youre growing customer fleet.
File excuse me I believe it's now over 10 million.
Could you maybe provide a little bit more color as to what you think the major drivers of that are.
Perhaps contextualize the growth.
You've seen in this customer file.
And how that's benefiting the overall enterprise.
Sure.
Jason.
Sorry, let me just reiterate that both brands their customer.
Customer file group, so really exciting to see a take a position on growth as far as not even just the comps, but their file and aerie grew nicely both.
Brands are just really dominating on a 360 approach to marketing so not only are we spending on performance and in fact, when we spend on performance marketing, we ensure that it delivers a return on investment because you know, it's an easy game to go out there and overspend on performance.
And dominate it's not that easy to have a 360 approach to marketing right. So that means.
When we think about what we did.
Actually coincidentally, but not so when we had installations in the meatpacking district in Aerie and AE, we took over that district in New York City Wow, how many eyeballs around our brands right.
That between our Influencers between our store Influencers don't forget about that.
Ours are stores represent our customer right. So when we go to a store, we see our customers our employees and by the way they spread the good news of our brands and and they see all the work that we're up to right delivering better products delivering innovation delivering new store concepts you know.
We haven't stopped as a reminder, the gateway.
I find this just as a testament to the team.
In July we came up with this idea to put all of our brands near.
Nir in together in Soho and see what it means to our company a L Inc. And Wow in July we came up with the concept and Lo and Behold, we have a whole new store design.
Brand new ideas.
Innovative in innovation at its Max.
So again, it's not just one thing when it comes to delivering sustainable long term growth and brand power.
You know this is what we're up to we believe well where nextgen show to the number one brand out there I'm not going to say.
But trust.
Trust me, it's a big.
And top of mind is <unk> and so when we think about our brands that way, we think about the long term growth long term strategies and how we're going to be one of the most powerful brands in retail. So again, it's not about just one tactic in marketing, it's about thinking about the future and how we're going to.
The best in show.
Jennifer.
With the 25% or so we're opening this year since 'twenty. One we would have opened 100, Australia, specifically 150 locations.
And that's obviously part of the strategy to customer file growth customer acquisition. Those stores are still earlier in that maturity curve, we'll be adding more stores again next year. So everything you're talking about from a marketing perspective, combined with that brick and mortar expansion for the brand and we still have opportunity to expand the store base.
And it's just adding to the customer file within again brands that play within a pretty sizeable addressable market that we only have a small percentage of sale.
Got it.
Then just to follow up on that Mike on the topic of.
Store openings.
Could you provide any color as to how to think about the.
AE store fleet as we look ahead and then just did you also talk about how AUR trended in the quarter I know you talked about traffic, but we got to get color on AUR trends and how you think about that throughout the remainder of the year.
I'll hit AUR first AUR was up in the quarter.
We talked about kind of holding onto that AUR position that we've been able to.
<unk> grew to over the course of the pandemic.
Brand equity, we don't we're not giving back up.
Part of the gross margin expansion story for sure.
Your question on AE store counts were still talking about a net 25 closures this year, but we're coming to the point where that is.
That number will be similar to maybe down we're actually continuing to explore repositions in market versus net closures and were seeing healthy results from some of those strategic moves.
So again, it's part of an AE brand growth strategy will articulate where we think the fleet's going.
When we provide more color in spring, but.
Square footage reduction won't be it won't be as significant as it's been in the last several years as we've reset the profitability of the brand.
Thank you. Our next question comes from the line of Alex <unk> with Morgan Stanley. Please proceed with your question.
Perfect. Thanks, a lot for taking the question, maybe taking a step back what part of the profit improvement plan has been the most impactful in your eyes. So far and then how should we think about the next leg.
And then secondly, I feel like we haven't heard.
And your latest thoughts on the quiet logistics business in some time, so perhaps if you could provide an update there that would be great. Thanks a lot.
And I think to date I mean, we've talked we've been talking about this for about nine months, we talked about the focus being within the gross margin area.
Product margin markdown and inventory management, but the expenses in gross margin.
There was 60 basis points of leverage from it.
Those expenses in the third quarter, we've leveraged the expenses and gross margin every quarter now this year, we expect to do that going forward.
So this year's results that's that leverage as a proof point to the work we're doing in fact, thats, where the focus has been which we are driving results. There gives me high level of confidence in what we're now landing in our 24 plans around SG&A and depreciation to drive the same thing.
Yes, Mike.
On a quiet part of the question quiet has provided us like enormous benefits to our brands.
Turning to see it flow through like gross margins, we're starting to use it more in our in our sister company Todd Snyder will go on to go onto the <unk> platform. This year and we also see an opportunity to still strengthen our.
Our third party business too.
Okay.
Thanks, a lot good luck.
Thank you.
We have time for one more question.
Thank you. Our final question today comes from the line of Janet Kloppenburg with J J K Research Associates. Please proceed with your question.
Hi, everybody congratulations on the progress.
A couple of questions.
First.
Mike did you provide the breakdown of the gross margin improvement I'm, just wondering about how much came from freight and how much came from.
Markdown improvement.
And what we should look forward to going forward.
Also on SG&A I know, you said you'd love, which next year, which is terrific, but when I look at the SG&A increases in the first half of this year.
They were mid single digit so shall we expect first half next year to have higher bonus accrual I'm unsure there and Jan if you could help on a man was it positive for the quarter.
What's your outlook, there and maybe you can talk a little bit about the legging business because I know that's a very high margin business for you and really thank you.
On the gross margin components, we saw really benefits across the board product margin.
Benefits markdown rate management, so some lower lower markdowns as well and then leverage of expenses through gross margin. So it was all all three components.
On SG&A next year, Yeah, I think the growth in the first half was mid single.
Our plans for the planes are embedding into 'twenty four with we talked about 80% of our SG&A spending compensation line items.
Your typing services maintenance areas.
There's changes coming that would not have been better than anything this year. So we're making changes to those all of those components in our 24 plans.
To your point, we may have a little bit of quarterly flow on incentive comp versus this back half weighting that we're absorbing now, but we can provide more color to exactly how the quarters will look once we get to more.
More specific guidance in March.
Thank you.
And then.
For sure our men's was softer than women's but we saw that coming.
As we entered into Q3, we definitely double down on the women's side of the business and American Eagle and certainly we released the results of that.
The comps were definitely more significant than women's versus men's.
That does not mean that we don't have opportunity in men's in fact, we see that as some low hanging fruit as we get into the back half of this year right now Q4, and as we head into Q1 Q2. So.
We've been working hard at it I definitely see mens.
As an opportunity to be a little bit more productive.
In the past, maybe we were a little bit over assorted there and we can definitely can have a little bit more productive skus.
As we continue to double down on the women's business.
<unk> I don't know if I should call that my middle name.
That business is never going to go away I think we have a cornerstone as far as innovation there.
I, just if anyone hasn't tried zoom.
You must try are loving.
The aerie real I mean, they are incredible the real need leggings.
They sit at what are the number one skus in our entire company.
And it's because of the outstanding design and the comfort ability and again everything has to move back to what your brand stands for and real knee is what <unk> stands for so there is so much more good stuff happening in offline in fact, we had a rallying cry this week on.
Really what offline means to the aerie brand or on its own Wow, you should see in the same mall, we're getting great comps in offline and an area at the same time, they like what Theyre seeing and keep in mind, we still have some crossover categories in both stores in the same malls, so that would tell me.
That as we continue to test growth for Aerie and there's some more opportunity for both brands in the future. So again.
Leggings.
They're not stopping I don't know what anyone's ever going to see it.
And what I love about this I'm going to finalize with this is the.
Dennis business in women's in particular, we're seeing some really great reads early on.
So what I'm, saying is we can do both she can wear things inside you can go to a gym class and legging dimensioned and go out in our denim and that's what we're up to them.
Thank you that concludes our question and answer session I will turn the floor back to Mr. Schottenstein for any final comments.
Yeah.
Okay. Thank you operator, and thank you for all joining.
Joining the call this morning.
I hope this is clear clear.
In our third quarter results. We are seeing we are seeing like we're seeing momentum build across our growth and profit improvement initiatives. This is a strong testament that our strategies are working like like Gen was saying, we're here to build enduring brands, where the VA aerie offline and Todd Snyder.
We are focused also on driving consistent profit growth and return to our shareholders. Thank you for your interest and investment in the company and we look forward to updating you in the coming year.
Thank you.
Okay. Thank you.
Sure.
I'm sorry.
This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.
Yes.