American Eagle Outfitters, Inc.

Greetings and welcome to the American Eagle Outfitters third quarter 2024 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, 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, and you may begin.

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 ARRI, and Micah Zayas, 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. Consistent with the retail calendar in the 53rd week last year, third quarter 2024 results and today's discussion are presented for the 13 weeks ended November 2nd, 2024, compared to the 13 weeks ended October 28, 2023. Comparable sales metrics are presented for the 13 weeks ended November 2, 2024, compared to the 13 weeks ended November 4, 2023. 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 third quarter investor presentation. And now I'll turn the call over to Jay.

Thanks, Judy, and good afternoon, everyone. We are pleased to report another strong quarter, building on positive performance in the first half of the year. Our powering profitable growth strategy is It's clearly delivering results. As we execute on these strategic initiatives, we're positioning AEO for healthy long-term growth and transforming how we operate to be more efficient and agile. This is all aimed at strengthening long-term profitability and building greater consistency in our performance. Third quarter comparable sales grew 3% on top of last year's strong 5% growth. with positive momentum across brands and channels. While we saw some demand choppiness, we successfully offset the bulk of this through expense efficiencies and delivered adjusted operating income at the high end of our guidance. Turning now to a few highlights of the quarter. First, we are making very good progress on our top strategic pillar, amplify our brands. Building on a solid foundation in Denim, As the number one brand for 15 to 25-year-olds and the number one brand for women of all ages, American Eagle achieved its sixth consecutive quarter of comparable sales growth and share gains in several key categories. Our strategies to fuel growth and go after new dressing occasions like social casual and men's active are gaining momentum with meaningful opportunities still ahead. Aerie achieved yet another record revenue result. also led by positive comp growth. With revenue on track to cross $1.7 billion this year, I'm so proud of the remarkable strides the teams have made. Aerie's unique brand DNA anchored in authenticity, positivity, and empowerment continue to resonate powerfully with women of all ages. And we are incredibly encouraged by continued momentum and market share growth in soft-dressing and activewear, which are two of our strongest long-term growth engines. There is no better validation of our strategic direction than the vote of our customers. On that note, we are pleased to see continued growth in our customer file across brands in the third quarter. And we were thrilled to see American Eagle and Aerie retain their top rankings as a shopping destination for a day's use. Yet again, In the fall edition of Piper Sandler's teen survey, this is a testament to our strong brand heritage and evergreen promise of delivering high-quality fashion at a great value to our customers. Turning to our second strategic pillar, optimizing our operations, we take great pride in the quality of our shopping experience, where we continue to invest and innovate. Openings and remodels are tracking well and delivering results in line with our expectations. Two recent call-outs in high-profile malls where we have seen terrific results are King of Pressure, Pennsylvania and Woodfield, Illinois, with all brands represented in a fresh and modern way. Additionally, we remain highly committed to elevating our e-commerce platform. We are successfully leveraging new tools like outfitting and sizing, as well as customer engagement tactics to improve conversion. Finally, within our third pillar of executing with financial discipline, we have continued to identify opportunities for cost efficiencies to drive more profit to the bottom line. SG&A dollars were down 3%, quarter over quarter, leveraging 50 basis points. We also set the stage for ongoing improvement through a number of restructuring actions we took during the quarter, which Mike will elaborate on. Lastly, our balance sheet remains in great shape. We exited the quarter with $160 million in cash and no debt. During the third quarter, we continued to advance our capital allocation priorities, investing in our brands and operation to drive growth while returning cash to our shareholders. With three successful quarters under our belt, we are poised to deliver significant progress across our strategic initiatives this year. And we expect to achieve mid-teen growth in operating income this year in line with our long-term roadmap. Yet, as Mike will review, we have adjusted our full-year guidance to reflect more caution fourth quarter demand outlook. This also incorporates pressure from a strong U.S. dollar. Before I turn it over to Jen, I want to underscore the strength of our brands and our commitment to powering their long-term potential while continuing to strengthen our operations. In the near term, we remain focused on delivering the holiday season as we execute on our strategic initiatives. Now over to Jen.

Thanks, Jay, and good afternoon, everyone. Overall, I am pleased with our third quarter performance. Demand was positive each month, with peak back-to-school selling weeks seeing the strongest trend. The teams executed well in this environment, working strategically to drive top line while maintaining healthy profit flow through. Led by our amplified strategy, we came to market with trend rate fashion underscored by our unique price value quality equation. We supported our brands with innovative marketing and collaborations and promoted selectively to support healthy traffic and conversions. So, beginning with Aerie, the third quarter marked yet another record revenue result, with comps growing 5%, building on 12% growth last year. I'm thrilled to see strong momentum continue. In fact, we expect 2024 to mark our 11th consecutive year of revenue growth, and we remain excited about the opportunities ahead. We continue to scale our core businesses and fuel new opportunities. Aries Apparel category achieved its seventh consecutive quarter of double-digit growth with strength across soft dressing and offline activewear, and we're just getting started. These two categories continue to be our most exciting growth opportunities, which we are actively building on with each season. In soft dressing, strength in the third quarter was led by sleep, dresses, tees, tanks, sweaters, and fleece. We are gaining traction in sleep by expanding into new fabrications and styles. In activewear, I am extremely pleased to see offline continue to grow in the highly attractive $29 billion activewear market. In the third quarter, we saw strength and share gains in leggings and sports bras, as we brought greater innovation to core product lines. As awareness of offline builds, it's bringing in new customers. In fact, Active Bottoms has been our strongest driver of new customer acquisitions. Now turning to Intimates, While the category continues to be down across the industry, we are holding our share. I was pleased to see demand trends improve sequentially with each month. Newness is resonating, and I am pleased to see this improvement continue into this holiday season. As we build brand awareness, we are accelerating investments in our influencer strategy. With our holiday campaign, Get Real, Make It Airy, we are highlighting comfy, cozy looks and elevated styling for the holiday occasions. In addition, we launched new activewear-focused marketing for offline for the first time. Here we highlighted our famous four fabrics, a key differentiator for the brand. Okay, now moving on to American Eagle. I was pleased with the business in the third quarter, particularly with the strength during the back-to-school season. American Eagle posted a 3% comp increase following a positive 2% comp last year. marking its sixth consecutive quarter of growth. We are making solid progress on our strategic pillars. Momentum in Women's continued, and I am especially pleased with share gains across denim and tops. We saw positive comps across most categories with double-digit increases in dresses, sweaters, fleece, shorts, and skirts. We are seeing powerful trends and distorting into new fashion as we offer greater options for outfitting, including more wear out, social casual dressing occasions. Within men's, we have seen sequential improvement across a number of categories. Highlights include knit tees and men's sweaters. AE Men's continues to be top of mind with our core demo as we hold chair and denim and gain in other focus categories like tops and active wear. Okay, now on the marketing front. With last quarter's launch of Live Your Life, we continue to engage our community in new and exciting ways. Product and celebrity collaborations have been positive, including our Timberland, Red Bull, and the NFL, where we are chasing into styles for future seasons. And we are particularly excited about our upcoming partnerships as we look ahead into the spring season. And now the holiday season is upon us. Our product looks great, and we are seeing a favorable customer response. Overall, we've had numerous wins across our brands, stores have been particularly strong, and we are highly focused on working hard to fuel improvements and deliver upon the holiday season. Stepping back, we are making fantastic progress across our strategic initiatives. Our brands are top destinations, and our unique combination of quality, fashion, and value is second to none in this marketplace. I am incredibly confident that we are on the right path to unlock the tremendous potential we see across our brands. Thanks to the teams for their incredible focus and commitment and wishing everyone a happy holiday season. And with that, I'll turn the call over to Mike.

Thanks, Jen. Good afternoon, everyone. We remain focused on our power and profitable growth plan with the third quarter, another proof point of the effectiveness of our strategic initiatives. As Jane and Jen noted, we were able to deliver adjusted operating income on the high end of our guidance with positive comms across brands and channels while experiencing some peaks and lulls in demand. As discussed at our strategy meeting back in March, we have an ongoing focus on optimizing our business and improving profit flow through. With this work continuing, we took additional actions in the third quarter, which included further moves to streamline our corporate cost structure and better align our teams. We also made a change in Hong Kong from a company-owned operation to a licensed model. Expanding on a few third quarter highlights, consolidated revenue of $1.3 billion was down 1% to last year, reflecting the $45 million headwind related to the retail calendar, as previously discussed. Consolidated comparable sales increased 3% in line with our guidance. This follows a 5% comp increase last year. Operating income of $106 million included $18 million of the impairment and restructuring costs I discussed earlier. Adjusted operating income was $124 million on the high end of our guidance range and included approximately $20 million of headwinds related to the shifted calendar. The adjusted operating margin of 9.6% was flat the last year. Gross profit dollars of $527 million decreased 3% and reflected a gross margin rate of 40.9% compared to 41.8% last year. Markdowns increased, and IME was relatively flat to last year. The IOW cut deleveraged 20 basis points due to lower revenue as a result of the retail calendar shift. Despite this, certain items leveraged, including digital delivery, professional fees and services, and rent, driven by our efforts to reduce costs and find efficiencies across the company. These efforts also had a positive impact in the SG&A line, which decreased 3% and leveraged 50 basis points as a rate of sales. The improvement was driven by lower compensation, including incentive costs, as well as lower professional fees and services and maintenance costs. Teams are continuing to make progress across key focus areas, and we remain on track to leverage SG&A again in the fourth quarter. Depreciation was down year over year, leveraging 40 basis points, The third quarter tax rate was 26.1% in line with guidance. Adjusted earnings per share for the second quarter was 48 cents per share. Consolidated ending inventory costs was up 5% year over year. Inventory is healthy and well positioned for the holiday season. As Jay noted, our healthy cash position allowed us to fuel investments in our business as well as return cash to shareholders. Third quarter CapEx totaled $60 million, bringing year-to-date investments to $158 million. Now expect full year spend to be in the range of $225 to $245 million. Additionally, we return approximately $24 million to shareholders through the third quarter cash dividend, bringing year-to-date returns through dividends and share repurchases to over $200 million. We ended the quarter with a strong balance sheet with approximately $160 million in cash and over $800 million of total liquidity, including our revolver. Third quarter results reflect continued progress on our long-term strategy to fuel growth across our brands, drive efficiencies across our business, and deliver shareholder value. And looking ahead, we remain focused on executing on our strategic pillars. Now, moving on to our outlook, as Jen mentioned, we're well-positioned and prepared for the holiday season. Customer response has been positive during key selling periods, including Thanksgiving and Black Friday weekend, when we experienced double-digit traffic growth, positive comps in stores, and some of our highest store volume in history. However, we've seen less consistency in our direct business relative to last year. We also remain cognizant of potential choppiness during non-peak selling periods. As a result, we're revising our fourth quarter comp outlook to be up approximately 1% on last year's 8% reported comp increase. With the $85 million adverse impact from the retail calendar shift and one less selling week, as previously noted, total revenue is expected to be down 4%. We expect operating income to be in the range of 125 to 130 million. This incorporates currency pressure from the recent strengthening in the U.S. dollar, in addition to a $20 million drag from the retail calendar shift. We remain focused on driving efficiencies and finding cost savings across the P&L, which will enable us to leverage SG&A in the quarter. For the year, this implies comps up 3%, total revenue up 1%, and adjusted operating income in the range of 428 to 433 million, an increase in the mid-teens from $375 million last year. This is consistent with our long-term algorithm of mid- to high-teens operating income growth announced back in March. The teams remain focused on delivering the quarter. We are confident in the decisive steps we are taking under our powering profitable growth strategy to position our iconic brands for success, further enhance operating efficiencies, and deliver consistent profitable growth. And with that, we'll open it up for questions.

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 your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the start key. One moment, please, while we poll for questions. Our first question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Great, thanks. So, Jen, maybe to start off, could you speak to what you've seen in terms of the progression of demand into the fourth quarter at ARRI, maybe any outliers by category? And as you look ahead to next year, what are the opportunities you see to potentially accelerate the pace of growth at ARRI as we look across the assortment or the store fleet?

Yeah, thanks. Look, as I mentioned, Aerie saw record revenues in Q3, and I love the way we are delivering on our strategic pillars. I've never seen such consistency in this company, including thinking about all three brands showing growth, which I think is something that hasn't been done in a long time, and that's what we're building into, Matt. Moving into Aerie, look, we're really pleased with the five comp on the 12th. Moving into Holiday, we're seeing... You know, a little bit of some choppiness Mike mentioned just in a couple weeks. We just want to be really cautious, and we want to deliver strong results. But at the same time, we're thinking about new categories. And that is something that we learned thinking back in Q3. So let me just take a moment to speak about that. Sleep has been outstanding. We've been chasing into that business, and we chased into it to Q4. It will be a new category for us as we deliver into spring. Something very exciting that I think Aerie hasn't really dipped their toes in. And thinking about spring, you know, that will be something, a new category to offset swim. Look, Aerie has a lot of potential growth. This year we only opened four stores. Next year we're opening 45. And we know what that means for the business, right? We're going to get new customer acquisition based on that. And by the way, our customer acquisition is strong right now. And the team did a really amazing job delivering an incredible campaign in Q3 where we saw just increased brand awareness, increased influencer strategies, increased investment that we are making change. And I believe all that marketing impact will have a halo effect on the brand as we march into 2025 and think about these new category opportunities.

Great, and then maybe a follow-up for Mike. Could you speak to your expectations for promotions in the fourth quarter relative to what you saw in the third quarter and just overall health of your inventory today? And with that, maybe just drivers of gross margin expansion that you see remaining as we look into next year.

Yeah, I'll start with inventory. Inventory up five at the end of the quarter. um positioned very well across brands and categories um we did pull up there's definitely some receipt timing differences than last year um looking to mitigate any potential port strike um so that's a little bit of an apples in the world just comparing with some of the receipts that we that hit at the end of the third quarter um and then reminder last year we were chasing a trend change into the third quarter. So inventory was down a bit. I think we were down this single last year. So we're kind of relatively flat on a two-year basis. So inventory is well positioned across brands and categories. Promotional level, we are planned similarly this holiday season to last year. So we're not expecting any real additional impact from markdowns or margin erosion from having to be more promotional this year. And I think we've seen that actually even through this last peak period over the last week and a half. through Thanksgiving and Black Friday weekend. So nothing indicating we'll need to be more promotional. As far as gross margin go forward, we talk about this really efficiency focus across the P&L, leveraging the expenses and gross margin on this 3% to 5% revenue algorithm. The teams are hard at work looking at delivery, distribution, and supply chain costs within the gross margin. And then finding efficiencies in our IMU as well. Somewhere else in the P&L we've been very focused on pulling apart the cost of the expenses within our landed costs, so raw materials, freight and transportation, duty, sampling development, those are all areas we're also focused on to reduce the cost and gross margin. That 39 to 40% target we put out back in March on a multi-year basis is still where our sights are set and we view as very achievable.

Great, best of luck.

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

Hey, thanks, guys. Just want to understand the choppiness that you're seeing a little bit better, understanding that there's a calendar shift impacting November. How did this period that you've seen quarter to date perform relative to your expectations at each of the brands. And then second, just curious as we think about SG&A, Mike, for next year, what sort of comp leverage point are we thinking is necessary to see leverage on that SG&A line? Thanks.

Yeah, the choppiness as we've described it, if you think about coming off of back-to-school peak in August and we provided guidance at the end of August, We were being cognizant of some of the shopping lists or low we saw end of summer in Q2, and we gave guidance for, we really contemplated that for September, October. I think the warmer weather, you know, a couple hurricanes, warmer weather, the impact of those different pieces in September, October, and the reason why we came in at our three comp versus the three to four that we guided to a little on the lower end, that did continue into early November. So the first couple weeks of November, we saw a similar pattern. And then as we got into Thanksgiving and the last week and a half or so, similar to the back to school peak period, we've been really pleased with the business. So it's really just looking at that, picking the learnings from the last four or five months here, applying to maybe what we could see post-Christmas at the moment. And we have the ability to update that with our holiday sales release at the beginning of January and see where we are recorded to date at that point. For SG&A next year, we are very focused FD&A continues to be a huge focus across the organization. The teams are in place managing all those big items we continue to talk about around corporate compensation, store labor, services, supplies, maintenance costs. And we are not going to take our foot off the gas in continuing to find reductions and optimization in those areas. So we intend to leverage on that sales algorithm of 3% to 5% that we're committed to, we will leverage at the low end. and leverage more on the high end.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Adrian Yee with Barclays. Please proceed with your question.

Hi, this is Angus Kelleher on for Adrian Yee. Curious if you could speak to some of the new customers you're bringing in. I know you mentioned Aerie, but curious if American Eagle is also seeing uptake particularly in the adjacent categories and the new brands like AE247 and AE77?

Yeah. Actually, I was referring to both brands combined are up double digits as far as customer acquisition. So really pleased with those results. And if I think about AE, we just launched our Live Your Life campaign, which was our original campaign. We brought it back to life in such a modern way, and we're really proud of that. Some of the tactics there were simply influencers, collaborations, speaking to our man, and really just doubling down where we haven't before. And these collaborations are really working. We noted it on the earlier speaking points. Timberland was fantastic. Now that we look ahead, we have so many exciting collaborations for spring, and I think we're going to continue to really open up the doors for these new customers. Also, I want to really reiterate something that hadn't happened in the American Eagle brand. Retention was an issue in the past, and we are now retaining our customers. They're staying with us longer and growing with us, and that doubled down there with the new acquisition and growing. We're also renovating stores. We've seen really nice upticks in the new store renovations, and that's bringing in new customers. Jay mentioned King of Prussia. Wow, the numbers are fantastic. So we're going to renovate more stores next year. I mentioned in Aerie, again, they saw acceleration in customer acquisition. We're opening 45 new stores next year, where we only opened four this year. So there's lots in the works to see this momentum continue.

Great. Thank you.

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

Great. Thank you so much. My question, Jen, too, for you. One, can you just talk about the denim category a little bit more and what you saw and how you saw the competitive landscape sort of develop over the last three months? And then, Mike, can you just quantify the FX impact on the quarter and also the full year guide? Thank you.

Yeah. Well, I'm going to reiterate that both men's and women's were holding our share. There was definitely some softness in long legs through Q3. Women's help maintain more, particularly in fashion. We're really excited about what we delivered on fashion. And so that continues. In fact, we've seen women's accelerate into Q4, and that team's chasing denim like no tomorrow right now. Our fashion is checking all new fits and silhouettes. I've never seen such a great variety in our assortments, and the team is doing an outstanding job developing new fabrications and new fits, and we have accelerated into Q4.

Yeah, FXJ, the significant strengthening of the U.S. dollar here over the last several months impacting both the peso and the Canadian dollar is what's impacting a bit of our guide here for the fourth quarter, especially the peso. Our business in Mexico is really healthy, growing at double digits locally, and the contribution from Mexico in the fourth quarter is over 40%. So that's changed here over the last several months, even more recently with the election outcome. We're adjusting our projections to account for that for sure in the fourth quarter, and that's having about a $15 million impact combined, mostly from Mexico and from the peso. So about half of our kind of guide change here for the fourth quarter is related to long-term, our long-term targets. No issues there. We are going to be looking for some mitigation through other expense reductions specifically in the market. So, you know, nothing concerning for the long term, but definitely a piece of this fourth quarter and annual guide change.

Got it. Thank you so much.

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

Good afternoon, everyone. As you think about the business with digital and stores, was there any difference as you went through the quarter between the two for either their brand? And how much did the hurricanes have an impact on the quarter? And just lastly, as you think about the remodels that you're doing, how are they performing versus the base and any initial thoughts as for 2025 on them? Thank you.

I can start with the remodels. We're seeing great results, as Jen said, from the program so far. So we're, you know, first year into this remodel program for the AU brand. We're touching 70-ish plus stores here by the end of the year. Seen some very nice consistent results across the board where the store performance is outpacing the base or average comp for the AU brand. Has us encouraged about what that means for the go forward and We talked about a 300-store-plus program, maybe 400 stores. We're going to accelerate that a bit going into next year. So it's a good thing. We're seeing a payback for that investment, and we want to go a little faster. Hurricanes, yeah, I think kind of the combined back-to-back impact of Helene and Milton there were a little bit of a surprise. I hate to talk about hurricanes from a comp perspective, but definitely a bigger impact to the southeast than what happened last year, even up into the Carolinas. So a bit of a hit, but I think the bigger – But bigger weather impact in general was just the warmer weather across the back half of September and all the way through October. And even in early November. So I think that was a bigger issue than hurricanes, quite frankly, in terms of us just coming in on the low end of our comp expectation in Q3 versus the 3% versus the 4%. Digital versus stores. Yeah, I think third quarter we comped both. Positively across brands and channels. So stores were positive. Digital was positive on that 3%. More recently here, we've seen traffic in stores through this past week was tremendous. Our store growth and our store results. As I said in my remarks, some historical highs in terms of store performance over the weekend. Looks like that could be continuing into this week a bit. So we'll see. That bodes well for us. We have a healthy store fleet. We've got a little bit of a shift maybe even back to the mall for holiday here That could be in our favor, but we'll take the transactions wherever they come.

Thank you.

Thank you. Our next question comes from the line of John Akin with TD Cowan & Company. Please proceed with your question.

Thank you for taking my question. I would love to hear about the intimacy business strategy in the you mentioned the category is still down and you help share but as you think about areas into this business what are ways that you can regain share and accelerate sales there and then also would love your thoughts on just offline it looks like it's doing really well but how are you planning to accelerate that growth as we look into next year thank you so much

Yeah, well, it's interesting with offline, we've seen really nice increases in shares in sports bras. So I think that that's been a big play for trend. Girls are wearing sports bras out again as tops, and that continues to happen. And we've done really well addressing that trend. Intimates, yes, it's down in total, but we've held our share. In fact, we've seen nice increases into Q4 as far as acceleration, particularly in undies. We're really unlocking some growth there in that category. On the go forward, look, this team does not stop as far as innovation, and I think we have some of the best in show. If you think about smoothies, we now have offshoots of that category. We have bodysuits. So we're going to continue to double down on the fabrications that we are famous for. That's what we do well. So going into Q1 and Q2, look, I think there's opportunity in this category. Lace is certainly a trend out there. The team's on it, and, you know, So we have lots behind those ideas, and there'll be more to come. I continue to see us holding our share, if not growing, with some of the new ideas that we have in store.

Thank you so much.

Thank you. Our next question comes from the line of Janet Kloppenberg with JJK Research. Please proceed with your questions.

Hi, everybody. I wanted to just, Jen, learn a little bit more about the choppiness. Did any of that, beyond weather, which I heard loud and clear, did any of that have to do with, you know, perhaps inventory imbalances? Like, I saw a lot of the colors sell down in the stores, and I thought maybe you could have had more of that, like the colorful sweaters and that kind of stuff. And I wanted to understand more about November, Mike. I think you said that November was weak maybe until Thanksgiving and then it picked up. And I think that's what you said. Maybe you could clarify. And if you've had some choppiness since. And does the great SG&A performance of the third quarter, does that, steal from the fourth quarter on SG&A. Thank you very much.

Yeah, of course. I think Mike said it well. You know, we're just anticipating what happens in January again with just some of the slowdown that we saw, for instance, during the hurricane. For instance, you know, long legs that I mentioned. We've seen very like trending categories from Q3 in both brands heading into Q4. The store is definitely outpaced, and we are on it. That team is filling in like left and right. We just have new deliveries today land. We've already seen nice upticks in the sales, including stores again. So we are feeding that beast as quickly as possible. I do like fast turns, let's not deny, and the team is doing a great job replenishing and getting back into business. But, again, Mike said it well. Our store business is on fire. Black Friday was a record breaker for us. We've never seen sales like that. and I think that that speaks well for how we execute it. I think that's the most important thing. When we were in the malls, our brand executed. Our bags were everywhere. We were fulfilling the needs of the customers. The lines were moving, and we have a lot in front of us, so we're hoping to grab every bit we can. And Jen? Yes, I'm right here. Yeah, oh, good.

Thanks. So what I'm trying to understand is your thoughts behind the digital business slowing down. What happened there?

Honestly, we're up against incredible comps on that side of the business. And look, we're balancing what Mike said. We are going to where the customer's at. So we're thinking Omni. It's not my favorite word, but we are there for where the customer is. And Digital, look, we're testing every day in that business. We're relentless, and we're learning new tricks. And as we get this halo effect, I think, from some of the new acquisition, we're going to really bridge that gap. So there's more to do, always, and I think we have a lot of good ideas for the future. And right now, I think digital is showing up again. There was a slight slowdown during cyber because I think we pulled it in, to be honest. We launched some of the ideas early, and we saw nice upticks earlier, so now we're getting it back, a little bit back, day by day.

Okay, thanks, and lots of luck. Go ahead, Mike. I'm sorry.

I'll answer your question. No, I mean, the improvement or us seeing a reduction in Q3 beyond where we expected is just the outcome of the continued work. The SG&A focus is here to stay. Q3 was another proof point of that. We were able to find a few other dollars through all the work we're doing to reduce SG&A a little further than anticipated. Compensation related areas, all the focus areas we continue to talk about leveraged. So corporate compensation, related incentives, store salaries have been well controlled, services leveraged. And Q4 is a continuation. We're actually expecting dollars to be down mid to high single. expecting similar type leverage, even with total revenue being down 4% with the calendar shift. So, focus is there, and it's here to stay.

Okay. Lots of luck to you all.

Thank you, Dan. Thank you.

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

Hi. Good evening. This is Dan, after Simeon. Thanks for taking our question. I'm curious what your general lead times are now and maybe how much has been left open to buy for holiday versus prior years. I'm sorry if I missed it, but how are you planning to end the year with inventory? Thank you.

Sorry, can you repeat that? You were a little choppy on the first question.

Yeah, so just where the lead times are now and then how much has been left open to buy for holiday now versus prior years.

Oh, yeah. You know, we were strategic, not even just in open to buy, but positioning new receipts, like I mentioned. We have new receipts from both brands that just hit digital today. We're launching in stores. Actually, we're releasing as ready because there is the demand out there, speaking to my last answer. So we're ready to go. We have new receipts here. We have another full delivery coming in towards the end of December. Really excited about that. We have open to buy. We're pulling in, actually, as we speak. So we feel really good. We're going to be very nimble. And we're thinking about spring and how we're going to be ready to sell and have our inventory ready to go. So I think as we launch into spring, you're going to see really incredible excitement across both brands. We're positioned and we're nimble. That's all I can say. And I've never seen the team react so swiftly before. on the business, and we're in a good position. Chase is always a good thing, and they're doing a great job.

Great. Thank you.

And going into spring, inventory planned in line with sales growth. That's our planning mentality at the moment, and we'll continue to do that into spring and next year.

Appreciate the call. Thanks, guys. Thank you. Our next question comes from the line of Chris Nardone with Bank of America. Please proceed with your question.

Hi, guys. Good afternoon. So just on your plan to ramp up the area door count next year, can you just talk about what is giving you the confidence to step up the pace relative to the more muted openings this year? And Jen, just on the recent introduction of the sleep business, is this sizable enough to offset any potential pressure you may see from your swim business next year if it continues to be a challenging category?

Yes, sure. You know, I should add on. It's not just sleep. We're seeing incredible momentum in all of soft dressing and airy fleece, tops, knits, new categories like dresses, cover-ups. So you'll see a lot more of that assortment as we head into the spring season. So I feel really good about the way we positioned our plans to offset any slowness in swims. Interestingly enough, Aerie held all their market share in all of our categories. Apparel, every category, but Intimates. Well, we did hold our market share in Intimates, I should say, but those are the two categories that are seeing pressure across the entire business. So feel good about the way we're attacking our other businesses to offset for spring. That said, we feel very confident about our spring openings. Offline is actually... neck and neck with Aerie and similar malls. This is amazing. It's a brand new business. I want to remind you, Offline launched in 2020 during COVID online only. We're now seeing record highs in our legging business and our sports bra business. So we feel like we definitely can go. Mike mentioned these stores are profitable. They're making money out of the gate. They're hitting performance. Really excited about the Offline growth. And Aerie, it's just about moving into new markets still. We still have opportunity in new markets and We know our area stores are very profitable. The new store design, must I say, is pretty cool. I love it. They're calling it the Arch. It's amazing. I think everyone would feel excited about it. If you haven't seen it, get out there, and we're seeing nice business on those new stores, and they're definitely more profitable. We were really efficient the way we built them out, so some exciting things to happen for the future.

Jen just said it, the accelerations to support that. We're open 25 stores, which is a combination of Aerie stand-alones, offline stand-alones, and side-by-sides, so even more doors for the two brands beyond the 25 total store count. We're looking to build upon that next year, probably more in the 45 store count, with doors being higher to support Aerie offline side-by-sides within that count as well. This offline business has been the kind of highest growth category for the company. We're seeing great strides here in terms of market share gains, so it's really a strategic need to support that even further going into next year.

Thank you. Our next question comes from the line of Alex Stratton with Morgan Stanley. Please proceed with your questions.

Hi, this is Katie Delahunt on for Alex Stratton. I just wanted to ask, how are you thinking about the impact of the new administration, particularly on tariffs? Any color you could give on kind of your manufacturing exposure there would be really helpful. Thank you.

Okay, this is Jay. We're very flexible in our operations. We have the ability to source anywhere. Just to remind everybody, we were around in 2016 through 2020. so this is nothing new to us we've been living with tariffs and never changed the tariff policy in 2020 it's still going on and we have that flexibility and nobody knows for sure exactly what's going to happen but we are flexible and we are lean that way yeah we've got a very strong source

sourcing teams, sourcing capabilities. We already source from 15-plus countries with great relationships and partnerships with our manufacturers. So we're in this together, I think, and the team internally is doing a great job and proactively looking at setting up redundancy and the ability to shift as we see fit depending on the outcome. But nobody knows where it's going to be. Right. So we're setting ourselves up to be ready to react regardless of exactly what occurs.

Great. Thank you.

Thank you, our next question, our last question comes from the line of morning Shapiro with retail tracker for you proceed with your question.

hey guys. I have a couple quick questions I just want to confirm, did you say 45 airy and offline stores in 25 and can you just give us an estimate on what Eagle stores would look like for next year as well.

Yeah, Marnie, I think we're talking about 45 stores roughly. We're going to refine these plans. We'll talk more in March when we provide a very specific color and updates for 25 guidance and store counts, capital spending, all of it. Right now, preliminarily, we're looking at 45 stores total, which would be a combination of Aerie standalones, offline standalones, And then when I say doors, doors could be like 55 to 60 because a bunch of those would be area and offline side-by-side.

Got it.

It could be 45 stores, maybe 60 doors, the way we call those, you know, our terminology internally, because a chunk of those would be side-by-sides.

Right.

And for AE, we're still looking at, you know, we're repositioning a bunch of stores. We're seeing good success when we do that in markets, especially one or two store markets. Mm-hmm. Probably still a net closure situation, but we've been closing less stores in the 20 range. Could be something similar. And we're really focused on this remodel program, though. So as we're touching 70 to 80 this year in total, we're looking at probably accelerating that just based on the results we're seeing. Could be over 100 stores.

And getting better locations in the mall.

And we're repositioning, right-sizing, getting better positions where it makes sense. And we could be looking at over 100 next year, but we'll refine that.

That's great. And then, Jen, it sounds like almost a tale of two businesses right now. When things are good, they're really good. I was in your stores all Black Friday. You know I sent you pictures. Your bags were literally everywhere. They were gremlins through the mall. So is the choppiness, to me, you had a lot of sweaters leaving the store. You had a lot of warm weather. To Janet's point, your fashion when it came in sold out. very very quickly um how much of this can you really attribute just to you know lack of weather driven demand and if that really is the case i guess why would you be so concerned about january i mean it's possible we have a really warm january but it feels inconsistent because you're getting really really good reception to all the products you're putting in the store so i'm trying to try to marry those two things yeah i understand it's a great problem learning like

we're up against incredible comps from last year. We're seeing this year-over-year, quarter-over-quarter growth for all brands. I think that's something that we should be proud of right now. It's been something that hasn't been done, and we've been working on all brands. Now I think it's time for these brands to really take it forward and really double down on all of our learnings. Aerie's at the pinnacle of a new stage of growth. AE has only just begun. We have opportunity in men's. We're seeing some acceleration in men's. But I think with some of the plans we have ready for spring, I think you're going to see a lot more excitement there. And, look, you know, we are just thinking, we're just being smart. That's all. There was some choppiness with the election. Who knows about snowstorms? So we're just preparing ourselves. And, look, what we're seeing early on, coming out of cyber, we like what we're seeing. I mentioned that. We're seeing similar repairs. And, you know, we want to obviously over-deliver. That's what we want to do. Just being smart. That's all.

That's great. Best of luck for the holiday season, guys.

Thank you. Thank you. And we have reached the end of the question and answer session. And also we have reached the end of today's call. And we thank you for your participation. You may disconnect your line at this time. Have a great day.