Q2 2019 Earnings Call
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Coleman Sir.
And I'm not promising.
Good old, Iran, but I'll give you all the time.
Im going to go so everything.
Gordon Ramsay, but arguably because of your day.
Not guidance, but don't go so everything.
Greetings and welcome to the American Eagle Outfitters second quarter 2019 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 conference over to your host Ms. Judy Meehan. Thank you you may begin.
Good morning, everyone. Joining me today for our prepared remarks, or Decitabine, Chief Executive Officer.
Kessler, a global brand President Jen Foyle, Aerie Global brand, President and Bob made or Chief Financial Officer before we begin today's call I need to remind you that we will make certain forward looking statements. These statements are based upon information that represents the companys current expectations or beliefs. The results actually realized may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information or future events or otherwise expect except as required by law.
Oh the please note that during this call and any accompanying press release certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at E ink Dot com in the Investor Relations section here you can also find the second quarter Investor presentation, and now I'd like to turn the call over to Jay.
Okay. Thanks, Judy and good morning, everyone. The second quarter marked our 18th consecutive quarter of positive comps would show remarkable consistency in a difficult environment. While we did face some challenges in the quarter that impact or are a brand. The issues were largely concentrated in certain warm weather apparel categories, which were affected by unseasonable weather.
With the start of August business has picked up we are pleased with positive trends quarter to date.
Based on these positive trends and strengthened Paul category I am optimistic about our prospects for the second half of the year.
Despite some of the challenges in the second quarter, we had a number of wins that accomplishment separately.
American Eagle Jeans continue to post record sales.
Marking six consecutive years of all time highs in each and every quarter. This period, we recorded strong double digit growth across genders carefree marketshare further strengthening our number one market position.
Aerie maintain incredible momentum achieving a 16% top increase its 19th consecutive quarter.
Double digit sales increases airwaves consistent industry, leading growth continues to demonstrate the power of this emerging brand and the significant opportunity ahead of us.
Clearly, we offer our customers industry, leading product innovations that best fits quality and value wrapped in emotional brand experiences.
Our digital business was also a highlight producing growth in the double digits across channel and brands. We saw positive traffic in stores outpace the mall, a clear indication of strong brand equity.
We ended the quarter with over $300 million in cash and no debt after returning $83 million to shareholders through dividends and share repurchases, we continue to make investments across our business and brands to deliver the best products and customer experiences and importantly, we invest in our people to ensure we have the best talent and culture to drive future success as I said last quarter, we are better positioned than ever to capitalize on the continued disruption across the retail industry that viewers not change our brand keeps getting stronger and we intend to continue to capture market share and grow our merchandise assortments, our customer base and our profitability.
Our strength lies in our culture, our people and a strong purpose as an organization to show the world letters real power in the optimism for you.
Im optimistic that we will posted another strong year for all of our stakeholders and now I'll turn the call to chat.
Thanks, Jay and good morning, everyone.
I would not satisfied with our second quarter results comp sales declined 1% against a strong 7% increase last year, which was our most difficult comparison of the year.
Accrual may hurt demand for warm weather apparel short, Mr expectations, and our product mix and women's tops skewed to lower your style.
It was the trend right. It was true it was the right trend and unit demand was strong at the U.R. pressure caused comps to decline.
These issues are largely behind us and we are very encouraged by meaningful improvement in our business in August and early September we are seeing consistently positive comps quarter to date led by strength in jeans, and fall apparel, which become increasingly important as we go forward.
In addition, despite the headwinds there are plenty of bright spots in the second quarter.
First we continued to consolidate our leadership in jeans, where we are the undisputed destination for customers. The second quarter represented our 24th consecutive quarter of record sales and we delivered strong double digit growth in both our mens and womens assortment.
We are proud to remain the number one women's jeans brand in America number one men's jeans brand in our core 15 to 25 year old age group and the number two jeans brand overall.
We are committed to extending our leadership and expanding share through continued innovation and an emphasis on inclusivity.
With that in mind, we're very pleased with the response to the new Women's Kirby collection, which has shown to be incremental together with extended size ranges in both men's and women's we're thrilled to welcome new customers to our brand.
As awareness to new styles and expanded sizes grow we expect new customers to build the time.
This will help sustain our strong growth in jeans and extend our leadership position in this important category.
With peak back to school now behind US we are confident we will deliver another record season.
There were other highlights on the quarter.
In addition to record sales and dresses and skirts I'd like to call out accessories, which was a standout this quarter. The team has been working hard to strengthen our accessories program and were pleased to see those improvements paying off powerful new trends combined with our renewed focus on this category should yield very positive performance in the near and longer term.
The brand is very healthy and coveted by today's consumer our a and media campaigns and brand positions of inclusivity individuality and self expression strongly resonates in today's youth market. Both in stores and online traffic was once again positive and we are retaining customers at a higher rate their best customers spending more and engaging more frequently with our brand.
Expanding our customer base through our loyalty programs, social media outreach and the personal connections at the store level will continue to fuel the brand strength.
Looking ahead I am confident in our plans for the back half of the year and encouraged by the start of the third quarter, we see a healthy consumer and powerful fashion trends that are perfect for our brand American Eagle is stronger than ever and poised to continue winning in the disrupted retail environment.
Now I'll turn the call over to John .
Thanks, Chad and good morning, everyone I'm thrilled to report that Aerie delivered a spectacular quarter revenue increased more than 20% fueled by a comparable sales increase of 16% and these stores.
Sales growth built on a 27% comp increase last year.
This period marked our 19th consecutive quarter of double digit sales increases.
I am extremely proud of the consistency, we continue to see across the business.
As we captured meaningful market share.
Sales metrics reflected a healthy growing brand traffic was positive across all channels, which stores well outpacing mall averages as we continue to track more customers to aerie. Our basket size is also expanding at a very healthy clip driven by increase units per transaction and strong yours.
In the second quarter to quarter, all categories posted sales growth bras were one of the strongest areas in the quarter, we saw healthy demand for core bras and renewed excitement for Bralettes one of Aries signature categories.
What's more we are thrilled by the very positive response to our new apparel collections, our bottoms business remains robust and due to strong demand we were chasing top throughout much of the quarter.
Brand awareness continues to grow.
Gary Brandt body Plop body positivity platform and empowerment is our strength and underpins the encouraging emotional connection with our customers. The power of self love and acceptance builds trust and loyalty and that is truly what the aerie real movement is all about.
As a result, our customer file continues to expand retention rates are growing with existing customers shopping more frequently and buying more categories from area.
Our store expansion plans are tracking well, we opened 20 stores in the quarter with an emphasis on new and fill in work, including openings in Texas, and California, which our priority states for us.
As we enter new markets, we are seeing an uplift in our digital business in those markets as well.
I'm also very pleased with the performance of remodeled stores in our latest design in fact 10 of our remodeled locations and several new stores quickly rose to be among our top 25, most productive locations.
This validates our real estate strategy and the power of Aerie.
We still have meaningful locations.
And opportunity to expand our footprint in the coming years with a sizeable retail presence of 10000 square feet in only 23 states.
Im so very thankful for amazing team, who continue to deliver exceptional results across the board from outstanding collections to our uniquely innovative marketing campaigns to new store openings. This team is firing on all cylinders.
Our back to school season has been a terrific success I'm very encouraged by sales trends in key seasonal apparel categories as well as strength in intimates I'm confident that we will continue our strong momentum into the second half of the year beyond that we have the visibility to exceeding $1 billion in short order and see great potential for aerie over the longer term and now I'll turn the call over to Bob. Thanks, Jim. Good morning, everyone. My comments will focus on the adjusted second quarter financials, which excludes certain items as detailed in the press release and tables in the investor presentation.
As indicated second quarter operating results fell short of our expectations by many accounts the environment was challenging and as we indicated back in early June may was unreasonably cool suppressing demand for warm weather apparel.
This continued with a later start to back to school adversely impacting second quarter sales and margins.
However, there were a number of areas that performed very well.
We were pleased to post increases in consolidated comp and revenue, marking 18 consecutive quarters of comp growth and record revenues.
We're also encouraged by a meaningful improvement and business trends so far this quarter.
Turning now to the second quarter financial results total net revenue increased $76 million rising 8% to $1 billion. Total revenue includes 40 million recognized for license royalties from a third party operator in Japan.
This payment was the primary driver of margin improvement and generated 15 cents in earnings per share.
We plan to terminate the agreement with our partner are currently exploring options for our future business model to continue our growth in Japan.
Consolidated comparable sales increased 2% building on 9% growth last year by brand American Eagle comps declined 1% in the second quarter following a 7% increase last year.
Eerie comps increased 16% building on 27% growth last year.
We saw positive digital comps for American Eagle, which was offset by a decline in stores.
Airey group across both channels in the quarter.
On a consolidated basis stores decreased 1%.
Digital sales rose in the low double digits, reaching approximately 25% of total revenue up 100 basis points last year.
We saw the biggest increases coming from our App and mobile channels, which contributed.
Which combined now represent well over half our digital business.
Total gross profit increased $29 million or 8% to $383 million.
Gross margin rate to revenue increased 10 basis points to 36.7%.
The increase was due to strong flow through from the Japanese license royalties, which contributed approximately 230 basis points of margin improvement.
This was largely offset by increased markdowns higher delivery expense and compensation costs.
Selling general and administrative expense of $253 million increased 8% and was flat as a percent of revenues at 24.3%.
Compensation was the largest contributor to the dollar increase primarily reflected the continued impact from our investments in customer facing store payroll and wages, which began in mid 2018.
Higher professional fees also contributed to the increase.
Absent some expenses associated with the license royalty revenue received SGN eight dollar growth was consistent with our expectation of a mid single digit increase.
Depreciation and amortization rose $2 million to $45 million or 4.3% as a rate to revenue, which was down 10 basis points compared to last year.
Adjusted operating income increased 11% to $85 million from 76 million last year and the margin rate to revenue improved 20 basis points to 8.1%.
Operating income includes approximately $34 million from the Japan license royalty.
The effective tax rate of approximately 24% compared to approximately 22% last year.
Adjusted EPS of 39 cents increased 15% from 34 cents last year.
Included in adjusted EPS was 15 cents from the license royalty received.
Adjusted earnings in the second quarter also excluded restructuring charges of $2.7 million or approximately one penny per share.
Now regarding inventory, which can be found on page 11 of the investor presentation.
We ended the quarter with inventory at cost of $535 million up $69 million or 15% from last year.
Units were up 10% versus the year ago period, the increase largely reflects inventory to support strong demand for AG genes, including new styles and expanded sizes.
These are incremental products product lines to last year. Additionally, new aerie stores and improve in stocks for our wholly owned international businesses also contributed to the increase.
These factors represented over half of the inventory increase to last year overall, we feel good about the composition of inventory.
Capital expenditures totaled $55 million in the second quarter, and we continue to expect capex to be in the range of $200 million to $215 million for the year.
During the quarter, we completed 60 million in share repurchases and paid 23 million in dividends to shareholders.
In July our board of directors authorized an additional 30 million shares for repurchase and we exited the quarter with little over 37 million shares available for purchase.
Our liquidity position remains strong and we ended the quarter with total cash and investments of $317 million and no debt outstanding.
Now turning to our real estate portfolio. Our 2019 priorities are to accelerate the growth of very to reposition model 80 stores and to continue expanding our global footprint.
Based on the openings to date and our plans for the balance.
We now expect dairy store openings this year near the lower end of our prior 60 to 75 target.
Importantly, this is simply a function of timing our long term footprint expansion plans and growth expectations for this business are unchanged.
Overall stores remain a very important part of how we operate our business and engage with our customers. We have a highly profitable store portfolio in significant lease flexibility.
Additional store information can be found on pages 14 through 18 in the investor presentation.
I would now like to provide an update on the impact of tears.
As discussed in the past we have actively collaborated with our sourcing partners to meaningfully mitigate the potential impact. In addition, we continued to make progress in further reducing our exposure to China tariffs.
Through a combination of partnering with vendors and diversifying our geographic production capabilities based on recently enforce tariffs on with score we do not expect a material impact this year at present, we expect the impact to be manageable in 2000 2020.
Now looking ahead.
We expect third quarter EPS in the range of 47 to 49 cents per share consistent with improving sales trends, we expect comparable sales growth in the low to mid single digits.
This outlook assumes continued promotional activity.
SGN expense is expected to increase in the mid single digits, our third quarter guidance compares to EPS of 48 cents last year and excludes potential impairment and restructuring charges.
To conclude we're very pleased with quarter to date trends as Chad and Jen discussed our fall product is performing across all brands and we have a clear path for the rest of the year. We remain focused on our strategic initiatives that will enable us to maintain our comparable sales momentum momentum strengthen our bottom line and generate financial returns to our shareholders.
Thanks, and now we'd like to take your questions.
Thank you.
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You allow for as many questions as possible we request that you each ask one question.
Our first question comes from the line of Jay sole with GBM. Please proceed with your question.
Great. Thank you so much.
My question is about Gary you're going up against tougher comps.
In Threeq Q.
Yes on a two year basis, the comp looked like it slowed a bit from one Q2 Q2, you feel confident you can deliver within the guidance.
Abhi deliver top line, where you were in Twoq or better as you look at the Threeq.
Absolutely.
If I mentioned.
Well I did mention that.
Our apparel business has been very strong as we get into the back half.
We own more apparel, because its seasonally appropriate. However, so we feel really confident about what's happening in apparel and what happened in August of our comps are very strong on laid up against some very very strong comps. So that said I'm also.
We continue to own and dominate bras and undies Bras had an extremely great month in August and we're looking forward to chasing more bralettes actually they've been on fire for us.
Great and then Bob if I can just ask you about the.
The Japan license royalty can you just clarify.
How is the Japan.
Business was accounted for in previous quarters was $40 million of one time issue a onetime payment or was there a similar amount last year. If you could just clarify that.
It's also a onetime payment that was was triggered by.
A breach by our licensed partner, which put into motion.
Minimum royalties from prior years that became due as a result of that breach. So it actually was the result of events and circumstances, the transpire directly in the quarter.
And.
Was related to higher.
Higher royalty rates that were triggered as a result of that.
Got it okay. Thank you so much.
Thank you. Our next question comes from the line of Paul Lashway with Citigroup. Please proceed with your question.
Hey, Thanks, guys just to follow up on the Japan payment was that already received or was that simply an accrual also curious why you didnt break that out Bob.
Barley seed.
Bart was received there is more coming the in the quarter. So.
40 million is the total amount of royalties earned 30 million was paid theres, a $10 million receivable thats due.
In the core loss.
Got you Okay, and then can you just maybe provide a little bit more color on quarter to date trends, what you're seeing by brand and what gives you confidence to include that mid single digit as part of the comp guidance for Threeq. Thanks.
For Aerie.
We're just we're seeing strong business in apparel as I mentioned honestly all categories are doing great. We're really pleased with the obvious results.
I just mentioned Bralettes are doing really well for us the broad category the core bra category.
We're really as I said in my script, we're really firing on all cylinders here the team's doing a great job executing.
I will tell you with August representing our single largest month within the quarter from both the sales and a profit operating profit perspective.
We've got that behind US now, we're very happy with how back to school finished off as we pointed out although we got off to a slow start last two weeks of July we finished back to school really strong in August So we've got our biggest month.
Completed and that gives us a lot of confidence in support of our guidance that we gave for the quarter I think what we're seeing in a lot of.
Challenges in the second quarter were really related to seasonal product as I mentioned.
Shorts with the slow start with the cool weather.
And.
You bet.
Demand was great and womens Knits, we had.
Lower you are as we go through back to school shift along the bottom and the strength of our jeans business that's been.
Really powerful with our new launches of all.
Exceeded expectations and then as we get into the warmer weather product that we've already started to sat through August early demand has been really great and broad based.
Across a lot of category so I expect.
The third quarter and the.
In the fourth quarter, the whole fall should have a better trend than what we saw in the second quarter.
Unfold and Promotionally, driven or are you happy with the margins.
We're happy with the margins, we're seeing we're not.
We were not much more promotional in the August than last year, we had a little more promotion and our factory channel.
As we cleared through some inventory there, but the main line channel.
Promotions were consistent year over year as the bottoms business grows.
That does carrier.
Genes are slightly lower.
Margin rate than the tops business.
But as we have talked back on track, we'll hopefully see margins.
Improving with that as well.
Thank you. Our next question comes from the line of Oliver Chen with Cowen and company. Please proceed with your question.
Hi, Thank you Bob wondering your comments you mentioned that you the outlook assumes continued promotional activity.
What does that mean in terms of how you're seeing merchandise margins evolve and it sounds like your inventory position right now.
Thats very clean would love your thoughts there.
And then the innovation that you've done with what style drop from the subscription model.
Chad what are your thoughts on on managing Incrementality and what this means for customer engagement and why now.
Yes, so our guidance does contemplate.
Slight deleveraging of our gross margin rate not to the magnitude that we've seen in Q2 results, we will be muted relative to that as we clear through some of the seasonal.
Inventory that we carried in from the end of the second quarter now having said that Oliver we are really happy with the currency the inventory not only are our incremental investments supported by businesses that are really performing well and huge large growth vehicles for us, but our carryover inventory from summer spring is less than 2% overall total on hand, which is extremely manageable, but it will have a slight impact on margin rate.
And then asked for style drop where basically six months into it and it's been really interesting to watch.
I think the main question Oliver is going to be the Incrementality as he said the incrementality of it right now we're seeing.
A lot of our most engaged customers participating in the <unk>.
Rather than at attracting new customers.
Per se, we're seeing a higher percentage of.
Already engaged customers in the program. So we just need to see if that means they're spending more in total.
With the brand and if we're getting margin flow through from what they're spending both in stores as well as renting. So that's why we kicked off as a test.
And we are watching it I do think these sort of new forms of.
Of.
Retail and new forms of customers purchasing are really interesting we have to make sure that they come with the sales and the margin that we expect in our business.
Thank you best regards.
Thank you.
Thank you. Our next question comes from the line of Tiffany Kanaga with Deutsche Bank. Please proceed with your question.
Hi, Thanks for taking my questions.
Would you are you are decelerating further in the second quarter, but a lot of new innovation introduced for back to school do you believe you can lift that metric back to positive territory. During the back half of the year against easier compares or should promotional activity keep it down year over year and would you also break down. Your you are in the quarter by brands I thought I heard Ken mentioned strong you are on the aerie side. Thanks.
We're already too many were already seeing a large positive to last year.
With the strength of the fall product and AG as well as.
The jeans business continuing to grow and we're definitely getting paid for the innovation, we're delivering and his team.
As I mentioned.
A lot of that you are challenged in Q2.
Came from lower you are.
Trend and the womens knits category that in the first quarter, we were able to.
Overcome the law you are with positive comps in the second quarter.
We weren't able to overcome that lower you are but it was really draw you are in the second quarter freight he is really driven by product mix.
Impacting and ended up impacting topline and as I said so far.
In the third quarter, our A. ours are back to positive and we definitely make sure that the innovation, we put into our product is recognizable as recognizable for the customer and we are getting paid for the innovation, we have and Aries definitely getting paid for their innovation and product category expansion. They saw you our increase in the mid single digits in the second quarter.
Thank you so much.
Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Good good morning, as you think about the tops category what needs to change in order to deliver the positive results that you are looking for and lastly, as you think about your store base, both full line and outlet stores. How are you seeing the profitability in each store format, and where do you see openings and closings standard reach thank you.
Yes, So you know, what we're seeing and tops.
As I mentioned was really the bare nets carrying lower you are being a high percentage of the business in the second quarter.
Well, we need to see change in Q3, I think we've already seen change as the seasonal categories come in.
With fleece sweaters outerwear question, it's really across the board and tops were seeing return.
To strong sales in seasonal categories that carry a higher you are.
And those businesses are all really healthy so I think we're going to see that continue through the rest of the third quarter and into the fall as temperatures drop and as the assortment.
Mix is even more into those categories in terms of.
Stores, we are we see healthy profitability in both mainline and outlet stores.
There's only a handful of our stores.
That are not profitable.
And so but we look at as we renew leases.
We're looking at.
At the returns and all of the stores not really factory or mainline specific but really store by store and Dana it's been a pretty consistent answer is I'll just add a little more color to that over 95% of our fleet is profitable that 5% that isn't are either new stores that hadn't hit their sales productivity maturity levels or the flagship in nature or have other purposes. Other than just four wall profitability, but we have an extremely strong and profitable real estate portfolio and to give you. An example, the flexibility we have in that we've got out of our 1075 stores 600 of them are coming up for lease decision over the course of the next three years at a rate on average about 200 locations a year. So we're constantly looking at those renewals whether the stores.
Meet our strategic objectives profit objectives et cetera. So we continue to feel really good about our store fleet and the performance across the fleet.
Thank you and I am sorry, you one other question with store openings and closings were going to open a little over 66 stores add to that number about another 29 for aerie side by side stores. So we're going to have 95 additional new stores that will be opening in the course of the year and we'll be closing around 12 stores with the majority of those being 80 stores throughout the course of the year.
Thank you.
Thank you. Our next question comes from the line of Janine Stichter with Jefferies. Please proceed with your question.
Hi, Good morning, two questions for John on Aerie.
First is interested in the Bralette commentary curious to your thoughts on what's behind the resurgence there and if you're seeing the bralette purchase has more of an incremental purchase that she'd using of a fashion item or is there some trade off between bras and Bralettes and then you mentioned strong you are the area wondering if you could just comment on what you're seeing in terms of promotional activity in the space and we've seen some competitors today promotional and just your thoughts on any impact that might be having with your pricing strategy. Thank you.
Yes, well, let you know I always say is we really have always had a strong business and bralettes certainly wasn't it really peak as a trend a couple of years ago few years ago in fact, but we stayed with it and it's our business and we own it so.
We feel proud of what we've done there and it hasn't really inventory core abroad.
In fact, we've been very disciplined and Brian we have extended sizes as Chad as in denim, but also really focusing on the broad silhouettes that she is demanding from us and lapping over assorted.
So that's really what's going on in the broader business, yes. It has been promotional out there.
But we keep on mixing our eurs up so we're able to ride that wave.
And just to put overall margin deleverage in a perspective total company.
Gross margin was down 220 basis points versus last year in the quarter Aries gross margin rate was pretty much flat.
They had a pretty strong quarter in spite of what was an extremely promotional environment, particularly going head to head with some for competitors, which you didnt have to do.
Really helpful color. Thank you very much. Thank you. Thank you.
Thank you. Our next question comes from the line of Marni Shapiro with the retail tracker. Please proceed with your question.
Hey, guys I think the Kirby line looks great. So I had two quick questions. Chad if you could just touch a little bit on a studio trying to understand how that fits into the big scope of the American Eagle brand and then Jay if you could touch a little bit on the partnership with seven cents I guess when are you expected to launch this in stores and do you view this as a new customer coming into American Eagle, you've been with the brand for very long time.
The customer intimately so I'm curious what your thoughts are on that launch.
Hi, Marty in terms of age studio.
We saw great results with don't ask why as the way that we could learn about test and learn quickly about new and exciting trends.
And we evolve don't ask why or I guess I would say replace don't ask why with a studio.
So a studio is a series of monthly trend capsule.
That were doing on a very fast lead time to try to learn about new product new styling.
And trying to create.
A more editorial fashion message for our customer and we're seeing great response to it and learning a lot. So don't ask why was really has a very specific point of view.
I live in a studio is the goal is for it to look different every month.
And it's been a great learning experience and we will use it like we use don't ask why to test and react in the business is it meant look very different than American Eagle core tops business or is it meant to sort of blend in with the assortment.
I think it depends month to month, it's really I think there will be things that we are looking to learn about but it's also a lot of it's how we style of the close right like trying to show maybe outfits in a different way.
And trying to communicate to the customer that you can get a different look than maybe she expects at American Eagle.
Got it and on the issue of the seven cents.
We're going to be and we're going to be issuing at that this coming fall.
We have a special day import.
Yeah, we have a special kick off and were not surprised by it. So we're not going to tell you now.
It will be very exciting we think we've done some customer research it's been very positive.
But we think there's a big opportunity big opportunity for us.
I'll stick it to get into the beauty business.
So Jay this will be in for the holiday season, then yes, it will be.
Fantastic Thanks, guys.
Thanks, Larry.
Thank you. Our next question comes from the line of Kimberly Greenberger with Morgan Stanley . Please proceed with your question.
Great. Thank you. So much I was wondering if you could look back to last year and let us know if you've got a similarly, a similar comparison in October just to get slightly more difficult as you get into October .
And then I wanted to just ask about the investments in store wages now that you've lapped the increases in store wages would you expect that that would represent less of a pressure point in SG nay.
Moving forward. Thank you so much.
Yes so.
The last question Kimberly that you asked around store payroll as we pointed out we started the incremental investments in store payroll kind of mid second quarter of last year. So we've pretty much left that at this point and you should not expect to see that level of incremental investment going forward.
If we are able to.
Our our revenue guidance as we communicated to to you, which we feel very strong that we can.
We believe we still have the ability in the third quarter to slightly leveraged SGN a rate. In addition to Q4, two so still represents part of our strategy and the narrative going forward.
For sure and as far as looking forward to October and the third quarter as I said.
We're coming up against some some good comp performance, but I think our revenue guidance of low single digits to mid single digits again roughly front.
Reflects August in the bank.
Which is almost 50% of our sales in the quarter and we're much more of our core profits in the quarter roughly 80% of our profit in the quarter. So.
Feel really good about the guidance that we gave on our ability to to hit it.
Thank you Bob.
Thank you. Our next question comes from the line of Janet Kloppenburg with JJ can research. Please proceed with your question.
Good morning, everyone quick question for Chad.
And for Jay said I know your denim business is up.
And consistently strong for a long time now and I'm just wondering if.
That chunk of the business is.
Becoming outsized and if there is.
Any worry about our genes slow down in some sort of change in the bottom cycle and what that might mean to.
American Eagle's growth outlook and for Jay. It's interesting you just talked about beauty I was wondering if you could give us a look forward to the kinds of growth strategies, you are thinking about whether they would be internally developed or if you also considering M&A opportunities. Thanks, so much.
Hi, Janet Thanks, Yeah, the jeans business.
James This is amazing and continue to grow and like I said.
At this point I'm quite confident we're going to another record quarter in jeans.
We find.
There's even more demand than what we offer today for the customer we continue to see the opportunity to expand productivity.
Throughout the assortment with more genes now I think that could lead to some concerns that you're saying that.
Gains and get too big but.
Four or five years ago, and everyone said genes were dead. We are writing record jeans business and we continue to do so I think for US we are the destination for jeans, and I think genes are going to outlive everybody in this room and on this call.
And so I think what we thought prior is when people ran away from James we just consolidating our position as the leader in the space.
And I think that that is an opportunity and the strength.
We do have.
A healthy bottoms business overall, so the rest of the pants business and even though I spoke to some weakness in shorts, we did right.
Positive comps in women's shorts in the quarter.
There is we have a very strong bottoms business led by our genes and I think people are going to continue to wear bottoms as time goes forward.
Thanks.
Thanks, Tim as far as the beauty business, we're just getting our toe into the water.
We're very excited about it we think it's a big opportunity.
Look that we see a lot of opportunity.
We're very gung Ho.
No as far as this year and we see a lot of opportunity like furniture too.
Thank you. Our next question comes from the line of Susan Anderson with B. Riley FBR. Please proceed with your question.
Hi, Good morning, Thanks for taking my question and on the China tariffs. So it sounds like you don't expect any material impact this year and next year manageable I guess should we assume that it will not be material next year. It also and then also maybe if you can give us an update on where you expect your exposure to China sourcing to be next year and I guess, if it did go to 25% maybe if you could just talk about kind of the plan at that level in terms of vendor concessions or would there be any plan in the future to raise prices. Thanks.
You know this China Paris issue trade War issue has been going on for a while and I have to tell you our team our production sourcing team has been out in front of this and has done a phenomenal job they've been able to mitigate.
Over two thirds of the tariff exposure through.
The partnerships and the negotiating skills that they've had with our manufacturing partners in China and.
Migrating some of our production to other geographies too.
Today, China represents about 30% of our production we believe in the next 12 to 18 months, we'll be able to drive that down to 20 or below 20 slightly below 20.
Yes. This years impact of terrorists is immaterial.
Next year, it's more material, it's a full year impact rolling going to see an impact a little bit in the fourth quarter.
And what it saw its manageable within our total operating income number and a lot of the other strategies that we have to drive income growth, sorry, billing or forecasted dark it's definitely reflected in the guidance is already in the guidance too and.
Look the good news is that with the factories. We are we are the vendor of choice.
It was good so we have the flexibility of moving around and we are moving around the world.
And.
Look hopefully hopefully the president makes a deal with China.
There is probably a very good chance of a deal getting done and Jay I haven't really heard any competitors disclosing that they've been able to mitigate two thirds of the tariff exposure. So I think thats, a big plus for us and it just demonstrates let's put it this way we don't plan to use the tariffs for for any excuse or anything.
We know we have got merchandise our competition.
At the other day.
Yes, we have certain that Mrs last quarter.
Last quarter, we think we can improve it next year, we know where those opportunities lie.
We know where it is where the opportunities are we know what we have to do merchandise wise.
Yes, we're working on we don't accept excuses and.
We don't like being down.
This is this was the first this was the first quarter missed in a long time.
But.
But there's been a lot of changes made and we feel very good about the future.
Great very helpful. Thanks, so much guys.
For this way.
I feel much better about the future than the analyst Phil.
We're watching the stock was down I got a lot more confidence in the analysts and.
And I'll just put it this way.
Shame on all the naysayers.
Thank you. Our next question comes from the line of Kate Fitzsimmons with RBC capital markets. Please proceed with your question.
Yes, hi, good morning, I guess piggybacking on that tariff question I'm curious kind of what your view is on price increases you know to the extent that tariffs go to 25% no definitely impressed that you guys are able to mitigate a lot of the pressure internally, but just curious on your views on pricing and then secondly, Chad you made mention of a fashion cycle and the changing silhouette you seem pretty optimistic on what you're seeing there. What are you seeing on the top to bottom ratio now isn't where you want it to be you know sounds like its improving quarter to date versus Twoq, maybe I'm just how should we think about the opportunity there. Thank you.
Yes, I think for pricing when we look at the Paris.
We just have to be very careful I think we have to make sure. We have always been a brand that represents value. We've always been a brand that priced our apparel, but where are we from what we built into it and what we think the customer will perceive as a fair ticket.
I think if tariffs do go to 25% and we're still making.
Percentage of our goods in China, we need to look.
But some of those tweener styles, where maybe there is an opportunity for a few dollars here or there.
But I think that.
I think that the environment, we will continue to be competitive and we will continue to be.
Leader, who representing value in the space and so I don't think that we can look at any sort of across the board.
Increases in ticket so.
But then again you know we have to look at it as the news breaks and as things come across and.
Use our best judgment at that time.
In terms of women.
Changing silhouette.
We are we do continue to see.
Now shifting to high rises and some of the new GE until the Latin womens.
Really driving a shift and.
But the size of the tops as well as.
Back to your silhouettes or longer silhouettes.
And I think it provides a great opportunity to going to fall as I said the back to school merchandise was very well received.
And the categories that we will drive going forward through the fall.
Are the categories that drove back to school and I think that provides significant opportunity.
In women's non bottoms apparel, our tops to bottoms ratio I think.
It's a bit of a tough metric for us too.
Look at other retailers because of the strength of our bottoms business as bottoms continues to grow.
That means that they continue to grow and they're part of that ratio right. So.
We continue to see bottoms grow.
The goal my goal is that the bottoms growth is incremental to the brand growth and that the tops business.
At least hold steady.
If not.
Growing along with bottom, but I don't see that shifting our tops to bottoms ratio back to tops.
But you know each every brand has their strength and our strength is that both our brand as well as our bottoms business and the apparel that outfits back to those bottoms and we've seen that drive.
Consistent positive growth.
Q2 was a hiccup, but I think coming into Q3 and going through the fall, we'll continue to see that drive the business in a positive way.
Great guys best of luck.
Thanks.
Thank you.
Our next question comes from the line of Westcott Rochette with Evercore ISI. Please proceed with your question.
Thanks, guys.
I have a question on the interplay between the Aerie and the American Eagle customer and as you grow brand awareness and Aerie and as you move into apparel, and especially that maybe if you go into new markets like Texas and California.
Do you see that every customer and the brand awareness translating over to Eagle and opportunity to call over to Eagle and has that customer kind of interact between the two brands.
I think I think we have a really virtuous.
Circle with the customer base, we have two really strong brands that appeal.
To customers from 15 to 25, and maybe even a little higher and Aireon.
Eric brings a lot of excitement with aerie real campaign, and bringing new customers to the brand that yes, we.
Actively work to migrate into the business and we still have a lot of 80 customers.
Who only shop in AG, and we work to build the Aerie brand awareness and.
However, in spite of those customers to shop and the Aerie business. So I think it's a really positive thing to have these two brands working together.
And a positive thing that we share web site.
And we see even with areas.
Apparel business growing you know as John and I have said on earlier calls we try to make sure that the area apparel is more lounge. They apparel is more genes based.
And we try to not compete directly with each other and we find that in total.
It lifts the entire business and that we can use both brands to attract new customers and then retain those customers and migrate those customers between the brands, it's really it's really.
Positive thing to have.
Two such strong brands under the same umbrella.
Okay. So we'll take one more question.
Thank you. Our final question comes from the line of Rebecca Duval with Bluefin Research partners. Please proceed with your question.
Good morning, and thank you for taking my question.
Chad I was just wondering you talked a little bit you just touched on it briefly about the extended sizes and that you're starting to see a new customer base come in particularly at the brand I've seen the reaction. If you actually look the reviews of the Kirby, it's pretty incredible online, but I'm wondering how you guys are measuring that in terms of just new customer acquisition and what are the plans on extended sizes are going to continue in Q.
Tops as well or is it just going to continue on to denim and then along those lines.
Are there different plans in terms of the marketing that we're going to see to kind of get that message out. There that you that you are offering extended sizes and send the back half.
Yeah. So.
Just.
Sure break into two parts, one mr. Kirby represents everything from.
You know, it's really about the silhouette and the shape and not the size and so Kirby has been great. When we look at the jeans business.
It looks like Kirby is.
Really incremental to the jeans business, our core jeans business.
I would also be posting positive comps in the quarter, even before we layer in Kirby South Kirby has been a great success and we're very happy with that we did a lot of specific marketing around curvy and getting the reach out.
To customers, both existing customers, who maybe felt like our genes didn't provide the optimal fit as well for new customers in the brand. The extended sizing is something that I am really excited we were able to offer in all stores. The brand is really about inclusivity, and I think aerie and John Rielly.
Led the way there and we're happy to build upon it.
By extending the sizes, we have in our stores.
I think that's still a story of.
Attracting a new customer to the store, we're seeing faster pickup online, but we're still getting the awareness out.
To the store customer and we're seeing it build we're seeing a build over time.
But it's still early days you know they've only been in stores for the five weeks.
But I'm happy that we have it and I'm happy to see a bill and I do think it's an opportunity to to grow the customer base, we do expect to have the larger sizes.
Across all of our bottoms categories and then in tops I think we'll see how the reaction builds.
In bottoms, and then see if we're able to offer it across.
Tops as well.
Great. Thanks. Thanks.
Great. So that concludes our call today, thanks for your participation and have a great day.
Thank you ladies and gentlemen, our call has now ended you may now disconnect. Your lines. Thank you for your participation.