Hi, everyone, and thanks for joining our virtual investor meeting. I'm Judy Meehan, Head of Investor Relations and Corporate Communications. This morning, we issued 2 press releases. In the first, we provided a 4th quarter and holiday update. And in the second, we provided details on our Real Power, Real Growth plan and our multi year financial targets, which we will discuss today.
Separately, we issued an 8 ks with segmented financial results for AE and Aerie going back to 2018. Today's meeting will include prepared remarks from Jay Schottenstein, Jen Foyle, Michael Rimpel and Mike Mathias followed by a Q and A session. We expect to conclude the meeting at approximately 1 p. M. Eastern Time.
So before we begin, I'd like to direct your attention to our Safe Harbor statement. Following today's event, a replay of the meeting will be available in the IR section of our website at www.aeo inc.com. And with that, I'd like to pass the meeting over to Jay.
Hi, everyone, and thank you for joining us. I'm excited to share our value creation plan and long term financial targets. As I sit here today, I've never been more optimistic about our future. 2020 was a pivotal year, managing through COVID-nineteen and doing so successfully, reveal the real power of our organization, the power of our people and the power of our brands. The COVID-nineteen crisis clearly accelerated the pace of change and innovation.
Today, we will share with you how we will fuel AEO in this new environment and why I believe we are better positioned to win now more than ever. As you will hear throughout the presentation, there are 2 main objectives that are at the very heart of our strategic plan. These are the 2 key points we want you to take away from our meeting today. First, we will continue to fuel the incredible Aerie brand. We just hit our first $1,000,000,000 and plan to double the business to $2,000,000,000 This will lead to significant margin flow through.
2nd, we will reignite the American Eagle brand for profit growth. First, I want to spend a moment reflecting back on 2020. It was a year when the unusual was the usual. Our response demonstrate the power of our organization. The team was truly exceptional.
We moved with speed, strength and agility. Early in the pandemic, we took aggressive and bold steps to protect our people, customers and business. We were the 1st retailer to secure masks, gloves and sanitizers and thermometers for our stores. We hired a medical consultant, put nurses in our distribution centers and ensured leading safety measures more in place across our operations. When stores closed in March, our teams redesigned the store layout to create the best and safest customer experience.
Throughout, we work closely with our experts and medical professionals. We continue to follow their guidance today. These aggressive steps were recognized and welcomed by both customers and associates. The next priority was maintaining our financial health. As we reported this morning, we had a very good holiday season and expect to deliver a strong 4th quarter with operation income over $95,000,000 well above last year.
This is truly exceptional in the light of the ongoing pandemic. As a result, we will end 2020 in excellent shape with $1,200,000,000 of liquidity. Our third priority was to go on offense. We knew 2020 was going to change the retail future, including with digital growing rapidly, we quickly expanded our fulfillment capabilities. We launched new tools to ensure strong customer engagement throughout the pandemic.
We fast track supply chain initiatives to create efficiencies. We build plans to optimize inventory for improved margins and we scaled back spending and increased our focus on ROI. Now as part of our value creation plan, we will build on the strength and leverage our core values. We are purpose led and our values are the foundation for everything we do. I've been involved with ADO since the very beginning, and we set out to create enduring brands and enduring company.
In order to build something that lasts, you must stand firm and stand for something. We've always been optimistic, authentic, democratic and inclusive. This is what defines our brands and our culture. In fact, I would say we were trailblazers on inclusion and diversity. We've always celebrated individual differences.
Our brands welcome everyone. For many years, we have appealed to multi generations of youth. We led the industry more consistently than any other brand due to our unique platform and I know this will be key to our ongoing success. Our competitive advantage also stems from our ability to execute well on a few basic fundamentals. It comes down to these great product, compelling marketing, strong customer connections and unique brands.
I can't emphasize enough how much this matters. When we do all of this well, the outcome is powerful and positive. Now as we build our brands for the future, I want to underscore our focus on product quality. This is really important to me. We have the best creative talent to deliver great quality and leading designs for our customers.
Our role is to inspire and we sell merchandise that is built to last and that people want to wear. Our finishes and fits make customers comfortable and look good at the same time. Our sourcing team works with the best mills to ensure only the highest quality fabrics are used. We operate every day with this in mind. Price is what you pay, quality is what you remember.
When we execute well, we have more pricing power and build stronger and lasting customer relationships. We're also focused on sustainability. This year a significant portion of our products will have the real good label, which means they are produced with the environment in mind. Great product and category focus drives loyalty. This has been one of our greatest strength and it's what sets us apart.
It will be a major priority as we fuel Aerie to greater height and strengthen AE margins. For example, let's talk AE Jeans. This was our largest and most successful business. Our focus on jeans go back to the early 90s, when my father and I along with Roger Marco set out to put jeans on as many customers as possible. We knew this would be a strong loyalty category and a major hook for our brand over the long term.
Our commitment to invest and innovate has ensured we perform consistently across demand cycles. Fast forward to the day, it is more than $1,000,000,000 business and coming off 5 straight record years, we are consistently the number one share position for 15 to 25 year olds and number 1 across women of all ages. Our gene dominance has been instrumental to our strong brand and supported our category leadership in other areas, which we will leverage even more. Innomus is another great example. Aerie started with a little idea.
It was a boys brief undie and the American Eagle brand. It was so popular and demand was so high that we continue to expand into new categories. We launched the bralette, an industry innovation. We then moved into core bras, soft apparel and swim, all with much success. Now Aerie is enjoying strong growth across the board and fueling our multi $1,000,000,000 opportunity.
Over the past several years, Erie has also built a meaningful presence in leggings and sports bras. These categories have been on fire and serve as our entry into activewear. Our new offline by Aerie sub brand will extend Aerie's more fully into this growth category. We see this as another massive opportunity for Aerie. Our brands are our lifeblood and Aerie is the most exciting brand in retail.
Today, we're providing greater transparency with segmented financials so that you can share in our enthusiasm. It is one of the fastest growing concepts at retail. Our business has doubled every 3 years and has been incredibly consistent. As the business has scaled, our margins have also risen significantly. At $1,000,000,000 in revenue, we have plenty of runway.
We have a small share of the market with significant white space for future growth. AE is a dominant American brand with leading market share. We have a strong customer base and for decades we have appealed to multiple generations of youth customers. We have a strong connection with the most in demand generation. Under Jen's leadership as Chief Creative Officer, we intend to refresh our marketing and introduce product improvement with a clearer point of view.
We will manage inventory with more discipline and transition to a smaller and right sized store fleet. We expect relatively stable AE revenue, yet we will manage the brand to strengthen margins and profitability. Here it is our value creation plan. I've talked about the most important priorities Aerie and American Eagle. Jen will discuss our strategies for each brand in more detail.
Michael will highlight our customer focus, omni channel capabilities and transform supply chain. Michael will provide details on our multiyear financial targets. I will then conclude with our ESG initiatives. By executing this strategic plan, we expect to deliver very compelling financial results. Our plan calls for annual revenue growth of 6% to reach $5,500,000,000 by 2023.
We expect approximately 15% annual operating income growth to $550,000,000 in 2023. Before I turn it over to Jen, I want to repeat what I said earlier. I am more optimistic than ever about ADO's future. First, we have a strong leadership team committed to the execution of this plan. Jen, Michael and Mike have taken on key leadership roles.
They have the right vision and are dedicated to driving growth and strengthening profitability. In addition to our unique strength and strategies to drive value, I believe we have a favorable macro backdrop. The competitive landscape has been disrupted and there is profitable market share out there for the taking. Customer shifts play to our strength, including the migration to digital and omnichannel commerce. Our multi year investments in these areas position us to deliver best in class shopping experience along with strong profitability.
Our A. Unary brands are well suited to take advantage of growing demand for casual, comfortable apparel and activewear. The real estate environment is very favorable. Our average lease term is short and our negotiating position is strong. We expect lower and more variable rents in the future.
For these reasons, I could not be more excited about AEO's positioning and future prospects. Now I'll turn it over to Jen. I'll talk to you again in a bit.
Thanks, Jay. Hi, everyone. I'm so happy to be here with you virtually today. I hope everyone is safe and well. As Jay said, we have one of the most exciting brands in retail.
And today, I want to share our incredible journey and our growth plans. It has been remarkable to see Ares acceleration over the past several years as more and more customers embrace our product, our brand and what we stand for. In 2020, once again, we saw Aerie's growth accelerate despite this challenging environment. This really demonstrates our brand strength and our massive opportunity ahead of us. But before I get started, I'd love to show you a short video to give you a sense of the Aerie brand and our powerful platform.
Aerieville is AerieReal.
Celebrating your most authentic, truest self. Being wild. AerieReal is so much more than no retouching. It's about power, positivity and letting the real you shine. Today is a very, very special day.
We are going to be doing the Make A Wish shoot and it's a total surprise to Sam. Good morning. Hi.
Hi. Hi. We've come
support. It's all about making the Aerie family feel welcomed, expected and loved. Together, we can change how we view resilience and healing. We can change the way the world views disability.
We can change how we see and treat each other through telling our entire story.
Now to really understand what drives Aerie's success, we need to start from the beginning. AEO's core values of being open, inclusive and accepting was Aerie's starting point. We wanted to build an intimates brand that was something different. We positioned Aerie to be the challenger to the supermodel, a brand that all women could truly identify with. Aerie was built on a platform of positivity with broad customer appeal.
And lo and behold, we started a movement, aerareal. We were the first to focus on real women and their natural beauty, and this continues to fuel everything we do. We don't retouch our models, they're simply beautiful. We focus everything on body positivity, which fuels empowerment. We are inclusive and we want all women to be confident on the inside and on the outside.
Let the real you shine and this is our mantra. So let me tell you, the customer reaction to Aerie and our platform has been overwhelming. Momentum is stronger than ever and we could not be more thrilled. As more and more customers embrace Aerie, we have seen exceptional and consistent growth. We've had 24 consecutive quarters of double digit increases.
Revenue has risen at a consistent 25% rate and will reach $1,000,000,000 this year. And the best part is, we're just getting started. Our most important corporate priority is to double Aerie to $2,000,000,000 and beyond. The plan is to win an intimates lounge soft and cozy apparel, expand in the fast growing activewear category, grow in underpenetrated markets and acquire new customers. But first, let's talk about our product line.
We focus on a $65,000,000,000 addressable market. While $2,000,000,000 is our 3 year target, over the long run, we see opportunity well and beyond that. Our core product lines, intimate, soft apparel and swim represent a $44,000,000,000 market opportunity. Our recent expansion into activewear increased this opportunity by almost 50%. And today Aerie commands only 2% share of its addressable market.
We are very excited about our growth potential, which is truly massive. So here's a look at our category breakdown. We've seen very nice growth across the board. Our customers keep asking for more as we deliver new items and product lines. We've seen brand loyalty and customers grow.
In recent years, we've had tremendous success expanding into soft apparel, fleece leggings, sweaters, swim and now activewear. And through all this, Intimate continues to take share. This speaks to the power of our portfolio and Aerie's position as a true lifestyle brand. But first, let's talk undies. This is where it all started with a small table of Boyd Reef undies in the American Eagle store.
This was our first loyalty item and its popularity led to the creation of the Aerie brand. Today, we offer a broad assortment of undies, which spans across 5 different fits and encompasses 7 core fabrications. Yet our iconic Boy Brief has been a mainstay of the collection for years and we sold over 130,000,000 pairs. This spring, we are thrilled to relaunch The Voya Brief with updated details. The campaign is aimed at creating excitement around our undie category and shifting the narrative from price to product and continuing to gain new loyalists.
Another loyalty category bras and bralettes. The truth is women do not love bra shopping. So when they find a bra that fits them well, it becomes their go to brand. We put a lot of emphasis on innovation and finding great fits and styles that work and getting customers into our bras. Our launch of the bralette several years ago really put Aerie on the map and is now one of our core classifications.
The Sunny collection was a game changer and really established us in core bras. This spring, we are excited It's about the softest fleece tees and sweaters out there. Aerie apparel has grown into a category for all facets of life, whether it's lounging at home or heading out with friends, comfort remains our top priority. This is what differentiates us and our business from true sportswear. All bottoms features easy pull on waistband and our tops are softest, easy and versatile.
Swimwear was introduced a little over 5 years ago and wow, we've been absolutely thrilled with our response by our customers. Aerie Swim has grown into a nice business for us, which continued to accelerate even in 2020 despite this pandemic. It's an important entry point for customers who are new to the brand and we see more opportunity in this high repeat and loyalty business, which leads me to our sustainability efforts. We are having significant conversations with our community about a greener, cleaner future, which is so important to all of us. Last year, we launched Real Good Swim, a collection using fabric made from recycled plastic bottles.
Our customers loved it. It was a huge success. And this year, we're expanding to more recycled fabrics across intimates, apparel and activewear. In total, by the end of 2021, the Real Good label will represent about 60% of our product line. I now want to talk about Activewear, which we see as a meaningful opportunity for Aerie and another growth priority.
Over a year in the making, last July, we launched Off Line by Aerie, an activewear sub brand and our timing could not have been better. Already a growing category in the past year, activewear has become that much more attractive. Aerie has a history in this category and we've been quietly expanding over the past few years. We've been focused on refining and perfecting our fits and fabrics. Our quality value equation was incredible.
Our leggings and sports bra compare favorably to premium brands and our customers have noticed. Strong demand led us to introduce Off Line by Aerie. It's a unique and fresh take on the activewear category built off Aerie's powerful platform of optimism, empowerment and body positivity. It's for people who want to get outside, get moving from walking the dog to downward dog. It's about celebrating the small wins together.
The offline collection is available in all Aerie stores and online. We are currently testing a handful of stores as well. The response has been terrific. I want to highlight Aerie's strong emotional connection with our customers. We've assembled a community of loyalists unlike anything I've ever seen.
Since 2014, we've more than doubled our customer count with a 60% increase in average annual spend. Our customer base of $8,500,000 is growing and we have a very healthy expanding retention. The feedback we get from customers has been truly overwhelming. Aerie's focus on body positivity, optimism and self love has been inspirational to so many. To see young women change their perception of themselves and gain confidence with Aerie as their guide has been life changing to me and to my team.
The letters and messages we get on a daily basis are everything to us. They inspire us. They fuel our community and provide the platform to take Aerie to the next level of growth. And this is truly the magic of Aerie and that's how we build a strong community. Our marketing and our engagement is customer focused and customer led.
We have real women reflected in our campaigns and our website and on our social channels telling the Aerie story. This year we had 47 virtual real talk events. We've had a significant presence on social media, which is incredibly powerful with our customer base. And recently, we had some amazing organic TikTok viral moments with our leggings. Within hours, this particular style sold out to the unit and it's on its 5th round of chase reorders.
I'm so incredibly proud of how we show up to our customers, both online and in physical stores. As Michael will review shortly, we have a strong customer focused omni platform that provides seamless and easy shopping for our customers. Our stores are also an important customer engagement point. It's how we acquire new customers, expand new markets and build our community. To grow our brand, new stores will be an important priority.
I love our Aerie market store design. It's emotional, creative and truly sets us apart. Aerie's future could not be brighter. We expect to double sales to $2,000,000,000 by 2023, yet we are increasingly confident that the ultimate potential is far greater than that. As Mike will discuss, this revenue growth will drive even more profit flow through.
And lastly, I want to thank this amazing Aerie team. There is so much energy and passion for our brand and they truly live it every day. I'm truly blessed and fortunate to have highly seasoned leaders who have been with me on this journey and it's because of their talent and their capabilities that I have the bandwidth to spend time now on American Eagle. So thank you guys and I love you. Now moving on to AE, I believe in some ways American Eagle is a bit underappreciated.
I love this brand. I love the strong platform and everything it stands for. Jay, his father and Roger had great vision. They built something very special with American Eagle, a brand with purpose and a brand with heart. AE has always truly welcomed everyone.
We embrace individual differences and independent spirit even before it was cool. And I believe AE's enduring heritage is why we are the largest most consistent youth brand. Shopping and wearing American Eagle has been a rite of passage for American youth generation after generation. We are here to ensure that that trend continues. I've got a lot more to say, but first let me show you a quick video.
You'll see some of our most updated new marketing, which we are so excited about. American Eagle is a big brand with $3,500,000,000 in revenue in 2019. We've seen very consistent top line performance over the years. AE is also very nicely profitable and always has been. In fact, AE was the fuel that built Aerie.
Its strong cash flow enabled us to invest and grow. Yet in recent years, AE's margins have not been as strong as they should be. As we look ahead, I see potential. We are positioning AE to be even better, stronger and more profitable. I arrived in this role back in September.
We started moving fast. We hired new talent in marketing with Craig Brommers joining the team. And I'm also excited to share Renee Heim has joined AE merchandising team to lead women's apparel and accessories. She's had more than 25 years of experience, including J. Crew, where we work together and most recently she was the Head of Global Merchandising at Vineyard Vines.
Our new leaders are working alongside an amazing talented and passionate team and I'm really pleased with the progress we've made so far. We started by refreshing the brand DNA. We have taken American Eagle's amazing platform and heritage and updated it for today's youth. We are reinforcing our product principles, ensuring great quality with a stronger point of view and leveraging our dominance in jeans. We also want to focus on our outfitting.
We will optimize inventory for better margins and right size our store fleet, which Michael and Mike will discuss a little bit later. But let me start with the brand. We are in a position of strength. This is the Piper survey taking stock with teens. We've been consistently at the top since the survey started 20 years ago, while many brands have come and gone.
Our current popularity is surpassed only by Nike, not bad company, and our rank is consistent across genders. Our target customers are largely in the 15 to 25 year age range, and we love this demo. They shop a lot for clothing, looking good is still really important. They have the highest per capita spend on apparel, twice the average of all ages. And they also respond to brands that reflect values, brands with purpose, brands that care about people and causes, brands like American Eagle.
From this position of strength, we want to ensure AE will build on its foundation. Over the past several months, we've been refreshing our brand platform. We are not changing who we are. We are applying greater clarity and consistency to our messaging. We are reinforcing our heritage and updating our messages for today's youth.
AE's platform is as relevant as ever. We are true. We have integrity. We are relatable, consistent, and we are positive. We are an American youth culture brand where modern life meets timeless style.
This is a platform the basis for everything we do. It's our North Star. When we are all aligned, it fuels great product, cohesive assortments and collections with a strong point of view supported by consistent marketing. This is what we've done so successfully at Aerie and this will help take AE to new heights. Craig has done an amazing job updating our platform and finding new ways to engage with customers.
We are creating more storytelling and incorporating a much stronger product message. And I am so pleased with our new campaigns and I look forward to announcing exciting new marketing collaboration in just a few weeks. AE has the ability to authentically reach youth customers in a way no other brands can. We have our finger on the pulse and share our customers' passions. We deliver content that speaks to them across their favorite mediums, driving very strong engagement.
We are especially proud that TikTok has asked AE to present at its best in class apparel brand at the first ever summit, reflecting our many viral moments and campaigns. We will continue to raise our engagement across all social channels. Our product strategy begins with American Eagle Jeans. This is our biggest product category and where we dominate. We are the number one brand and retailer with youth customers and the number one women's brand and retailer across all ages.
Our success in jeans is because of continuous innovation across fabrics, styles, fits, washes and fashion, the broadest range of styles and sizes and exceptional comfort, also the best jeans at the best value in this market. So why do we care about jeans? It's an incredibly sticky category that builds strong brand loyalty. Like Aerie Bras, when people find their favorite jeans, it becomes their go to brand. It's a business that is central to our customer connection and experience.
Almost half of our new customers have jeans as their primary item in their first basket. This is our best retention category across genders. And when we measure lifetime value, jean customers are always at the top. So it's really important that we continue to invest and innovate in this category where we see even greater growth in the future. Just as crucial, completing the outfit.
When we deliver great tops that go with our great jeans, that's big upside. We need to do a better job building complementary tops to pair with our powerful jeans and our bottom businesses. This is our priority. We are buying items with clear points of view. We got over assorted in women's tops and lack focus.
By buying more narrow and deep, we will provide our customers with greater clarity and focus. This also provides the opportunity to market these key looks and items much more aggressively. We have a clear strategy for tops grounded in the following. First, the quality needs to be great. In some areas such as men's tops, we've made improvements and are seeing results.
Fabric fit and style are much better and customers are responding. Within women's work is underway across classifications. Our focus is building great styles to complement a very strong women's jeans business. Focus and we are adding emotional details to give our product that special something, which creates greater interest and loyalty. And at the end of the day, we want to delight our customers with our merchandise, compel them to shop more frequently and shift the focus from praise and promotion to an amazing brand experience.
A few weeks ago, we launched AE's Real Good Spring line. The team has done an incredible job creating items that are not just good for the environment, but look and feel amazing as well. The early reception has been fantastic and we look forward to doing much more. In closing, I'm very excited about the early progress we've made at AE. We are applying many of the best practices to product and brand marketing that have worked so well for Aerie.
AE is an iconic brand and I firmly believe we have the opportunity to grow revenue. Yet as you can see, our plan does not require revenue growth to hit our targets. Any top line growth would be upside. Our plan is instead to focus on improving margin to drive profitability. Our entire team is aligned behind this goal and I'm confident we will achieve it.
I am grateful for the team's hard work and I look forward to driving even more success in the future. And with that, I will pass this meeting on to Michael. Thank you all.
Well, thank you, Jen, and thanks to everyone for participating today. Jen is always such a tough fact to follow. Her passion for our customers, our products and our brands really inspires us all every day. What I'm going to do is start by building on something that Jay said earlier, that 2020 was a pivotal year. It really was.
I'm so pleased with how we adapted and how our teams operated the business. When our stores closed, we leaned into our online channel and we ramped up our supply chain to meet the accelerating demand. We made very quick adjustments to our inventory buys, we created efficiencies across the company and as a result, today we're delivering financial results that we're extremely proud of. The events of 2020 accelerated the pace of change and innovation and our teams really delivered. Today, what I'm going to do is I'm going to talk to you about how we're positioning our operations for the future and how we're going to fuel our next chapter of growth.
So let me start with our customers. Several years ago, we began to transition to a truly customer centric organization. We made significant investments and we upgraded our systems, our data analytics and our omni capabilities. Today, we have approximately 19,000,000 total identified customers and these customers account for 85% to 90% of our domestic sales. Nearly half these sales come from customers that engage with us across both our store and digital channels.
And of course, not surprisingly, these are our best customers. They transact more frequently. They spend 3 times more money with our brands. They stay engaged longer, and they're our most profitable customers. Our focus is going to be to continue to grow and expand these brand loyalists.
We are increasing brand engagement and we're making it easier, more enjoyable and more rewarding. Some of the most powerful tools we have to do this are our loyalty program and our incredible store associates and our e commerce platform that provides both an easy and engaging shopping experience. Last summer, we relaunched our loyalty program. We brought it in house to increase both control and flexibility. We also made changes to reach more customers and incentivize more frequent engagement.
The initial results from these changes have been great. New digital enrollments have been very strong. We're seeing higher redemptions, more frequent purchases and a significant improvement in program margins. Yet, we still see tremendous opportunity to build on this program and we feel like we're just getting started. Our objective for the program is to create more personalized experiences and use it as a platform for broader brand engagement.
Of course, as retail has evolved in recent years, there have been massive shifts in how brands reach customers. Many digitally native companies, they're now increasingly establishing physical presences. Traditional retailers are attempting to migrate online and wholesale brands are now seeking greater control over their distribution. At American Eagle, we're set up to be the best of all worlds. We control leading brands.
We have amazing products and we sell directly to customers. We have strong capabilities both online and offline and this is a model that we've always embraced and we're going to continue to optimize. Our approach is customer centric and market based. We're not channel focused. We leave it to customers to choose where, when and how they engage and shop with us.
And our customers choose what's most important, whether it's speed, convenience or engagement, and it could be different each time. For example, for me, I'm a very loyal AE customer. For me, shopping is about convenience. How do you make it fast and easy? But for my kids and their friends, it's about finding inspiration or tracking down the hottest new styles, such as our legging that's now blowing up on TikTok.
What our tools do is they enable us to meet both of these preferences and many more, and we do that through the integration of a strong digital platform and a healthy store fleet. We have significant capabilities across fulfillment and customer engagement and we also offer flexible payment options. And for us, creating the best brand experiences is our priority. We're going to remain aggressive adopters of both new tools and new technologies. For example, we're currently testing same day delivery from our stores and we're also testing in store customer self checkout through our app.
Soon, we're going to begin testing live streaming retail, and this is where our store associates engage directly with customers through their mobile device. As our business has scaled and customer expectations for speed have increased, transforming our supply chain has also been a major priority. Now we built our plans in 2019 and we anticipated a multiyear rollout. But like many things when COVID hit, we had to accelerate this work and we were able to mostly transform our network in just 6 months. We created a supply chain data science team, we upgraded numerous technologies and we opened regional hubs across the country.
This work has enabled us to be faster, we're more agile and we're more efficient. For example, our store replenishment times, they're now 2 to 3 times faster. We've unlocked significant capacity and significant flexibility with our carrier network. And we're also vastly improving both the placement and the utilization of our inventory. For our company, these changes are going to benefit merchandise margin and they're going to drive cost efficiencies.
For our customers, these changes are going to mean better in stock rates, digital orders showing up faster and in fewer packages and many more delivery options. I'm so proud of how we've increased speed and established a strong linkage between our factories and our logistics network. Our teams have managed so well through the disruptions of the past year. In fact, the strength of our chase capabilities have recently been tested as we've been fast tracking a number of hot items in Aerie with incredible success. Just to give you an example, last week and really over the last few weeks, we've had orders that leave our factories on Monday.
They're received in our distribution centers on Thursday. They sell out on Friday and they are delivered to the majority of our customers by the end of the weekend. It's an incredible job by an incredible team and we really feel like we're just getting started. Now let's talk a bit about our digital channel. What we have is we have a meaningful online presence and it's been growing at a double digit pace for the past several years.
Sales this year, they're going to be approximately $1,700,000,000 and that's up over $400,000,000 representing 35% growth compared to 2019. As we know, COVID fueled the demand way beyond what we would have expected, but our teams and our platforms have seamlessly managed through what's been ever higher traffic and transactions. It feels great to see that the investments that we've made over the past several years have really paid off. We offer a compelling online experience where we provide the fullest and most comprehensive expression of our brands. For example, as you can see here, Aerie offers a year round swim shops.
This is where customers have access to abundant brand content, complete flagship assortments, plus expanded sizes, styles and colors. And what you see here is a look at the AE Jean Shop, which is our most popular destination. This is where we clearly display our dominant jeans collection in an easily shoppable and understandable way. And in the coming months, we're going to launch a tab structure to our site and that tab structure is going to have more distinct and immersive brand experiences for both AE and Aerie. This has been something that's been in test mode for the past several months.
We expect this change is going to drive even stronger engagement in sales for each brand, and it's still going to offer cross shopping convenience through a shared cart and a shared loyalty program. Here you can see that within digital, our fastest growth comes from mobile web and app. Serving a youth customer, we must offer exceptional experiences across these platforms. We love the progress that we are making and investing here is going to remain a priority. Our stores also continue to play very big role in both reaching and serving customers.
Stores fuel customer acquisition, they fuel engagement and they fuel retention and our fleet remains very strong and very highly profitable. Yet as we all know, 2020 did accelerate the pace of consumers shifting to online and the fallout from the crisis is also putting a number of malls and retailers under pressure. For us, this backdrop creates a few really big opportunities. The first opportunity is that we're going to accelerate AE store closures while maintaining healthy transfer rates. The second opportunity that we see is we expect that we're going to achieve rent reductions.
And the third opportunity is that as other brands continue to close, we see an opportunity to improve our store locations. And that's in some of our best malls where we're going to drive profitable market share gains. As we thoughtfully rationalize our store fleet, we're very confident in our ability to transfer both profit and revenue. Historically, we've seen good retention as customers migrate to online and nearby stores, yet we know we can even improve further on those rates. Our high percentage of identified sales means we can take a very customer focused and market by market approach.
We understand the role each A. D. Store plays in each market as well as our likelihood of shifting volume. We are employing aggressive strategies much more than ever before to engage customers before we close a store. We are also investing in focused marketing and acquisition tactics in all these impacted markets.
This fall, we tested these approaches and we've been very pleased with the results so far. Our goal is to make our overall markets more profitable and we're very confident that we're going to do this over time. We believe the right number of AE brand stores in North America is roughly 600 to 700 and that's down from approximately 880 today. In this fiscal year, we're going to close about 50 A stores and we're going to learn from those results. At the same time, we're renewing leases on a very short term basis.
With 85% of our 2020 renewals lasting just 1 year. In these renewals, our team did a great job and we were able to negotiate significant rent reductions. Essentially, what we're working to do is to make our overall store expense as variable as possible. We've intentionally maintained a highly flexible AE store base and we're going to respond as we see what the future holds. We're constantly experimenting with new capabilities, smaller store formats, new locations outside our malls, and we're committed to adapting as customer shopping patterns shift.
For Aerie, our store strategy is focused on expansion. When you consider the competitive landscape and our market opportunity, there is clearly meaningful runway for our brand. As you can see on this map, we're underpenetrated in most of the country and we have very limited presence in some very large consumer markets. There's opportunity to meaningfully increase our customer reach and new stores are going to help fuel us to our $2,000,000,000 revenue target. We see significant opportunity for additional stores and our footprint for Aerie is expected to reach 500 to 600 stores by 2023, and that includes approximately 180 side by side locations that we have today.
Yet what you have to keep in mind is that Aerie developed as a digitally focused brand and it's going to remain digitally led into the future. Now my comments today have largely focused on the U. S. And Canada, which accounts for the majority of our revenue, yet over time, we do see a sizable international opportunity. Our approach to international is going to be focused, it's going to be capital light and it's going to be digitally led.
We're going to distort our investments initially to Mexico and Hong Kong, where we already have successful direct to consumer businesses. In other international markets, what we're going to do is we're going to pursue commercial models that require limited upfront capital and these include franchise partnerships, concessions and strategic wholesale arrangements. We're very excited about the long term international opportunity, yet I'm going to again emphasize that our investments here are going to be measured and disciplined. Our 2023 targets don't assume a significant contribution from international expansion. Any meaningful international success that we experience is going to be upside to our plans.
In closing, I just want to reemphasize a few key points. First is, we operate a superior business model. We have a direct connection to our customers. We have 2 of the strongest brands in the industry. We're well positioned to thoughtfully rebalance our store fleets and we're going to leverage past investments to drive powerful profit growth and strong returns.
As Jay said earlier, we're more optimistic about the future of our business than any time in our history. And with that, I'm going to pass the call on to Mike.
Thanks, Michael, and good afternoon, everyone. It's been an interesting 1st 9 months as CFO to say the least. 2020 may have been the most challenging year in our history, but with what we learned and validated about our brands and business model, I believe we're heading into the most exciting period in our history. Back in April, with stores indefinitely closed, my immediate priority was to bolster our balance sheet, preserve liquidity and seek cost savings. The speed with which we were able to do these things was truly exceptional.
It reinforces my confidence in the talent and experience of our cross functional teams as we execute our go forward strategies. The results we've seen this year from those actions also confirm my long held view that our company can deliver improved sales and profitability with higher returns on invested capital. Let me start with the Q4 update. I'm extremely pleased with how we performed, especially in light of continued weak mall traffic, store closures and reduced hours due to the pandemic. These factors pressured store channel revenue as we lap traditional peak events like Black Friday and Super Saturday.
In Canada, we also managed through store closures that began on Boxing Day. Consistent with trends we saw all year, the online channel was very strong, with double digit growth across brands. Aerie's momentum continued with revenue growth expected in the high 20s. American Eagle revenue is projected to decline in the low double digits similar to the Q3 due to its large store base. We expect total revenue to decline in the low single digits.
Our anticipated operating results reflect strong full price selling and a meaningful reduction in promotions. The merchandise margin is up significantly, fueling projected adjusting operating income of at least $95,000,000 well above $77,000,000 in the Q4 of last year. In an unprecedented year, I'm really proud of our results. We saw sequential improvements each quarter and we well exceeded the expectations we had back in March. Our focus on inventory and expense management, while continuing to drive our brands and channels, are disciplines that are in place and fundamental to our long term plan.
As a reminder, here's our value creation plan. Looking at our business, we have significant opportunity over the next several years. We spent this past year building the long term plan and I'm very excited to be sharing it with you today. Starting with Aerie, with many years of experience in this industry, I can say with confidence that opportunities like Aerie are few and far between. It's one of the fastest growing brands in the market today with extraordinary potential even beyond our nearing targets.
But today we're focused on our plan through 2023. To reiterate, our target is to double the brand to $2,000,000,000 over the next few years. Our outlook assumes comparable sales will grow in the high teens led by digital and new market expansion will fuel additional growth. As you heard earlier, we have plenty of runway to open in new markets. Some of the biggest consumer markets in the U.
S. Remain underpenetrated. Houston and LA are just a few examples. We're targeting anywhere from 60 to 75 new stores each year. Product category expansion into apparel and activewear will raise AURs in basket size and we continue to aggressively build our marketing strategies to grow Aerie's customer base.
New market expansion enables us to grow the brand and deliver strong financial returns. Based on Ares maturity curve, new stores usually grow at accelerated rates in years 23 before approaching the comp store average in year 4. In addition, when we open new stores and markets, we get a natural digital halo, which fuels Ares online growth. As a result, we not only see a very nice contribution from the sales and profit generated within the four walls of a new store, but also an acceleration in our digital business within the market. On average, we see a payback on the initial investment in less than 3 years and returns that well exceed our cost of capital.
To provide greater transparency, going forward, we'll be segmenting results by brand. And here's a look at Aerie's financial plan. Note that brand operating income and margins exclude unallocated corporate expenses. With Aerie at $1,000,000,000 in revenue this year, we are at an inflection point. Fixed expenses are being leveraged at an accelerated pace.
We expect ARIATE's next $1,000,000,000 of revenue to generate significant profit flow through. We forecast adjusted operating income increasing to $310,000,000 in 2023, up from $68,000,000 in 20 19 with margins growing to 15.5%. This is approximately where American Eagle's margins are today. With much of Ares' major investments in overhead behind us and infrastructure in place, this is a very reasonable and achievable target. And our history with AE at this point in this growth cycle supports this view.
As Aerie has been ramping up, we see economies of scale in buying and benefits to costs. Additionally, although inventory optimization is largely an AE initiative, Aerie will also benefit from this work. So as you can see, this is why we're extremely excited about Aerie. The flow through to the bottom line will be significant over the next several years. Now moving to American Eagle.
I'll start by saying the brand is and has been for many years highly profitable with very strong cash flow. Our primary focus for the next few years is to build on that large cash flow base. We'll do this by focusing on inventory efficiency, improving merchandise margins, managing expenses and closing stores to strengthen profit flow through. As Jen indicated, we believe there is a top line opportunity for the American Eagle brand. However, our strategic focus is on the bottom line.
Our plan assumes roughly flat revenue through 2023. Any growth would drive upside to our targets. We expect approximately 90 basis points of operating margin expansion by 2023. Our merchandise margin opportunity will be a key driver of the operating margin expansion. Inventory discipline is something I've been passionate about for many years and it starts with a philosophical shift in how we manage the brand.
We're staying disciplined in our inventory investments and we'll use our product chase capability as a tool to respond to demand. As we've demonstrated in recent quarters, strong inventory management enables us to carefully control promotional activity. That's leading to very nice merchandise margin results, results we haven't seen in some time. We've seen reduced inventories across the industry, which has resulted in a less promotional competitive landscape. And although we are not counting on the environment remaining this rational, we believe there's a desire among our peers to sustain their inventory discipline.
An important part of our work is getting a better handle on our choice counts. Over the past several years, we let choice counts and inventory grow too quickly, creating complexity and inefficiencies that weighed on our profitability. A brand revenue has been concentrated in our top styles, approximately 95% of revenue comes from the most productive 40% of items. And as Jin indicated, the team is focused on sharpening the product point of view, buying deeper into big ideas and removing unproductive styles. Believe this is the right approach and will strengthen our merchandising and marketing efforts to our customers, while also meaningfully reducing markdowns.
Executing on our strategies for Aerie and AE will drive a very compelling financial profile. Our model assumes 6% revenue and 15% operating income growth through 2023. Aerie is the driver of the expected top and bottom line growth on our plan with only marginal improvement from AE's operating income. Given the substantial work we're doing on the AE brand side as Jen reviewed and the financial and operating initiatives, I believe this is very doable and likely conservative. Our corporate unallocated expenses are mainly comprised of home office, distribution center and shared services.
These are projected to grow in line with inflation to $320,000,000 by 2023. Our financial targets imply total AEO operating margins will increase to 10% in 2023, up 2 70 basis points from 7.3% in 2019. Keep in mind that 2019 was a challenging year and our margins were approximately 8.5% each of the 2 years prior. To reiterate, expected margin growth will come from fixed cost leverage related to Ares growth, inventory optimization efforts, a right sized AE store fleet and related expense controls, as well as a favorable product mix. Headwinds will likely be in delivery, distribution and labor inflation, although we expect to partly mitigate these cost pressures.
We are very focused on providing healthy returns to shareholders and have a long history of doing so. We generate strong cash flow and have consistently returned cash through an attractive dividend and share buybacks. In fact, from 2011 to 2019, these returns totaled nearly $2,000,000,000 to shareholders. Our go forward capital allocation priorities are first to invest in our business to drive Ares growth and continue to enhance our operational capabilities. We expect annual CapEx of approximately $250,000,000 to $275,000,000 for the next few years.
Almost half will be invested in store openings and remodels. The remaining investments will be split between digital, IT, distribution, supply chain and maintenance. Next, we will preserve our balance sheet strength. Our convertible notes mature in 2025 and are callable in 2023. We'll evaluate options to potentially retire these securities ahead of their maturity.
And 3rd, we'll maintain our commitment to direct shareholder returns through dividends and share repurchases. I want to close by reiterating our financial outlook and priorities over the next 3 years. We'll grow our revenue at a mid single digit rate and deliver 10% operating margins in 2023. This will translate to a mid teens operating income growth rate. We expect our operating income growth to drive a healthy increase in cash flow.
We'll deploy this cash in a balanced and disciplined fashion, including returning a significant portion to shareholders. The combination of strong earnings growth and consistent direct cash returns should drive attractive shareholder returns. In closing, we believe we are sharing a highly compelling financial outlook and are confident we'll execute on this plan. We have an incredible team that will drive these results. I'd like to thank them again for their hard work during 2020.
What we were able to achieve this past year was just the beginning. With that, I'll pass it on to Jay for some closing remarks.
Thanks, Mike. Needless to say, we are very excited about our strategic plan and financial targets, which will guide our journey over the next several years. Before we go to Q and A, I'd like to spend a minute on something that's very important, our environment, social and governance initiatives. In 2019, we introduced comprehensive sustainability goals, including a plan to be carbon neutral in our operations by 2,030. We have made a commitment to move towards the use of more sustainable raw materials and reduce our water and energy usage.
I'm clearly proud of the progress to date. Our chain factories in total are saving more than 1,000,000,000 gallons of water each year. That's equivalent to 2,000 Olympic sized swimming pools. And we use the equivalent of 60,000,000 plastic bottles through recycled polyester. We lead with purpose and commitment.
We understand that every action we take, even the small ones can have a huge impact. Through the AEL Foundation, we support numerous causes, giving back to our local communities. This includes many volunteer opportunities for our associates. Each year, we set aside a community day where our associates volunteer with local organizations. Early last year, we secured and donated more than 1,000,000 face masks to first responders and healthcare providers.
And we contributed more than $1,000,000 for COVID-nineteen relief efforts to charities in need. The American Eagle and Aerie brands support charitable causes that empower youth and promote young women's health. Last year AEO and our customers donated more than $4,500,000 to support these important causes. As I said earlier today, our culture is a different spanker. AEO is a place where people want to work.
We embrace a strong set of values based on being real and always doing the right thing. Passion and integrity are at our core and we are committed to inclusion and diversity, which is fundamental to teamwork. Last year, I was pleased to appoint a Chief I and D Officer. This appointment formalized our I and D work, which began several years ago with a dedicated focus on hiring, development and culture. In 2020, we are extremely proud to introduce the Real Change Scholarship for Social Justice, a $5,000,000 commitment to advance educational opportunities for associates who are actively driving anti racism and social justice initiatives.
We also made a $500,000 donation to the NAACP Legal Defense and Education Fund to support their education, equity work and scholarships for exceptional African American students. We have strong governments. Our Board of Directors is highly engaged and meets often with management to guide and advise on our strategic initiatives and priorities. This year, we expanded our Board to 9, including 8 independents, which also includes 3 women. We have a diverse Board with an extensive range of experience and expertise.
Before closing, I want to remind you of the 2 key points from today's meeting. First, we will continue to fuel the incredible Aerie brand and plan to double the business to $2,000,000,000 2nd, we are reigniting the Americaingo brand for profit growth. I want to end with our people. They are our most important asset. I am extremely proud of the great work in 2020.
Without our talented, passionate and dedicated associates, none of our success would be possible. Now, we will hand the meeting over to Judy, who will open it up for questions.
Thanks, Jay. And now we'll begin the Q and A section of our meeting today. So I think the team is ready to go and we will kick it off with Matt Boss at JPMorgan. Matt?
Great. Thanks. And appreciate the increased transparency today. Really, really helpful. Two questions.
Maybe first, as we bridge Aerie's operating margin from 8% to 9% in 2019 to mid teens by 2023. Could you just help rank the drivers of the increased profit flow through on that next $1,000,000,000 of revenues? And then second, maybe for Jen, on the AE brand, more or less flat revenues assumed in your plan for the next 3 years, where do you see the most opportunity or ability to exceed this plan?
Okay. Mike, why don't you take that question?
I can take the first part. Thanks. Thanks, Matt. So when you think about Ares revenue growth from here on this next billion, we're looking based on what we disclosed today, we're around $70,000,000 last year. We think we'll be $100,000,000 or higher in terms of op bank this year prior to any allocated corporate expenses.
So we're really implying when you look at this next $1,000,000,000 of growth and you look at 3 years of target, only about a 20% flow through on that revenue. I actually think that could be conservative. We are very comfortable and confident that we can flow through 20% minimally.
And thanks for that question. Look, as we mentioned, profitability is 1st and foremost looking at the American Eagle brand. I will say I'm just thoroughly impressed with the talent that now I've been introduced to. Chad and team have done a great job thinking about our denim business and how strong that business is. Just we are the number one recognized brand in women's, number 2 in men's in our age demo, just thoroughly incredible.
So I think we've done a really great job in that business and I could not be more proud of that team. As I think about the future, look, anything on top of this plan is gravy. So what I'm really excited about is outfitting Tops have definitely some opportunity and we're going to really be smart about our growth. But right now, it's all about the bottom line. And I really think though there is some great opportunity in our tops business.
Okay. Thank you. Best of luck.
Thank you. Thanks, Matt. Our next question comes from Janine Stitcher at Jefferies. Janine?
Hi, everyone. Thanks for all the color today. Really appreciate it. Couple of questions for Jen. First, just wanted to ask that you have the slide there where you talk about Aerie becoming going from being purely an intimate brand to having a big presence in active and beauty and apparel.
Maybe talk about from here where you see the biggest category opportunities. Then also just wanted to ask about the Aerie shopper. Do you have a sense of how many Aerie shoppers currently shop American Eagle? And then what's the opportunity to market to the American Eagle customer? Thank you.
Sure. Just going to our shoppers just quickly. Basically, we share about 63% of the file, but we're growing at a nice pace. And as Michael mentioned, our BrandMAX strategy is to continue to get new customers entering into Aerie solely. So I think it was a great strategy years ago when we needed to introduce the Aerie brand, growing new ways to find customers that are solely dedicated to Aerie, but also introducing them to AE too.
So I think it's great that we have these 2 wonderful businesses that we can share a basket with. So that's great. As I think about product opportunity, first of all, let me just say that we launched offline during the pandemic. Who would have thought a brand new brand? And it just took off.
In July, we started on the digital channel. And then soon after, we opened up some various formats to see what the potential is from a brick and mortar standpoint. And again, we've exceeded expectations. So certainly, we see a lot of growth. The activewear market is a huge opportunity.
And I think we're going to use our unique
platform in Aerie to show up
with offline in the new and total we're only 2% of the market share and there's a lot of in total we're only 2% of the market share and there's a lot of market share to gain out there. All categories really have growth and actually we've seen all of our categories growing, including our heritage bras and undies. It's just amazing. We just launched, relaunched our Boy Breeze. That was a product that started at All In Arie.
It's pretty fun right now. Actually go and check out your email if you're on their list. Today, we really went after it and you can see the new details in it. And look, that's what we're going to continue to do. We're going to build franchise items and we're going to grow each business.
Swimwear, we're under penetrated there. That's been growing. Last year, we grew the swim business in the middle of the pandemic. So I don't know where these women are going, but it's just amazing. So really all categories, the soft dressing apparel has been growing at a nice rate.
You thought you saw it's 33% of our business, so amazing. And we're going to continue to do it with integrity and quality. I think that's the most important thing, is really standing out with details, product differentiation and of course, our unique platform. So it's endless. I really I could not be more excited about the potential in the team.
We have a team that's ready to deliver.
Okay. Thanks very much.
Great. Thanks. Next up is Paul Lejuez at Citi. Hi, Paul.
Hey, thanks guys. So we've heard your plan laid out through F23, I guess. Jen, Mike, Michael, I'd be curious to hear from each of you what you think would be kind of the lowest hanging fruit for you as you think about the next 12 months? And also just what are the biggest challenges as you think about the hitting those targets longer term by F-twenty three, where you're going to really have to work harder to get to the numbers that you've laid out. And I did just want to make sure I understood one thing.
I think you said that you were planning to take your store count down relative to F 'nineteen by 100 plus stores, almost 200 stores, but revenues at AE that is at AE and sales are supposed to stay constant. So just wanted to make sure that you're thinking about things in a way that I was hearing them that you would retain 100% of sales even with those store closures? Thanks, guys.
I'll start first. First of all, you have to remember, we are still in the pandemic and we're still operating under 50% capacity. We have certain markets we can only operate 25% capacity. Even with these challenges that we're going through right now, we're still driving better profitability business total than we did last year at this time. So that gives me real hope for the future because if I can make the profit I'm making now under these type of circumstances and have to work with these type of challenges, I can't wait until we get back to until this pandemic pass.
I'm optimistic that with this vaccine and this vaccine looks very, very promising. So far everything that's been published on it has been great. I read 2 days ago that now they feel that the Pfizer and the Moderna is a 95% effective, I think 100% effective because the 5% that it was that people got it, but had very mild cases and nobody died. So I'm optimistic that as the country gets vaccinated in the next few months, we'll be able to get back to where people could go and we could open up the store to more people at one time. So I think that's a big opportunity that will take place.
And Michael, what do you want to add about our logistics area? Michael and Pal?
Yes. I mean, Jay, I wanted to touch on Paul's question about stores and store closures. Paul, we have a pretty interesting challenge there and we had a lot of debate internally. Because when you look at what's been happening in the industry, a lot of retailers have closed stores with the intent of making themselves more profitable. But really they've been doing that at a time that their brands were in decline, they were closing unprofitable stores and they needed to preserve cash.
And those were pretty easy decisions to make. For us, we feel like we have a totally different challenge and that's why it took so much debate. We have 95% or so of our stores are profitable today. Our brands are not in decline. I mean, if you look at AE's conversion rate, it's sky high.
It's much higher than we likely ever thought would be possible. Aerie is one of the best growth stories, if not the best growth story in retail. So we have a different challenge. Now in our challenges, can we take stores that are profitable and close them and make the whole business more profitable? Okay.
So we identified these 50 stores actually take a step back. What our team did is they took a very market by market, store by store, customer cohort by customer cohort approach to look to see in these markets, in these stores that are profitable, but might that profitability might be declining, what's the likelihood of us being able to transfer revenue to other stores or to e commerce? And we identified these 50 stores as a good test. So we proactively marketed to customers, signed more and more customers up for the loyalty program, communicated to them what was going to happen, how they need to experience the brand. And we're going to test and see the results.
But we feel we actually feel very good that we can close stores, even profitable stores and make our overall business model more profitable. And Paul, I just want to be clear, like that's not to say stores aren't an important part of our future, because they are. I mean, I said in my presentation, if you look at what's happening in the world today, Warby Parker has stores all around me, all these digitally native brands. Amazon, I go to Whole Foods to return my Amazon package or you could go to Kohl's to return your Amazon package. Clearly a model that has both stores and strong e commerce where customers can try on product, they could return product, they could pick it up the same day, they could interact with store associates.
We know that's the best model. And our opportunity here is to refine our model and make it and make our overall business more profitable. So yes, we do expect to retain a good amount of the sales. We have history that shows us that we think we can even do better than that. And we think that's going to drive some comp, both in our stores and in our e commerce channel.
And ultimately, at the end of the day, we're going to make the company more profitable and we're going to provide the customer experience that we think customers want both now and into the future. Mike, I don't know, do you have anything?
Yes. I can add just the pure dollar formula or calculation around your question. So if we're starting from a $3,500,000,000 base in 2019 and we're saying we're going to close 200 to 2 25 stores. But I want to make sure everyone understands these are stores at the very low end of our average. In a lot of cases, we're talking about sort of the I want to say the extra store, but it's if we've got a 4 or 5 store market, we're talking about the 5th store in the market that we're really focused on.
So when you talk about the volume that's associated with that reduction in store count, we're only talking about $150,000,000 maybe $300,000,000 total revenue within that $3,500,000,000 base. And if we believe we can recapture up to half or 50% of that revenue, you're looking at $125,000,000 to 100 $150,000,000 number, which over a 3 year period isn't significant to that base. When you hear Jen talk about the opportunity in tops and categories across the American Eagle brand, that's not a big gap to fill in our mind.
Yes. And just to add on as far as getting to our number in 2023, I would say none of this is easy, right? In Aerie, 3, 4 quarters of competitive coverage growth was not easy. I would say, I think the way we think about it in Aerie and in American Eagle, being newer to American Eagle, but the most important thing we can do is stay humble, right? There's always competition out there.
People are growing. But you know what, I think if we stay humble and hungry and focused. So one thing I always tell my team is less is more. I think that's an important takeaway. Focusing and honestly comping item over item is a harder task to do than just adding assortment.
So I think the thing that we'll be focused on as I mentioned is quality, integrity, not straying away from our brand. Many brands as they move into the next level of growth tend to get sloppy, right? And they tend to stray away from their DNA. And I think this is a time that we can come from strength. American Eagle has incredible heritage and incredible backdrop to their DNA.
Jay and his father and Roger built a strong platform and now Ares learned from that and you see where we are right now. So that is probably the most important thing that we have to keep in the forefront and owning that and being smart about our buys, inventory optimization and chasing those trends when it's appropriate, but not over chasing them and really watching and monitoring so that we can get that steady growth in Aerie and continue to optimize the American Eagle business.
Thank you, guys. Good luck.
Thanks, Paul.
Next up is the Marni Shapiro at Retail Tracker. Hi, Marni.
Hi, everyone. Thanks, guys. And before I ask my question, I just want to say thank you to your store people because I somebody who's been walking the malls the entire pandemic. Your stores are among the safest and cleanest and your associates have been actually really careful with everybody coming in and it's a pleasure to see and it makes me feel safe being in the mall.
Okay. Thank you for that. Thank you.
And Jay, my question is actually for you as somebody who has been walking the malls very, very regularly every week during this. I've noticed how the consumer behavior has changed and she's spending less time in the mall and she's going to the brands she knows and trusts first, getting in and getting out. And the same thing is happening online. And there are a lot of very good smaller brands that have struggled because of this and they don't have the financial flexibility of a large company. As a company who's been acquisitive and who's made investments in the past, Dormify, Urban Necessities, do you see opportunities out there today that maybe weren't available to you a couple of years ago, because they were too expensive or the growth wasn't there?
Or is there just so much growth within the American Eagle organization today that that's sort of on the back burner for now?
Well, I think it's a yes, yes to both questions. Number 1, we're very focused right now. We see a big opportunity to really grow Aerie, double the business over the next 3 years. And so we don't want to lose that opportunity. We also see American Eagle, the opportunity to grow the bottom line there.
But at the same time, if the right deal came along, if it made sense, we'd be very open to it, but it has to fit into our niche.
That makes sense. And I'm curious just a quick follow-up. Minimalish, the cutest name ever. I saw the launch in the store. It's fantastic.
You guys have babbled in personal care on and off before. What's different about this or why do you feel this is different? I think it looks fantastic by the way.
Yes, recycled packaging, the products are organic, but mostly we launched it obviously during a tough time during the pandemic where you really want that engagement in a store. So the early reads are slow out of the box, but when we get up and rolling again and God forbid, if we all can just open up our stores again and get back to business, I think we'll really engage our customers in a new way. I do love the product. I think it looks really fresh and the marketing is great around it. So more to come there, Marni, and I'll definitely keep you posted.
Fantastic. Best of luck
to you guys.
Thank you.
So next we have Susan Anderson from B. Riley. Susan?
Hi. Thanks for taking my question, everyone, and thanks for all the details today. It's really helpful. I guess, I wanted to drill down more on the denim category, a very successful category for you guys, number 1 in women's, number 2 in men's. I guess, how are you guys thinking about the growth there for American Eagle over the next several years?
Are you expecting to continue to gain market share? Do you feel like there's more opportunity in men's than women's? And also, do you think that the category could continue to grow over the next several years?
We do. But let me remind you that this is about this is a profit story, not a growth story. So like I said, anything above this plan will be upside. And sure, like if we get the trend and it's in front of us, we will continue to grow. This team is constantly innovating.
We have great new ideas down the pike, some pretty exciting ones. Jay has us working fast and furiously on and there'll be some learnings there. And that's what we'll do. We're going to introduce new fits and as we
learn those new fits,
I will say sometimes when new fits arrive, it does take away from older bodies. So that's always the balance in denim. But the team is we work months in advance with innovation and I would say we're like no other really from a comfort perspective. And we even saw it during COVID when everyone thought everyone's going to soft dressing, which was great for Aerie and that was the trend, we still saw a nice momentum in denim headed into Q3 when we really opened up again. So we're going to balance the assortments.
I do think there's opportunity in tops and again anything above and beyond this will be gravy and we will continue to focus the assortments. Mike mentioned it earlier. That will be really important. And I think as we focus the assortments, we'll get more leverage on our initial margins and potentially some upside in our gross margin. So more to come
here. And as Jen said, we have opportunity on top of our plan. And I made a statement a year ago we plan to be number 1 in denim. And we're working on some concepts on that and it's not in the plan, but we think there's still a major, major opportunity in the denim business.
Great. That's very helpful. And if I could just add one follow-up on the Aerie brand, it seems like you've been very successful really across all product categories that you've introduced. And so I'm just curious, are there more product categories you feel like you could go into? And then also within your existing categories, where do you think the most growth is going to come from?
Or do you think it's going to be fairly equal across the categories that you've seen already? Thanks.
Sure. I mean, it's just amazing what we see. As we expand offline, it'll open up opportunity in our AE stores as well in our AE business, digitally and in stores, I should say. So there'll be opportunity to expand our assortments inside the AE box. As I think about this, bras, we still are under penetrated.
There's so much market share to grab, as I mentioned in my original comments, that I really think there's opportunity for all areas of growth. Beauty, we're just getting started. I just mentioned that to Marni. Swim, I mean, like I said, during the pandemic, we saw growth. So think about when we get out of this and our customers traveling again.
Bras, undies, we are still not fully out there in all the fits that we could offer in undies and in bras. And bralettes has been a phenomenal category for us. I think really a cornerstone for us. What I love about bralettes and sports bras is alpha sizing smart inventory management, and it's great margin. So we're just going to continue to drive our current businesses.
And I will say, if I listen to my customers and what they ask for day in and day out, we might have a department store here. They love Ares platform and they love what we stand for. So the requests are endless and we're going to be really smart on how we go about offering new categories, making sure that we always protect the franchise.
Good afternoon. Thank you so very much for all this information today. Very interesting to hear obviously the game plan of the business going forward. Unpacking the real estate portion of what you're doing, when you think about the transfer rate of closed stores, how do you think of that is is it going to be mainly the B and C malls where you're closing? How do you think about next to the side by side of ARE and how that's looking?
And when you think about factory stores, where does that come into play? And then just one follow-up after that. Thank you.
Okay. I'll take the first part. First of all, with the stores, we're doing things differently with the stores. The stores like going forward. We're trying to make as much modular stores as possible.
So in the past, you'd open a store, you put a lot of money into the fixtures. So you didn't have that ability to go shift locations, move stores, because it just cost you too much money. We're figuring out a way that if we want to move a store, I can move 80% of the store with me. So I'm not stuck at one location because I have so much money poured into that one location. I'll have the ability in the future that within the mall itself, if a better location opens up, we can take advantage of that at the same time too.
So that will give us tremendous flexibility.
And Dana, I would add, I think our factory locations, as we've seen in the last two quarters, really impressed by their trajectory and their productivity. And I think that's still an opportunity for us. They generate a lot of volume. They generate a lot of profitability for us. So I think the leverage of that piece of our fleet will continue.
And with the store closures, there aren't that many. When you think about Aerie and AE side by sides, a lot of the stores we're talking about in these low volume locations are not side by side. So there's really no Aerie implication to what we're talking about. It's really an AE brand focused strategy in terms of the repositioning of the store base, this decline overall in stores. Then back to Paul's question, the volume we're talking about here is not a significant gap to fill within this $3,500,000,000 target.
We're very focused on the profitability of the bottom line story here and maintaining a $3,500,000,000 number within this is not a huge lift for us.
When you think about the digital margin versus the physical store margin, that digital margin, do you see that improving? Does the digital margin exceed that of the store margin? How do you think of that with the significant profit growth at Aerie and the improved profit growth at American Eagle?
Yes. Well, the flow through on that, so think about the volume transfer, these are low volume stores and especially post pandemic, they'll be our lowest profitability. They would be our lowest profitability stores too. So if you're talking transferring half the revenue, then really becomes a variable model to digital, which we see a healthy flow through on that revenue that transfers first to digital space versus what we're making in the store. Same thing goes for the volume that would transfer to another store location.
Now you're talking about leveraging all the fixed costs of that volume shifting from the store to another store as well. So as we even if you can transfer 40% to 50% of the volume from these stores that we're closing to another store or the digital channel, the flow through of that volume in those spaces is better than what we're seeing in the current store. Does that make sense?
Yes. Thank you.
Thanks, Dana. Next up is Jay Sole, UBS. Hi, Jay.
My question is for Michael and Mike. It's really about the supply chain transformation. If you could sort of connect that to the margin goals, like what part of the supply chain transformation is benefiting the company's operating margin? And maybe if you can connect it to the slide where you show some of the positive drivers of gross margin and compared to some of the maybe the headwinds. If you could help us sort of connect the dots there, that'd be great.
Thank you.
I can start, Michael, just from a yes, that chart, the 2 70 basis points, if you start there. I think the other thing I'd point out is that we're grounding that in 2019. So that's our lowest or a low watermark from an operating rate perspective. If you go back to previous 2 years, I think I said in the presentation, we were around more the 8.5% mark in 2017 2018. And if you actually go back to year before that in 2016, we were at 9.8%.
So my high degree of confidence that this 10% is very achievable. And I think the thing you can correlate the most to it that we're talking a lot about is inventory. So if you think about the chart of sort of the proliferation of choice counts, SKU counts, quite frankly losing a little bit of discipline around our inventory management. And that go back from 2016 to 2019, it's not by coincidence that our operating rate sort of started to decline as some of those disciplines were lost. So I think the what we just proved ourselves in these last two quarters that maintaining or reinstating some of our mentality around inventory that we had previously and how much benefiting our business just in the Q3 that we've seen.
I think tie that to the supply chain initiatives in terms of the speed and delivery inventory being in the right place at the right time, Michael can build on this, it all comes together. So how are we buying upfront, keeping our choice and speed balance managed in a very disciplined way and then tie that to the supply chain capabilities in terms of where inventory is going to reside and the speed at which we can get it there. Now we have a margin story that's very confident in terms of the merch margin expansion that benefits or targets us or pass us to that 10%. The other thing I'll say, the inefficiency, we talk about merchant margin a lot, but there's a lot of hidden, I like to call it the hidden cost of inventory when we're a little bit undisciplined and there's significant expenses in transportation, store labor, DC carrying costs, we're talking tens of 1,000,000 of dollars of inefficiency on the expense side of the equation below or within BOW and gross margin. So tie that all together with capabilities Michael can expand upon and then getting back to a 2016 level where we were 9.8% and being 10% or higher, I have no hesitation that that's more than achievable.
This is one actually that I want to I do want to build on. I'm super passionate about the supply chain transformation work that we've been doing. And if I could Jay, just to take us back in late 2018, early 2019, Jay and I hired a new supply chain. It's a really visionary guy who brought to us an incredible plan for how to transform the company through supply chain. And what he proposed to us was essentially taking building a new model that makes our inventory much more flexible and makes us much more agile as a company.
So it involved, like I said in my presentation, creating a supply chain data science team, implementing a bunch of technologies and positioning inventory on the edge of our network close to big customer populations of pulling inventory out of stores in order to have a lot more flexibility with how we use that inventory.
And Also, Michael, what you can use for an example is what happened in the beginning of December when we didn't know if certain areas were going to be open, not open, how we held back inventory that we've normally sent out to all the stores and how we held that inventory back to give us that flexibility to be able to adjust it to where the stores were more operable than not.
Exactly. You could see our passion for this, Jay, because it's a big it's really a big idea for the company. We plan to do this over the next few years, but COVID hit and we had to move quickly And we implemented all these capabilities, set up these DCs. And like Jay is saying, COVID actually created a challenge, but it also created the perfect opportunity for us to stability and leverage it. So we pulled AE stores were down 30% back.
They were down a massive amount, but yet we still fueled a ton of demand because we had inventory in these warehouses close to the stores in a very flexible way that we could fill back in same day, next day by size, by color. And at the same time, what's been killing retail is retailers have traditionally had DCs in the center of the country. They've pushed a ton of inventory out to stores and had a ton of excess at the end of the season. And the options were either mark it down or sell it through e commerce, shipping it all over the place. For us and what that does is it creates a lot of split shipments, a lot of excess delivery costs and frankly, a lot of customer frustration because instead of getting one package for the recovery, they're getting 3 year quarter.
So COVID created this moment of opportunity for us. Our teams really rallied behind it across the company, like Mike, that's everything from how we buy, how we package, how we manufacture, how we allocate and how we ship product. And we prove this concept. So we feel like going forward and look under the covers there's a ton of things we can do better. Inventory came in late because of COVID.
It wasn't placed perfectly. We set up these operations just in time. So it's not a one and done thing. It's not that we did it in Q4 and now we have that built into our base. We did it in Q4.
We leveraged our inventory in a more productive way than probably ever in my 20 years. We leveraged deleveraged delivery cost was much less is much less in 4th quarter than what we had anticipated because we were able to have a lot more consolidated shipments. And we have a ton of opportunity to build on this capability going forward. We have an to expand and we brought on some great partners to help us with it. So we are I truly believe, I mean, we can't win without great merchandise, without great marketing, without great brands.
But for the first time in a long time, we have an opportunity to really change the trajectory of our business, compete with digitally native companies by transforming our supply chain and transforming our operating model. So I know that was a long answer to your question, but it really is a big idea and a big gap.
Well, you know, something we're very proud of it too. What Michael was talking about, we're very proud of and we did it in a virtual manner. The amazing thing is it isn't like we had like 10 people sitting in office figuring it out. We did it from across the country. We had people in San Francisco, people in New York, people in Kansas, people in Pennsylvania and they were able to work through all this.
And it was amazing how we were able to deliver to the customer in time for like the holiday, get it to them, them, keep we kept our guaranteed delivery for Christmas up until December 18 that we have the ability to get to the customer. And we even give an example, we had one area LA where all of a sudden Federal Express was not going to was looking at our pickups and our people figured out a very creative way of learning selling packages in their associates' cars, taking different drop off stations and making sure the customer got it in time. And this is the type of ingenuity that our people have and dedication they have. And really through this what this time has showed me was the dedication of our associates to this company. Back in March, we had shut down our stores, talking about 1 week closing 1,000 stores, because nobody wanted to take a chance at God forbid getting people sick in a store and having people die.
That was our biggest concern in the beginning was we didn't want anybody to get sick because of us. So we didn't want people to get sick in our stores. And then we had to figure out while we were shut down, how we were going to reopen in a safe environment. And at the same time, we had to keep our distribution centers open. People have short memories, but they were shutting distribution centers all over the country to different states and we have to make ourselves essential and how we brought product in from overseas of medical suits, masks and that to give to different hospitals and work in the local communities.
And by doing that, we became essential. At the same time, we put nurses in our distribution centers. We do a lot of creative stuff in order to keep us open. And with all that going on, to have the development of the product we did and have our designers in their homes working virtually and developing the new fabrications and the new fits and the finishes, it was really amazing. And if we could do it this way, I can't imagine when we get back together how much greater things that we could do.
And Jay, through all that, don't forget our culture of surveys have never been better. So it does show just how we really think about our employees and take care of our employees. I think it's a really great point of strength here.
Great. Thanks, guys. We're going take the next question from Janet Kloppenburg. Janet?
Hi, everybody.
And congratulations on one of the most outstanding executions during fiscal 2020. It's a really tough year and you guys did an excellent job. My hat off to you. A couple of questions. With respect to Eagle, I understand that the store base is shrinking, but it sounds like Jan has some great plans to increase the productivity of the stores with the increased tops and the power of the new marketing.
So I'm wondering if we should even though total sales will be flat or projected to be flat, Basket size may be improving, Jen. So should we look for a comp gain as we go forward in the stores? Because I don't think you're going to let the denim business go and the top business should improve. And if you could give us some timing on when we would start to see that talk evolution, that would be great. And just my second question is on Aerie.
As PINK's growth trajectory unfolded and Lulu's, Athleta's, we saw great pricing power emerge for these brands. And Aerie has a very strong value message every day online and in stores. And I'm wondering if that will continue or if you see some opportunity for elevating prices going forward? Thanks so much.
Yes, definitely. And it's already been happening, Janet. Our AURs in Q3 and Q4 have never been better. And it was part of the strategy. Don't forget, 5 years ago, we set the course to get Aerie to $1,000,000,000 by 20 20.
And it was on how we grew the AUR and here we are, we're at $1,000,000,000 And the plan was to build the AUR year over year without necessarily having to sell more units. Now the beauty is we sell units and grow our AUR and that was a beautiful thing. So and we're going to continue to do that. We've been pulling back on promotions. We pulled back MAE as well.
We're not seeing any resistance. And that gives us the power to really dig into details that it's going to separate our product, quality, innovation from our competitors. We're earning our right here and it will be something that we're focused on. As far as tops, Janet, you know I'm a feisty person.
No tops in the stores, Jen. There's just no tops in the Eagle stores right now. I know.
We're going to get tops.
It's pretty bottoms heavy right now.
Yes. Yes. And we are working so hard to balance out the assortments and really own the outfit. So that is what we've been highly focused on. I would say that I believe quarter over quarter, particularly as we head into Q3, you're going to see a more rounded out assortment.
And with that, Janet, the plan is right. If we hit this plan, this is a beautiful thing. And there will be opportunity and there is upside. I definitely see upside, Janet. So I'm not going to deny that.
But in the meantime, I think it's a great time for us to sit back and develop and innovate and build beautiful product that we can be proud of. Look, one of our best lessons in the pandemic was the quality of the sale. Andrew and the store team Sunny, I mean the leverage that they got out there has been I've never seen anything like it. So from where I sit, I just am like, wow, we have a store team out there that can sell product. And how beautiful is that.
And I think we've really found unique ways to engage with our customer and it gives us the right to continue to grow our AURs. And with that, of course, we're looking for always upside and I'll continue to do so, Janet, and we will balance out those assortments. It's a major focus of ours.
Perhaps there'll be the reduced inventory will reduce the clearance opportunity and that could be a constraint to comp.
For sure.
Reduced inventory focusing on and denim too, narrowing and deepening the assortments there too. So as we do so, we've done more volume with similar inventories over the past 5 years. So I think the opportunity is to remix and build into our key items and that I see as opportunity.
Great. That gives me a much better understanding of how you're evolving the assortments. Thanks so much and good luck.
Thank you.
Thank you. And next we have Kimberly Greenberger from Morgan Stanley.
Okay, great.
In this virtual world, the trick is to take the mute button off, I guess. Okay. The first question I have is for Mike Mathias and then I had a question for Jen. Mike, I just wanted to clarify, did I hear you correctly? I think you said the $3,500,000,000 roughly American Eagle business, you're closing 50 stores and that in aggregate is 3 $50,000,000 in revenue.
I just wanted to clarify that before I ask the other question.
Yes, the 50 stores is just this year.
I think Paul's question was the 3 year target where we reduced the fleet somewhere between 600 to 700 stores. Between now and 2023, that is somewhere between $250,000,000 $300,000,000 estimate based on the stores we're talking about. They are definitely at the low end of our average, so it's that 200 to 2 25 stores between now and the end of fiscal 2023 that's worth you could estimate $250,000,000 to $300,000,000
Okay, great. Thank you so much.
Not the 50 if the 50 stores this year were that much, we would not be closing those
ones. Great. Thank you for that. And then beyond the clarification, I was just intrigued by your commentary on the operating margin decline from 2016 to 2019, and it really was exactly that commensurate decline in gross margin.
Kimberly, there's somebody crinkling papers or something.
Yes, I hear that. If you
could repeat that?
Yes. Could you just un pack the gross margin decline that led to that operating margin decline from the 9.8% in 2016 to set it was about 260 basis points of gross margin decline through 2019. Was it all merchandise margin, Mike, or was there some deleveraging of store occupancy expense in there, some distribution expense, deleverage, digital delivery expense deleverage? Or was it really just decline in merchandise margin, which you kind of solve for with the better inventory management?
Majority would be tied to our inventory management and merchandise margins. And then I think you could think that the some of the capabilities we invested in and delivery and supply chain costs were mostly offset by rent. We've actually seen rent leverage over that period. So those expenses within BOW are gross margin somewhat offsetting each other since from 2016 to 2019 with merchandise margin being the majority of the decline over that period within the gross margin.
Okay, fantastic. That's great. And then my question for Jen. Jen, I'm wondering, how do you decide when you're developing new items or new categories, which ones are developed as opposed to which ones are developed under the Aerie brand? And I'm just thinking back over the category development for the last several years, including this new activewear category.
And I'm wondering if you think that in some ways the American Eagle women's business growth rate has curtailed or limited somewhat because some of the new category development has been given to Berry?
Well, the beauty is now that I sit over both, I can really ensure that we are protecting the soul of each brand. So that's really important. That said, if categories are trending and as long as there's differentiation of the item, we're seeing growth in the category, for instance, fleece. So that to me tells me that both brands are helping us gain more market share as a company, that's AEO Inc. So I love when something like that happens.
Look, we work hard to embed our each business and what we stand for. So I like to say from an Aerie perspective, it's innerwear, it's inside, it's comfy cozy for the most part and then AE is the outside brand. So and look, I think there's a lot of beauty in that when you think about that. So lots of opportunity in both brands. We just expanded on the opportunity in tops.
And I might have missed your question a little bit because you went out. So am I answering your question? I just wanted to double check.
Yes, that's perfect. Sorry about that. The hazard of Zoom is the unstable Internet connection.
Yes. I mean, just to be really honest, like I go through I have I go through all the product meetings. I'm part of all those meetings and I can really make sure that we're leveraging the best of best in each brand. So really it gives me a place of just have that opportunity now and it's great.
Thank you.
Thanks, Kimberly. Next up, we have Laura Champine at Loop Capital.
My question is about rents. I wanted to talk a little bit about what stage you are in, in your negotiation with landlords around pandemic related rent cuts? And how much leeway do you think you have to adjust the expectation for closing 200 stores depending on how much progress you make there? And maybe to help us level set for overall margin impact, with e commerce gaining so significantly on your store based revenues. What percentage of the company's total expense structure today is related to rent and where do you think that goes in 2023?
I can
start with that question, Laura. Thanks, Laura. So if you think about the details we're providing between the brands. So as we just is the modeling right now and to maybe answer the one part of your question first around flexibility. We have ultimate flexibility around this reduction.
So we're talking about 200 to 2 25 stores. It's a bit of a modeling exercise right now. It's a lot of guesstimating and using our sort of experience and intuition on what things are going to look like post pandemic. So we have under 3 years of average lease term within the fleet. Stores we're talking about, this sort of the 500 bucket, over 400 expirations right now in this fiscal year.
Between this fiscal year and next fiscal year and anything we're renewing will remain flexible and initiatives around and comfortable and move, definitely pivot and change our mindset around how many we want to close if it warrants addressing that. From a rent structure perspective between now 2023 to answer that question, assuming we do close roughly 200 to 225 in AE like we're talking about, while we're opening Aerie stores at the same time. So we're talking about almost opening as many Aerie doors as we are closing American Eagle in this one scenario, our overall rent dollars between now and 2023 will decline even with the even the mix of that activity. So you talk about growing the top line from a little kind of over $4,000,000,000 in 2019 to $5,500,000,000 in 2023, rent dollars being net a net decline from 2019, we'll have significant rent leverage in the P and L. Hopefully, that gives you the specifics you're looking for.
Thank you.
Thanks, Laura. Next up is David Buckley from Bank of America. Hi, David.
Hi, good morning. Thanks for taking
my question and thanks for all the details this morning. Jen, I know you mentioned improving the tops category, but can you elaborate what your top priorities are for
the men's business at AE heading into 2021?
Well, I can only say that AE men's got started over a year ago and really upgrading the qualities in tops specifically. We walked away from some tried and true heritage businesses and also just intrinsic details that separate our products from everybody else's. And the men's team has been highly focused and they're doing just such a great job. I am so excited about the future assortments and just what's already happening. We're just seeing results out of the gate.
We're not fully there. We still have lots of work to do. But I think they're focused and engaged and really listening to what the customer is looking for. So the qualities are has never been better honestly in men's. And women's is following suit.
So I think men's had a little bit of a head start and that is our focus now is really just bettering our qualities, our details and ensuring that we stand apart from the competition, naming and claiming items, for example, and owning that item and marketing that item and showing up with that item. These are the most important things you can do in retail and owning it and claiming it that like I said, I just think in that distortion in buying product, I think best practices have gone by both sides. Fast fashion made a lot of retailers sloppy. And I go back to my less is more. It's so important to build a product that is going to comp last year's product.
And that is what we are highly, highly focused on not only in American Eagle, but in Erie as well. So I have a lot of I just a lot of excitement around the assortments that I've seen coming. The design team in American Eagle has just really risen up to the challenge and I'm excited to see these assortments come to life.
Yes. If I could just reemphasize one point that Jim brought up is we take a lot of pride in our design work and in the quality of the product we make and the detail that we put in the product. And she cannot overemphasize that because I think today in retail, the competition we're going against, we're going against different competitors. But I don't know if they put that same type of detail into their product. And I can just tell you for myself personally, that's been a great emphasis is making sure that we make a great quality product, better and better, softer and softer and some of that some of the people want to buy and that people want to wear and people are proud to have.
And I guess we just can't emphasize enough our merchant team and our design team. And we take that as like the heart of the company. And if we don't make good product to start with, nothing else counts. So it starts with the product, making it better and better. And our goal is to keep making it better and better and have our customers do want to keep growing with us.
Thank you. Okay.
Great. Next up, we have Oliver Chen at Cowen. Oliver?
Hi, good morning. Thank you, everybody. Jay, on the ESG frontier, how are you balancing profits and purpose and the real good program? Would love your thoughts on what might be more challenging from an ESG perspective and what's lower hanging fruit? And then Jen, on the brand story, optimization of incrementality as you think about Aerie relative to American Eagle, relative to cannibalization risk and what you've learned from the brand focus and clarity?
And 3rd and final, on the Michael, CACTA LTV, as we think about customer acquisition
opportunity in the future?
Thank you. Well, one of the highlights that the data is telling you that's an opportunity in the future? Thank you.
One thing to give an example is that we've known the past year about what was going on in China with the cotton going on, and we don't take any product from there. We don't take product at using that cotton. And at the same time, whether we're doing it in opening our stores in the future with waste and everything. So it makes environment friendlier, using the right type of materials. We're making that a priority today.
And also where we buy our product to make sure that we're working with mills that are they have the best practices in there, whether it be for less water usage and with the carbon emissions, we're making emphasis on that because we believe that it's that number 1, it's the right thing to do and it's right for the future.
Yes. We don't really see a trade off, Oliver, between purpose and profit. So we do believe that reducing water usage, reducing our energy consumption, making goods that are more sustainable, making our offices and our stores more environmentally friendly, we can do that and increase profit at the time. So historically, that's been a trade off, but we feel like plans we have in place, we can do both. And as Jay is saying, live up to our value.
What about the value.
What about the consumer side on
that topic? Are the consumers is it an opportunity for you to gain share? And what are you seeing in the customer cohort behavior as you think about sustainability as a competitive advantage?
I think the customers today are very educated and this is what they want. They want a better environment. They care about the future. They care about the air. It was very interesting when they had the shutdown here in Miami.
For like a month, everything was shut down. And you didn't see much there wasn't much like on the waterway or anything. And it was amazing after 30 days how clear the water looked. It was amazing. And we look around the world, places like Bombay, for the first time, they can see the sky.
So it does make a difference. And I think people realize that and people hear about it. It's not just younger people. I think people are starting to realize if we don't take care of the environment, we're not going to be around.
Yes. And our data shows that they're not really willing to pay more for it, but we're not asking them to make that trade off. We're working closely with our factories. We're working closely with our partners And we're building better product that is more sustainable that does support our cost goals. So we have higher margins actually in total, but we're building more sustainable product that are and that's what our customers tell us they want from us.
So we do think it's a differentiator. It's hard to do it when you're making cheaper product. But as we're focused on better factories, better fabrics, better washes, we think we can make that product and do it at a cost that our customers are willing to pay us for because it's in line with what they pay us.
And Oliver, as far as optimization, Aerie, just thinking of Aerie alone, it's only 2% of a 65 $1,000,000,000 market opportunity. So that alone in our core key categories, so swim, activewear, intimate. So I think we can really maximize that. While we go back to thinking about American Eagle, I mean, like I said, we're going to go back to heritage items. We're going to reintroduce them.
And I think there's opportunity there. But again, we're going to do this with grace. Honestly, we still want to get this bottom line story moving and anything above that I have to keep on saying it is grade B and upside. So but I see lots of opportunity for both brands. Combined, we're only 4% of the market.
Okay.
You can tell
if it's off the gen, our target for AE would have definitely been above 3,500,000.
All right, guys. Next question is from, Adrienne Yih at Barclays. Hi, Adrienne. Great. Hi.
How are you? Thank you very much
for all the information. Good afternoon. J and J, this question is for you. How do you see the competitive backdrop evolving as it shifts to digital and the competitive effectiveness of the pure play e tailers versus traditional brick and mortar? Second to that, what new metrics are your new key performance indicators?
It feels like sales per square foot is sort of an archaic indicator. And just want to know what the KPIs are as we look forward to the omnichannel future?
Thank you.
Jade, do
you want to take that? Michael, maybe you should help out there too. There's a lot of
I mean, I'll just kick us off. I mean, Adrienne, as far as metrics, what we're really focused on is not store metrics, not individual digital metrics. Of course, we look at those to make sure that we're performing okay, but we're really looking at the profitability of a market and what our share is in the market and how we're capturing sales. That line between digital and stores is completely blurred. When you have curbside, you have same day delivery from stores, You have the live streaming that we're going to be doing from stores.
Also Michael to add, today, the last couple of years that we converted our stores that the stores have the ability to ship right to the customer. We have the ability to do curbside pickup. So we don't necessarily look at it as an old definition of a store because it serves multi purposes of stores today. And as Michael said, we're going to have live stream that in a short time they'll go on our app, they'll be able to look at our product and have a live person store help them. And as they're talking, they see the product going by them, they click it and they get it shipped right to them.
Exactly.
One of them, they can pick it right up to the store.
Exactly, Jay. So we're really focused, Adrian, on what's the most profitable makeup of the market between stores and online. We just want to get our share and do it in the most profitable way possible.
Great. Okay. And our final question comes from Simeon Siegel at BMO. Simeon?
Thanks. Thanks. Thanks for all the details, everyone. Congrats on the ongoing success. Thank you.
Mike, can you just help I don't think I I don't know if I missed it. Did you say what you expect the gross margin between the brands to be and the ultimate gross margin embedded in the 2023 op margin goal?
We didn't say specifically, but, Simeon, we're not expecting them to be very different actually. When you think about Ares leverage on this next $1,000,000,000 we're already in place now when you look at the last two quarters where the margins between the brands really aren't that different anymore. So I think the next $1,000,000,000 are growing Aerie from $1,000,000,000 to 2,000,000,000 dollars even close that gap even more just to be blunt about what's in our models, you're talking a matter of basis point different basis points, not tens of basis points. So go forward, the leverage is there. Since we started grounding ourselves in 2016 a little bit, that 10% operating rate as a company, go back then, we're talking about $1,500,000,000 of Berry growth from 2016 to 2023.
So and then, yes, obviously, merch margin, gross margins come really close and in line with that target about 3 years from now.
Thank you. And then that 50% transfer rate that you had mentioned, that's fantastic. Can you just speak to it sounds like you have that's coming from data you're seeing already. So can you just speak to that a little bit and give where how you get to that 50% number? Thanks a lot.
Take that one, Michael, or I can. Historically, we've seen 40% plus without really any effort. And Michael, you described the effort around what we're doing as these stores close. And really the stores we're looking at closing, we've already done all the analytics to show that there's already a propensity for the customers at these stores to shop in other locations and online. So we think really on average, if we're already seeing 40% on average in our history, 40% to 50%, that what we're doing with these first locations should be 50, because of the extra effort and the hyperpens view in terms of behavior these customers have already displayed around shopping with other locations and the digital channel.
Exactly. That's why we feel so confident about the plan, Simeon, but we're going to test it, we're going to learn and we'll adjust as we go. But based on our history, based on the activities that's happening both in marketing and with our store teams, we feel like that transfer rate is within our grasp.
And then again, the absolute number being $125,000,000 to $150,000,000 if you sort of did the math and as we were joking a minute ago, Jen definitely has much bigger aspirations for the brand from a category growth perspective. So that volume we're talking about is not something we're concerned about
a bit. Great.
Thanks so much, guys. It was a great day. Thank you.
Thanks, Eunian. All right. That concludes our meeting today. Thanks, everybody, for joining us. We really appreciate the support and we look forward to talking to you all again soon.