Well, thanks everyone for joining us. My name is Jonna Kim. I'm TD Cowen's analyst covering specialty retail, and I have the pleasure of hosting American Eagle Management Team today. AE and Aerie have unique brand positioning in retail, and we're encouraged by the recent momentum we've been seeing. With me today, I have Mike Mathias, CFO of American Eagle, and Jen Foyle, President and Executive Creative Director of AE and Aerie. So with that, I will just kick off. You just introduced an updated multi-year strategy plan in March, Powering Profitable Growth. Can you review the progress you've seen, anything that's above your expectations, and some opportunities ahead? So-
Yeah, I can start. Thanks, Jonna. Yeah, our Powering Profitable Growth strategy sets a new path forward for us. It's been over a year journey now as we worked through our profit improvement initiatives last year. Really started with a cultural mindset shift in the organization that's really in educating everyone that value is created, and not just from revenue growth, which we've been very consistent with over the years, but income and incremental cash generation as well. So we've got that mindset embedded into the organization. You know, we've been consistent with mid-single-digit revenue growth for a lot of years. Now we wanna be consistent with delivering this mid-teens or better income growth on that revenue growth, and the first quarter was a, I think, a great proof point of that for us.
We grew income by 76% on 6% revenue growth. Well on track to our guidance for the year of $445-$465 in income, which would be a 15%-25%. That range is a 15%-25% growth over last year.
I would add on, there's a whole new leadership team in place. Very proud of the talent that we acquired for this company, and we're up to business. Like, we mean business right now. New vision, new ideas, new tactics, and we're only just getting started. They only just started with us, Sarah and Val, back in October, and they're bringing new ideas and new strategies to support-
Mm-hmm
... what I think we delivered on. But not only that, like, this is a company about brand building, right? Like, and, I've only been at American Eagle with Mike and team for three years. You know, during COVID, too. Not only did we launch two brands during COVID, Offline being one, which I've never seen a growth trajectory in my entire career so fast and during a very, you know, stressful time and, you know, unusual time, and we grew Offline digital only. But now we have this whole new power of our brands. American Eagle, I'm so proud to go back and oversee American Eagle and be part of that growth.
Mm.
Because this is a brand that has tenure and stability. That's really important for everyone to hear because if you look at since 1977, I've done the history, this brand delivers, and we're gonna do more.
Mm.
We're only just getting started. With the new team, the new platform that we're about to-
Yeah
... present for Back-to-School, for American Eagle alone, I think, I think you're gonna see nice things. But again, this is about the marathon. It's not a sprint, and it's about year-over-year growth.
Just on that point, Eagle has seen some very nice acceleration over the last few quarters. Do you plan to adjust your targets? And you mentioned back to school a little bit, but how is this season different than previous season, in your opinion?
We have tailwinds. I mentioned it on the call, on the earnings call. There's definitely you can see an inflection of denim happening, and we own it. We own that market share. And when you think... I say this all the time, but I'll reiterate: When you think about our positioning and how our consumer thinks, we're, like, next in line to some of the biggest players out there in the industry, and denim is our cornerstone-
Mm
... and there's tailwinds about to happen, and we're on it. But not only that, we're, we're actually, you know, what, what we've been up to is repositioning the total assortment offering for our store base and showing the consumers that we're gonna dress her head to toe, and him, head to toe, and really, it's as simple as that. And, we're seeing nice results from it.
Mm
... and we're gonna go after it more.
Yeah, Jen, just quickly on that point, 40% of AE sales denim. We are seeing a new denim cycle and hearing good things about it. Have you seen an uptick there, and how are you positioning your offering to benefit from this tailwind?
Look, you know, we were in the past, we were highly distorted into singular fits, and for the past three years, we've been up to opening up the denim assortment, that we can be more nimble in chasing the business. Because I think what we're seeing, there's a fit for everyone now, and as we grow our consumer base, because we're seeing some aging up-
Mm-hmm
... but we're never gonna, like, walk away from our demo. But we're seeing that they're growing with us, which is so important, because in the past, they would dump off at a certain point, and now we want them to live with us, grow with us.
Mm.
No pun intended, that's our mantra. But, and I think now that we've figured out a new recipe on chasing the business, I think now we can distort the various silhouettes faster and just simply be more nimble, and also leaning in a little bit more into women's. I mean, women's is... Let's not forget, women's, they're the consumers of everything we do. They actually purchase for the guys, and I think even just that simplemindedness about the women being the consumer and changing that little shift a little bit is really gonna be an important part of how we're gonna grow this business, and how we're gonna mature and think about the business and distort the business.
Mm.
But not forgetting about the men's. We, you know, we're always going to have that. Men's is very important, but women are the consumers, and we're thinking a little differently that way.
Yeah, that's very exciting. And Mike, on guidance, just quickly touching on that, looks like you're keeping second half expectations similar to before, with low single-digit comps. What could potentially drive upside or downside in your view, you know, in conjunction with what Jen is saying in terms of merchandise-
Mm
... and Back-to-School season?
It's early in the year, but we're definitely pleased with the momentum across brands that we saw in the first quarter. Question about Eagle being now, whether it be four quarters in a row-
Mm
... that we'll see growth in the brand. Within our amplify our brands piece of the strategy plan, we've got strategies to continue to see that growth. But it is early in the year. We do lap some better comps coming up here at the tail end of Q2 and into Back-to-School and through the back half. So we're, you know, we're set with that guidance. We're set to leverage on that low single-digit assumption-
Mm
... in the back half, well on path to that, to that income range that we've provided.
And moving on to Aerie and Offline, and question for both of you, both concepts have been a key differentiator in the market, and we'd love to get more color on how each brand is growing. Also, in terms of the customer base, how many customers shop across both, and is there an opportunity to convert more, across both brands?
That's everything we think about every day. Keep in mind, we share, you know, a website. We share. So we, I think, you know, the unlock for Aerie, when you think about how we grew that business, was taking advantage of the AE customer base-
Mm
... right? And showing up with a new category that we can turn the customer on to. So that's really how Aerie started, really. When we thought about that business, that was an unlock, okay? Now, we're here. We have 22 million customers. It's... And we continue to grow the customer base. Our metrics are incredible. This year, just starting, we continue on all corners, all businesses, all facets. We are growing the customer base, we're growing our loyalty base.
Mm-hmm.
That's the most important thing we can do, and they're staying with us. They're retaining with us. We keep them, the most important thing, and we're turning them on to all the categories.
Yeah.
See, it's really interesting. When you think about having the opportunity to have all these brands, we can, depending on what's happening with the trends-
Mm-hmm
... and what, what we're seeing, we can turn the customer on to what's natural for them now. And we're dressing this customer, her in particular, because as you know, Aerie is OFFLINE, Aerie is women-based.
Right.
And then we have American Eagle women's, and we can dress this customer head to toe.
Mm-hmm.
We have the power of this portfolio to do that, and that's what we've been up to, leveraging and distorting on the trends that are working to deliver on the strategy that we presented back in March.
Mm-hmm.
There'll be times that categories will shift. You heard me mention swim.
Yeah.
It was tough. Swim was tough, but we delivered our numbers.
Mm-hmm.
Because we could lean in on to other categories that are working, and this is what we're up to. I mean, I am involved in all the businesses. When I think of Aerie, it's endless. We're not even in every market... Or we're, we have markets to that we need to enter. OFFLINE is really just getting started. I think we're being very disruptive. If you think about OFFLINE for one minute, our leggings market share has grown almost three points.
Mm.
That is an incredible number. Where we are in leggings, considering that we launched the Offline business during the COVID pandemic, and here we are with this business that's $600+ million overnight, we're doing it-
Mm
... in a very tough environment. So, we're only just getting started. We have one of the most powerful legging categories in the industry, and there's more that we're up to. We're not just going to be a leggings business. We are going to dress this customer head to toe in what she wants to do actively in our, the new lifestyle today. So, and there's more in store for back to school.
Mm.
We have some new tests that we just launched, and some of these bodies are outperforming leggings. That... It's huge. It's a new idea for us, and I think you're gonna see some exciting things happening. Because we can't just rely on one idea. We have to be innovative and move. And then Aerie, look, we're rounding out every category-
Mm
... we can possibly do. There's more ideas with sleep. We haven't even barely entered the sleep market. It's coming.
Mm.
There's ideas that we have that, well, Aerie could be its own business, you know? There's just so much we can do in that business, and the customer just votes for us every day.
Mm.
We will continue to deliver.
And just talking about brands and in-store experience as well, you have a lot of opportunity on the store front for Aerie and OFFLINE. How do you decide, you know, it's a standalone concept or a side by side, and which markets are you thinking of and store concept as you think about growing that brand?
I mean, Mike, this is, we spend hours upon hours, looking at our, you know, our space in the market and our retail, you know, how we position our real estate.
Mm.
Um...
Yeah, we go through a very exhaustive market review process-
Yes, it's-
... with our real estate team. It's just one. Every year, it's about a month-long process.
Yeah.
We're going market by market, looking for the opportunities across our brands, and it's pretty exciting to see how those, especially for Aerie and Offline, continued growth.
Mm
... and OFFLINE, as a potential accelerator and beyond where it is today, there's a lot of opportunity in the market for us.
Absolutely. We're seeing offline stores even outpace-
Mm.
Some of the freestanding Aerie stores, so those numbers are very encouraging. We have a new store design for Aerie. Again, you know, this is a business where we can't stop, like, we have to keep on moving forward. We just opened up in Tysons Corner a new Aerie store design, which I think is incredible, and the early results are amazing. It's a side-by-side offline, and then we have the new store design for American Eagle as well.
Mm.
It, you know, it just... To see this whole presentation in one mall, an incredible mall. We know Tysons Corner is a great mall, and wow, the results are incredible. They love the new store design, and I think it speaks volume that we have to continue to innovate. People, they wanna come to-
Mm.
They still wanna shop in a mall.
Yeah.
We have to entertain them, and that's what we're doing.
American Eagle is doing a lot of remodels. You've seen very good results from that. How are you thinking about just the target as you invest, and potential opportunities that could come from that remodels?
Yeah, early days in the process. We are going to remodel the majority of the fleet.
Mm.
Tracking very closely, not only just the top-line benefits that we're seeing in the comp results-
Yeah
... but the flow-through of income and cash generation from those locations. We'll do 60-70, maybe more, with some maintenance touches this year.
Mm.
Could be as much as maybe 80 stores, more to come over the next several years to get to close to 400 locations by the time we're done. So I think that's just one element of, kinda under the, underneath the AE brand growth story-
Mm
... that we're seeing, something that will continue to help fuel growth, in these next several years.
Moving on to gross margins, it expanded nicely, 240 basis points in last quarter. What is your expectation for the year, and where do you see gross margin trending over time? Maybe you can talk about major buckets within it, that we can think about for out years as well.
We were just under 39% last year.
Mm.
Back on March 7th, we put out on our path to our 10% operating margin from the seven-
Mm
... percent-plus we were last year, that we look for gross margin to be within the 39%-40% range, so we're right there. A nice expansion through the back half of last year-
Mm
... and again, in the first quarter, to your point. But, we see still our line of sight, the product costs look favorable, no headwinds from freight or transportation.
Mm.
We are controlling promotions very well, continuously. Inventories in a healthy spot. You know, supporting categories where we're seeing growth-
Mm
... and it's positioned intelligently that way, and then we've continued to see a nice kind of expense management and leverage across rent, delivery, distribution costs within gross margin, and that work will continue as well. So I think we're on path to that range.
Mm.
Expectation for this year is slight improvement as we head to that 39% mark, with the impact of all the revenue shifts-
Okay
... from the 53rd week-
Yeah
... last year, that we know we need to, account for-
Yeah
... in the back half of this year, but, we're on path to that, that target range.
In your guidance, in terms of promo, it seems like it's under control, but what's embedded in terms of promotions in AUR, and do you have any expectation for higher in the back half, just given, you know, macro is so volatile? Any thoughts there?
Yeah, I mean, I think we look at our inventory position is, like, like I said, in the right spot. Healthy to total level, we'll continue to see that-
Mm
... for the balance of this year. I think the industry has discipline based on kinda all the-
Yeah
... just recently reported inventory levels, so we don't expect any kind of pressure out there in the industry.
Mm
... to overpromote-
Mm
... or do anything different we've been doing differently for the last several years. So, we're positioned well for what's out there, and we'll maintain our discipline on inventory and promotions as well.
We still leave a high percentage open, you know?
Yeah.
We're not booked for the balance of the year.
Mm. Mm-hmm.
We leave receipts open that we can chase or not chase.
Mm
... depending on the business, so-
Yeah
... it allows us to be fluid and nimble and think about, yeah, obviously, distorting the categories that are working, so.
Yeah. Yeah, that makes sense. And you've done a lot of work in terms of where you're going to do a lot of work as well on the cost-saving side. The plan, as you mentioned, you know, 100-200 basis points of cost leverage by 2026. Just could you talk about key buckets of the savings, as well as investments that you are planning to make in the near to medium term?
We've got continued work streams through our Office of Continuous Improvement, across the entire OpEx base-
Mm
... expenses and gross margin and SG&A. The big buckets in SG&A are corporate compensation-
Yeah
... store labor, services-
Mm
... repairs, advertising, so we've got kind of functional efforts across the board to control those costs. We'll see nice leverage starting here in the second quarter.
Mm.
We're set up nicely to leverage expenses across the year. We did leverage total operating expense in the first quarter, and now SG&A will be the, a big, a good leverage story from, from here and, and for the full year. And we do have some normalized incentive accrual timing that would be kind of savings to last year versus the very back half way to last year, so we'll leverage that expense in the back half as well.
Mm.
The target we put out there for SG&A was 25-26. Our guidance implies something in the mid-26 range, which will be nice improvement over last year's rates. So I think, like gross margin, we're well on our way to that range, over the next several years, too.
Jen, I just wanted to quickly touch on, you know, I think the AE is growing and tailoring more towards the broader demographic, the older generation. How... What's sort of the work behind that, and what are you seeing there, and how are you thinking about that specific demographic and competition there?
... as I mentioned earlier, you know, we saw a huge dump out at a certain age.
Mm-hmm.
When I thought about the category of denim, you know, I mean, this is a powerful category, obviously. This is what I love about all of our brands, by the way.
Mm-hmm.
Leggings for OFFLINE, powerful category. Intimates for Aerie, powerful category. Denim. These are all margin-building categories as well, and they can help us evolve. Like, we can do... We can have all the fashion-
Mm.
Right? We can deliver all the fashion, but we have powerful core businesses in each of our brands that helps us stabilize.
Mm.
So we're just not gonna be that brand that all of a sudden we're doing this, and now we're going up against it, and now we're not. It, it's just not what we're up to.
Mm.
These businesses have longevity, and they're timeless. So when I think about denim, and I'm just gonna use that in American Eagle, everyone loves our denim. I just don't think we talk to every consumer. Now, we're just actually gonna speak to the consumer and say, "stay with us, live with us." We have a new idea, AE77.
Mm
... which is a little bit more premium, a little older. It leans a little older. We're testing it. These are ideas that are gonna keep the customer with us and grow and mature with us, so, that's one example, and there's many more. But I think we leaned a little young in the past. It's not to say we're ever gonna walk away from our core demo, but I think because we're a classic American brand, we have earned the right to speak to more audiences.
Mm.
That is really what we're up to, and look, we're using our store base to think about that, how we're gonna distort different stores in different markets, our assortments in various markets. We're definitely leaning in there. That's been a huge undertaking-
Mm
... and we're just getting started. That on top of just bringing our brand back to life and taking advantage of what I think... You know, you're seeing a specialty sector right now. It's happening, right?
Yeah.
Let's take advantage of it in American Eagle.
Yeah.
Like, we own it. We've been here at... since 1977.
Mm.
It's our time. We're an American heritage-based brand, and we didn't falter. Let's remember this. We never really left a... We didn't have an issue. Like, we just need to now expand, right? And meaning we never walked away from who we were, and now it's our time, and I think we're really proud of this. I think with the new leadership and what we're... I think you're going to see what I would say a brand that will last over time and endure.
Mm-hmm.
You know, there's good things happening.
Yeah.
We've only been up to this for three years. I've only... During COVID, so, we have a whole new team. We have a new designer... a new head, a merchant who I worked with at J.Crew. We went public. I mean, we did good things there.
Yeah.
Let's bring it over, and let's get going.
Yeah.
I think that's important for everyone to hear because we did a lot of this during COVID.
Mm.
I mean, this has not been a 10-year project. This has been a 3-year project for American Eagle during COVID, and we maintained our margins, okay, during this.
Yeah.
We did not just jump ship. In fact, we bettered our margins during this time period.
Yeah.
And now we're here. It's time for us to soar.
I want to touch a little bit on the margin target. It's going to 10%, from 7%, last year. In that target, how can we think about the brand level? What's the right level for AE and Aerie and Offline?
Well, Jen just said hit a few things-
Yeah
... on the AE brand. We spent a bunch of years here resetting the brand for profitability, saw a nice gross margin improvement, operating rate expansion for AE.
Mm.
Aerie, as it's hit a growth inflection point over the last several years, also seen very nice improvement across the board. So we're set, we're set for growth in AE. We've got kind of strategies underneath the covers to grow the brand in a lot of different ways. Jen's touched on most of them. Continued work on expense management.
Mm
... while we're, while we're maintaining this consistent revenue growth and looking at the brands to be in the kind of high-teen, operating rate level-
Mm
... and into the low 20s on a longer-term basis.
And Jen, just on the intimates side, it's an important part of your business, and you've been able to hold share when the market has been under a little pressure. How are you thinking about the intimates category and the business overall? How are you planning to sort of hold your share and grow your share in that market?
Innovation, it's coming back, the cycles, right?
Mm.
So, we feel that the intimates business will come back. Look, my head of design has been in the business forever. She's innovating. We have a category, SMOOTHIEZ, that we launched way before any of our competitors, and it's the first layer. We're up to expanding that. Like I said, we've held our... You know, we held our market share there. We held our market share in swim.
Mm.
Like, that's, you know, sometimes categories shift, so then we have to distort into new ideas. But I think for intimates, it is about now this first layer.
Mm-hmm.
And there was a whole piece of the business where they're wearing it out. Like, it just was a top that you could wear as a bra or whatever, so you just wear it out, and that's fine. But I think it's changing again. I think as we get back to... And you can see it, denim, hard pieces are trending again. Apparel, Aerie apparel was up high double digits-
Mm
... in Q1. So now, how do we dress this customer, from the first layer to the next? And that's what we're thinking about. As I think about this portfolio, how do I dress the customer?... in Aerie,
Mm-hmm.
and then build her out for American Eagle. There's a huge idea there, that this is what we're up and we're thinking about this. There's growth here, because we want this customer to come, start with us from head to toe, and we will dress her that way.
Mm.
So I'm very excited about that. There's some new ideas in intimates that we're launching.
Mm.
It's. There's some good things happening, yeah.
Mike, on capital allocation, just what are some priorities going forward, and what are some ways that you can return capital to shareholders?
Yeah, our range for this year, we're gonna spend about $200 million-$250 million in capital-
Mm
... in that range, investing back in the business first. So that's always the first priority. Aerie and OFFLINE growth in stores, and, you know, other capabilities, American Eagle remodel program-
Mm.
Fueling peak growth there, and that's, again, an exciting start to what we're seeing there. So first and foremost, investing back into the business. We're committed to maintaining a healthy dividend and raising the dividend appropriately to maintain about a 30%-40% free cash flow payout ratio. And then, we have been repurchasing shares lately. We're committed to minimally just offsetting dilution or-
Mm
... or share creep from internal grants, and being opportunistic from there. So that's... It'll be a consistent approach to capital allocation.
As we get close to the end of the time, could you just each discuss what you think is most underappreciated by investors now, and what are you most excited about American Eagle in the next three to five years? You first.
I said it earlier, I mean, this is a heritage American brand.
Mm.
You know, we've proven that we can grow with new ideas, Aerie, OFFLINE, and then rebuilding the core-
Mm
... American Eagle. And when you think about that portfolio, we can answer to so many needs, and we're just getting started. I believe in the power of brands, the power of brand building. We are not fast fashion.
Mm.
This is not... This is something that, you know, will have longevity. And we, we're not gonna go into a business just because that's what's trending today.
Mm.
We are gonna build our core businesses that have margin stability, long-term growth, and customer loyalty. And as I said, our three brands, and to think about the staple categories in each of those brands, have the power of stay, and I think this is a long-term gain. I think we're only just getting started. I see what the teams are up to. I see the talent that we've been able to recruit, the new leadership, and the new ideas that we're bringing forth. We had a board meeting yesterday, and it was incredible. What we are doing and thinking about for the future, and for our investors, and for our team, it's powerful, and I think we've only just begun.
Mm.
Isn't that a song, by the way? I think that's a song. But we only... It, it's true.
Mm.
We're excited for this future, really.
Yeah.
We believe in the future.
Yeah, I'd add on to say, some similar points. I think, bringing back the growth is something that, we can't ignore. It's been consistent now for four quarters in a row. We're very confident in the strategies we have to continue to see that growth, and it's set for profitability differently, in a different way than where we've been in recent history. I think Aerie, and the combination of Aerie and OFFLINE only crossing the $1.7 billion mark-
Mm
...recently, with a massive TAM that we play within, with those categories. So I think we're just getting started. I know Jen's got more ideas than I even ... could imagine to continue to grow the brands. And then, really, the strategy work and the things we've done this last year to... as that growth is going to happen-
Mm
... that we're fully confident in. Our history shows that we can grow revenue. Totally different mindset and structural approach to how we're gonna flow that revenue through, through profitably to create value now, very differently than where we've been. So I think that's the thing that... You know, we're still early days in proving that. I understand that.
Right.
But I feel really confident in what we've done recently in these last three quarters, and where we're headed for this year and the next several.
Yeah. Some rapid-fire questions to end the session. How would you rate the health of the consumer on a scale of 1 to 10, and your favorite TV series that you're streaming or favorite book?
Oh, my gosh. That's a hard one.
Maybe start with Mike.
Oh, yeah, I get to go first on this one. Well, the first-
The health of the consumer.
Oh, yeah.
Yeah, yeah, yeah.
I think, look, you know, I, I'll give it a 7-8.
Mm.
Somewhere in that range. I think, we're not seeing any disruption in our business right now.
Yeah.
A lot of noise out there, but we can only control what we can control.
Mm.
I think our assumptions for this year are very solid, with some upside to them, and that's based-
The economy's good. I mean-
Yeah, that's based on where we think the consumer is gonna be.
Employment's good. The economy-
Yeah
... I mean, considering, you know-
Yeah
... it's not bad.
Um-
Your favorite book.
I guess we have to say... Well, I'm not afraid to admit, I guess. Outer Banks is something that... we binge-watch. And then we have to say, too, we sponsor the show. We have a collaboration. But our kids are in the sweet spot of, like, 18-22-
Yeah
... so they forced me to watch that. But... And then I also spent a bunch of years in, like, youth, coaching youth sports with them-
Yeah
... and especially basketball, soccer. But I became a fan of the English Premier League, too, and kind of enthralled with that. Welcome to Wrexham with the-
Yeah
... Ryan Reynolds, Rob McElhenney ... and what they've done there, buying that Welsh soccer club. It's pretty ... It's season three right now, so I'm watching that at the moment, but-
I think, you know, so far, so good. The health is... I mean, you're seeing specialty. I love when I see our competition doing well, too.
Mm.
It just speaks volumes for the business.
Right.
Okay, the French Open. I can't help it, and it's-
Oh, that, too.
... really keeping me up late at night or early in the morning. And Coco Gauff. Well, I can't share my secrets, but there's something happening with her in our company, and watching her play and just seeing this competition, I love. So French Open, number one. And I do have to keep on going back to Ted Lasso.
Yeah, that's a great show.
I watch... I still watch it.
We watch it. I watch it every-
Because you know what? I believe. And that's our mantra in this company, "We believe." And when you see this organization in action, I've never seen it in my whole entire career, I mean, at 35, whatever, years, this organization is ready to go. It's a class act. We do not cut corners. We are not a cheap date. We are not cheap and cheerful. We'll never be that. We have quality, value, and a brand that is powerful.
Mm.
And, we are gonna deliver to that.
Well, we're excited for what's ahead of American Eagle. Thank you so much for joining us today.
Thank you.