American Eagle Outfitters, Inc.

Q4 2022 Earnings Conference Call

3/1/2023

spk05: Greetings and welcome to the American Eagle Outfitters fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Judy Meehan. Thank you, Ms. Meehan. You may begin.
spk02: Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer, Jen Foyle, President, Executive Creative Director for AE and Aerie, Michael Rempel, 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 filings. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Also, please note that during this call and in the accompanying press release, certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at www.aeo-inc.com in the investor relations section. Here you can also find the fourth quarter investor presentation. And now I will turn the call over to Jay.
spk16: Good afternoon. Thanks for joining us today. 2022 was a dynamic year, with numerous external crossroads. As we lacked outstanding results in 2021, we faced a difficult macro environment with rising inflation, higher interest rates, continued supply chain disruption, and a highly promotional retail environment. I am proud of how our teams executed throughout the year. Early on, we took swift and aggressive actions to reduce inventory levels, cut expenses, and capital spending. This contributed to a significant recovery in profitability and free cash flow during the second half of the year. We also posted our second highest revenue periods on record in both the fourth quarter at $1.5 billion and the year at $5 billion. Our fourth quarter results exceeded expectations and adjusted operating income of $96 million was above last year. We strengthen our financial position and exchange nearly all of our outstanding convertible debt to end the year with a healthier balance sheet and improved liquidity. Moving to the American Eagle brand, I'm incredibly proud of the work the AE team has done over the last several years to improve profitability, rationalize unproductive SKUs, and close those margin stores. As a proof point, fourth quarter adjusted operating profit for AE was up 36% to 2019. Jen has made great strides to refresh the brand, re-energizing assortments to capitalize on trends while delivering better profitability. AE is a strong and healthy brand. I'm encouraged by how customers are embracing new styles and I look forward to our continued progress. Aerie has demonstrated exciting, multi-year growth with fourth quarter revenue and adjusted operating income up over 70% in 2019. The rapid success of offline, our extension into activewear underscores the strength of Aerie's powerful brand platform. We have significant potential as we reach more and more customers, and I cannot be more excited about the future. Our international business performed well in 2022. We will continue to fuel sales and profits, pursuing a multi-year strategy to optimize key company-owned markets and expand our licensed business. In 2022, I was pleased to publish our first ESG report, highlighting over two decades of actions we have undertaken to build a better world. As noted in the report, we have made tremendous progress across our water goals and continue to reduce emissions. ESG responsibility is embedded in our brand and company culture and deeply intertwined with our corporate strategy. As we grow our brands and markets, we will stay disciplined and focus on profitability. Inventory management remains a key focus, and we will use the strength and agility of our supply chain to chase demand. Additionally, we have launched a formal program to further reduce expenses, gain efficiencies, and prioritize high ROI in projects. Given the highly volatile environment we've been operating in over the past several years, now is the time to reset our business. Last year, we made good progress, yet opportunities remain as we strive to break out of the mid-single-digit operating margin range. On Quiet's platform, we continue to see interest from prospective customers and remain optimistic about the long-term opportunity, yet the demand has been pressured this past year. As Michael will review, we are adjusting our go-forward plans to strengthen profitability. Although the macro environment remains uncertain, we entered 2023 better positioned. I see no shortage of opportunities for this company. We will harness the power of our brand and industry-leading operating models to drive growth and find efficiencies in processes and capabilities. I'm confident with focus and discipline We can strengthen our bottom line. We're committed to returning cash to our shareholders and are very pleased to reinstate our quarterly dividend. With that, I'll turn the call over to Jay.
spk11: Thanks, Jay, and good afternoon, everyone. Over the past few years, the dynamic macro has battle-tested us in many ways, and 2022 was another rollercoaster of a year. In this environment, American Eagle and Aerie displayed resilience, maintaining their status as fan favorites within our core demographic. In a year where customers pulled back on discretionary spending, we grew our loyalty customer file, further strengthening our relationship. Even in a highly competitive promotional environment, fourth quarter results exceeded our expectations. With inventory back at healthy levels, We brought exciting new innovation to our customers in stores and controlled markdowns, achieving our second highest fourth quarter AUR. This was down 7% to last year's record high, yet up over 20% across brands to 2019, highlighting our focus on controlling promotions and building brand equity. ARRI reached a milestone at $1.5 billion in revenue in 2022 as new stores continue to expand awareness. Since 2019, revenue has nearly doubled with operating profit up close to 150%. I am pleased with this accomplishment, especially given the unprecedented macro volatility. For the fourth quarter, ARRI continued to see good growth, yet came in below our expectations. Core Apparel showed up well, and we achieved our best sweater season in the brand's history while also continuing positive growth in fleece. Our activewear extension, Offline by Aerie, remained a standout performer led by our leggings franchise. Leggings continue to be a powerful driver of new customer acquisition, and we are seeing nice momentum across fashion and performance styles. Intimates was a bit softer than expected, And as we look forward to 2023, our plans include launching more newness and intimates to build great awareness and engagement. As we continue to scale Aerie, we are leveraging creative marketing touchpoints to drive excitement. In the fourth quarter, our I Want Aerie holiday marketing campaign centered on gifting was a strong success. Additionally, this spring, we launched a new Find Your Wonder campaign with a throwback to Y2K fashion, including real life and digital experiences. Turning to American Eagle, demand in the fourth quarter exceeded our expectations. As we evolve our assortments with engaging fashion trends, we are seeing a nice reception to new silhouettes such as wide legs and cargo, and renewed excitement in fleece and knit tops. I look forward to capitalizing on new fashion trends as we move through the year. Over the past several years, we have been intently focused on improving the health of the AE brand, tightening our assortments, pulling back on the value-destructive promotions, and selectively closing unproductive stores. These changes are driving better margins. As we maintain our focus on profitability, we are also actively exploring opportunities to drive growth. On that note, in January, we launched AE 24-7, A new men's sub-brand focused on the fast-growing activewear category. Early reception to our limited initial assortment has been very encouraging, and we look forward to scaling the collection later this year. Last month, we also relaunched AE77 as a premium sustainable capsule within the AE brand. Introduced with limited denim choices for now, the assortment spans both men's and women's and will be available predominantly online with brick-and-mortar presence in select stores. The reception has been very encouraging, and I look forward to building on the early success. I'm pleased to note that AE's customer file grew in the fourth quarter as we retained and reactivated more customers. On the marketing front, we collaborated with the cast of The Summer I Turned Pretty, a Gen Z favorite show, launching a limited-edition collection that fully sold out. Buzz around AE. is continuing into spring. Last month, our newest denim silhouette, Dreamy Drape, went viral after an organic post by Alex Earle, one of TikTok's fastest growing influencers. We have also launched an exclusive spring collaboration with the Outer Banks crew, which is off to a good start, drawing in new customers with great reception across social media. In fact, a recent post by one of the stars on the show became our number one Instagram post of all time. Entering 2023, while the macro remains uncertain, emerging trends in casual wear continue to provide new avenues to drive growth across our brand. Innovation is our strength. We will lean into newness and continue to deliver excitement and high quality on trend styles to our customers. Thank you, as always, to the AE and Aerie team's for their tremendous effort this past year. With every season, we are making progress, and I remain very excited about what's to come. Thank you, and now I'll turn the call over to Michael.
spk13: Thanks, Jen, and good afternoon, everyone. As Jay noted, the past few years have been extremely volatile for the retail industry, highlighted by shifts in consumer spending and operational challenges. Navigating through this period has not been easy, yet I'm very proud of how we've responded with both agility and speed. we've added significantly to our capabilities and increased our use of new technologies, which are driving benefits to our operations and the customer experience. As we continue to manage through a dynamic landscape, we'll lean into these capabilities as we strive for productivity improvements and even stronger profitability. Fourth quarter channel performance largely reflected the ongoing macro volatility. It's notable that customers are returning to in-person shopping, store revenue was flat to last year and up 5% to 2019. Since taking responsibility for stores last fall, I've had the opportunity to visit numerous locations and spend considerable time with our incredible store leadership. We have a powerful fleet and truly a world-class field team, and I've been very impressed with just how well we service the customer and leverage tools and technologies to drive store productivity. For example, this quarter, I am pleased to note that we were tied for the number one specialty retailer for customer satisfaction in the ACSI customer satisfaction survey and actually had the largest year-to-year improvement of any company surveyed. Our new point-of-sale system is providing a better shopping experience and reducing average checkout times by 50%. We expect this to drive improvement to sales per selling hour as we focus on further efficiency gains. I'm also very excited to share that we will start rolling out an innovative RFID and AI-based technology capability across our stores later this year. Our pilot test this holiday proved highly successful, providing visibility into inventory availability and placement at over 99% accuracy. I'm very enthused about the sales opportunities, inventory productivity improvements, and labor efficiencies we can unlock moving forward. As I indicated last quarter, we are also focused on updating and modernizing our most productive stores and relocating certain stores to ensure we are in the best locations. Last month, we consolidated our store footprint in Manhattan. We moved Aerie from Spring Street to the second floor of our A.E. Soho Broadway location, and introduced our full offline collection to this market. We will also be testing a handful of off-mall locations, which are smaller, lower-cost stores in emerging neighborhood outlets. And this summer, we are testing a new American Eagle store design, introducing a fresh and modern take on both the aesthetics and functionality of the heat stores. As we introduce these changes, we are dissecting all facets of the store channel to optimize how we operate. As we sharpen our focus on store productivity and profitability, this is revealing further opportunities, particularly within our labor model. As a result of channel shift and unnatural build from COVID, digital revenue was down 9% to 2021, yet revenue was up 19% compared to 2019. Digital is a healthy channel, representing 36% of total brand revenue, and it continues to be highly profitable. This quarter, I'm happy to say we are hiring new talent to the team, welcoming David Zhang as our new chief digital officer. David brings vast experience in building successful digital commerce, and we're looking forward to his contributions. Now, turning to the supply chain, after three years of unprecedented volatility and inflation on the inbound side, we are entering 2023 in a much more stable supply chain environment. Lead times are essentially back to pre-pandemic levels, and product costs have normalized. As we manage through an uncertain macro, we are using this to our advantage, planning cautiously and chasing into demand. Buys for the spring season are down to last year, and a significant portion of our fall still remains open. On the outbound side, our investment in quiet platforms continues to provide much-needed capacity, flexibility, and speed for our brands, combined with cost savings. Digital delivery costs in the fourth quarter were down to last year. We are making progress in reducing fulfillment costs and the number of shipments per order, which resulted in a lower delivery cost per order. As Jay noted, although Quiet's third-party revenue has grown significantly to last year, acquiring new customers has been slower than anticipated due to a tougher macro. For 2023, we are focused on reducing expenses to better align with growth trends. will streamline investments in the platform and look to leverage quiet's capabilities to continue to drive benefits both for our brands and for all of quiet's third-party customers thanks and now i'm going to turn the call over to mike thanks michael good afternoon everyone as jay mentioned in response to changes in the environment we took early and aggressive actions to reset our plans we reduced inventory expenses and capital expenditures
spk15: which enabled us to deliver a meaningful improvement in profit and cash flow in the second half of the year. Margins rebounded, and we generated adjusted operating income of $213 million in the second half, compared to $56 million in the first half. We also returned to a positive free cash flow position and further strengthened our balance sheet. Full-year consolidated revenue of $5 billion was second only to last year's record results, and adjusted operating income was $269 million. Fourth quarter results exceeded our expectations, reflecting improved demand and stronger margins. Consolidated revenue of $1.5 billion declined 1% to last year's record result and included one point of growth from Quiet Platforms. Brand revenue was down 2%, coming in ahead of our outlook for a mid-single-digit decline. This included our second-highest holiday sales result in the history of the company, with positive momentum continuing into January. Compared to pre-pandemic fourth quarter 2019, Consolidated revenue was up 14%. Adjusted operating income of $96 million reflected a 6.4% margin and was up 30 basis points to last year and 60 basis points to 2019. Quad platforms produced a $13 million loss, excluding a $4 million impairment and restructuring charge. Demand was lower than anticipated. As Michael reviewed, with macro challenges continuing into this year, We've adjusted plans to reflect a more measured pace of growth for quiet platforms and reset expenses aimed at improving profitability this year. The gross margin rate of 33.9% in the fourth quarter was ahead of our expected range of 32 to 33% due to stronger demand and lower markdowns versus plan as we leveraged our healthy inventory position to control promotions. Compared to last year, gross profit dollars increased 4% to 507 million with the gross margin rate up 150 basis points. Merchandise margins were higher, reflecting lower product and freight costs with a partial offset from higher markdowns. Lower compensation and delivery costs also had a positive impact on margins, offset by higher distribution and warehousing costs and higher rent. Equal platforms had an 80 basis point impact as that business continues to scale. Despite a highly promotional operating environment, markdown levels were significantly healthier relative to 2019, reflecting our multi-year focus on improving brand equity and driving profitable growth. S&A dollars were approximately flat the last year in the fourth quarter, reflecting our ongoing focus on controlling expenses. As Jay noted, we're currently undertaking a company-wide assessment to look for additional savings and efficiencies across our entire cost structure, strengthening our culture to focus on innovation and investment discipline. I'll report on progress over the course of the year. Adjusted EPS was 37 cents per share. Our diluted share count was 197 million, down from 203 million last year. Shifting to the brands, area revenue increased 8% driven by new stores. Comparable sales declined 2% following a 17% increase last year. The adjusted operating margin of 12.2% reflected a significant recovery from the fourth quarter of last year. Area remains a strong multi-year growth and profit story. As we move past tough comparisons and new stores ramp up along the maturity curve, we anticipate comps returning to positive territory this year. American Eagle revenue declined 8% and comps were down 9% following an 11% increase last year. Demand was ahead of our expectations and reflected a sequential improvement from the third quarter. I'm particularly pleased to see a significant improvement in the health of the brand since 2019. While revenue was down 7% compared to the fourth quarter of 2019, adjusted operating profit was up 36% over the same period, and brand operating margin expanded 510 basis points to 16%. Consolidated ending inventory cost was up 6% compared to last year, with units up 4%. Inventories reflect current spring product, and earlier than expected delivery, the supply chain continues to normalize. A&R inventory across the U.S. and Canada is down to last year, with a consolidated increase driven by expansion in Mexico, where we're experiencing growth well into the double digits. We ended the quarter with $170 million in cash and total liquidity of $862 million. Capital expenditures totaled $61 million in the quarter and $260 million for the full year, which is down significantly from our plan at the start of the year. As we focus on strengthening free cash flow and capitalize on the investments made over the past several years, we're reducing annual CapEx to the $150 to $190 million range in 2023. We plan to open approximately 25 new Aerie stores next year with net closures at 80 of approximately 25 stores. As I reflect on the fourth quarter performance, despite operating in a highly dynamic environment, I'm pleased by the multi-year improvement in the health of our business. We continue to see opportunity drive growth and profit improvement over the long term. Moving on to our outlook, as we enter 2023, as the team has discussed, our brands are strong and inventory is healthy. The global supply chain environment continues to normalize, providing improved costs and greater agility. And we have a company-wide focus on expense reduction and operating leverage. That said, visibility into the macro and overall consumer spending behavior is still limited. As a result, we're taking a cautious view. Regarding the current quarter, while we've seen good trends in February with a favorable response to new merchandise, the environment remains choppy. Additionally, it's early in the quarter with our most important week still ahead. At this point, our outlook for the first quarter is for revenue to be in the range of flat to up low single digits and for operating income to be approximately flat to last year. For the year, our outlook reflects annual revenue growth in the range of flat to up low single digits and operating income in the range of $270 to $310 million.
spk14: With that, I'll open it up for questions.
spk05: Thank you. We will now 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 that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment, please, while we pull for questions. Thank you. And our first question is from Jay Sol with UBS. Please proceed with your question.
spk00: Great. Thank you so much. Maybe just two-part question. One, just first on Aerie, it sounds like there's a lot of exciting things happening just in terms of fashion. I mean, I think in the slide deck they talked about still you see it as a $2 billion brand. You just talk about the long-term opportunity you continue to see with Aerie. And then maybe, Mike, just on the guidance that you gave for first quarter, it sounds like February has started strong. You're looking for flat to low single-digit growth.
spk11: Oh, sure. Hi, Jay. How are you? Good morning. As we, you know, Mike mentioned it, as we start to hurdle these new store openings, we feel like there's definitely some comp growth in these stores. Because as you know, you know, we go into a new market. We have to get the digital side of the business up and going. And we're already seeing some new end results as the quarter, you know, starting Q2. Our quarters from a comp perspective, we've increasingly gotten better. So I think it's proof of the pudding there. that there's some upside as we hurdle these new store openings and really like let those businesses mature. So we're excited about that. Regarding just the product side, Jay, I mean, we could not be more excited. You know, we have so many new categories, one being offline. This business is on fire. Let me just say that. Q4 delivered incredible results over last year. We've been hurtling an incredible launch year over year of the of the crossover flair. It's our first new and coming, and it's our best, and nobody can comp this item because we own it and it's ours. The one thing I want to say about Aerie, and this is true, our customer awareness. So our customer awareness about this, it's up 25% year over year in Q4. That speaks volume. That means that the store openings are really starting to take hold. We're introducing the brand to new customers. Don't forget, we're still in expansion mode. We're about 500 stores right now. We're opening about 20 more this year. So all these new stores hopefully pay off as far as brand awareness. From a product standpoint, we're all over it. We're excited about offline. That is presenting growth for us. New businesses, including fleece, which we've owned, but I really think we're dominating there from a competitive standpoint. And then, you know, for the future, we're really going to double down on Intimates. We feel like that's a category that we can hone in on and really innovate. Our smoothies launch this year was incredible. In fact, some of those frames have really taken hold for us, and we're really going to reinvent that business. So more to come. You know, as you know, we're never going to stop innovating this team. I can give you a little insight. Next year is Aerie's 10-year Aerie Real anniversary. So everyone can be excited to see what's to come because the creative team's not stopping.
spk00: Great. And then, sorry, I think I got cut off there at the second of my question, but just for Mike, just on the revenue, it sounds like for Q1, it sounds February has been good. You said choppy, you're looking for flats, up low single digits. Can you just talk about if your quarter to day trend so far is above or below that? And then secondly, on gross margin, how are you feeling about gross margin Q1 sort of up or down year over year?
spk15: Hi, Jay. Thanks. Yes. Just to confirm the cadence of revenue that applies to our Q1 guidance. So coming out of December and ICR, we talked about a quarter date at that point, we were negative 3% brand revenue. But we did message that January, we saw some uptick in trend at that point. That continued through the rest of the month, netting us to a minus 2% brand outcome for the fourth quarter. And then, you know, That trend actually has continued through February, so the combined January-February result here has had some consistency to it, which is giving us confidence in this flat to low single-digit guidance. And then for gross margin, yeah, we're looking for a range of similar to last year, or not range, but our guidance of similar to last year income on that flat to low single-digit revenue implies some gross margin improvement. I think we're Still looking at some freight headwinds from last year that we recaptured. Obviously, the air freight in Q4 and some other freight headwinds, expecting some of that to come through in the first quarter again. So definitely some improvement, a bit of improvement assumed in our gross margin within that similar to last year income guide.
spk03: Yeah, okay. That's very helpful. Thank you.
spk05: Our next question is from Matthew Boss with JP Morgan. Please proceed with your question.
spk07: Great, thanks. Jen, could you elaborate on early spring selling trends that you're seeing across categories? Maybe if we touched on both the American Eagle brand and also Aerie.
spk11: Sure. Hi, Matt. How are you? As I mentioned on my last answer, it's nice to see Comps in both brands, you know, we're getting better quarter over quarter starting in Q3, so I'm excited about that. Look, it's early on. It's February. But I have to say that there's a lot of encouragement from the teams. AE, you know, I'd like to reflect on American Eagle for a minute. First of all, you know, we've really assembled a world-class team here. I'm very proud of the work they've done. And we've been up to really right-sizing that business. and um you know during these tough times it allowed us to do so while also protecting our bottom line as you can see um but we've been up to you know building a profitable base um a healthy customer base i think that's the most important thing i can articulate right now on the american eagle side um you know we had a lot of customers in the past that only came to our brand once and they were promotional customers we're up to getting the best customers in our brands um so starting with american eagle I think we're really here. I think we've right-sided the business, and now we're looking for growth opportunities. So early on, Matt, we launched 24-7 and another new line, 77. But let me take a step back to say that women, we're starting to see a nice turnaround here. I think we're getting into the right balance of the assortments, and I just really want to highlight that. It is about the balance. Denim had been a little softer recently. but we saw other trends happening out there in other bottoms, and I think the team did a nice job adjusting and really going after, and we're starting to see some nice results there, as well as just outfitting. Now we're seeing great tops, you know, come to life. Our tops business has turned around in women's, which is so exciting to see. And then in men's, just going back to we're learning, men's, you know, that customer is a little slower to take off, But I like some of the early reads in our new 24-7 athletic business, as well as 77 is a little bit of a surprise. It's premium denim. We really worked on it. We wanted to perfect that line. We believed in a higher-priced business. We own denim as a company, and why not service a new customer? And early reads have been spectacular. Yeah. We have two new potential growth vehicles for the company, as well as it's just nice to see women's, that business round out, Matt. And all I can say is because of our test and scale and our logistics platform and our ability to get goods here, we're pretty pleased on how we can chase these goods and get back into business on the American Eagle side. And then Aerie. Look, it's a little early to read SWIM, but we've seen some nice momentum starting in February, but coming out of the end of February, some really nice results there. I can't even talk enough about the apparel side. And what we're up to is really going after intimates for the future.
spk07: Great. And then maybe, Mike, as we break down your full year operating margin guidance, could you just help bucket the embedded assumptions if we're thinking markdown rate versus IMU recapture, maybe relative to just potential offsets to consider on the expense front?
spk15: Sure, Matt. I think we're definitely assuming freight cost recapture. So we saw it in Q4. We'll start to see it here in Q1. So our guide for the year includes the assumption that we know that product costs are improving. Speed and agility in the supply chain is here now. We're back to case mode. We're leaving significant open to buy, so that should allow us to – will allow us to ensure inventory levels are appropriate for the full year. So, both freight cost recapture and then not repeating that charge we took in Q2 associated with cleaning up the first half inventory. The offset then would be some expense growth, some level of incentive assumption that's We did not incur it all in 2022. And then just some typical annual wage costs that we're looking to offset and some other just annual expense growth categories. That's what's embedded in our assumptions. Great. Best of luck.
spk14: Thanks, Matt.
spk05: Thank you. And our next question is from Paul Ruiz with Citibank. Please proceed with your question.
spk12: Hey, thanks, guys. I'm curious if you could talk about the performance of Aerie new stores from this most recent year. Compare that to previous years, just what you're seeing in terms of the new store ramp. And then also curious if you could size for us the size of the offline business within Aerie. And just what are you counting on that business to do in terms of growth for 23 versus the rest of that Aerie business? Thanks.
spk15: Yeah, Paul, I can start with the new store productivity. I think we're actually really pleased with the new stores out of the gate. I think we described it as they're achieving pro forma expectations, which ties to our typical guidance or communication around two- to three-year payback on those investments. And that's what we've seen out of the gates. I think really in the back half of the year, recent quarter, and what we're continuing to see here in the spring is we've described and others are too, are returned to stores. So I think that's actually having a positive impact on the performance of these new stores. Store traffic is healthy in general. As we know, business is coming through stores a little more right now than digital. So digital traffic is under pressure, but stores are really healthy. So it's contributing to that area of performance. Then offline size of the business, Jen, I don't know if you want to take that piece of the question.
spk11: Just about, sorry, I might have missed that. I fell off the line for a minute. So offline, meaning are we encouraged by the early results? Absolutely.
spk15: Just the size of the business.
spk11: Let me just say it feels like Aerie in early days, we're growing at a very rapid rate. We are, you know, learning about the business. We have, you know, some different store formats so that we can really learn to leverage. It's interesting, our new stores we're feeling very encouraged by, but we still have a portion of the business inside of the Aerie, you know, inside of select Aerie stores. Whether there's an offline store in the mall or not, we still are learning in the Aerie stores. What that, you know, tells me is that as we build out offline, we're looking and testing new businesses inside of the Aerie store. Because the only thing I can say is that every day I get a letter from a customer asking, why can't Aerie do this category? Or why don't we have more in this Intimates business? Or why or why? So I'm pretty excited about having a new business that we can really scale. And I think if I look at the run rates, If it's not faster, it's equal to Aerie's extreme, you know, quarter over quarter, double digit growth year over year prior to getting into the pandemic. And even during some of those years, I mean, the pandemic years, we still did great. Look, the business is about 30% of Aerie and more to come, but we are testing new categories every day. And what's great about our offline business and the way we set it up, it's not only just lifestyle. they're really starting to trust us in the performance side of the business. So again, that really opens up new opportunities.
spk13: And Paul, this is Michael Rampell. I just want to stress what Jen said earlier. I think it's really important for the conversation, which is we've seen sequential comp improvement in Aerie stores each quarter from second quarter and even here at the start of Q1. And what that really does is it supports our hypothesis that we opened over 130 Aerie stores in the last two years. Those stores, as they mature, they're going to start comping. They're going to start a multi-year trajectory of comp, which is what all our data and all our history tells us. And they're going to bring new customers into the brand and grow not just the store comp, but also the digital comp. You know, early signs, if you look at the last few quarters and you look at these stores as we're anniversarying them, are very positive that what these stores are doing for the business is going to mirror history, which is going to give us multi-years of growth. And we got into these stores, obviously, during COVID, you know, at a very advantageous time to get long-term deals done for that brand. So it's very encouraging what we're seeing right now in the area of business. Thanks, guys. Good luck.
spk03: Thanks, Paul.
spk05: Thank you. And our next question is from Adrienne Yee with Barclays. Please proceed with your question.
spk04: Great. Thank you. Nice end to the quarter, everybody. Jen, I'll start with you. So kind of in other kind of conversations, there's been talk about the teen consumer type wallet there and a level of price sensitivity there. It does not seem like that that is necessarily impacting your customer. In fact, you're pulling back on promos. So just wondering, you know, I'm sure it's the product. So that's, you know, first and foremost. But what are you doing differently to engage and create that loyalty? And then how much higher are the AURs versus 2019? How much of the promo versus initial retail? Thanks so much. And the stores look great, by the way.
spk11: Thank you. Our AURs are up. Do you mean on the year or on the quarter? Mike can get a little bit more specific for you. But regarding what we are doing differently, first of all, we've been highly focused on loyalty customers, our loyalty files up. But again, in total, but again, it's about the health of our file, right? Because they're our best vendors. They come back the most to our brands. And we want more of those customers. So that's why we're just incredibly focused on our loyalty program. And you'll see more there. We have some really great findings and how we can even build that program stronger and better. Adrian, I'd like to say that, first of all, as I mentioned, Aerie doesn't quit. Like we've been going after that brand year over year, inventing, reinventing, newness. And as I mentioned, As you can see, our customer base is growing at an incredible rate. In fact, I just looked at a chart. I believe it's over 10 million customers at this stage, like quadrupling the base. It's incredible what we've done in Aerie, and it is about building that brand awareness, as I mentioned, and getting into new markets and learning about those customers and building that community, Adrienne. We do this grassroots in both brands, and I'll get to AE in a minute, but We have ambassadors and those tentacles and Sunny and the store team have done an amazing team using our associates to reach our customers. And Michael said it even best, right? Our store experience and our customer experience, you heard those results, they're like no other and that's a winning edge for us and it's a place that we're not going to quit. That's the Aerie story. In AE, as I mentioned, we're sort of rebirthing the brand, sort of pulling back to go forward. We're seeing new opportunities now. And in doing so, I'd like to say we kicked off January with our new launch of AE 24-7, but let's not forget what we're up to, okay? Some of the new stats are saying over the past two years, more recently, so January into February, We are seeing Gen Z take a greater hold on the AE brand. I'm saying this, and I mean this. It's like the Outer Banks. We just did a collab with Outer Banks. It's the number one teen show out there. The product sold out. We're going to do collabs. We are going to get this customer into our brand. And what we've been doing so great, Adrian, is they're living with us. They're staying with us. We've mastered that. Now what we're up to is getting this customer into American Eagle, seeing the new American Eagle, seeing all the work that we've done and the trends. We're liking what we're seeing. You know, we just had a jean that just went viral on TikTok with, I mean, the number one TikToker out there, Alex Earl. Every girl watches her and this jean is on fire. It reminds me of the old days of the crossover, you know, legging and airy. We are chasing that jean. And you know what I love about it? The most important thing is if you can get organic winners into your brand. Organic customers and organic play, organic social media, all of that means more to our customers and what our brands stand for, which is 100%. We're authentic. That's what we stand for. Aerie's real. AE's authentic. And if we can get more of those customers and we can get that buzz, that's what we're doing. So Tons of positive signs. We have collabs you're going to see left and right, back to school. We have another great collab. We just have some really exciting things coming, and we're going to now use this new base in AE to kind of launch ahead and move forward. That is super helpful. Go ahead.
spk15: And Adrienne just answered the second part of your question on AUR. AUR is still up over 20% to 2019. I think we talked about that being a combination of control promotions, more targeted promotions versus full box offers, some structural changes in our loyalty program in terms of giving away free jeans historically that we eliminated during the pandemic, which we don't plan on going back to. I think targeted increases in ticket where we have not seen price resistance and where we can see the customers willing to pay for it and That's a continued strategy. We built up that brand equity through the pandemic and our plans are set to not give that back.
spk04: Thank you very much. Super comprehensive and super helpful. Best of luck.
spk14: Thanks, Adrienne.
spk05: Thank you. And our next question is from Alex Stratton with Morgan Stanley. Please proceed with your question. Great.
spk01: Thanks so much for taking my question. I know last year you guys had mentioned this path to kind of $6 billion in sales and a low teens EBIT margin, and obviously that's very different from where you guys are landing this year, just given what's happened in the last year or so. So just taking a step back, are those numbers still in play at all, or how should we think about those targets and the revenue and margin trajectory longer term? Thanks.
spk15: Thanks, Alex. I think at some point we'll come back out and talk about longer-term targets. We're obviously very focused in just navigating the current environment, and our guide for 23 includes that. I think we've got the firepower in the company and across our brands to get to $6 billion over time. Again, we can discuss later. We'll provide maybe more color when we think that's possible. And then double-digit operating margin is still our goal. The guidance we just provided for this year is kind of keeping us in that mid-single-digit range, call it 6%, maybe 6% to 7%. But as Jay noted in our prepared remarks and was in our press release, we're embarking on a project here this year to really unlock across our entire cost structure the opportunity for us to leverage that continued revenue growth in a different way than we've been able to in the last few years or in our history. So more to come on that project. It's geared toward exactly that, structural changes to our operating model that allow us to leverage revenue in a different way and path us toward that 10% or double-digit goal.
spk03: Great. Thanks so much.
spk05: As a reminder, it is star 1 if you would like to ask a question. Our next question is from Marnie Shapiro with Retail Tracker. Please proceed with your question.
spk10: Hey, guys, congratulations on a great end to the year. And, Jen, that gene, that gene, whenever we're looking for it, that gene.
spk11: Barney, it's the best. We just got a new delivery in.
spk10: That gene. But, Jay, I actually have a big-picture question for you. I completely understand the caution about 23. You know, there are still some headwinds out there, and comparing to 2022 is not, which wasn't a normal year by any stretch. And I appreciate reviewing that. the costs for the company in 2023. But, you know, you did reinstate the dividend, which suggests you and the board have a level of confidence about the business. So I'm curious, you know, from your vantage point, what are you seeing that's maybe not yet in the numbers that you can share with us?
spk16: You know, we see, like, good momentum going the right way. You know, as we said, like, last month was a good month. You know, we feel very, you know, we've And even though we don't know what the future is going to look like, you know, we are very optimistic. You know, it was very interesting. This past week, we had our international partners in. And I got a call from one of our major partners and said to me, I've been coming for like 10 years, and this is the best I've seen the line look. So we're very optimistic. I mean, I think our, you know, as Jen was saying, you know, we developed the new AE-77. We're getting good traction on that. It's 24-7. We think it's going to be very big.
spk10: So it's mostly product-based, which is really where you guys shine anyway.
spk16: Yeah, it's going to be product-based, so product-based will help drive it. And at the same time, you know, as Michael Rappel was saying and Mike Mathias was saying, we're looking at the real estate strategy a little different. We're looking at how we take each market separate and where the best locations in those markets are. And our goal is to make sure that we have stores and the best locations in those given markets.
spk10: That makes a lot of sense. And then, Jen, if I could just ask one quick follow-up to the AE Gene situation. You've had some very big hits in the store that I've seen, and I'm curious, has the market opened up enough that you can chase back into that product? I'm not calling out the product in the public forum for a reason, but... Do you have that ability to now chase what I'm seeing selling out very quickly?
spk11: Yes, absolutely. And we've really changed our testing process in American Eagle so that we can be a little bit more nimble and we can be a little bit more flexible, not only with silhouette, but with wash. You know, I've learned a lot in my couple of years in American Eagle and It's not just about one thing in a jean. Sometimes it's about wash. Sometimes it's about a new fit. And that's where I think we can really dominate because of the way we test and go to market. We are seeing a lot more agility there, Marnie, to your point. And we're seeing trends improve in denim, which is good news, at least in American Eagle, albeit we're offsetting it with newer ideas at this stage. And that was intentional. We sort of forecasted this, so we have other new ideas to help offset. But I'm looking forward. Jeans never go away. That was the funniest commentary. I could actually quote Roger Markfield from years ago. When do jeans and T-shirts in America ever go away? They soften, and then we have to be prepared for the next trend. And I think this team did an outstanding job with the spring assortment, making sure that we're leveraging the new trends in bottoms where we do do an incredible job. And now, as I mentioned, Marnie, we have new tops and other things that are working and that we can really trend and chase. So look, there's good news here. It's early on. We like what we saw in February, but I also like our ability to react and what we're reacting to and the nimbleness. So There's more to come here, you know, and, you know, hopefully you'll hear this enthusiasm with me at the end of Q1.
spk08: Thank you so much, guys.
spk16: Also, Jen, like we have other businesses, too, that we're very excited on. We have our Todd Snyder business, which is growing very strongly, and we're very excited about that. Unsubscribe, we're excited about. We have a lot of deposit things going on.
spk03: Thanks, guys.
spk05: Thank you. Our next question is from Jonna Kim with TD Cowen. Please proceed with your question.
spk06: Thank you for taking my question. Just curious about the quiet logistics platform and how you're thinking about long-term. You mentioned that the revenue growth and profitability, you're revisiting that for 23. What's sort of your assumption there and how would you still think about the long-term trajectory And in terms of the ARECOMP growth, how should we think about the cadence as we start to lock the impact of new stores? Thank you so much.
spk16: You know, you talk about quiet. It was a valuable acquisition. We need a capacity to be able to fulfill our orders for our brands. And quiet gave us the efficiencies and speed. And at the end of the day, we still believe That if you don't, if you don't win it at the logistics, you're not going to win the model, especially retail in order to compete against everybody. So we're still committed to that. Uh, you know, we want to get, you know, we want to get a, we want to get like a better bottom line there. And Michael Rappel could talk about that for a second.
spk13: Yeah, no, thanks Jay. I mean, you really can't separate the two, uh, issues. So one is quiet provides tremendous support for our brand and our business. It gave us capacity, like Jay mentioned, faster delivery times, and of course, we've consistently reduced our delivery cost per order to customers over the last couple years, which is pretty unique in retail. But like I said, the third-party business just hasn't ramped to our expectations. It saw great growth. It grew almost 40%, but that was below what we expected, and it did it at a margin that was below what we expected. So While we're not giving up on the business at all, we still think it's going to be a very valuable business someday. We are resetting our plans, and we're going to pull expense out of that business. We're going to eliminate unprofitable service lines in that business, and we're very committed to reducing the loss on a full-year basis. So from a year-on-year basis, it's going to go from something that was a headwind to in 2022 to something that provides benefit in 23. And again, over time, we still believe this is going to be a successful and profitable business for us.
spk03: Was there a second part to the question?
spk06: Yeah, just on the . Yeah.
spk15: Yeah, I think if you think about the minus 2% for fourth quarter, John, I think we talked about the fact is all that non-comp 150 stores that we added over the last couple of years, the 60 we added this past year, even more specifically is those anniversary, that comp gap that you do the math on Q4 is a 10 point gap with total revenue up eight comp minus two. That's going to close. even further into the Q1 as we anniversary some of the Q1 openings last year. So on the similar kind of total growth rates, we do expect area comps to turn positive as early as this first quarter and definitely positive for the year. And Michael described earlier how that ramp is going to impact the business as a whole. But from a gap perspective, just to kind of give you that specific metric, we use the comp, the total growth versus comp gap will close and we'll be in positive range and 23 is our expectations.
spk06: Thank you.
spk05: Thank you. Our next question is from Janet Joseph Klopenberg with JJK Research. Please proceed with your question.
spk09: Hi, everybody. And it's nice to see the improvement going on. I'll be quick. I wanted to ask Jen what her overview is on the intimates category. There seems to be softness. across the industry, Jen. So maybe you could tell me what's going on there. And also on basic leggings, black leggings, I'm starting to see a lot more promotions in the industry. And I'm wondering, you know, are customers gravitating more to fashion leggings? And just lastly for Mike, given your guidance for, you know, flattest revenues this year, a flat top low single, I think, Should we expect inventory to track in line with that? Thank you.
spk11: Yeah. Hi, Janet. How are you?
spk09: Hi.
spk11: Good. Thank you. You know, Intimates has been a little volatile, I will say. You know, we're holding our own as far as market share, but it has been a little up and down. With the launch of smoothies, as I mentioned, we're learning new things in the business that I think gives us – the gateway into new ideas and honestly that's what we really need to do i i think the team is up for new challenges and new innovation and intimates and it's something you're going to hear me talk a lot about in the future it it has been a little bit interesting it's the tale of two cities there is you know sort of a built-up business that's happening again but then it's really almost nothing so um you know and what we want to do is play in what is meant for aerial right what's right for our business and i think we've learned some things over the last year and i think you'll see us start to pick up momentum and some of these new ideas and really um attack you know what we own and um you know what i think we we are famous for including you know bralettes being one of the businesses that i would like to say we really You know, we're one of the first to really, you know, dominate in that business. When it comes to black leggings, yeah, there are a lot of black leggings out in the industry. You're right. And I think we are starting to see more fashion. Interestingly, not just in black leggings or leggings, but in other parts of the offline business. And I do want to congratulate the team, Abby and team, for really going after some new ideas in that business. You'll start to see us really marketing to them. And early reads, we're feeling really good about it. So again, you know, and then how do we reinvent the black leggings? We have new launches coming forward, starting in Q3, a really exciting launch in Q4 that I think will definitely separate us from our competition. And we're going to continue to you know, to, um, build on all the equity that we've built on in both brands, as far as building our AURs, um, building that quality, um, and the, you know, the customer's willing to pay. We're seeing that because, um, they trust us. Um, so I think that's when it comes to the legging business, that's what we have to just continue to work on. So, and, and, and get that trust and, Hopefully, they'll grow with us the way they already have, those customers. So, thanks, Janet.
spk15: And hi, Janet. On inventory, by the time we get to the end of the first quarter, as we talked about, total inventory is projected to be down. As we said today and actually at the end of the fourth quarter, A&R, U.S., and Canada inventory was down high single digits. We're expecting that to actually, by the time we get into Q2, to be down even further. which really it should be, right? We were against the elevated inventories last spring that we had to clean up. You'd expect us to be down pretty significantly on this guide of flat to low single digit revenue increase. Then when you get to the back half of the year, knowing all the actions we took last year to right that inventory for the back half, which drove the positive results we saw in Q3 and Q4 in general, it'd be really just philosophically back to inventory growth being below sales growth expectations similar to below, and that's what we're planning as of now.
spk02: Okay, we're running up on time now, so I'll turn it back over to Jay for some closing remarks.
spk16: Okay, entering 2023, we are in better position. Our brands and operations are healthy. Given macro uncertainties, our outlook is cautious. We will stay disciplined on expenses and inventory. If demand is stronger, we will strive to deliver better results. Thank you for joining the call. I look forward to updating you on our progress next quarter. Thank you.
spk05: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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