American Eagle Outfitters, Inc.

Greetings and welcome to the American Eagle Outsetters third quarter 2023 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Judy Meehan. Thank you. You may begin.

Good morning, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer, Jen Boyle, President, Executive Creative Director for AE and ARRI, 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. Results actually released 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. Additionally, you can find our third quarter investor presentation posted on our corporate website at www.aeo-inc.com in the investor relations section. And now I will turn the call over to Jay.

Good morning. Overall, I'm pleased with our third quarter performance. Although the macro environment remains highly dynamic, we are seeing encouraging trends. Our brands remain stronger than ever, and our strategic priorities are propelling us forward. AEO's customers are at the center of our strategy, driving constant innovation that enables us time and time again to deliver exciting collections. And this fall was no exception. Additionally, we provided industry-leading customer experience, reflecting our investments in data-driven insights and operational excellence. With the launch of our profit improvement program, structural initiatives to drive growth and higher margins are taking hold. Now a few financial and strategic highlights from the quarter. Third quarter revenue hit a record of $1.3 billion, driven by 5% comp growth, reflecting growing brand momentum and terrific fall merchandise collection. Our market-leading brands are true lifestyle destinations for our customers, and that was evident this quarter. Aerie returned a double-digit revenue and comp growth, and they generated positive revenues and comps. We also saw significant strength across digital and stores with new merchandise and strong execution, driving improved traffic across AE and Aerie. The digital channel was a star performer, accelerating to 10% growth. We are seeing great momentum here. Under the leadership of our new head of digital, David Zhang, we have introduced innovative customer engagement tactics, enhanced our use of data and analytics, to drive stronger KPIs. This work has yielded a remarkable improvement in our e-commerce business, where we see plenty of runway ahead. Stores were also positive in the quarter. We are pleased with early results from new store designs, including our Gateway store in Soho. The store encompasses all of our collections across AE, Aerie, Offline, AE77, AE247, and are unsubscribed seamlessly under one roof. New area and offline stores are also coming out of the gate positive to expectations. Turning to profit, we achieved our second highest third quarter gross margin and operating income in over a decade. This was only second only to 2021 when stimulus fueled exceptional results across the industry. Margin expansion to last year was driven by improved markup as well as numerous structural changes aligned with our ongoing focus on profit improvement. A few highlights of this work include maintaining tight inventory and promotional discipline, changing our clearance strategy to yield higher profit, scaling area and shifting the product mix into higher margin categories, modernizing our delivery network to reduce costs, and optimizing AE's real estate footprint. As we continue to drive strong demand and build momentum on this work, we are raising our full-year operating income guidance to the high end of our prior range. We now expect to be in the range of $340 to $350 million from $325 to $350 million prior. Lastly, our capital allocation priorities remain unchanged. We are committed to investing in our brand to continue growth while returning capital to shareholders. Our balance sheet is resilient, and we maintain a healthy liquidity position. We ended the quarter with $241 million in cash and nearly $900 million in total liquidity with no debt. Looking ahead, we remain intently focused on advancing our long-term strategic priorities to, one, drive consistent growth across our portfolio brands, and two, generate efficiencies and cost savings for improved profit flow through. We continue to advance towards our priorities and are investing in talent, which further positions us for future success. During the quarter, as part of our COO, Michael Rappel's succession plan, we made two key leadership appointments. We're excited to welcome Sarah Clark, our new Chief Supply Chain Officer, who is responsible for ensuring operational excellence across our global supply chain from sourcing through distribution and a welcome to valerie van atrop our new head of brand operations a role we created to drive greater collaboration and synergies across ae and aries growth and profit plan sarah and valerie nicely complement our teams of experienced executives an excellent bench of division leaders and associates There's a high level of focus and energy across the organization around our profit improvement project. We've had strong engagement from our leadership teams with great support from our board of directors. We're harnessing our innovative spirit to rethink how we operate every day. And with Workstream's focus on unlocking both revenue growth and efficiencies moving forward. We intend to host an investors meeting in spring of 2024, where we will unveil specifics on our go-forward strategy and provide long-term financial targets. In the near term, with incentives fully embedded in our 2023 expense base and early benefits from our profit improvement initiative, I'm confident of our ability to leverage expenses even on modest sales growth in 2024. AEO has enduring brands, robust operations, and strong talent. I am confident that with our strong foundation and new strategic direction, we have the right recipe in place to build revenue and profit from here and deliver shareholder returns. With that, I'll turn the call over to Jane.

Thanks, Jay, and good morning, everyone. As Jay noted, we have a strong quarter with sequential improvement across brands and channels. Fall collections were well-received, and I am proud of how the team executed on our brand strategies. It was incredibly exciting to see American Eagle return to growth with revenue and comps of 2%. We delivered a winning assortment that showcased our incredible brand heritage and an exciting customer experience. Women's was particularly strong where we wrote positive comps across tops and bottoms. We are seeing strong demand for fleece, tees, skirts, and newer bottoms such as twills, cargos, and wider legs. Men saw strength in tees, sweaters, twill bottoms, and shorts. AE also delivered strong operating profit growth, up 6% to last year, aligned with the strategic plan we laid out in 2021. We have made significant progress in improving the health of the AE brand over the last few years. We stepped away from low margin sales, rationalized SKUs, to eliminate unprofitable offerings and optimize our brand's real estate footprint. As a proof point, third quarter brand profit is up 20% relative to third quarter 2019 levels with revenue modestly down 2%. With profit restored to a healthy level as discussed in prior quarters, we are strategically focused on growth. Early initiatives have been highly impactful and I'm pleased to note that AE returns to growing its customer file this quarter. Casual wear is a lifestyle that continues to evolve, providing exciting new trends for us to drive and play into. We are focused on expanding our dominance in denim, leveraging our industry-leading fits and fabrics to deliver newness. At the same time, we are also making investments to better penetrate categories and occasions that are important to our customers with collections like AE 24-7 and men's activewear and AE 77, our premium capsule. We are also continuing to invest in our store fleet to improve productivity and ensure we put our best foot forward. We have seen a positive response to AE's new store design with remodeled stores delivering significantly improved comps. Based on the success of these initial tests, We are expanding our remodel program next year to include additional stores while continuing to close and reposition low-productivity locations. And we are also focused on improving inventory allocation and replenishment to better serve our customers. And lastly, we continue to leverage and innovate marketing campaigns and amplify excitement around the AE brand. This fall, we collaborated with the Ziegler Sisters on a limited-edition capsule to showcase key fashion items for back-to-school season. This included our OM Jeans event, a powerful takeover on the High Line in New York City, an immersive installation that stopped many New Yorkers in their tracks. We showcased the quality and versatility of our iconic denim assortment, underscoring our strong heritage and dominance in the category. The campaign outperformed our expectations, driving strong sales both online and in stores. Now, turning to Aerie. We had an exceptional quarter with revenue incomes of 12% and profits expanding 34%. Newness and assortment changes in our core intimate business drove a nice sequential recovery. We grew market share and had our best ever third quarter performance in core broad. We also continue to see rapid growth in our core apparel business with particular strength in fleece and sweaters, where new collections are resonating very well. And our activewear collection offline also had a great quarter, achieving double-digit growth. Area has seen incredible expansion over the last few years, growing into a beloved destination for exciting fashion and comfy, cozy fits in intimates, apparel, swimwear, and activewear. Since 2019, we have doubled our sales and quadrupled our profits. We are gaining new customers every season, with our total customer file now over 10 million. Yet, with just a low single-digit share of close to $80 billion total addressable market, we are just scratching the surface. Activewear in particular provides an attractive opportunity fueled by strong demand for athleisure. We see a unique opportunity to build share here with offline. ARI is vibrant and playful take on activewear as we continue to develop the assortment. We are focused on continuing to build brand awareness as we leverage investments in our store fleet and innovative marketing strategies to grow our customer base and share of wallet. New store performance remains strong, providing a positive lift to comps as they come into the comp base. Additionally, offline openings are exceeding planned. On the marketing side, Aerie's fall campaigns were focused on elevating the brand as the go-to for high-quality, fashionable, and comfortable intimates and apparel. We showed up across the season with an array of notable influencer talent and programs. This included a first-to-market partnership with the popular dating app Bumble, encouraging users to find their comfy match with Aerie. We also hosted the Hidden Gems Marketplace, a fun, interactive customer event in new york city that generated strong marketing kpi we have two of the best brands in retail for over a decade we have consistently ranked in the top three brands in the piper sandler taking stock of team survey ae is the market leader in denim in the age 15 to 25 cohort the number two brand across all ages and the number one brand for women in particular Aerie is one of the most exciting brand platforms in fashion, celebrating body positivity and empowering women to feel their best selves every day. It's a strategic priority to profitably grow our portfolio of brands, and I see meaningful opportunity ahead. Before I turn this call over to Mike, a big thank you to the AE and Aerie teams for their hard work in delivering a strong quarter. Our brand category and channel strategies are gaining momentum. which is a true testament to this talented team. And with that, I will turn the call over to Mike.

Thanks, Jen. Good morning, everyone. As Jay mentioned, third quarter results marked continued progress on our strategic priorities to grow our brands and set us up for improved profit flow through. Strong brand momentum combined with actions taken on our profit improvement initiatives resulted in improved gross margins and operating income year over year. We entered the quarter with momentum that continued into the early holiday season, fueling a strong top line result. Consolidated revenue of $1.3 billion was up 5% to last year, and comparable sales also rose 5%. Operating income of $125 million reflected a 9.6% operating margin. Gross profit of $544 million increased $64 million, representing a gross margin of 41.8%, up 310 basis points to last year. As Jay noted, we achieved some of our highest merchandise margins on record, reflecting strong demand, lower costs, and a number of benefits from our profit improvement initiative. Inventory discipline resulted in lower markdowns as we maintained healthy promotions. With the change in our clearance model announced last quarter, we continue to sell through end-of-season merchandise at better margins. We also saw leverage on rent, reflecting our focus on strengthening fleet productivity at AE and the ramp-up of new area stores. as well as delivery, distribution, and warehousing costs with efficiencies across several key metrics, including lower shipments per order and lower cost per shipment. SC&A expense of $362 million was up 16% to last year and in line with guidance. Consistent with strong business trends, roughly half of the increase was driven by incentive expense after zero accruals last year. As discussed last quarter, incentives are weighted to the back half of this year. So our payroll also increased largely due to higher wages. Depreciation was up year over year and in line with guidance provided last quarter, primarily reflecting our investment in new stores. As noted previously, we have reset incentives to reflect improving business performance. With incentives now in our base and an ongoing focus on cost efficiencies, we're well positioned to leverage our expense base on modest top line growth next year. EPX for the third quarter of 49 cents per share Turning to our brands, area revenue and comparable sales increased 12% in the third quarter. A positive non-conflict from new stores was offset by lower third-party sell-offs, reflecting greater inventory control and our shift to a more profitable clearance model. Area's operating margin of 19.3% hit an all-time high, expanding over three points to last year as the brand continued to scale, and we saw improved markups, lower markdowns, and early benefits from the clearance shift. American Eagle revenue and comps increased 2%, with the operating margin expanding 70 basis points to 21.5%. As we've discussed on numerous occasions, our focus over the past several years has been strengthening the profitability of the AE brand. I'm extremely pleased with the progress we've made, expanding profit margins by 400 basis points since the third quarter of 2019. We're now turning our attention to growing the top line with a sharp eye on profit blowthrough. Consolidated ending inventory at cost was down 4% compared to last year, with units down 3%. Inventory levels remain healthy and controlled as we maintain buying discipline in case demand. We ended the quarter with a balance sheet in a strong position, including $241 million in cash and total liquidity of $875 million, including our revolver. Capital expenditures totaled $43 million, and we continue to expect full-year CapEx to be in the range of $150 to $175 million. Our plan for our consolidated store count in 2023 remains roughly flat for last year, reflecting approximately 25 new area store openings, offset by approximately 25 net closures for the AE brand. Before I move on to our outlook, I'd like to provide more color on our ongoing profit improvement work. Last quarter, we made an important change to our clearance model. This is tracking in line with plan to generate 25 million in savings in 2023 and 50 million in savings on an annualized basis. As we continue to lock down efficiencies that have supported our gross margin expansion, other significant work streams within STNA have also been identified and are being actioned on. We are instilling an internal culture around continuous improvement in expense management, the results of which are incorporated into our 2024 plans. As a result, next year we expect to drive continued gross margin expansion leverage on FC&A and depreciation, operating rate expansion, and healthy earnings growth, structuring the business to deliver this at low single-digit revenue growth. A more positive trend would drive incremental leverage and profit closer. We'll give further details in future months as we provide our specific expectations for 2024 and beyond in the spring. According to date, we are seeing sustained momentum across our brands with revenue up in the mid-single digits. Additionally, we continue to make good progress in executing on profit improvement initiatives. With this as background, we're raising our four-year outlook for operating income to the high end of prior guidance. We now expect to be in the range of $340 to $350 million. This reflects revenue up mid-single digits, with comps up low to mid-single digits. For the fourth quarter, this implies operating income in the range of $105 to $115 million, with revenue up in the high single digits, including a four-point tailwind from the 53rd week. Comp sales are projected to be up in the mid-single digits. SC&A is expected to be up approximately 20%, including a five-point impact from the 53rd week. As previously discussed, it also includes higher incentive accruals, which are skewed to the back half of this year. As Jane mentioned, we look forward to providing more color on our long-term strategic priorities and financial goals at our spring investor meeting. With that, I'll open it up for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. To allow for as many questions as possible, we request that you each keep to one question. Thank you. Our first question comes in the line of Matthew Voss with JP Morgan. Please proceed with your question.

Great, thanks. So, Jen, could you speak to key areas of acceleration at Aerie in the third quarter and just how you see the brand position for holiday and on the return to growth at American Eagle this quarter? How do you view sustainability of positive comps of this concept moving forward? And then, Mike, could you just elaborate on the profit improvement project and maybe the modest top line to leverage SG&A next year. Just taking a step back, how that compares to historical flow through in the model.

Sure. And happy Thanksgiving to all, by the way. Look, I'm going to take a small victory lap here. I just loved what we saw in Q3. And let me just say one thing. This team, okay, my team, Jay's team, all of our American Eagles They were out in stores last week. We saw almost 20 stores in basically two and a half days. This is what my team commits to. We're in this for the long haul. That's all I can tell you. To grow year over year, day over day, quarter after quarter, you have to have a long-term strategy, and I'd like to say we're delivering on it. Really proud of what we accomplished in Q3. Women's in particular in AEs. We did double down there. Their comps definitely superseded the men's comps. And we're going to continue that. And I love what I'm seeing for spring. More fashion, more nods to what I think is relevant in today's trends. You know, we went back and we decided that we needed to get famous for our nearing categories. And we've been up to that for three years now. And now it's time to jump off in American Eagle and wow, do I like what I'm seeing in the future for trends? And in Aerie, well, I think this is long overdue. You know, keep in mind, Aerie held their market share in bras in a declining business. We held our own in Q3. It's an $80 billion opportunity for us to grow into that category. And the team's up to it. I like what I'm seeing early on. Q4, you know, it's still, we have many weeks ahead of us. And as you know, the big week ahead, heading into what we call Green Friday, not Black. I think we're ready to go. Like I said, we were in 18 stores, almost 20, in two and a half days. And we are ready to compete on our terms. And as Mike alluded to, we're going to talk more in the spring season when we speak to you all about our long-term growth plans. But I see it. I see what's happening here, and we're going to deliver and build this incredible brand strategy.

Yeah, and Jan, you know, like when you were in the stores, you would agree that our stores were like the best-looking stores out there too.

I think so. I think, you know, the way we operate, you know, it's one thing to grow your business. It's another thing to deliver operational excellence. That's what I have to say.

And on profit improvement work, Matt, you know, the third quarter was another proof point on where we've had to focus, which has been expenses and margin improvement all generating and providing that gross margin expansion. So now, for three quarters now, we've seen gross margin expansion. We've leveraged the expenses in gross margin. Fourth quarter, we'll do it again. As we talked about, this work is sort of a multi-year journey, and the SG&A pieces of that would take a little longer as we've looked at labor models, services, things tied to contracts, and vendors that were negotiating either reductions to current rates or looking to consolidate or move vendors. That work, we have line of sight now that will have to end in 2024, and we know what the benefits look like. So on top of the gross margin expansion that we believe that will continue next year, now we've got the opportunity to leverage SG&A at low single-digit revenue growth next year, if that would be the result. Anything better than that, we'd see even higher leverage against that historical model.

Great, Collar. Thanks, and good luck with Green Friday.

Thank you. Our next question comes from the line of Paul Lajoie with Citi. Please proceed with your question.

Hi, this is Kelly. Also, Paul, thanks for taking your question. Could you just talk about how the clearance strategy change impacted the P&L this quarter? Was it a headwind to sales and how much of a benefit was it? What is the gross margin at 3Q? And how do you expect that to impact 4Q and F24 for both the sales and margin perspective? And then I have a follow-up. Thank you.

Yes. I think the headwind of revenue was one or two points in the quarter just based on the sell-off revenue not being booked, which is unprofitable. And that's the story around this improvement, this $50 million annualized benefit that will happen over a 12-month basis. Historically, we Royce Oak hits in Q2 and Q4 for the most part, selling off clearance versus clearing it ourselves now, which is what we're doing. So we'll see this benefit across a 12-month period. It's also a benefit in Q2. There's some benefit in the Q3 results. Again, most of that benefit is markdown management, inventory management in total, and then leverage of our expenses and gross margins in Q3. And then Q4, we'll see another slight benefit. But again, those other pieces are bigger than the clearance benefits. So it's a 12-month model now versus sort of Q2, Q4 sell-off model. We'll see that $50 million annualized across a 12-month period go forward.

On the SG&A guidance for the fourth quarter, I think coming into today, we sort of had the SG&A up mid-teens in the fourth quarter. So I'm just trying to understand what's driving the – the greater growth in fourth quarter relative to your previous expectations. Is that all accrual of incentive costs? And I guess on that, I mean, you've been talking about sort of finding cost savings for a while now, just wondering why we wouldn't be seeing more offsets. Thank you.

Yeah, I think the plus 20% includes five points from the 53rd week. That gets you back to sort of mid-teen growth, which was similar to Q3. And yes, and half of that is based on change to the incentive accrual. So half of that mid-teens would be incentives, the other half other expenses. Again, the work we talked about on SG&A we knew would be a longer path. There are some benefits embedded in there, but not what we're expecting now in 2024 that we've got full line of sight to some of those work streams within the work completing as we speak. The teams are embedding that into 2024. We've always said the SG&A benefits would come more next year and then even into 25. So there's a couple, there's some components that continue past even this coming year. So we're not, you know, the gross margin focus is what's coming through the P&L in the back half. Really pleased with the proof point that that's providing of all the work that the teams are executing next year is when SG&A and depreciation leverage kick in.

You know, just to follow up on that. So the new team's guidance prior did not include 53rd weeks.

It includes 53rd week, and the new guidance includes some movement in the incentive accrual between quarters.

Got it. Thank you.

Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Good morning, everyone. As you think about the store remodels, and I was in the one on downtown on Broadway on Sunday, and it was busy, and it looked good with all the concepts together. How do you think of the remodels? What type of a list are you getting? And how much of CapEx would that play into it? And when you think about the digital and store channel performance by brand this quarter, biggest differences that you saw and how are you planning promotions for holiday in each channel? Thank you.

I'll start, Mike, and then you can take over. You know, the gateway, we're calling it the gateway. As a reminder, it's the first facade that you see as you enter Soho. And this incredibly talented team came up with, and they did some research, and thus the name The Gateway. And, you know, what a place to highlight all of our brands and all the work we're up to. So I could not be more proud on that delivery. And there's more to come there. And there's learnings that I think we're going to leverage for the future. That said, As we think about the new store design, there's more out there. American Eagle has this incredible new lived-in store design, and I mentioned it in my comments. Those comps are exceeding, when I say exceeding, the average sales comp in the brand. So, so many learnings there, and we're going to, you know, we're going to test and scale, but we love this new design. It's so fun and, you know, it's been a long time coming for the American Eagle brand to show up the way we deserve. So I love what I'm seeing there. As we fast forward, there's so much good in play here. The learnings that we've had over the past three years in American Eagle particular, we have, you know, we've definitely rationalized this brand. We've closed stores. We've done everything. And now it's time. to forge forward and get what we deserve back. And I love what I'm seeing from the teams. I just looked at spring concept and our windows and the product that's coming in and like a good bottle of wine, it gets better with age. You know, there's a lot to hurdle out there, but I feel really proud of what this team's doing. Aerie, that's a whole other story. It's about time we had that halo effect on the comps. with the new stores. And we did say that in prior calls. We acknowledge that, that it takes time to halo a new store opening and learning from that. And well, here we are. So we love what happened in Q3. And then on direct, well, so everyone talks Omni, but I think the best retailers look at each channel and drive what they are best at. And this is what the direct team's up to. You heard the comps. They're at 10%. But, you know, I want to say that this company is very modest in its ad spend, and so we do it with a lot of return. And I love what this team's up to. David and team have tested, and we have so many new ideas that we can launch, and we're going to do this over time so that we see steady growth. And that's what we're up to. Thank you.

Just to add a little bit of color on remodels, as Jen said, we've got the Toho location, love what we're seeing out of that store, but we also have four mall-based locations that we remodeled. We're reading early indications are that we are seeing significant and positive sales lift from these locations as well. We're going to be coming out and talking about the detailed plans around the AE brand growth strategy in the spring, but part of that will be remodels, supporting a lot of other things Jen and team are doing to grow the brand. Preliminary number now, which we'll refine as we get closer, around 50 more remodels is what we're looking at in the next year to help fuel that growth strategy.

Thank you.

Thank you. Our next question comes from the line of Jay Sol with UBS. Please proceed with your question.

Great. Thanks so much. Jen, you mentioned you're excited about the spring product assortment. Can you talk about SWIM a little bit, what you're seeing in that category, how you think you were expected to perform versus last year? And then maybe just Mike, I believe the company has a business in the Middle East through some of its franchise partners. Can you just talk about how that business has trended since October and if that has an impact on a quarter or your guidance for fourth quarter? Thank you.

Sorry, I got disconnected. Swim, interesting category for sure. Lots of learnings here. It's still a great business for us, high margin business. I would like to say that the teams have taken away how to think about the business on a more profitable growth trajectory for the future. My teams are just in Brazil, actually, coming back with what I think are the best trends out there, and we're certainly putting them into play. and Nearin, and we're definitely doing a little bit more tests and scale there. And for sure, we're looking at, you know, what's interesting, we have American Eagle and Aerie, and we have American Eagle Women's and Aerie, which is a women's brand. And so as I think about, you know, our opportunities as a company, we take that into play, right? We're better together. And that's what I was, you know, as we talk about the gateway stores, you see all of our brands housed together, and guess what? We're seeing growth in both women's business, Aerie Offline, well, both Aerie Offline, and then AE. So it's amazing what we can do if you just think about the business that way. So as I think about SWIM or as I think about trends, not only do I think about Aerie or Offline, I think about American Eagle, too, and what are the women wanting and how do we position our company for growth in all of the categories. And that's, I think, a competitive edge. So going back to SWIM, as I think about that, that's the way we're thinking about the business. And certainly we're making sure that we don't over pitch the plan. Again, high margin business and testing and scaling there. And I think we have other businesses that we can leverage in all brands. So more to come there. Spring looks great. And... I hope we can continue to deliver.

Okay, I'll take the question about the Middle East. We have a strong international business there. The first couple of weeks, it did get a little whack, but the last couple of weeks, it is coming back pretty strong. So we're very optimistic there, and we're praying for peace as far as down the road in that area, in that region.

Okay, thank you so much.

Thank you. Our next question comes from the line of Simeon Siegel with BMO Capital Markets. Please proceed with your question.

Thanks. Good morning, everyone. I just want to say a quick thank you for your show of support at your Times Square store. It meant a lot. So any color you can add on to speak to the gross margin drivers into next year would be helpful. And then congrats on the nice growth in the brand-level EBIT dollars. Any color and height, just to think about that growth in general corporate expense dollars, what we should think about going forward? Thank you.

On gross margin expansion, we've got line of sight into our first half buys. We see tailwind still in our initial markup, so benefiting margin on that front. There's still annualization of a lot of the benefits that we were seeing through expenses and gross margins. So our shipments per order, cost per shipment, we've got line of sight into the first half still as well. See some of those benefits continuing through the expense buckets. We are, you know, so rent, delivery, distribution, warehousing, we still see benefits that we're capturing that will have an annualized effect in the next year on top of the expansion and markup that we have at least half, you know, half the year embedded in our plans at this point.

Yeah, and Mike, like, we also see, like, an opportunity in, like, the international part of the business, too, growing. We see that as a great growth vehicle, too, the international part, too.

Great, thanks. And then just the corporate expense dollars?

Yeah, again, it just ties to everything else we've talked about from a profit improvement perspective. There's pieces being embedded into our plans as we speak for next year, really across all areas of the P&L, you know, expanded on the gross margin opportunities that still exist, and then corporate expenses that really straddle both gross margin and SG&A, making changes to labor models in the next year, services line items, maintenance line items, those things are being embedded. All the benefits we're seeing from the work happening as we speak are being embedded in the next year's plan.

Yeah, also, Mike, I think Mike is also saying that he doesn't see really the SG&A increasing for next year.

Yes, Jeff. Great. Thank you. And then just a quick one. How should we think about the right total sales comp spread for Aerie at this point?

Only a few points now. I think as we anniversary all that store growth in 21 and 22, that comp spread definitely lessens. Digital is comp. We're only opening 25 stores this year. So really as we get past this year, you only have those 25 in a non-comp base. So it's maybe a point or two. It's probably low single digit spread.

Thanks a lot, guys. Best of luck for holiday. Happy Thanksgiving.

Thank you. Thank you. Our next question comes from the line of Chris Merdon with Bank of America. Please proceed with your question.

Thank you. Two questions. First, could you clarify how comps are trending quarter to date for each brand specifically? And then as we think about next year, How much do you think operating margins can expand? And is this low single-digit sales growth you mentioned, is that your base case for next year? Or is it more of a point that you can still leverage costs on that level of sales growth? Thanks.

The second part first. Yeah, it's more of a point. We're not providing specific revenue guidance in that color. It's just to make the point that we can expand operating rate, leverage expenses on just that level of modest sales growth next year based on how plans are coming together. And then quarter to date, comps are similar. So we're providing guidance that's similar on top of the 5%. We just achieved in Q3. Right now, we're only a few weeks into the quarter. We've got only about 20% of our revenue in. The big weeks really start now. But we're, within the guidance, expecting similar type results for the brands. And I think on operating leverage, I think this year on the low to mid single-digit comps, that we're guiding to the year. We're going to expand operating rate by 100 to 150 basis points. As we get to early next year, provide color and guidance specifically for 2024 in March. We'll provide some level of expected leverage on varying revenue results. Again, the initial color is just to make the point that we see opportunity to leverage and expand Expand gross margin, expand operating rate by leveraging expenses across the P&L, not just in gross margin like we've been able to do in the back half of this year. And that's, again, just an early indication, some early calendar on what we have, our line of sight into 24. We'll provide more specifics.

Okay, thank you.

Thank you. Our next question comes from the line of Jonah Kim with TD Cowan. Please proceed with your question.

Hi there, this is Katie. I'm for Jonah. I just wanted to dig in a little bit to the Intimates category and how you're thinking about ARIES brand positioning there as well as the performance within Intimates. I know you mentioned market share was pretty consistent across bras, I believe. And then just briefly, I'm sorry if I missed this, but can you talk a little bit about traffic trends through the quarter? Thank you.

Great question. You know, I mentioned we're holding our own in the Intimates category as far as market share with, you know, it's an $80 billion opportunity and we're only just, you know, scratching the surface here. I will say that when we launch new ideas, so smoothies is now a cornerstone of our business and we added on to that category in Q3, we win, right? So, The customer trusts us in this category. They love the way it feels on their body. It totally represents our brand platform. So more to come there. I think we have now a jumping off point to really sort of compete on our terms. And it just, again, it totally fits the bill as far as what Aerie's up to on a day in and day out. You know, this is what we do, right? We make women feel great about themselves and smoothies does that. So, More to come there. Look, the bra business has changed. It's not what it used to be. And the one thing I can promise you is the design team and the merchant teams are constantly thinking of new ways to entertain this customer. And we have so much in store for the future that I really believe that we're going to really compete again on our terms. That's what counts. How it fits into the bill of our brand platform. and how we show up with product categories, and more to come. But I can't share all my secrets. I guess that's what I'm saying. But I think there's lots of opportunity as far as the market space. It's been underserved, and we're going to serve up to our customers what she's demanding.

Traffic was healthy throughout the quarter. We saw positive traffic across brands and channels, so both in stores and digital. And this is sort of kudos to the team. Within our profit improvement work, we're not looking at reducing marketing expense, but we've done a ton of work to optimize how we're spending media to drive healthier and more qualified traffic. And then we're actually seeing significant benefits to digital conversion, especially really conversion in both channels. But the work that David and team are doing on the digital side to convert that traffic and making A-B testing, making continual changes to our customer journey and how we're messaging the customers. We're seeing the digital benefits. So we've got a lot of work happening on driving healthy traffic, and then a lot of work happening on converting that traffic. And we're seeing those benefits through the back half. And I believe that's going to continue in the next year as well.

Thank you so much. Happy holidays.

Same to you. Thanks.

Thank you. Our next question comes from the line of Corey Carlo with Jefferies. Please proceed with your question.