As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Judy Meehan, Vice President of Investor Relations for American Eagle Outfitters. Please go ahead.
Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Chief Executive Officer Chad Kessler, AE Global Brand President Jen Foyle, Aerie Global Brand President and Bob Madore, Chief Financial Officer. Before we begin today's call, I need to remind you that we will make certain forward looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results actually realized may differ materially based on risk factors included in our SEC filings.
The company undertakes no obligation to publicly update or revise any forward looking statements whether as a result of new information, future events or otherwise, except as required by law. Consistent with the retail calendar in the 53rd week last year, the 4th quarter's financial report and discussion today reflect the quarter ended February 2, 2019 compared to the quarter ended February 3, 2018. 4th quarter and year to date comparable sales are shifted to reflect the 13 and fifty 2 week periods ended February 2, 2019, against the comparable 13 52 week periods ended February 3, 2018. Also, please note that during this call and in the accompanying press release, certain financial metrics are presented on both a GAAP and non GAAP adjusted basis. Reconciliations
of adjusted results to
the GAAP results are available in the tables attached to the earnings release, which is posted on the company's new external website at www.ae0 inc.com in the Investor Relations section. Here you can also find the Q4 investor presentation. And now I'd like to turn the call over to Jay.
All right, Judy. Thank you. Hopefully, this time it takes. Okay, good afternoon and thank you for joining us. I'm pleased to announce that we ended 2018 with a strong momentum, delivering another quarter and a year of record sales.
We have now achieved our 16th consecutive quarter of positive comp growth. I'm proud to report this level of consistency, which is a real standout in the industry. It's a testament to the talent and commitment of our teams and strength of our brands. For the year, we reached a milestone of $4,000,000,000 in revenue, representing 8% comparable sales growth on top of a 4% increase last year. And adjusted earnings per share rose 28% to $1.48 Business strength in 2018 was broad based as we again achieved growth across markets, brands and channels.
American Eagle's 4th quarter comp sales rose 3%, marking the 7th consecutive quarter of comp increases. Aerie delivered another impressive comp increase of 23%. The brand's 17th consecutive quarter double digit comp growth. In a highly competitive holiday season, we achieved record volumes on lower promotional activities. Our 4th quarter EPS of $0.43 exceeded our guidance of $0.40 to $0.42 Cash flow was strong and we ended the year with a very healthy balance sheet.
Cash and investments totaled $425,000,000 a year and after we returned $242,000,000 to shareholders through share buybacks and dividends. In addition, we invested approximately $190,000,000 in capital. While 2018 was a year of great progress for our company, we know that significant opportunity is still ahead. As we look forward, our focus is squarely on our strategic priorities and executing growth and gaining market share. We will remain highly focused on elevating the customer experience and raising the bar on product innovation.
We surpassed $1,000,000,000 in jean sales in 2018. You'll see much more growth in jeans and bottoms as well as complementary business such as graphics, shoes and accessories. We are also focused on testing new categories our customers care about. This weekend, we are opening a new sneaker shop within our New York SoHo store. The shop is a partnership with Urban Necessities, a leading rig dealer of exclusive premium sneakers with a huge customer following.
We look forward to seeing the results of this initiative. Aerie is a major growth vehicle for us for the foreseeable future. We have filled a void in the market and emerge as a powerful voice for real women. The team is focused on gaining market share by continuing to offer compelling quality products that make our customers feel good. Aerie's growth has been terrific and profit has improved.
We see tremendous opportunity ahead. Our sights are squarely set on the first $1,000,000,000 as we continue to enter new markets and grow our customer base. As we maximize our customers' owned businesses across North America and expand Aerie's footprint, we are also prioritizing global expansion. In 2018, we continue to grow our worldwide presence and ended the year with 231 licensed stores across 24 countries. A few weeks ago, we signed a license agreement to launch our brands in Europe.
Our partner brings strong expertise and a proven track record of launching brands in Europe. Today, we have the most exciting brands in the specialty retail market. Our purpose is to show the world that there's real power in the optimism of youth. As we conclude 2018 and look towards 2019, We are not only focused on driving profitable revenue growth, but doing so in the right way. We will continue to give a voice to our customers and represent the values that are important to them, such as inclusivity, fairness, transparency and authenticity.
We have built a strong community for our customers and our associates that we can all be proud of. I'd like to take this opportunity to congratulate and thank the team for their outstanding execution in 2018 and their unwavering determination as we look to the future. Now, I'd like to turn it over to Chad.
Thanks, Jay. Good afternoon, everyone. 2018 was a strong year for American Eagle. We continued to deliver on our strategic pillar of fueling more growth for our brand. We saw greater consistency with all quarters achieving improved margins and comparable sales growth across channels.
4th quarter was no exception. Comp sales grew 3%, building an increase of 5% last year. Both women's and men's posted positive comp growth driven by strength in jeans and bottoms. Sales growth reflected increases at both stores and digital. It's great to see stores once again post a positive comp, which marks the 5th consecutive quarter of increases.
Investments in store payroll led to greater customer engagement and a better overall experience. Combined with effective marketing, these improvements drove store traffic, which outperformed them all. We delivered strong merchandise collections, which emphasized gifting in key categories. Although there's always room for some improvement, I'm proud of how we performed this holiday season. Sales metrics were healthy with increases in the conversion rate, transaction growth, average unit retail and average transaction value.
We also saw consistency across geographic regions. In a highly competitive environment this holiday, we controlled promotions and reduced markdowns in the quarter. AE Jeans were strong across genders with the 4th quarter marking the 22nd consecutive quarter of best ever results. Our jeans business has strengthened dramatically over the past few years, fueled by unique fit, fabric, innovation and value that our customers love. In 2018, AE Jeans surpassed $1,000,000,000 in annual sales, gaining nearly 200 basis points in market share.
Across all age demographics, we are now the number one women's jeans brand and the number 2 overall. Those are powerful stats and we continue to see a ton of opportunity for further growth in this important loyalty category. Leveraging our incredible success in bottoms, we remain focused on growth across the balance of apparel. We're capitalizing on new fashion trends and using our seed sourcing capabilities to offer the best collection season after season. I'm pleased with the performance of our loyalty program, which is bringing in new customers, increasing retention and fueling more frequent buying.
We're always testing ways to introduce the customers new customers to our brand and expand share of wallet. With our customers at the center, we look for opportunities that are important to them. As Jay mentioned, we are excited to open Urban Necessities sneaker shop in our SoHo store. Like jeans, sneakers are essential to self expression and we look forward to seeing the results of this pilot. Also recently launched a test of American Eagle Style Drop, a rental service in partnership with Castle.
The pilot is aimed at expanding brand awareness, getting new customers into AE jeans and highlighting outfits within our seasonal collection. Our AE and Me brand platform continues to be a driving force for an authentic relationship with our customers. This spring, 10 real customers photographed, styled and creatively directed our campaign. It was truly first of its kind and strongly resonated with our customer base and strengthened brand perception. Look for more to come.
As I said, I'm excited about the opportunities for future growth. Congratulations to the entire team for another quarter and another year of exceptional and consistent performance. Now I'd like to turn it over to Jen.
Thanks, Chad, and good afternoon, everyone. I am once again thrilled with another quarter of record performance for the Aerie brand. We posted 4th quarter comparable sales growth of 23% on top of a 34% comp last year. That's a 2 year stack of 57%. This was also our 17th quarter of double digit sales growth.
It's truly gratifying to see consistency in the Ares growth as we continue to gain market share. It's also important to note that on our 4th quarter annual growth was achieved on less promotional activity, resulting in higher margin flow through. We continue to see healthy gains across our sales metrics, posting growth in traffic, conversion transactions, AUR and the average transaction value. The quality of our sales metrics is a clear indicator that we are expanding our brand reach and attracting new customers to the Aerie community. New loyalty members rose in the mid teens consistently throughout the year and retention rates are up over 20%.
Our Q4 category performance was broad based with particular strength in newness in apparel and accessories. We also maintained a very positive momentum in core intimates, bras and undies. Overall, we are pleased by the positive response to our gift giving collection. We continue to broaden product offerings, adding categories, styles and expanded sizes that are important to our customers. Stores performance was again impressive as we posted strong results in both our standalone and side by side formats.
We continue to see great success in newer markets. The data analytics points to meeting demand across the country for Aerie well beyond our primary East Coast exposure. We are super excited to be accelerating our store growth to 60 to 75 openings this year. We will focus on new markets in Texas and California and add into filling existing markets and fill into existing markets. All of the new stores will incorporate our latest design highlighting unique features such as a selfie wall fitting rooms like no other.
The new design stores are performing extremely well. They are outpacing our average store comps and we are seeing online penetration in new design markets at 40% to 50%. This is a tremendous opportunity for us to expand the reach of our Aerie brand. Our marketing platform AerieReal continues to gain momentum. Aerie is a game changer by staying at the forefront of body positivity and women's empowerment.
Our new cast of role models are even more inspirational. They embrace the Aerie lifestyle and were chosen for their influential voices, unique stories and commitment to inclusive, empowering and empowering our community. And speaking of women's empowerment, this spring we are excited about a cool collaboration with the new Captain Marvel movie. Congratulations to the entire area team for a record 2018. Let's stay humble and hungry and focused on the significant opportunity ahead.
Thanks, and now I'll hand it over to Bob.
Thanks, Jen, and good afternoon, everyone. As I recap our performance, it's important to note the impact of operating 1 less week in 2018 in keeping with the retail calendar. This adversely affected both sales and operating profit for the year and the Q4. Throughout 2018, American Eagle and Aerie demonstrated strong brand performance. Total revenue reached record highs for the Q4 the year with broad based strength across regions and channels.
Investments in our store experience, our people and marketing have contributed to greater consistency and improved results across the business. In the Q4, we delivered strong quality of sales metrics and reduced markdowns in what was a promotional holiday season. Please keep in mind that my comments will focus on the adjusted financials, which excludes certain items as detailed in the press release and tables on pages 6 through 9 of the investor presentation. Now looking at the Q4. Total revenue for the 13 weeks increased 1 percent to $1,240,000,000 compared to $1,230,000,000 for the 14 week period last year.
Total revenue grew by $15,000,000 despite operating with 1 less week, which approximated $60,000,000 in lost revenue. Comparable sales for the 13 weeks increased 6%, falling in 8% in the prior year. The quarter marked our 16th consecutive quarter of positive comp growth. Additional sales information can be found on page 11 of the investor presentation. By brand, 4th quarter American Eagle comps were up 3%, building on a 5% increase last year and Aerie comps increased 23%, following a 34% increase in the prior year.
Our stores business continued to demonstrate momentum posting a mid single digit comp increase with positive results across both brands. The investments that we've made in our stores, including talent and payroll, have delivered positive sales trends throughout the year. Digital was also strong, posting a positive high single digit increase in the quarter, its highest volume quarter ever. Digital penetration rose to 31% of revenue in the 4th quarter and 28% for the full year. Overall, quality of sale metrics were healthy, particularly in stores, supporting our investments in field talent and wages.
On a consolidated basis, traffic and transactions increased with store traffic positive in the quarter, outperforming the mall for both brands. Investments in store payroll and a positive response to our merchandise collections also drove an improved conversion rate. Controlled promotions led to a slight increase in the average unit retail price and transaction value. Gross profit dollars increased to $431,000,000 up 1% from $425,000,000 last year. The gross margin rate was flat at 34.6 percent of revenue.
Lower markdowns were offset by higher delivery costs due to increased transaction counts and increased incentive expense. SG and A expense of $288,000,000 increased 9% from $264,000,000 last year. As a rate of revenue, SG and A rose 160 basis points to a rate of 23.1 percent to sales. Investments in our brands, field talent, customer facing store payroll, higher wages, advertising and incentives drove the majority of the increase. As well as we've noted, these investments have strengthened our brands and the quality of sales.
Depreciation and amortization decreased 5% to $41,000,000 improving 30 basis points to 3.3% as a rate to revenue. Operating income of $101,000,000 compared to $118,000,000 last year and as a rate to revenue declined to 8.2% from 9.6% last year. 1 last week in the 4th quarter adversely affected operating income by approximately $18,000,000 The effective tax rate decreased to 26.5 percent compared to 34.2% last year, primarily due to the impact of U. S. Tax reform.
4th quarter earnings per share of $0.43 exceeded our guidance of $0.40 to $0.42 and compares to adjusted EPS of $0.44 last year, which excluded $0.08 of tax benefits related to U. S. Tax reform. Now a few comments and highlights regarding our annual results. Total revenue for the 52 weeks increased $240,000,000 or 6 percent to a record $4,000,000,000 compared to $3,800,000,000 for the 53 week period last year.
One less week in the year resulted in lost revenue of approximately $40,000,000 Consolidated comparable sales for the year accelerated to 8%, building on a 4% increase last year. Comps were fueled by strong brand performance throughout the year. AE brand increased 5% and Aerie comps were up 29%. AE comps were consistently positive during 2018 and Aerie continues to grow at a fast pace with this year marking 4 straight quarters of double digit growth. Gross profit dollars increased $115,000,000 to $1,500,000,000 rising 70 basis points to 36.9 percent as a rate to revenue.
As improved markdown rate and rent leverage were partially offset by increased delivery expense due to a strong digital business and higher compensation. SG and A of $981,000,000 rose 11% and 110 basis points to 24.3% as a rate to revenue. Throughout the year, we made deliberate investments in our brands, the customer experience and our people, which drove the dollar growth. For the year, operating income of $339,000,000 increased 4% from $325,000,000 last year. As a rate to revenue, operating income decreased to 8.4% from 8.6%.
This excludes restructuring and related charges of $2,000,000 $22,000,000 respectively. Operating income was adversely affected by approximately $12,000,000 due to operating 1 last week in the fiscal year. Annual adjusted EPS of $1.48 increased 28% from adjusted EPS of $1.16 last year. For additional information, please refer to Pages 7 and 8 of the investor presentation. Now turning to the balance sheet.
Total ending inventories at cost increased 7% to $424,000,000 Inventory ended the year in line with our expectations and consistent with our demand. We ended the year with $425,000,000 in cash and investments, up $12,000,000 from last year. As a result of our strong free cash flow during 2018, we returned a total of $242,000,000 to shareholders. We paid dividends of $97,000,000 dollars reflecting a 10% dividend increase in the Q1 of 2018. And we repurchased 7,300,000 shares for $144,000,000 Consistent with our guidance, capital expenditures totaled $180,000,000 for the year.
In 2019, we expect CapEx to be in the range of $200,000,000 to $215,000,000 The increase in capital spending is driven primarily by increased Aerie store openings. 2018 store activity can be found on pages 15 through 17 of the investor presentation. Total gross square footage increased 1% for the year due to additional square footage for Aerie store openings. We opened 12 new Aerie standalone stores and closed 6 old format stores, and we also opened 29 new Aerie side by side locations. For the AE brand, we opened 16 total locations and closed 15.
Our real estate priorities in 2019 are to accelerate the growth of Aerie with approximately 60 to 75 store openings, to reposition and remodel AE stores and to continue expanding globally through our franchise partnerships. Now regarding our outlook. In the Q1 of 2019, we expect earnings per share of $0.19 to $0.21 based on comp sales in the positive low single digits. In closing, we remain focused on driving better earnings flow through while fueling growth in our brands. The future is bright as we look to the opportunities ahead.
Our goal is to deliver consistent bottom line results while creating sustained shareholder value. And now, we will open it up to questions.
Thank you. At this time, we will be conducting a question and answer Our first question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Good afternoon, everyone, and congratulations on a successful 4th quarter.
Thanks, Dana.
As you think about the leverage opportunities in 2019, Bob, what do you see this year that will be different than last year, whether it's occupancy, whether it's comping wages? And then this next Q1 and how you're thinking about the comp guidance, what are you seeing different in the Q1 than what you saw in the 4th? Thank you.
Yes. So Dana, thank you for the Two things I think that are really going to drive leverage in 2019, and really the primary one is leveraging SG and A. As we've noted throughout the year, we've made significant investments in advertising, stores payroll, wages. In addition to that, we've done a number of restructuring activities in the retail field organization where we've really upgraded talent. All investments that particularly highlighted by Q4's quality of sale metrics in the stores, we've seen significant improvement across AUR, ADS, conversion, just the comp performance in and of itself in addition to driving comp gross margin dollar increases.
So we really feel in addition to really driving an increased sales per associate dollar metric too. So all of those are pointing to great returns from those investments. Looking forward to 2019, most of those investments are behind us, and reflected in the base with the exception of Q1. We really started investing heavily in store payroll wages, all the things I mentioned, in Q2 through Q4. So Q1 will see continued incremental investment in those categories, in addition to just some slight increase in advertising year over year and some timing differences of when advertising materializes in Q1 and then flows out the rest of the year.
So looking to Q1 of this year, we're really not expecting leverage or improved operating margin in light of those investments. But as we move through Qs 2 through 4, you should expect to see operating margin leverage improvement and it's really primarily driven by SG and A leverage. The one other thing, speaking about investments or things that are different but reflected in the base in 2018, we had a very strong year this year, which drove a higher incentive compensation payout than it did the prior year. A higher incentive compensation payout than it did the prior year. That's now baked into the base also and is reset.
So we won't have that as a headwind as we look forward to. So those are really the drivers, Dana.
Our next question comes from the line of Oliver Chen with Cowen and Company. Please proceed with your question.
Congrats on a great quarter. The positive traffic was impressive. As we look to model traffic over the next year quarter, what are your thoughts on traffic and merchandise margins, particularly as some of the commentary on February has been more cautious from other retailers. And lastly, just on denim, your denim leadership has been outstanding. I just would love thoughts on what's next for continuing innovation and newness and making sure that you interfeuse technology and active in the right way for what the customer is looking for with the latest trends?
Thanks.
So in 2019, just thinking about traffic, both brands, AE brand and significantly Aerie brand, have performed much better versus the mall. We expect that trend to continue. You know, AE has kind of leveraged traffic by 2 full basis points, at least on average, if not more throughout the course of the year, and Aerie's traffic performance has significantly outpaced the mall. So we expect both of those trends to continue throughout 2019. Lastly, related to traffic, our digital traffic has been performing at mid teens performance and we expect that traffic trend to continue in fiscal 'nineteen.
And as for jeans, we're obviously focused every day on making sure that we're delivering the most innovative jeans and the best assortment possible for our customers. This year is going to be a huge year for jeans and American Eagle. I don't want to share what we have planned because back to school is still several months away, but I am really excited for the 2019 season store for jeans for AE. We're going to continue bringing the innovations and fit fabric wash and value and quality that we do, but I think there's some really exciting things coming for the customer.
Our next question comes from the line of Marni Shapiro with Retail Tracker. Please proceed with your question.
Hey, guys. Congrats on a great holiday and best of luck for spring. So rather than talk about denim, Jay, I thought since we have you on the call, can you we've had a lot of bankruptcies, a lot of store closures in the teen space, a lot of players that I kind of wonder how they're still there. Can you think could you give us your thoughts on where you see Eagle going forward? Is it mall based?
Do you see opportunities to partner with other brands or other digital brands inside your stores. I guess, where are you thinking with so many of the players going out? Where are you thinking the brand can go over time? And do you feel like we're closer to a bottom or maybe that's a strong word, closer to status quo in the teen space where the winners are now squarely in their place and the rest will eventually go away?
We know like the latest bankruptcies were like the little kids, not the teenagers. As far as like the Gymboree stores and those type of stores there.
But you had Charlotte Russe, Wet Seal, those over the last year or so?
Well, it's going on right now, Charlotte Russe. It's about the start to seal there. Look, we still see the malls being strong. A lot of the mall developers are doing special things in their malls. They're trying to add like some special site.
You saw where Simon Mall has just announced that they're doing a deal with like putting CBD products in their malls right there. So we're still very optimistic. We're working with some different store designs. We know that part of the retail experience has to be what type of experience that as far as the customer gets. And we're challenging ourselves to see what type of special things that we can add within our stores.
We add up a customization, personalization in some of the stores. We're opening a store this week like in New York, where we're going put the sneaker shop up. So we see opportunities there. We think in the next year or so, there could be a major opportunities, different accessory areas for us. And so we're very upbeat.
We're challenging ourselves to see what other area products for development do to do. So we see it being very strong. I'm very bullish, and I know the team is very bullish. We know Aerie is just still growing. And as far as Eagle, we think there's big opportunity for other products too.
And in the denim area, we still see a big market in denim. And as Chad was saying, we put a lot of energy into development of the denim, into the fits of denim, into the special fabrication and creating the excitement for the denim. We see a big opportunity there too. And we also see that there may be opportunities down the road of picking up other businesses too with what's going on out there.
And Jay, this sounds weird, but I'm going to be a little more optimistic than you. If you take Gap's recent announcement of closing over 200 stores, I'm excited by that. That's a huge opportunity for us to continue to capture market share Just like we've been doing in AE brand, I mean, denim is up 200 basis points in market share this year. We sold over $1,000,000,000 in denims. Aerie is taking market share every single day and then more.
So I'm really excited about it. Let the disruption continue.
Look, I also feel that people got nervous last 30 days because of February. But it was a strange month, February, because we had the government closure. Had income tax checks that came out late as far as like tax refund checks. You have a shift in the calendar. You have a later Easter, which is good, which I believe is going to be better for us.
But it changes everything. Last year in February, you had people taking spring breaks And spring breaks are just starting now. So we're very optimistic. We think it's going to be a strong season. And we have a policy we'd rather under promise like to over deliver.
So we're optimistic. We're very positive. And our team is very excited, and we see a lot of good signs the last few days.
Hector, we'll take the next question.
Our next question comes from the line of Kate Fitzsimons with RBC Capital Markets. Please proceed with your question.
Yes. Hi. Congratulations on a strong holiday. I guess my question would be on the Q1 gross margin outlook. Bob, I heard your comments on SG and A, but just was wondering if you could give a bit more detail on what you're looking for on the gross margin side between IMU markdowns, occupancy, etcetera.
And then also just what you are seeing on the IMU side as you look to 2019? Thank you.
Yes.
So you can think about Q1 gross margin along the lines of flat to down slightly, really driven by BOW deleverage, because of some increases in buying compensation and delivery due to increased transactions in digital and a couple of other things. We are seeing really strong improvement in IMU in the quarter for sure and we are expecting IMU improvement throughout the course of the year. On that delivery As I said, Q1 is overall going to deleverage by based on the SG and A investments that I recapped. It's really Qs 2 through 4 that we are going to see margin improvement in leverage going forward.
Our next question comes from the line of Janet Kloppenburg with JJK Research. Please proceed with your question.
Hi, everybody, and congratulations on a great Q4. Really welcome. Hey, Janet. Hey. So, that's an interesting comment on gross margin, Bob.
So, do you look for that shipping deleverage to moderate in the second and third quarter then, so allowing gross margins to improve or maybe you could help us understand how that shift will change?
I do. We saw some slight demand shifts in February, that as Jay pointed out, spring breaks are just kicking in, in March for college. You've got an Easter shift versus last year, both pre and post Easter, all fall into April. So we have got a lot of the quarter ahead of us for sure and we are expected we did a great job in holiday managing promotions. We are expecting to do the same this quarter, but we will possibly be flat to slightly lower on gross margin because of that deleverage.
I don't expect that BOW deleverage to be something that continues quarter on quarter for the remainder of the year.
Our next question comes from the line of Simeon Siegel with Nomura Instinet. Please proceed with your question.
Hey, this is Dan Stroller on for Simeon. Thanks for taking our question. We just wanted to know about international trends, anything you're seeing differently or any color on Europe? Thank you.
Yes. Well, we're really not operating in Europe presently. As Jay pointed out in his opening remarks, we just signed a new franchise agreement for Europe. So that won't kick in until later on in fiscal 'nineteen. We really saw strong performance in our Canadian business and our Mexican businesses.
Mexico has been performing very strong consistently throughout the year, and our license businesses have been performing very well.
And that's despite all the gas shortages there, all the other sectors like Mexico, right?
That's a great point, Jay. So in Mexico, there's a lot of disruption going on down there at a macro level, a lot of disruption from a supply chain perspective, just getting product into the stores because of the ports being held up. So yes, Jay, that's even more of an accolade to how well the Mexican business is performing. But we're very happy with the performance of our international business. We've really significantly reduced some of our loss making businesses there in Asia and previously in Europe.
So we are really happy with the profitability improvement that we have seen throughout the course of the year in international.
It's become a very profitable business. Absolutely.
Our next question comes from the line of Susan Anderson with B. Riley FBR. Please proceed with your question.
Good evening. Nice job on the quarter. I was wondering if you could touch on Aerie and the profitability there and the improvement you saw in 2018 and then I guess where you guys are at on the timeline of kind of narrowing the spread between Eagle? And then also I guess just one follow-up on the previous question on the BOW deleverage. If you could clarify kind of the different puts and takes on the second through 4th quarters versus the Q1 and why it wouldn't deleverage going forward?
Thanks.
Yes. So on Aerie profitability, we don't break that out separately. But the one thing I will say that Ares pretty much doubled their profitability this fiscal year from last year, which is one of the main reasons and it supports our accelerating the growth of that business and looking to open 60 to 75 stores there. On the BOW deleverage side, the things that I don't expect to continue through Q2 and Q4 that we're seeing in Q1 is really some of the deleverage coming from compensation as we kind of start comping certain activities. And I don't expect some of the deleverage we're seeing on delivery to continue.
The supply chain team has some great initiatives that we feel are going to positively impact Q2 through 4, whether it's shipment optimization, software that we've purchased, machine learning and AI technology that we're employing to maximize the efficiency of our shipments, whether it's buy online, ship from store, and we've changed some of our vendors around shipping methods and have driven some reductions in some of our shipping service levels. So a combination of all those things are what's going to drive that performance that's
a little bit better
than you're seeing in Q1.
Our next question comes from the line of Tiffany Kanaga with Deutsche Bank. Please proceed with your question.
Hi. Thanks for taking our questions. Would you touch on the promotional cadence at Aerie and how that's trending? And also provide your initial thoughts around Target launching its new intimates line, which seems to go after the same customer, but through a lower price point? Thanks.
Yes. Well, actually in Q4, we were less promotional. We really took advantage of our momentum going into the Q4, and we were really strategic about our promotions. It's a promotional time period, as you all know, and we definitely pulled back and we actually saw our margin flow through higher than even our sales trends. So that's really good news and we're going to continue that into Q1.
We're watching it like a hawk and we're watching our AURs and they are up. Regarding Target, we have tons of competition out there. There's lots of pure play on the digital front in intimates and they've been in the business for a long time and they have huge assortments and style counts. And what we do different in Aerie is we're really focused on what we're going to deliver to this customer. So our teams are highly engaged on what the missing styles are, what the new trends are and how we can focus and distort those trends.
And that's really the difference of what Aerie does versus some of these bigger stores and department stores.
Our next question comes from the line of Paul Lejuez with Citigroup. Please proceed with your question.
Hey, thanks guys. I'm curious about your outlook for Aerie store openings this year. Maybe if you could break down number of standalones versus side by sides. What should you expect in terms of average store volume in year 1, just given the geographical breakdown of where you're opening, how you expect store volumes to look versus your normal Harry store openings? And I'm also curious about the dollar lift that you get in e comm when you do go into a new market?
Thanks.
Yes, sure. So as I pointed out, we're going to open 60 to 75 Aerie stores this year. They're going to be a little more heavily weighted to standalone store openings versus side by side, think maybe sixty-forty ish weighting along those lines. And from a store productivity perspective, stand alone stores do approximately $1,700,000 or greater with side by side stores over $1,000,000 or slightly under depending on the size of the side by side location. From a geographical breakdown, we are really focusing on markets where we don't have a presence.
So markets like California, Texas, for instance, really expanding our presence in Florida, etcetera, are really where we're going to be focusing that. And it's going to be really market opening focus versus one off stores within each state because what we find is the digital halo that you get when you've got a concentration of store openings is much more significant than you do one offs. I think Jen had pointed out in her comments that she's seeing in her new store concepts a 50% to 60% lift or pickup in digital sales just from that new concept. I can tell you on average across the chain, we see a digital halo that equals approximately 60% or so of the volume of the stores, the brick and mortar retail stores in that same trading market. So we do get a significant lift in e commerce and we've got a lot of white space out there.
I think we have got a presence, a brick and mortar retail presence in 15 to 17 states at this point. So we have got a lot of room for expansion in addition to filling out the markets that we do have a presence in too. So we have been we continue to be bullish not only on Aerie, but AE brand and the growth opportunities there, but we are starting to put the pedal to the metal, committing more of our capital allocation to Aerie and really looking to accelerate that growth. As I pointed out, we don't disclose Aerie profitability separately, but that business pretty much doubled their profitability this year. That's on 41 store openings.
So we think that doing 60 to 75 is going to continue to accelerate that even hopefully at a greater pace than we saw this year, in addition to leveraging a fixed expense base.
Great. Hector, we have time for one more question.
Okay. Our next question comes from the line of Laura Champine with Loop Capital. Please proceed with your question.
Thanks for taking my question. It's basically a follow on. How many stores can you add to your current base, presumably for Aerie without needing to expand your distribution facilities into new buildings?
I think we've got a couple of years out in front of us before we hit capacity in the distribution network that we have and actually the teams have already been working on this for a while. They're way out ahead of this. So I think we are regardless of store counts within Aerie, I think just as a total business, right, because we are not just brick and mortar retail, but we support a pretty significant and significantly growing digital business. Capacity issues are something we are on top of already, maximizing the facilities we have, in addition to looking at expanding our footprint.
Okay. That completes our call today. Thank you, everybody, for your participation. Have a good night.