American Eagle Outfitters, Inc.

Q1 2023 Earnings Conference Call


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spk14: feels Oh Greetings and welcome to the american eagle outfitters first quarter 2023 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 mehan Thank you. Ms. Meehan. You may begin Good
spk01: afternoon everyone joining me today for our prepared remarks are jay shot and steen executive chairman and chief executive officer Jen foyle president executive creative director for ae and ari Michael rempau 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 it may differ materially based on risk factors included in our scc 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 gap and non-gap adjusted basis Reconciliation of adjusted results to the gap results are available in the tables attached to the earnings release Which is posted on our corporate website at In the investor relations section Here you can also find the first quarter investor presentation And now I will turn the call over to jay Good
spk07: afternoon. Thanks for joining us today Entering 2023 we built our plans for the year cautiously balancing continue optimism for our brands with the flexibility to navigate uncertainty in the macro environment Exiting the first quarter. I am pleased to note that this strategy delivered for us Our team successfully managed through the quarter and achieve results in line with plan Consolidated revenue of 1.1 billion dollars was up to last year And marked a new first quarter high to the company adjusted operating income of 44 million dollars Improved slightly to last year We continue to make progress strengthening the balance sheet and redeemed our outstanding convertible debt ending the quarter with healthy liquidity My brand first quarter revenue defined two percent at american eagle and increased 12 at airy Despite a tough spending environment both brands demonstrated a sequential improvement from fourth quarter trends We made progress at american eagle with profits up to last year and top line trends moving in the right direction We remain steadfast in our focus on healthy and profitable growth Although still early new extensions like ae 77 Our premium capsule and 24 7 are entering into men's activewear are seeing encouraging results Erie remained a fan favorite delivering record revenue and profitability Our activewear extension offline continues to carve out a unique identity in the marketplace With its high quality assortment and vibrant spirit Additionally investments in new stores are increasing brand reach and awareness Providing a tremendous foundation for erie as it continues to scale in the coming years We took action to restructure required platform to strengthen profitability As I mentioned last quarter across aeo We have initiated a formal program to find further cost savings and uncover more efficient ways of working We have a powerful portfolio brands with tremendous value still to be unlocked In the near term, we are highly focused on managing through this macro environment As mike will review we're maintaining strong disciplines and seeking opportunities to optimize profitability this year and in the future With that i'll turn the call over to jen
spk03: Thanks jay and good afternoon everyone I'm proud of how our brands perform this quarter despite choppiness in the retail environment We showed up well across stores and online with fresh styles and chased into high demand items profitably While promotions were up to last year we participated strategically protecting our multi-year progress in building brand equity Our first quarter aur was the second highest in history down three percent to last year's record result yet Up over 20 to pre-pandemic levels across brands Our customer kpis were healthy in the first quarter. We grew our total customer file and also expanded our loyalty customer base In fact our real rewards loyalty program was recognized by newsweek as america's fourth best program in apparel this year Moving on to the brands Aerie had a strong quarter with double digit revenue growth and positive comp growth We saw an incredible customer response to new styles in our core apparel collection across fleece bottoms and tops Seasonal tops and new bottoms silhouettes in particular were key drivers of new customer acquisitions Demand for our active wear extension offline by aerie also remained healthy with strengths and tops Sports bras active shorts and fashion items Swims and intimates were soft this quarter consistent with trends we've seen in recent periods as our customers focus on other categories We are continuing to engage our customers with exciting content in the first quarter our find your own wonder campaign supporting our ypk collection Included partnerships with key influencers and publications like who what where This month aerie launched the real youth summer campaign celebrating our new summer collection including our fan favorite pooled to party capsule Turning to american eagle revenue was down to last year yet profits were up as we continue to focus on healthy sales We made progress across several major categories. For example women's tops. I'm pleased to say return to growth We also continue to see exciting comps in non-denim bottoms and denim trends improved throughout the quarter Men's was a bit soft where I believe we have the opportunity to lead with more newness As noted last quarter following several years of work to streamline the ae brand and improve profitability, we're honing our focus on growth I'm pleased with the response we've received to ae 77 our premium denim collection and 24-7 the men's activewear line We are testing and scaling thoughtfully as we position ae for profitable growth We are continuing to think creatively about how we leverage marketing to drive momentum for ae In the first quarter our organic partnership with alex earl one of tiktok's fastest growing influencers generated strong buzz Videos promoting ae products have received six million views to date and increased sales velocity of promoted products Additionally, we introduced an exclusive partnership with elf cosmetics bringing together two powerhouses in the gen z world The collaboration was first of its kind and sold out within minutes of hitting our website Looking ahead. I am excited by new trends in casual wear While the macro is clearly tough. We will lean into high quality innovation and marketing to draw in our customers I'm incredibly grateful to the ae and ari teams for their hard work and solid execution this past quarter Thank you. And now i'll turn the call over to michael
spk05: Thanks jen and good afternoon everyone i am encouraged with the progress we are making across our operations brands and channels Given ongoing uncertainty in the macro. We've been very focused on making operational improvements Across the business with an emphasis on finding efficiencies in labor inventory and expenses This is a multi-year journey yet the early impacts we are seeing provide compelling proof points of the work underway In the first quarter store revenue increased five percent as customers returned to in-person shopping and new ari stores continued to ramp up I am pleased to note that store labor costs declined to last year As we achieved efficiencies in our labor model offsetting both wage inflation And payroll related to new stores Our focus on the store fleet is to ensure that we are fueling the best stores in the best locations with the right inventory The right staff and the latest new technology All to deliver outstanding customer experiences and while finding efficiencies and cost savings at the same time We are taking steps to enhance our operational excellence across all these areas as we focus on maximizing roi and store productivity This includes the rfid and ai-based technology. I discussed last quarter Which provides accurate inventory and location visibility within our stores As we roll out this new capability, I believe the benefits to our business will be meaningful Yielding efficiencies and inventory productivity On the digital side revenue declined four percent as customers returned to in-person shopping And demand continued to normalize from elevated builds during the pandemic New leadership is bringing innovative ideas to drive improvements to online kpis Specifically we're you we're looking at greater use of analytics and testing to drive increased engagement traffic and conversion I remain excited about what we have in the pipeline for 2023 We've also seen positives in our supply chain On the outbound side quiet platforms innovative fulfillment model continues to drive incremental benefits to our brands Digital delivery costs in the first quarter were down to last year and leveraged as a percent of digital revenue We reduced shipments per order and found efficiencies in fulfillment costs All while delivering orders to customers faster since the first quarter of 2019 Digital delivery costs have leveraged nearly 100 basis points as a percentage of digital revenue As mike will review we took action this quarter to restructure the third party side of the platform Reduce expenses and focus on core services that drive value both for american eagle and clients customers We now have a leaner organization that will position us well for the future We see opportunities to leverage quiet fulfillment capabilities to unlock even greater efficiencies in our operating model This includes optimizing inventory placement buys and replenishment as we work upstream through our supply chain As expected 2023 is providing a much more stable supply chain environment with lead times and product costs Normalizing back to pre-pandemic level This was incredibly beneficial to us in the first quarter It enabled us to plan cautiously and successfully chase into strong items With continued choppiness in the macro environment. We are approaching the balance of the year with a similar strategy From where we sit today. We are leaving a sizable portion of inventory open As we focus on maintaining agility to read and react to demand signals in the market As I said earlier we are early in our journey to strengthen our operating model We still see significant opportunities across both labor and ongoing inventory efficiencies And we are also going to be keeping a sharp focus on expense reduction Thanks, and with that i'm going to turn the call over to mike
spk13: Thanks michael. Good afternoon everyone As expected the environment remained choppy in the first quarter Yet i'm pleased with how we manage through monthly variability We entered the year with a healthy inventory position product cost favorability and renewed agility in our supply chain This enabled us to operate with flexibility Strategically control promotions and deliver on our first quarter plan Consolidated revenue of 1.1 billion dollars marked a new first quarter record for the company increasing 2% to last year Adjusted operating income of 44 million was up slightly reflecting an operating margin of 4.1 percent Compared to last year gross profit dollars increased 6 to 413 million with the gross margin rate up 140 basis points Merchandise margins increased to last year led by a favorable transportation environment with a partial offset from higher markdowns Markdowns remain below pre-pandemic levels as we maintain focus on healthy promotions And preserving the progress we made in rebuilding brand equity over the past several years Within gross margin we also leverage compensation and delivery costs partially offset by rent expense linked to new store openings Sg and a expense of 312 million dollars was up five percent to last year driven by corporate compensation and advertising Store compensation was down despite new store growth driven by efficiencies in our labor model We also saw a reduction in professional services another area that has been a focus over the past several quarters Depreciation increased primarily due to investments in new stores In the first quarter we took measures to restructure quiet platforms and strengthen profitability We reset expenses to align with the current pace of growth in a third-party business This included downsizing the workforce and streamlining costs to focus on areas where we see the greatest long-term runway In our first year of ownership, we've seen significant benefits to our brands from quiet platforms innovative delivery and fulfillment model From here as michael mentioned we're focused on the next layer of benefits Including rethinking how we buy place and replenish inventory As noted last quarter We began a company-wide assessment of our entire cost structure as we prioritize unlocking greater profitability in our business And rebuilding long-term operating profit margins back into the double digits over time This includes a full review of expenses across the pnl As well as processes such as clearance management as we continue to explore more efficient ways of working I look forward to sharing more on this in the second half of the year So just the dps was 17 cents per share. This excluded eight cents of charges primarily due to two impairment and restructuring related to quiet Our diluted share count was 197 million down from 220 million last year Turning to our brands we were pleased to see trends for both ari and american eagle improved sequentially in the first quarter Ari revenue increased 12 percent with comparable sales up two percent As jen noted new product assortments resonated well Additionally, we saw a nice lift from new stores opened over the last two years as they ramped up along the maturity curve Aries operating margin of eight fifteen point eight percent Improved 240 basis points to last year driven by normalizing freight costs as well as rent and expense leverage American eagle revenue declined two percent and comps were down four percent to last year As jen noted we have rebuilt the foundation of the a brand over the last several years Eliminating unproductive skews and closing down or relocating unprofitable stores This allowed us to deliver better profitability year on year despite lower sales With the bones of the brand in a healthier place. We're now focused on pursuing new ideas that can drive profitable sales moving forward Consolidating ending inventory cost was down eight percent compared to last year with units down nine percent A and area inventory across the us and canada in particular ended the quarter down double digits to last year As we continue to buy cautiously in the current environment Looking ahead we are maintaining inventory discipline and expect second quarter inventory to pace below revenue In the first quarter we successfully redeemed the remaining balance of the principle associated with our convertible note position We ended the quarter with 118 million dollars in cash and continued to have healthy access to additional liquidity through our revolver With total liquidity amounting to 659 million Capital expenditures totaled 46 million as we continue to prioritize free cash flow generation We're investing selectively and focusing on leveraging the infrastructure we have We now expect four-year capex to be in the range of 150 to 175 million Down from our prior guidance of 150 to 190 million at the start of the year We continue to expect our consolidated store count in 2023 to be roughly flat to last year Reflecting approximately 25 new ari store openings offset by approximately 25 net closures for the ae brand Moving on to our outlook As the supply chain continues to normalize we're seeing product cost favorability and increased agility in our operations Yet the environment for discretionary spending remains volatile Over the last several weeks business has slowed from the first quarter While it remains to be seen that this trend will continue at this time We are guiding the second quarter revenue down in the low single digits with operating income in the range of 25 to 35 million dollars We expect a gross margin recovery from last year as we cycle pressure from end of season sell-offs and elevated freight costs Sgna is expected to increase in the low to mid single digits and depreciation expense is expected to be similar to the first quarter For the year, we see revenues flat to down low single digits and operating income in the range of 250 to 270 million dollars As discussed we're highly focused on finding efficiencies and savings across the organization and we'll continue to provide updates on our progress With that i'll open it up for questions
spk14: Thank you We will now be conducting a question and answer session If you would like to ask a question, please press star one on your telephone keypad A confirmation tone will indicate that your line is in the question queue You may press star two 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 star key One moment, please while we pull for questions Thank you our first question comes from paul lehuez with city, please proceed with your question Uh,
spk08: thanks guys. Um, can you talk about what has changed so far in the second quarter and where you adjusted? Your expectations down Uh for the back half, uh as a result of that And then mike, uh, you know talking a lot about cost savings and efficiencies Um, when are we going to see that hit? I'm curious if there's anything coming in the second half Uh or any concrete examples of where you might be finding Savings to date as you go through and do that work. Thanks
spk13: Yeah Yeah, thanks both mike I can um talk about the trend of the business obviously we talked about first quarter Um revenue up to comps down one and a half um Definitely choppy as we keep using that word to describe it um felt good about how things were progressing with uh through the Spring break shifts easter shifts got to the end of april and now into may and things have slowed down a bit So again may is just our Smallest month of the quarter. We're four weeks in um Definitely some for us. We're keeping an eye on schools are letting out It's looks like it's gonna be later this year that could have an impact. We're being cautious about what we're seeing these last few weeks Majority of the quarters ahead of us still probably 75 plus of the volume But the the guide's cost is just based on what we've been seeing for the last several weeks Uh your second question on cost savings. We're four or five weeks into pretty aggressively laying out a road map for Opportunities some of which we haven't waited on as michael talked about store labor was a good result in the first quarter He's been working on that since last year Services also a good story in the first quarter that work continues We're pulling down our capital spend more to benefit to impact appreciation Looking forward past, you know in future quarters and really next year and beyond And then as I mentioned my prepared remarks, I mentioned clearance inventory. That's something else that is underway as we speak Could have some benefits. Um Definitely for this year Maybe even the second quarter a little more than we've provided in our guide that's something we're not locking down right now in terms of plans And it's really just about how we manage to clearance our end of season sell-off process It's basically part of the operating model like i've been talking about within our 4.7 billion dollar cost space Something we've been looking at and we're looking and we're changing that process as we speak. So some of those things We think could have more more second half benefit than what's in our guidance right now But i'll be talking more about that on the second call to lock down things more specifically I can answer your question with definitely more specifics at that point
spk08: Got it. And then was that slowed down at both brands or was there more one than than the other thus far in may?
spk13: It was both brands by by a bit Reflecting in our guide and that's why we think there could be some shift happening and we want to keep an eye on that cautious for now Three and a half weeks into the quarter Um, there's definitely a bit in both brands Yeah, thanks.
spk08: Good luck
spk14: Thank you our next question is from jay full with ubs, please proceed with your question
spk07: Great, thank you so much Maybe i'm wondering if you can elaborate
spk12: a little bit on the intimacy business within ari Maybe jane can talk about what she's seeing there and maybe what the plan is going forward. Thank you
spk04: Sure We're really excited about this business actually because You know the whole ceiling is lowered in intimates. We held our ground on bras for sure. There's been some shifts in silhouettes But we're double downing tomorrow. In fact, I have a huge off-site with the team I know they're going to present me with tons of new innovation and ideas Look, the whole category has shifted girls are wearing bra tops out So there's no need for bras and we're focused on that and how she's wearing Her intimates, so I think there's going to be a lot more exciting things to come here Uh, we've certainly seen some plus ups in sports bras as mike and team mentioned offline is certainly an exciting category for us and Sports bras are really Accelerating so we've got and I don't know if anyone's worn our sports bras Please do get out there because I wear mine every day to the gym and it's the most it's it's honestly the most comfortable and supported Sports bra out there. So I get pretty excited. Um, look, um, I you know, we're not giving up next year's aries Anniversary, it's our ari real anniversary spring 2024 and let me tell you we're revving up into that year With new exciting things happening in all of our categories actually
spk07: Great thank you so much
spk14: Thank you our next question comes from matthew boss with jp morgan, please proceed with your question
spk09: Great. Thanks. It's amanda douglas on for matt So jen you mentioned a focus on driving growth at the american eagle brand Could you just elaborate on key initiatives in place today? Timing of those initiatives and any key categories in the assortment you see as an opportunity as we look ahead into back to school
spk04: Sure, absolutely You know, we've been really at rationalizing this brand as mike mentioned too Closing some stores. We've got out of some businesses that were not profitable. We've been focused on The bottom line and certainly we're delivering there so proud of the margins. We've been delivering in american eagle and look we've seen improvements In women's really exciting improvements from a comp trend into q1 A significant shift and so we're really leaning in there In that category and in men's we did see some softness I think we could be a little bit more aggressive in some of the newer categories and we've tested those categories in q1 So you'll see as we head into You know the the back half of this quarter because we launched back to school Around june 30th. So we'll have some new ideas that we were able to react to in men's Jay mentioned 24 7 that active line is incredible. I just saw all the creative for it Some of the innovation there and the excitement around that. I think our customer is going to be very Excited and delighted as we like I said head into back to school also 77 it's a small test albeit but These jeans are not cheap. There are premier price points premium price points And we like what we're seeing early on and definitely that would entertain an older customer so pretty excited about some New ideas and on that side of town too So we've got opportunity in these new categories, you know to really go after them as we get more momentum in the business and then ari The back to school is incredible. I I I just it it gets better with age this brand That's all I can say just to remind you ari since 2019 has grown 129 And I believe that's better than any nearing competitor. So This team just is an engine and we have you know, so much opportunity in front of us and we're going to keep on Looking for our golden nuggets and driving it. I will say all the teams Reacted to the business early We saw nice momentum coming out of the quarter, you know in april on As a reminder easter when we saw that shift and we got into easter, you know, the momentum happened Look, um, you know, i'm here as the optimist. Um, we're we haven't hit memorial day our stores business Really performed nicely as michael mentioned in q1. So when these kids get out of school, i'm hoping they like what they see
spk09: Great thanks and then mike to follow up on the margin side How best to think about the magnitude of gross margin expansion you see in in q2 relative to the first quarter And to what extent do you see higher markdowns as a potential headwind for the balance of the year?
spk13: Thanks manda. Yeah q2 gross margin expansion will be we're Assuming our projection it would be even healthier if you remember last year. That was our We recover similar freight related impact versus last year really every quarter and then last year from markdown perspective. We You know did some things the right size inventory at the end of the quarter last year that we are not obviously in a position to have Anniversary so gross margin expansion for the second quarter will be healthy that's largely what we're expecting really every quarter from here is that uh, Product costs freight recovery and we do not have any intention or any plans for higher markdowns on the er inventory is in great shape Supply chains are back to normal. We have flexibility in our open to buy So against the against what we just guided to our inventory's position very appropriately we can chase into Trends as we see them readjust inventory still for the back half as we need to as well So we're not planning on higher markdowns at all
spk09: That's helpful. Thank you
spk02: Thank
spk14: you Our next question is from adrian yee with barkley's please proceed with your question
spk11: Great, thank you very much. Um, john I was wondering on the ae brand How much higher are initial retails at ae versus 2019? And the ability to you know after we get through this kind of you know, period The ability to hold on to that that pricing based on just elevating the business and you know more innovation And then for mike, um, can you talk about traffic versus traffic and or transactions versus tickets? Basket for each of the brands. Thank you very much I
spk04: mean, I should just say both brands are significantly up to 2019. Um, and we're pleased with that adrian Um, certainly as you see, uh, too, we're going to have nice, you know costings been coming in really favorably as well So we're going to do we're going to really you know have a balancing act in both brands on how we're pricing and what our out the door prices are look like and Ensuring that we're competing on our terms. Um, so That's really the answer I believe that um, we've really struck gold here in some of these categories And uh, we don't want to give up that, you know, uh We don't want to give up that where all the work we've done. That's what we've been at Over, you know the past three years during covid we were increasing our prices in Specific categories denim being one. Um, you know, uh, I reflect back We actually had uh pulled back on our promotions in denim during some of these peak, you know, uh, tough time periods Out there and so, uh, you know, we believe that there's opportunity in specific categories. Like I said in both brands And specifically, you know in american eagle as you know, the two new brands that we just launched in our testing We've seen no resistance to the pricing. So we're going to use Those as test points for us and you know, hopefully we can scale those businesses as well Great.
spk13: Thank you Adrian to your traffic question traffic's been relatively healthy. Um, and as Jen just said a u r is up nicely still to pre-pandemic levels Not getting any any more that a u r back. It's down a little bit to last year Not substantial. Um The average basket size the group driven by a u r is down a bit then too Um, we have some work to do on the conversion line I think we think we could believe it could be tied a little bit to macro conditions that mid to low income consumer Traffic is coming through but not converting maybe it's heavily That's something we're keeping an eye on something. We're trying to move the needle on But that gives you a sense of the metrics that are driving the business right now,
spk11: that's perfect. Thank you very much and best of luck
spk14: Thank you our next question is from dana telsey with telsey advisory group, please proceed with your question
spk10: Hi, good afternoon everyone As you think about the upcoming back to school period with the cadence of business currently Any shifts that you're making whether it's marketing whether it's when you're bringing goods And how you're planning promotional levels as we go through to queue into the back half. Thank you
spk04: I mean marnie, um all of the above. Um, you know, it everything has to be a full 360 approach And when it comes to best back to school, I think we do a best I'm really proud of the way the stores look out there. Um, and like I said, the store business has been very healthy We're focusing on um stores and uh, I don't know if michael had mentioned I know we I believe mentioned on previous calls, but we have a new leader in the digital business Um david zang who comes with tons of experience and is already locking unlocking opportunities for us On that side of the business back to school. Um, I go to see it live tomorrow But um, i've you know, obviously been through all the product categories, but I see it in our simulated stores tomorrow At our home base in pittsburgh and marnie, um, like all I could tell you is from q1. We've shifted the businesses Significantly with what we saw I would like to say I thought we were really aggressive on The other bottoms categories in q1 and that continues into q2 when we build on it for q3 We're seeing some bright lights in denim that we're able to respond to so that's really exciting We've seen improvements in denim actually particularly in women's as we pace throughout the quarter Um and building in demes. So um some bright spots there Um, so I I think we're we're ready marnie so, um, you know, like I said, I have to be the optimistic one on the saw because you know, it's it's our job to React to what's happening in the business and um push harder as we you know head into the balance of the year We do not plan on You know promoting. Um, we you know, we're going to promote with intent and Mike mentioned that we have some opportunity to really look how we clear goods In q2 hopefully more profitably. I think we have some good plans in place there And we're going to come out clean and be ready to fight Thank
spk13: you, yeah, I think i'm Your markdown question or your promotional level we don't have any plans to be more promotional for back to school As you know, we were very clean. We were clean going into the back half and back to school last year after uh, you know taking Uh measures to clean up inventory in the spring season in july there at the end of the second quarter So we were actually pleased with our promotional level through the third quarter last year and we're looking at something We're planning similar levels of promotion this year And dana
spk04: i'm sorry. I caught the car. I'm my uh phone went off. So dana. I know you and i'm sorry So thank you for the no worries. Thank you
spk14: Thank you Thank you Our next question is from john akim with td cowan. Please proceed with your question Thanks
spk12: for taking my question. Just curious about what you're seeing the loyalty program how the spending and retention trends have been like versus history and What are some of the? Data advantages you can have by leveraging the loyalty program. Thank you
spk14: you You You You Good question, it is star one on your telephone keypad Our next question comes from alex ratten with morgan stanley, please proceed with your question
spk00: Great. Thanks a lot for taking the question I just wanted to focus on on revenue here in the sequential top line weakness you've observed Have you seen any variations by household income demographic? And and then secondly, I know you're near uh peak aurs and i'm just wondering do you think that's at all contributing to some? Of the challenges on the top line or how do you guys gauge price sensitivity?
spk13: Thank you Yeah, if I could start on the revenue side, um, you know Really in may here, we're three and a half weeks in your question. This is exactly the question we're asking ourselves I think there's some of this Which will tapping externally? And the impact on what we think is the mid to low end, you know household income cost consumer which we are susceptible to You know, that's what we're being cautious about from here I think if you look at that what everyone's reporting at this earnings period you do see a bit of bifurcation between Kind of brands that are appealing to a higher Income customer versus those that are more exposed at the mid lower side So I think that's something that we are going to navigate Again inventory levels being flexible supply chain timelines back to normal those are things we'll navigate as that continues to be a macro External impact that we can't control we'll control everything that we can We don't think I mean back to what michael and I just described in terms of customer base and loyalty program Aur usually has some kind of impact on that as well. We're not seeing any impact to those customer metrics in that way And again, we are you know, we're well ahead of pre-pandemic levels, but we we actually haven't uh Kind of grown aur since last year or 21. We're actually down a couple points to those peaks So as you sit here today, maybe the combination of those factors is having a longer term impact Something we will be assessing but um again, we'll control we can control in that equation right now, which Which is really inventory and everything else around our operating model that we're looking at
spk01: Okay, we'll take the next question
spk14: Thank you. Our next question is from janet clopinberg with jjk research associates. Please proceed with your question
spk06: Um Hi everybody, um, just a couple of quick questions first on housekeeping michael It is depreciation now Looking to be at mid teens for the year. Maybe you could help me on that and then On the guidance cut on the operating income for the year Um that includes a lower look outlook for the second quarter As well as for the back half. Could you could you flush that out for me, please? and then jen Um, was there some change in category investment? Um in may versus april. It sounds like april was a decent month. You said you had some acceleration in april Maybe after a week march i'm guessing So i'd like to understand maybe how the the assortment shift may have may have Maybe impacting the response rate right now at both brands. Thanks so much
spk08: Hi
spk13: janet, um, your question on the first time. How are you? Your question on depreciation as we said for uh q2 got in similar dollars for q2 It's really similar dollars every quarter of the year based on the plan based on the 150 to 175 million dollar range this year versus we spent in previous years depreciation pretty consistent quarter to quarter I think you'd get the roughly a 10 increase on the year based on that That is something we are focused on we pulled down capital spending for this year Made a lot of investments the last few years as we talked about especially in area and offline growth We want to grow into those investments optimize those investments uh investments in technology supply chain capabilities that's Part of this project this year and finding efficiencies in our operating model It's part of that is actually leveraging all those investments that we've kind of proactively and aggressively made in the last few years So we are looking for depreciation to kind of normalize and even come down over time And then as far as the guide goes, yeah, the full year guidance does Contemplate of course what we just got for the second quarter and how we're thinking Cautiously, uh how we're reviewing the rest of the year So we talked about flat to load to revenue download single digits for the year Do you think about first quarter results second quarter guide? You're relatively flat Through the through the spring season and we're basically saying relatively flat for the year based on what we know today Um, and the income guide off of that is based on that type of revenue, uh thought process right now
spk06: Plus some greater pressure on gross margin or no
spk13: That actually grows not as much
spk06: not as much recovery as you had originally expected
spk13: not as much leverage on expenses and right but definite recovery of All freight and related product costs seeing that flow through that's going to happen every quarter Even on this revenue expectation our our inventory levels That are planned for the year. We're actually expecting Uh net net uh kind of positive impact from lower markdowns on the year still as we sit here today So definitely gross margin expansion from those things but to your point. Yes, not as much leverage On the expenses through gross margin, uh, if On the revenue that we got it to
spk06: Okay, thank you and jen on the on the change and assortments and what's How are
spk11: you danette?
spk06: Good nice to hear your voice. Thank you. Nice
spk04: to hear your voice No, actually in fact, um, you know, we've built on the assortment off of april So the the only uh thing I would add is we do need a few of our seasonal categories to turn on right now we're hoping as we Get into the seasonality, um memorial day weekend on that. We'll see that happen And just to note though, I will say, you know some of our in american eagle in particular. We've seen bright spots in bottoms including denim So that's where we really took the business going into q3. We feel We're really well positioned there janet. So You know, I really you know I'm looking forward to some of these after school shifts seeing what those changes do to the business I'm cautiously optimistic on the quarter And we're ready to go but no the assortments did not significantly change In fact in some cases i.e. In women's tops we could use more. Um, we saw a huge shift in women's tops Janet, I don't know if I mentioned that earlier, but um from where we ended q2 It's nice to see this business turn around. In fact, we're in the positive comp zone Healthy positive comp in women's tops bottoms are are very strong So yeah, just some of these seasonal categories. We need to turn on a little bit more
spk06: Thank you
spk14: Thank you our next question is from chris nardon with bank of america, please proceed with your question
spk08: Thanks guys Can you quantify what is driving the low to mid single digit increase in sgna in the first half of the year compared to last year? And then if you can tie that into your expectations for full year sgna growth embedded in your new ebit guide That'd be great
spk13: Hi chris, thanks, um, the sgna was up five percent for the first quarter. We provided second quarter direction and low to mid single For the year, you can kind of get your mind around that same range Although like we've been talking about that is a big piece of the initiative. It's not we're looking at the entire 4.7 billion dollar cost base not just sgna, but there are definitely Elements of sgna, of course that we want to continue to work on store labor corporate compensation services um You know marketing effectiveness in terms of driving revenue for us uh A few other line items and categories so on the year guide it is mostly compensation related payroll taxes and benefits um That are driving that low to mid single digit increase and there is reminder. That's a 53rd week year So about a point of the growth Is also just a tribute to that that extra week But as I said, uh I think back to paul's question More keller on the second quarter call in terms of opportunities Against that keller things we're working on now laying out the priorities in a timeline of how we're going after them Some things are already underway And what more keller on the second quarter call about uh potential back half benefits and what benefits we're expecting on the go
spk08: forward Got it and just one follow-up on the gross margin Are the opportunities around freight and cotton would capture? Um, is that just the fiscal 23 thing or do you expect some of the cost reversal? Will help you you know looking out into fiscal 24 i'm just trying to understand the cadence of when you expect to fully recuperate that 60 to 80 million and Incremental freight costs you guys have talked about in the past
spk05: Yeah, we'll get most of that back this year there there is some spillover into 24 As you know goods that we sourced in 2022 We're selling in 23 goods that we'll be sourcing. Uh this year will spill into 24. So You know, let's see the sourcing environment is very favorable right now demand is Is weak commodities are stable transportation is available and and back to pre-pandemic levels so You know, I expect like mike was saying we'll see recapture all this year But uh, we'll also see benefit into early 24
spk08: Okay Got it. Thank you
spk14: Thank you And our final question is from marnie shapiro with retail tracker. Please proceed with your question
spk15: Hey guys, jen now you have me for real But you should know that dana and I grew up in the same neighborhood and we shopped at the same bakery So that you know mixing up shouldn't be such a big deal Um, actually you're stopping at american eagle I don't think it existed back then for the older generation Um, I just wanted to dig a little bit into the gross margin to make sure I understand the puts and takes here because You know, there's obviously the freight recovery And it sounds like the sourcing environment is better So were you able to get those aucs for the back half of this year is that for next year? And then but you talked about promotional pressure Was that pressure coming on mostly the seasonal goods? Was that primarily in places like swimwear for example where you've had some issues? Or is that across the board because i'm wondering if you know is denim as promotional or or go forward or the Knit tops and things where you've seen the improvement in women Do you have to be promotional in those areas too or are the promotions a little bit more specific?
spk13: Yeah, margaret i can start um I don't think we really talked about promotional pressure. Yeah mark dawns were up a little bit in the first quarter compared to Here but last year was definitely on the low end of history. So they're just more Kind of the appropriate in the first quarter. Um As I said earlier, we're not looking at a higher level promotional activity really any quarter throughout the year based on how we're I think we're at a good level now a healthy level now. We like the The the mix of what that's driving. There's no there's no inventory reasons or cause to Over promote to get through units to manage inventories. So Yeah, I don't know if there's any color you want to add but um, what's the
spk15: a was the pressure in aur? I guess maybe was it was it just versus very high Aur last year. Is that what it really is?
spk13: Yes, we were again You're not obviously not 2021 peaks but last year's aur in the first quarter was still historically high. Yes. Uh-huh. Got
spk05: it Yeah, and we do and we do expect both transportation and product cost benefits Uh, you know similar if not greater to first quarter throughout the year
spk15: And then can I just follow up on the seasonal products? Are you seeing the same? Slow down in those sales across the country Are there any regions where the weather I hate to have these conversations about weather but where the weather has kicked in earlier Or is it across the board?
spk13: We're definitely seeing Um better results out of the south and the west so we don't like to talk about weather either But at the same time there's a reality to looking at those geographic results every single week and there's definitely more life in the south and west where the seasonal categories would kick in earlier, so again with our Guide the guide's cautious some of the other results in the other area of the country are definitely embedded in our thinking but we are You know thinking with again, hopefully even more improved weather as much as we don't like to use the word And there is something too I think our customer and uh, the timing of schools getting out and uh, you know mindset around The summer vacations, etc Where we think some of these things will kick in for us differently as we move into further into the second quarter
spk15: That makes sense. Thanks guys. I'll take the rest offline Thanks, Bernie
spk14: Thank you I would like to turn the floor back over to jay shot and steam for closing comments. Okay. Thank you
spk07: Okay It's like in conclusion. We are staying focused On navigating the near term Our brands are in good shape and we know there's opportunity to unlock growth and profit from here We're staying disciplined on inventory and expenses and looking for additional efficiencies Thank you for joining the call. I'm afford updating you all on the progress Next quarter. Thank you
spk14: Thank you this concludes today's teleconference you may disconnect your lines at this time

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