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spk05: Greetings and welcome to the American Eagle Outfitters second quarter 2022 earnings conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Ms. Judy Meehan. Thank you, ma'am. You may begin at this time your presentation.
spk15: Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer, Jen Boyle, President, Executive Creative Director for AE and Aerie, Michael Rumpel, Chief Operating Officer, and Mike Mathias, 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 company's current expectations or beliefs. The results actually realized may differ materially based on risk factors included in our SEC filing. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Also, please note that during this call and in the accompanying press release, certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis, reconciliation, of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at www.aeo-inc.com in the investor relations section. Here you can also find the second quarter investor presentation. And now I will turn the call over to Jay.
spk13: Good afternoon. Thank you for joining us today. This is clearly an unprecedented time in retail. We are cycling extraordinary and uneven demand patterns brought on by stimulus and COVID over the last few years. And we are navigating through a highly volatile macro environment. Our second quarter results reflected these challenges as revenue came in below our plan and markdowns weighted on profit margins. On the first quarter call, we highlighted the actions we were taking in response to changing demand and to reposition our business for an improved second half. This included a firm goal to right-size our inventory and reset our expense base to be more aligned with demand in the second quarter. Significant progress was made across both these initiatives. On the inventory side, we cleared all excess spring and summer goods and entered the third quarter with better inventory levels and fresh back-to-school and fall merchandise. We also action expense reductions across the organization. As Mike will review, we are taking further steps to drive improved profitability and cash generation. This includes a hiring freeze, further reductions in non-critical expenses, and lower capital spending. We have also paused our quarterly cash dividend. We have returned $265 million in cash to shareholders through a combination of dividends and share repurchases. marking our highest level of returns since 2015. While we will take the rest of this year to strengthen our cash position, we are committed to continuing to return cash to shareholders as a fundamental principle. On a separate note, we made strategic changes to our leadership structure to enhance focus on consumer experience and our growth initiatives. We combined store and digital operations to enable a more holistic and cohesive view of the customer. The new structure will create efficiencies and strengthen the brand experience as we execute seamlessly across channels. This includes more focus on our international business, where I see tremendous opportunity for our brands. I'm pleased with the positive momentum we've been building over the past few years. This change will facilitate a more strategic approach as we further optimize key markets, including Canada and Mexico, while fueling our licensed partners for continued expansion over the long term. As we navigate through near-term macro challenges, we have not taken our eyes off the strong potential for future growth. Aerie's incredible brand platform continues to see exceptional multi-year growth, with second quarter revenue reflecting industry-leading 25% three-year compound annual growth rate. I remain extremely bullish on the outlook for Aerie and offline and their future potential. American Eagle is a dominant chain brand and the go-to destination for youth with very strong brand affinity and recognition. Innovation, new products, fueling new fashion trends, and further global expansion are key areas of focus to drive profitable growth. We continue to invest in bringing our customers a seamless and engaging shopping experience across digital and stores. Our logistic business, Quiet Platforms, is providing significant benefit to our operations while also expanding its third-party revenue base by offering innovative and more cost-efficient logistics solutions. The growth in the business so far confirms our initial investment thesis Onquire's value proposition of a differentiated fulfillment model. I am encouraged by the business and excited about the long-term growth potential. And I'm proud of the continued progress we are making on our ESG initiatives. We look forward to publishing our first ESG report next week, introducing standards, dyes, reporting, and increased transparency. Our brands are healthy and our business is resilient. Comparisons will eventually stabilize and the supply chain landscape continue to improve, restoring agility in our operation. In the meantime, we will stay conservative and focused on the core fundamentals that have brought us success in the past, creating great product, compelling marketing, building unique brands with strong customer connection, and chasing into demand. The actions we have taken to reset this year's were a significant undertaking. I'm thankful to our teams for acting quickly and purposely. Yet, we know there is more to do in these unprecedented times. We are focused on driving continuous improvement across the business. With that, I'll turn the call over to Jack.
spk09: Thanks, Jay, and good afternoon, everyone. This was clearly a challenging quarter as we managed through the current environment, we remained focused on adjusting our assortments and right-sizing inventory. I'm pleased to note that we entered the fall season with fresh and current assortments across brands. We have significantly pulled back on fall receipts and continue to adjust forward inventory to be more in line with shopping trends. Clearly, lapping enormous demand from last year has also been a hurdle, yet I see no let-up in the consumer affinity and love for casual, comfy, and active wear. It's a lifestyle, not a trend, and it's in demand. As we see comparisons to last year's Eve, I'm confident momentum will come back to us. And in fact, looking forward, there are great new trends emerging around silhouette, color, and fabrication that will create even more excitement around the lifestyle. Now, let me provide some second quarter details by brand. Area revenue increased 11% compared to last year, driven by new store openings. Comparable sales were down 6% following a 25 comp increase last year. Swimwear remained soft. While overall demand was below our plan, the majority of categories posted increases to last year. Undies, leggings, apparel, and accessories all posting positive growth. Additionally, offline continues to show incredible potential and demonstrate strong customer acceptance. I'm also pleased to see that ARIE's multi-year growth trajectory remains intact. Since second quarter of 2019, revenues have nearly doubled, growing almost 170 million. Our customer file has expanded by almost 2 million shoppers. We continue to focus on delivering innovation and newness to our customers. Smoothies is our new collection of favorite first layers that we call anti-shapewear. The launch has been extremely successful, driving incremental traffic to the brand and nearly 6 billion impressions to date. Our new bra-ish bra features revolutionary technology, reestablishing our authority and bringing newness back to the business. We will continue to build out our Smoothies collection in upcoming seasons. On the marketing front, We launched We Are Real campaign, amplifying inspirational messages from women within the Aerie community with a strong customer response. Now, shifting to American Eagle. Revenue declined 8% to last year. Comparable sales were down 10%. This followed 39% comp growth in 2021. Category trends were challenged as we cycled exceptional growth last year in a tougher macro environment. Our best categories included menswear overall, women's dresses, shirts, fleece, and accessories. We have been highly focused on making adjustments to our buys to ensure we are better positioned for future seasons. In addition to resetting overall inventory levels to be more in line with demand, we are making adjustments across all categories. As we make the transition into new denim silhouettes and fashion trends and bottoms, we see an opportunity to better allocate our investments. Additionally, we are beginning to see pockets of improvement in TOPS as our focus on outfitting yields results. Here, we are rebalancing our buys to emphasize the trends that are working very well. We are also pleased to see the supply chain begin to normalize. This is creating better inventory flows, shorter lead times, and enables us to reestablish our best-in-class test and chase practice. AE remains number one in jeans and the number two favorite brand for females and number three for males in our core demographic. As a dominant player, AE is continuously bringing newness to the category. This quarter, we launched our new Strigid collection. An industry first, Strigid jeans marry the latest in fashion trends with our unwavering commitment to comfort. AE continues to be a leader in social commerce, and the new realms of the metaverse. As we explore new ways to engage with our customers, in the second quarter, we partnered with Twitch on a gaming tournament which drove strong traffic to our site. Separately, our Roblox experience has become the second most popular experience on the platform. AE is second only to Gucci, with 35 million unique visitors to date and exceptional engagement metrics. As I said earlier, across brands, my confidence is stronger than ever. we are focused on delivering innovation and distorting into new trends while maintaining a cautious near-term view. We are ready for the upcoming holiday season, and spring is right around the corner with plenty of exciting trends to leverage. I want to thank Ari and the AE team for their hard work and being quick to adapt in a very dynamic macro environment. Thank you, and now I'll turn the call over to Michael.
spk12: Thanks, Jen, and good afternoon, everyone. As we navigate a challenging retail environment, we are leaning into the strength of our operations. We've invested in our supply chain, which is yielding greater speed, efficiency, and cost benefits. We have amazing brands, and our selling channels are very strong. We operate an industry-leading store fleet and a truly best-in-class digital capability. In the second quarter, channel performance reflected macro pressures across retail. In stores, lower traffic and lower spend drove a 9% comp decline. Digital sales were down 6%. While down to last year, our digital business has seen significant growth over the past three years, with revenue up 60% to second quarter 2019. Digital penetration has also grown to 33% from 24%. Our mobile app had another strong quarter, and is now our largest source of revenue in the direct channel. This is a key positive as app customers are our most engaged and valuable omnichannel customers. We are continuing to invest in the latest new technologies to enhance the customer shopping experience. In the second quarter, we introduced a new mobile point of sale system across our North America store base, giving our customers the flexibility to check out or return items through a store associate anywhere in the store. We expect this to improve transaction speed and minimize wait times, especially as we head into our peak fall and holiday selling season. As Jay mentioned, the organizational changes we have made will allow us to operate with a more integrated and channel-agnostic customer strategy, and it's going to create efficiencies and cost savings. We are continuing to rationalize AES store base and close seven more stores across the North America fleet in the quarter, bringing our regional store count to 858 stores. This is down from 931 at the end of fiscal 2019. We also added approximately 20 new area and offline locations in the second quarter, bringing our total openings over the past 12 months to approximately 100 new stores. Aerie's store expansion strategy has been very successful in building brand awareness. After significant investment over the past few years, we are slowing down the pace of openings as we focus on maximizing these investments. As we've noted in the past, new stores grow at an accelerated rate in years two and three before approaching the comp store average in year four. So as new stores ramp up, we expect to see very nice returns from our investments including both the sales and profits generated within the four walls, as well as the digital halo created for our online channel. Our typical payback period on ARI stores is less than three years, with returns that well exceed our cost of capital and reflect the company's highest ROI. Moving on to supply chain. After a highly challenging year, I'm very pleased to see inbound supply chain improvement. Shipping delays and bottlenecks are easing, transit times are shorter and freight costs, although still elevated to pre-pandemic history, have come off substantially from highs reached last year. As a result, our lead times have narrowed dramatically from their peak last November. Importantly, this is bringing back our ability to be more agile and responsive to changes in demand. On the inbound freight side, we expect to see markup relief in the back half of the year as we anniversary $70 million in higher air freight related to factory disruptions in Vietnam last fall. This is going to begin to benefit the P&L in the third quarter and build significantly into the fourth quarter and into 2023 as we cycle peak usage. Cotton pricing has also moderated from peaks this past spring, and I expect we're going to see product costs look favorable into next year. Now moving on to Quiet Platform. Our localized fulfillment model now handles a third of our direct orders across the AE and Aerie brands and is continuing to drive efficiency. We are fulfilling orders faster and with fewer shipments. Our costs of fulfilling orders are down to both last year and to 2019. The resulting savings are helping us to contain delivery costs, even as rates remain elevated across the industry. Faster delivery times are contributing to a much better online shopping experience for our customers, with approximately 75% of online orders reaching customers within three days of checkout in the second quarter. We even see room for this rate to move higher, as Quiet Platforms expands its footprint to service additional markets next year, which should enable nationwide next-day services. Over the past eight months, we have made significant progress in scaling Quiet Platform. Since closing the acquisition last December, we've added significant amounts of new customers and entered new markets. We expect the momentum is going to continue in the second half. As new customers are entering the platform, they're realizing efficiencies in their operations, resulting in greater engagement and additional business. While Mike is going to highlight the impact of the business on our consolidated financials, I want to note that it performed in line with our plan with improved results from the first quarter. I remain very encouraged by all the interest we have received in this business as it continues to expand. As we look ahead, our focus remains on capturing even greater share of the market opportunity. And with that, I'll turn the call over to Mike.
spk01: Thanks, Michael. Good afternoon, everyone. As Jay mentioned, we're taking numerous steps to improve profitability and cash flow which I'll discuss throughout my remarks today. Let me start with a review of the quarter. Consolidated revenue for the second quarter was $1.2 billion. This was flat to last year, including two points of growth from our supply chain acquisitions. Brand revenue declined 2%, following record revenue supported by an exceptionally healthy consumer environment last year. Consistent with what others have said, we saw a slowdown in demand this summer. For the quarter, area revenue was up 11%, and American Eagle declined 8%. Compared to pre-pandemic 2019, total revenue increased 15%, and brand revenue was up 12%, or $130 million. Gross profit dollars declined 26% compared to last year. The gross margin rate of 30.9% contracted 1,120 basis points. Higher markdowns drove 750 basis points of the decline. I want to emphasize that as we cleared through inventory in the second quarter, our priority was to maintain the pricing integrity and brand equity build over the past few years. Our AUR in the second quarter was the second highest achieved in the history of the company, down only 4% to last year. We leaned on end-of-season sell-offs to fully clear out all excess spring and summer goods, which was roughly one-third of the markdown pressure in the quarter and had a $30 million impact to profitability. Higher freight costs were a 200 basis point headwind to the gross margin rate, and the integration of our supply chain acquisitions drove 60 basis points of incremental deleverage. Turning to expenses, SG&A deleveraged 110 basis points compared to the second quarter of 2021. The mid-single-digit dollar increase was in line with guidance provided last quarter, led by higher wages for store associates, new store opening expense, as well as increased corporate compensation, advertising, and professional services. This was partially offset by lower incentive accruals and expense actions announced last quarter. We remain laser focused on resetting our expense base. Since our last update, we have expanded the scope of our expense reductions as we continue to target store and corporate compensation, professional services, travel, and advertising. We've implemented a hiring freeze and paused non-critical spending. With these actions, we now expect $100 million in annualized expense reductions from our original plan ahead of the $60 million discussed last quarter. This translates to SG&A dollars approximately flat to last year in the second half, compared to prior guidance for low- to mid-single-digit growth. Second quarter operating profit of $14 million reflected a 1% operating margin. This included a $30 million impact from incremental end-of-season inventory sell-offs mentioned earlier, and a $25 million headwind from higher freight costs. It also included a $9 million loss from Quiet Platforms, reflecting a sequential improvement from the first quarter as planned and previously communicated. Margin pressure was felt across brands due to their missed to plan. ARIES margins were more impacted as a result of several factors. ARIES saw a larger variance to plan, which was based on outsized growth over the past few years. This resulted in a larger impact from sell-offs to clear inventory and in-season promotions felt mostly acutely in the second quarter due to the timing of ARIES seasonal clearance activity. Additionally, we saw some pressure on margins due to higher number of new store openings, which are still in their ramp-up period. As inventory resets and newer stores continue to build, we expect ARIES margins to show a meaningful recovery back to double digits in the second half. Adjusted EPS was 4 cents per share and included a $1 million interest add-back to net income. Our adjusted diluted share count was 207 million, During the second quarter, we took steps to strengthen our capital structure. We exchanged $342 million, or approximately 80% of the principal associated with our convertible note, and upsized and extended our ABL facility. This provides additional liquidity under more favorable terms. We also completed a $200 million accelerated repurchase program. In the second quarter, we repurchased 17 million shares as part of the program. With the full benefit of these actions, we expect a third quarter weighted average diluted share count of $198 million. Consolidated ending inventory costs was up 36% compared to last year, reflecting a 10-point improvement from first quarter levels. From a brand standpoint, Aerie and AE each represented half the increase, with approximately 20% of the increase driven by black leggings, a core item that sees strong year-round demand. Total inventory units were up 22%. This reflected higher in-stocks as we lapped supply chain disruption last year, earlier receipts of back-to-school and fall goods reflecting improved lead times, and higher units to support new area and offline store openings. Quarter end inventory is current and fresh for the fall season. Clearance levels are in line with last year, and we do not have packaways. Given ongoing macro challenges, we have taken further action to reduce inventories for the second half of the year. As we make additional progress, we expect to end the third quarter with inventory up in the mid-single digits and fourth quarter ending inventory down to last year. We anticipate promotional intensity to remain high across retail in the back half of the year. Although we will not be immune to this, with inventory plans more aligned with demand, we're better positioned to navigate through it. We ended the quarter with $98 million in cash and total liquidity of $453 million. Capital expenditures totaled $69 million in the quarter. As mentioned earlier, we have paused all uncommitted CapEx spend for the balance of the year as we absorb and grow into our investments. For the full year, we now expect capital expenditures of approximately $250 million. This is down from our prior guidance of $275 million, with work being done to reassess investment needs for 2023 as well. Now on to our outlook. Demand remains challenging, especially as we cycle an incredibly strong and record back-to-school season last year, with brand revenue down in the high single digits quarter to date. Assuming current trends continue, we expect third quarter gross margin to be in the mid-30s and fourth quarter in the low 30s. This reflects higher markdowns as a result of the current demand environment and our seasonal clearance cadence, which is more weighted to the fourth quarter. We are also anticipating freight relief as we lapse significant use of air freight linked to the Vietnam factory closures last year, especially in the fourth quarter. As I noted earlier, STNA dollars are expected to be relatively flat in the back half. our tax rate assumption in the high 20s and weighted average share count at approximately $198 million. 2022 is clearly shaping up very differently from what we'd originally anticipated. As Jay noted, we're prioritizing liquidity and financial flexibility in the near term and pausing our quarterly cash dividend of $0.18 per share. American Eagle Outfitters has a long history of returning cash to shareholders through dividends and share repurchase. We remain committed to maintaining this precedent in the long run. In the midst of the challenges we're facing this year, we're also working hard to position 2023 for improved profitability, solidifying work across expenses, CapEx, and inventory. As Jay noted, our brands and operations remain strong, and I'm confident this will come through in our results next year. With that, I'll open it up for questions.
spk05: At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. you may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. In the interest of time, please limit yourself to one question. One moment while we poll for questions. Our first question comes from the line of J. Sol with UBS. You may proceed with your question.
spk06: Great. Thank you so much. I want to ask about Aerie. And if you could just talk about, you know, where in the quarter... Maybe the projection differed from what played out. Was it that, you know, your view on the macro was optimistic? Was it, you know, some of the styles didn't resonate? Was it some of the categories maybe that you thought would trend didn't versus other categories? You can just sort of dive in a little bit and talk about where the differences were in that business versus your expectations. That would be great. Thank you.
spk01: I can start. I'll just hit some of the trend progression. You can hit the product side of Jay's question. Thanks, Jay, by the way. So if you go back to the first quarter call, May 24th, we talked about the consistency of the sales trend that we were seeing through the first quarter. You know, up in the mid to high, mid-teens to high-teens to 2019 is what we were talking about then. And we saw that very consistently February through April. Actually, in May, up into the call, we actually saw May accelerate to that trend a bit, which made us confident in kind of grounding ourselves in that. But what happened really mid to late June, just as others have talked about, we did see a deceleration to trend as we got into summer. That's really continued through July, continued into sort of early mid-August through back to school peaks. And we've definitely seen some improvement in recent weeks here as we've kind of got into September and this past Labor Day weekend. But we're still guiding conservatively and we're assuming that high single digit, the guidance we're providing is assuming that negative high single digit trend continues that we've seen quarter to date so far. That's what really changed. It was really that mid-June to late-June time frame, and I feel like across the industry, it's been consistent in terms of a bit of a slowdown that occurred at that point. Jenny, you want to hit the category?
spk09: Yeah, thanks, Mike, and you said it well, but really, it was isolated in the swim category, to be honest, Jay. We saw really incredible results in all of our other categories, and you heard from Mike how that really impacted from a seasonality standpoint. But I like what I'm seeing. Like, look, we look forward, we look ahead. We just had one of our best launches ever, the smoothies launch, which is highly rooted in intimate apparel, which is seasonless. So I love that category. And leggings are off to a great start. And again, we don't take a lot of markdowns on leggings. They're highly isolated in black. They do the majority of the business. So early on, and it's early to say, but We're very pleased with the results so far for back to school. So like I said, going back to Q1 and Q2, very isolated in SWIM, but other categories saw nice results.
spk01: Yeah, Jay, maybe the last point to that too. In the end, for ARIE specifically, we still saw almost doubling the 2019 results, but by the time we got to the end of the quarter. So from a go-forward perspective, now we feel like inventory is reset very appropriately. You know, we've got these new stores that are still in their ramp-up period. Michael just described kind of where we think those are headed. We've got over 100 stores that are sort of non-comp or new going into the back half with inventory reset. Very bullish on ARRI for the back half in terms of where we're going from here, knowing the macro environment is still uncertain. But as we go forward for the rest of this year and into 2023, there's a lot of optimism in terms of ARRI's bottom line. top line growth and bottom line results that we're focused on.
spk06: Got it. Okay. Thank you so much.
spk05: Our next question comes from the line of Matthew Bosch with JP Morgan. You may proceed with your question.
spk10: Great. Thanks. So, Jen, could you speak to demand shifts that you're seeing across categories? What changes are you making across the assortment at Aerie and American Eagle in the third quarter? And is there a way to think about the timeline needed in your view for inventory completely across the board to be fully reset at this point?
spk09: Sure, Matt. Mike mentioned it. We certainly get in a great position as we move into Q4 and then as we're looking out to 2023 as far as inventory is concerned. I mean, the teams have worked tirelessly to make sure that we are in good position, but also making sure that we distort in the right categories. Look, I love what's happening out there right now. We just actually chased something within 19 days. We have deliveries here. So Michael Rimpel said it. We're starting to get best in show again. I would like to say the testing and the chase that we're capable of doing in this company is remarkable. I mean, I learned it 12 years ago when I joined the company. And it's nice to be in a position where logistics are freeing up for us and we're able to sort of move a little bit more seamlessly. There are some category shifts happening, but I just, you know, it's funny. The team, we were talking today how we are just so dominant in bottoms, and now that's happening in area as well, from leggings to denim to other bottoms. We are seeing some new shifts in silhouettes and denim, and the teams, like I said, we're moving fast and getting into some new categories there from the bottoms perspective. And in Aerie, certainly offline being a new business for us, we're seeing great results in that business. And I think that that holds a very promising outlook for the company as far as a growth vehicle. And certainly, as we've been able to shift the categories in American Eagle, I like what I'm seeing in outfitting. It's taken a little time, a little longer than I thought. But early on for back to school, some of the women's trends that we're seeing, we're able to chase. I mentioned that 19-day chase I mean, that's pretty impressive. And we're going to continue to test and scale. But mostly, I would like to say that this team has responded fast. We've worked tirelessly. We're not quitting from the marketing to production to the product categories to the innovation that I'm seeing from this team. You know, we're not quitting here. So I'm really proud of the team.
spk10: Great. And then, Mike, could you just speak to the magnitude of the recent EBIT margin contraction that we've seen at ARRI? Maybe if you could just elaborate on some of the drivers of double-digit margins in the back half. And has anything changed on your multi-year view of profitability for ARRI? Or how do we maybe break down the structural versus transitory elements of the profitability of ARRI today relative to previous plans?
spk01: Sure. Thanks, Matt. I mean, to Q2 specifically, really first half, I mean, ARIES had some challenges, obviously. When we go back to the supply chain disruptions last fall, the air freight that we experienced mostly in Q4, some of that carried into Q1. Elevated freight costs in general hitting the brand in Q1 and Q2 beyond the air freight. We talked about that being a 200 basis point impact to the quarter. ARIES was about half of that, I think, so 20 If it's 20-some million in total, you could take 10 to 15 million, that being an Aerie impact. If you think about the resetting inventory in Q2 and the $30 million charge I described, Aerie was over half of that. So the combination of those two factors plus the, Michael talked about the 20 stores we opened in the quarter and the ramp up of the new stores we've opened in general, Those three factors, you could take areas operating rate from 3% to double digit in the second quarter alone. So as we get into the back half now, inventory is reset. We don't expect any impact from inventory or us overplanning the business like we did in the first half. Freight actually normalizes. We'll anniversary elevated ocean freight from last year. As we've described, we think there's actually some light at the end of that tunnel in terms of freight costs and freight and transportation coming back in line or maybe even benefit versus last year. And now we'll have these new stores carrying into the back half and not much impact from new store opening costs. So those three main factors really go away for the back half. We think inventory is reset and we're focused on the profitability of all these new stores and the business in general. So we're very confident in being double digit in the back half and we're looking forward to 23 already benefiting from all this growth. 34% plus square footage growth from these 100 locations and focusing on at least the mid-teen operating rate, if not better, in terms of how we're setting up our plans for next year.
spk10: Helpful caller. Best of luck.
spk01: Thank you.
spk05: Our next question comes from the line of Paul Lijuez with Citi. You may proceed with your question.
spk02: Hi, this is Kelly Craig along for Paul. Thanks for taking your question. I was just curious, with the brand sales running down high single digits versus... last year's quarter to date versus the down 2% you saw in 2Q. I was just wondering if you could help us think about that deceleration by brand. And then I'm just curious, given the inventory position has improved so much, is this kind of a function of having less clearance sales available that might have drove some of the sales in 2Q and you're just not expecting that? Just any thoughts there would be great. Thanks.
spk01: Let me hit the last part of that question first. The $30 million impact to the second quarter profitability to get ourselves right to that inventory, devalue that inventory, it's really down to bringing summer goods into August at a historical clearance level. So we still have, I'll just leave it at that description. We're in line and we think we're in good place in terms of typical historical clearance levels coming into August and the sales related to those units. As far as AE's trend, I think that was the first part of your question. I think we expected coming into Q3 on top of a very hyper back-to-school season last year with really not having a 2020 back-to-school stimulus checks out there again starting in July last year. Just that pent-up demand and the amount of money that came to us during back-to-school in the brand because we are such a back-to-school destination. We knew AE lapping that period was going to be tough, so we actually planned plan for Q3 a bit of a deceleration versus the plan for the first half already, or that was part of the plan initially. So I'm not necessarily surprised by that based on the macro conditions out there and knowing what kind of back to school we were lapping last year. And I think maybe Jen can take on the product side what we're seeing so far during fall and what we're expecting go forward. But we're expecting that to normalize a bit knowing we come out of that hyper back to school period here after Labor Day.
spk09: I think you said it well, Mike, just really after coming off of the swim, a little bit of a hangover with the swim business and Aerie and, um, summer and, and honestly, you know, obviously both brands had incredible tailwinds last year. Um, but AE is just getting going, you know, this is a fairly new team and we did have, you know, um, a little bit of that benefit last year with the stimulus and, and lapping that the tailwinds that a lot of retailers benefited of, but I like what I'm seeing on the AE team. Um, We're very conservative. We're sticking with our strategy. Like I said, we're testing and scaling new product categories. We have some excitement coming up for spring 2023. I can't tell you my secrets, but some new launches in the AE brand. And, you know, we're not going to stop there. And like I said, it's a fairly new team, and I like what they're doing. They're turning into a very well-oiled machine. And the Aerie team, again, we have so many new ideas, so many new categories. I mean... I mentioned it, we just launched that smoothie category. Let me just say in one day we saw 30% increase in traffic to the direct site, that one day when we launched that campaign. So again, we have to keep on challenging ourselves to come up year over year, whether it's marketing, product, production, but that's where we're into right now and that's what we're thinking about 2023 and beyond.
spk02: Thanks. And just to clarify there, so the American Eagle brand is kind of driving the deceleration in brand sales quarter date relative to 2Q more than Aerie?
spk09: Do you mind repeating that? Sorry, you've faded out a little bit during your question.
spk02: Sure. It seems like the American Eagle brand is driving deceleration the deceleration in brand sales quarter to date relative to what you saw in the second quarter? It's more coming from the American Eagle brand versus Aerie.
spk09: I think it's just based on their likes, if you're looking at last year. So Aerie, you know, has year over year, quarter over quarter likes that are, you know, high double digits. AE saw nice benefits last year, as I mentioned. from the stimulus. So I think if you just are looking at last year, that might be what you're comparing. But like I said, we're looking at the business on the go forward. And it's really interesting. And I'm going to pivot here for one second. But there are a lot of conversations out there, what's happening in retail, whether it's getting all dressed up. And certainly, the luxury sector has seen some benefits of weddings and what have you. I have to tell you, casual lifestyle apparel is not going away with our sector. I watch my daughter every day going to school in sweats and a hoodie, and it's here to stay. And I think American Eagle and Aerie does it best as far as comfort, casual lifestyle, you know, wear. And that's what we're up to, and that's what we're focused on in the future.
spk05: Thank you. Our next question comes from the line of Marnie Shapiro with Retail Tracker. You may proceed with your question.
spk08: Hey, guys. I'd actually like to take a little bit of a step back. Jay, I want to address this to you because we've been through and certainly you've been through periods of time where the customer has pulled back for a moment in time. But it sounds like there's a lot of confidence still here at the company. You cleared out the inventory. You're positioning for the back half. I guess broadly speaking... Knowing what you know, knowing what you've been through, what gives you the confidence for the back half of next year? Is it the brand strength? And I guess, you know, how do you think about Holiday and further into 2023?
spk13: So let me ask you, is that question to Jen or is that question to me? You know, I didn't hear what you asked.
spk08: That's to you. I mean, you've been doing this as long as I've been doing this.
spk13: Look, I've been around like a few go-arounds here. We have a great team at American Eagle. The people we have, the merchants we have are top notch. They, you know, they didn't go bad one day. You know, they are top notch. You know, Jen said that, you know, in American Eagle, you know, like we put some new designers in. It takes time for people, you know, to get like, you know, to get acclimated with, you know, with the brand. But the stuff that I see, the stuff that I see that Jen and the team's working on for the holiday season and for the spring, spring of 23, looks very exciting. And also introducing new concepts into the brand, not just introducing more denim, but introducing some additional fresh product and some new type of product, too, which would be very exciting. You know, we emphasize that this past quarter we opened, you know, it was our biggest opening at like Gary's stores, which we should get the benefit of the future. We're seeing, I'm seeing, you know, today, I don't want to get too excited because, you know, say something and all of a sudden somebody else pops up somewhere else, you know, as far as like the rest of the world. But I feel very good about the company. I see the freight rates are going the right way. Our time is coming back on. This past two years, everything got out of sync. We had countries close up on us. We had to put stuff on containers, and containers all of a sudden got backed up in ports. It's been a strange year. Like Jen said, she was smiling because she was able to chase a product and get it in 19 days. We haven't had that happen to us since the beginning of 2020. So that's a very good sign for us to get back in sync.
spk08: That's great.
spk13: I think the company is going to be in great shape. And to see the way that investors carry on, I can't control that. The only thing I can control is what we do. And we have a great company. We have great vision. We're very innovative. whether we're innovative and merchandise, whether we're innovative in our technology. I think if you walk into the malls, we're the best looking store in the malls. You know, we're figuring out more efficient ways of getting the merchandise to the customer and to the stores. So I think we're doing a lot of stuff right. I think, you know, we got caught up in, you know, this past year, you know, going against last year's figures. But for the future, I think, you know, I think we'll be one of the big winners out there.
spk08: That's great. Thank you.
spk05: Our next question comes from the line of Adrian Yee with Barclays. You may proceed with your question.
spk14: Great. Thank you very much. Actually, Jay, this might still be for you, but anybody who wants to comment on it. Can you talk about the changing competitive landscape? I know that we have always talked about kind of fast fashion, then there's faster fashion with Boohoo and Asos, and now there's hyper-fast fashion. with competitors such as Sheehan. So I'm just wondering, how often do you, in your research, how often do you compete against them, and what does that do to the overall kind of pricing pressure? And then for Mike, when you talk about a pause in the dividend, would that imply a pause in repurchase activity as well, or are those two distinct events? Thank you very much.
spk09: Hey, I can take that if you want. As far as, you know, fashion and competition, look, there's always competition. I mean, that's what our job is, right, to compete and to try to do it better than anyone else out there. And, you know, certainly we're humble and we certainly pay attention to the new up-and-comers, Sheen being one of them. And, look, we look at building our brand. You know, we're brand builders. We protect our brands, both American Eagle. I mean, certainly American Eagle is something to be proud of and Aerie, the new up-and-comer. And, That's what we're up to. We're up to building our brands, protecting our brands, not turning on a dial. I think flow and steady wins the race in brand building and how we think about our business. We think long-term. Obviously, the retail sector has been hit a little bit more recently, but we're in this for the long haul. I like what I'm seeing in the future. Jay already said it. He said there's innovation out there that's up and coming. We have new ideas. Every day we have some really new, exciting concepts that we're going to launch. And, yep, we stay focused. We stay in our lane. And something I tell our teams every day is just stay in your lane, stick with our brand, and look ahead and make sure that we're innovating and competing on our terms.
spk13: That's very helpful. And, Jen, you talk about concepts. We have Todd Snyder, which is an on-fire brand. Mike, you want to talk about that a little bit, Michael, or Impel?
spk11: Yeah, sure. I mean, look, we're, you know, we're not just, we are working on American Eagle and Aerie and obviously doing some great innovative things there, but we're also incubating new brands and new businesses. So, you know, one of the things we're proud of as a company is we're not resting on our laurels. We're not solely dependent on one business to drive the company. But we're looking for ways to grow it into the future. So we have Todd Snyder, which is up well over 50% this year. We're expanding its footprint, opening more stores. It's still an 80% digital business. It's going to be profitable, growing nicely. We're incubating Unsubscribe, which is an exciting new concept that Jen and team launched quietly last year that has about five stores open. and is doing very nicely. And of course, we're investing in Quiet, which is a business that not only is it providing benefits to American Eagle, but we're very excited about where that's headed and the potential in that business.
spk14: That's very helpful.
spk01: I can handle the, Adrian, your question on the dividend. I think, look, our priorities are the same. We're investing back into the business first, which we've done pretty aggressively in the last two years and are continuing this year. We've talked about the $100 plus area and offline locations. And we continue to invest in our digital and supply chain capabilities this year with other projects. On top of that, we've already returned $265 million back year to date to shareholders between $65 million in dividend and then the $200 million ASR that was strategically tied to that early convert settlement to offset the dilution of the shares we issued there. But that $265 million is the highest we returned to shareholders in a year since 2015. I think Jay and I both said that. in our prepared remarks. So at this point, now we're looking at improving profitability in the back half, generating positive free cash flow in the back half in the next year. And then I'm confident we'll get back to some level of appropriate dividend and investing back in the business first, where appropriate, some level of appropriate dividend and then opportunistic share repurchase is the way we've approached it. But we will definitely, we've had the history of Returning cash to shareholders and we will definitely get back to that once we go to our cash position a bit here.
spk14: Fantastic. All very helpful. Best of luck. Thank you.
spk05: Our next question comes from the line of Kimberly Greenberger. You may proceed with Morgan Stanley.
spk03: Great. Thank you so much. I wanted to just check on inventory. If you could talk about how much you expect inventory to be down at the end of the year. That would be great. I'm just cognizant that at the end of fourth quarter last year, inventory was up around 24% compared to 2019. But looking at the revenue run rate here in the second quarter revenue, total revenue is up only, it looks like about 15% compared to the second quarter of 2019. So I'm just wondering if, how much you think you could cut
spk01: inventory by the end of the fourth quarter and what would your preliminary plan be for how much you would expect inventory to be down next year thank you thanks Kimberly I think the fourth quarter right now I mean a lot of volume to go a lot of business to be had our projections as we sit here today we would be down in the double-digit range so something probably low double to maybe mid-teen. But that's, again, a preliminary projection. We'll refine that as we go. And then for next year, we are going to continue to plan conservatively. This is still an uncertain environment. I think the great thing we're excited about is that we're back to, from a timeline perspective, as Michael talked about it, being able to chase again. So we're not committing to inventory, you know, three to six months earlier like we had to in the past 12 months. That's part of our part of our issue in the spring season is how early we committed to those plans and didn't have much flexibility. So we're looking at spring as we speak. We've had some initial conversations, some initial POs have been placed, but we're keeping a lot open and keeping ourselves flexible now that timelines are back to some of the historical flexibility that we're used to.
spk03: That's really great, caller. Thank you for that. And on the $70 million in freight relief in the back half, I'm wondering if you can help us understand how that portions out between Q3 and Q4. You also alluded to some savings you anticipate in the first half of the year next year. Any numbers you can help us with on that? That would be great. Thanks.
spk01: I believe I'm looking. I think it was $10 million in Q3 and $60 million in Q4 was the effort. That's right, Mike.
spk11: Yeah.
spk01: Yes.
spk11: Yeah, it was $10 million in Q3, Kimberly, and $60 million in Q4 for the air freight.
spk01: And some of that air freight carried over into Q1 a bit with goods that we sold. That's when we incur that expense and we actually sell the units. So some of that impacted Q1 as well, and we see some benefit there, we believe, too.
spk03: Okay, that's great, Culler. Thanks so much.
spk05: Our next question comes from the line of Janet Joseph Kloppenberg with JJK Research Associates. You may proceed with your question.
spk07: Hi, everyone.
spk00: Good evening. I was wondering, Jen, if you could talk a little bit about this shift in denim. We're hearing a lot of mixed reads on denim right now and maybe some disappointment in back-to-school performance. If you could talk about that and if there's a a shift towards something dressier or maybe pants and how American Eagle might be positioned for that. And as we look to the future and you talk about introducing new concepts, I'm just wondering if some of this dress up trend that we're seeing prevalent today is something that American Eagle can participate in, and perhaps if some of your new concepts are built around that, or if you think the dress-up trend is just a temporary moment. Thank you.
spk09: You know, how are you, Janet, by the way? Yeah, I'm really doing well, doing well. You know, like I said, I think the casual trend is here to stay, and certainly our generation and the generations to come love casual, comfortable sportswear, which I'd like to say we do best. And when it comes to denim, there's definitely some shifts, Janet, and we're certainly reacting to it. We've been working on the inventory. That was a big piece of the inventory rationalization that we needed to do from an AE standpoint, and we've been working on that. But inside of denim, there are some great hotspots that we're seeing that we're able to now you know, go in and distort some of these, you know, baggier fits that you're definitely seeing out there flare. And then we always have our staple and jeggings. And then there is a shift for sure into some other bottoms that we're starting to see. And certainly we're testing all of the silhouettes as we speak again. And we've actually instigated, like we've initiated a whole new test and scale, not even just based on You know, the timelines that we're getting now based on, you know, just the logistics freeing up, we're actually trying new testing scenarios that are going to make us even more smart or smarter, I should say, for the future. So those are in play right now. We're going to get results very soon, and we're going to be able to, as Mike and Michael said, we're going to be able to implement those tests for spring and on the go forward. And there are some new exciting trends happening in bottom. So we're excited about that. And then when it comes to our new idea, I can't tell you, but it's very exciting. And it will be launched for spring 2023. And it's a new concept for us, and I'm pretty excited about it. We've already had some early reads on some of the product categories, and very well received, very well received. So more to come there. I can tell you one secret. It's in the American Eagle brand. So – Very exciting.
spk05: Okay, Laura, I think we have time for one more question. Okay. Our last question comes from the line of Dana Telsey with Telsey Advisory Group.
spk04: You may proceed with your question. Good afternoon, everyone. As you think about the ARRI business and the rate of growth, can you talk a little bit about store openings? Obviously, you've opened a lot of stores over the past few years. How do you think of current store metrics And how do you think of the growth of existing stores and what you're doing and adding on the product front? Thank you.
spk13: Well, you know, Jen should answer part of it. But the part of it also is, you know, like we're very excited about Aries and offline. Offline is a new concept for us. It's being very well received. We think it's a big opportunity there too. And Mike, what do you want to add?
spk01: Yeah, I can just say I think Good question, Dana. It's something we're very focused on, not just for the back half, but I think it's a major opportunity for us next year in terms of improved profitability, obviously for the brand, but then impact of the company as well. So we know that when we open these many stores, we do have a short-term comp impact as markets absorb these new locations and digital shoppers in those markets kind of go to the new stores, and then we see a ramp up of customers and what we call our digital halo effect, you know, six to 12 months later. So if you think about these 100 stores we just opened, we'll carry these into the back half, you know, get our plans right set around them, focus on that into 23, and that digital piece of it kind of kicks in. You can do some of your own math on just the implied revenue growth from these stores. And if we believe, you know, inventory being positioned conservatively but appropriately to drive the right margin rates, expense focused, We can be mid to high teen operating rate, and that will be our goal for the brand. So off of this year's kind of guided profitability, it means significant impact to next year in our minds, and we're already focused on that. And for next year, as we talked about, look, we're going to grow into these investments. So we've $250 million in capital last year, $250 million in capital this year, a lot of it tied to these area and offline stores. So from a cash flow perspective and the philosophy that we want to generate positive free cash flow and focus on the profitability of the investments that we've made, we're probably going to look at a relatively smaller new store count for next year just so we can focus on that. But we still believe there's runway in terms of store growth over the next three years. I think there's just a lot of benefit to focusing on the profitability of what we've already invested in over the next four to six quarters.
spk05: Thank you. Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Jay Schottenstein for closing remarks.
spk13: Okay. Thank you for joining us today, and hopefully next time there are any calls, we'll have more positive news.
spk05: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.
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