As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms.
Judy Meehan, Vice President of Investor Relations for American Eagle. Thank you. You may begin.
Good morning, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Chief Executive Officer Todd Kessler, Global Brand President of the American Eagle Brand Jen Foyle, Global Brand President of Aerie and Bob Madore, Chief Financial Officer. Also joining us for Q and A today is Michael Ropel, Chief Operations 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 realize meaningful material based on risk factors that are included in our SEC filings. We also have posted a supplemental supplement with additional financial details on our website. And now I'd like to turn the call over to Jay.
Okay. Thanks, Judy, and I'd like to good morning too. I am pleased with our Q3 results. We achieved record sales and double digit earning growth consistent with our guidance. 3rd quarter revenue grew 2% and EPS increased 17% to $0.41 compared to EPS from continuing operations of $0.35 last year.
American Eagle and Erie achieved positive sales and healthy margins. We maintained favorable sourcing costs, expense controls and manage inventory well. As I said a while back, consistent performance is our priority. And I'm pleased to report that this quarter marked our 9th consecutive quarter of profit improvement. These results are especially noteworthy given the challenges and rapid transformation that are taking place in our industry.
We've been winning in a tough environment and we need to keep winning. We're working hard to propel our brands forward and deliver a differentiated experience across channels. To that end, our priorities are squarely focused on the following. 1, product leadership. We must deliver the best innovation, quality, outstanding value to our customers day in and day out.
2, strengthen the brand, customer experience and engagement. AE's new campaign and brand platform are critical steps towards the future. 3, growing Aerie to be a leading intimate brand of choice for today's modern women. We continue to see great momentum in Aerie and are extremely excited by the future growth potential. 4, we will leverage our omni channel capabilities and strong store fleet to gain market share, maximize profitability and gain efficiencies.
5, global expansion is a significant opportunity. We will accelerate growth through high ROI licensed stores, utilizing partners with strong market knowledge and customer. 6, we'll also continue to strengthen our financial disciplines and focus on ROI based investments. I am pleased to announce that over the past several months, we've hired seasoned talent to new and existing leadership roles, bringing fresh perspective and important capabilities in the areas of digital, international, marketing, human resources and finance. Together with our highly experienced tenured executives, I have tremendous confidence in our team.
We have the skills and visions to drive success in today's marketplace. We have a new member of the team joining our call today. I'd like to introduce Bob Madore, Chief Financial Officer. Bob brings outstanding experience to consumer, retail, strong financial acumen as well as strategic vision. I know he will be instrumental driving future success and strong returns to our shareholders.
And finally, we're encouraged by the start to the holiday season. We are well positioned and ready to compete and win. Looking ahead, we remain intensely focused on our top priorities. I'm confident we can continue to deliver consistent profitable growth. Thanks.
And now I'll turn the call over to Chad.
Thanks, Jay. Good morning, everyone. In a tough retail environment, the American Eagle brand delivered solid results. We achieved a slightly positive comp and maintained healthy merchandise margins. This was achieved against an 8% comp last year.
Our digital business was particularly strong as more and more customers shop through our mobile channels. We drove quality sales with higher realized prices as our customers responded well to product improvement. Promotional activity was controlled and targeted, yet up slightly against the strong and significantly less promotional Q3 last year. American Eagle bottoms continued to dominate, where we achieved consistent sales growth, record volume and margin improvement in both men's and women's. Leading product innovation, distinguished American Eagle Jeans and bottoms in the market.
Our customers recognize the consistency and value the team has delivered. We also saw positive results in our women's business and achieved a comp increase in the mid single digits in the Q3. We saw very good strength across the collection with a positive reception to fashion and more timely deliveries of emerging trends. Additionally, we continue to see strong demand for new fabrications and tops. As an example, our recent line of amazingly soft shirts have been an outstanding product line.
Consistent with the trend all year, men's tops was more a bit more challenging. As a result, our men's business declined in the mid single digits. While I was disappointed with the performance, I'm working hard with the team to make improvements. We're focused on bringing the same level of product innovation, value and fashion to the men's business
that
we have established in women's. As I've discussed in the past, our priorities over the past few years have been rooted in product, process, people and presentation. We have been realizing the benefits of those priorities and remain intensely focused on building on our success. I'd say over the past few years, we've made very good progress bringing together outstanding teams and have a stronger process now in place. We've been faster and more reactive to emerging fashion trends, and we have instilled innovation and product leadership as a core principle in our product development process.
At the same time, I'm proud of how the team has driven our costs down, while consistently improving quality and value. Yet we are far from perfect and have more opportunity for improvements in category growth. On brand strength and presentation, during the Q3, we launched our much anticipated We All Can brand platform. This campaign authentically empowers young people and celebrates individuality. I hear from customers, our field team and even the campaign cast how powerfully this message is resonating.
As we move forward, we are well positioned to leverage our strength as the leading domestic apparel brand to become the global resource for casual American style. We will leverage our market leading jeans and bottoms business to build a global reputation for great fits, quality, value and innovation. It's a big opportunity for us and clearly a focus over the next several years. Now regarding the holiday season, I was very pleased to see the results over Thanksgiving. I want to congratulate the entire AE team on delivering solid results.
Our brand is strong and growing stronger. Our desirable product and terrific store execution delivered the excitement and value our customers were looking for. Today, we deliver a new online product capsule to feed customer demand. We are also delivering a robust spring transition floor set in mid December to drive excitement and margins around peak holiday selling. We have less than a month to go until Christmas.
As the results come in, they reinforce that we are focused on the right priorities. We have enormous opportunities still ahead, and we look forward to future success. Thanks. And now I'll turn it over to Jen.
Thanks, Chad, and good morning, everyone. Aerie had another great quarter. Our momentum continued with 3rd quarter marking the 6th consecutive quarter with comps over 20%. Our comps turned 21%, following a 21 percent increase in the Q3 of last year. We saw strength across all channels and have continued to gain new customers, which rose 15% in the quarter.
Traffic and transactions increased in standalone stores and online. Quality of the sales metrics were favorable, including a higher average unit retail and strong conversion. We achieved positive sales in bras, undies and apparel. Bradesse novelty fashion items continue to post strong results. I'm extremely pleased with how we have led an exciting new fashion trends such as our innovation around the bralette, where we continue to see great momentum.
Additionally, this fall, we had an incredible response to the launch of our new yoga inspired line, Chill Sleigh Move. The collection exceeded our expectations. We're excited about our customers' initial response and we will build on that line, expanding customer choices in the upcoming seasons. The digital business has been remarkable and we continue to focus on strengthening our core store base. I'm pleased with the performance of our new store design.
70 standalone stores are generating productivity at 50% above older formats. We are on track with our expansion plans and we will end the year with 10 to 15 new format stores. We plan to open 25 next year with at least a third of them in new markets. On December 8, we are opening up a new pop up Aerie location on Spring Street in SoHo. This store will feature a complete brand experience.
We're thrilled to have a presence in New York and to build brand awareness for Aerie in such a great location. We continue to be excited with the positive customer response and growing enthusiasm around our Aerie Real campaign. I am so proud that Aerie was asked to sponsor the Glamour Women of the Year Conference a few weeks ago. Our spokesperson and model, Iskra Lawrence, attended along with the team to talk about women empowerment, confidence and body positivity. It was an absolute thrill to be part of the event and for Aerie to be honored with such an amazing group of women.
Although we still have a few weeks ago, we've been encouraged by the holiday season. Our customers are embracing Aerie's unique gift giving items and our magical and real take on the season. Thanks to my team who's done an amazing job and we look forward to continuing our growth plans and driving ongoing business momentum. And now I'm going to turn it over to Bob.
Thanks, Jen, and good morning, everyone. Somebody is sleeping at the wheel. This marks my 5th week at American Eagle Outfitters. I'm thrilled to be here and to be part of this fantastic organization. We have a great team and strong brands.
I'm excited about the many opportunities ahead. I already know many of you and I look forward to seeing everyone soon. In a tough retail environment, the team delivered a solid Q3. Comp sales increased reaching record total revenue in the quarter. Margins strengthened and expenses were well managed, leading to 8% growth in operating profit.
Now looking at the details of the quarter. Total revenue increased 2% to a record $941,000,000 from $919,000,000 year. Consolidated comp sales increased 2%. This follows a positive 9% comp last year. The sales increase was driven by strength in our digital business, fueled by rapid growth in the mobile channel, where traffic and conversion have been very strong.
On a consolidated basis, transactions declined, while average transaction size increased due to a higher average unit retail price and higher units per transaction. Total gross profit increased 3% to $378,000,000 from $368,000,000 last year. The gross margin rose 20 basis points to a rate of 40.2%. The increase was the result of improved IMU, partially offset by a slight increase in markdowns. Buying, occupancy and warehousing costs were flat as a rate to sales.
SG and A dollars were down slightly to $220,000,000 and leveraged 60 basis points to a rate of 23.4%. Increased investments in advertising were offset by disciplined expense management. Depreciation and amortization increased 5% to $40,000,000 deleveraging 10 basis points to 4.2% as a rate of revenue. The increase in D and A largely stems from technology and omnichannel investments, which have shorter useful lives. Operating income rose 8% to $118,000,000 from $109,000,000 last year and the operating margin expanded by 70 basis points to 12.6 percent, the best 3rd quarter rate we've experienced since 2012.
In the Q3, the tax rate was 36.3%, down 50 basis points compared to last year. Our share count declined by 12,900,000 shares due to share repurchases late last year, which had an impact of $0.03 Earnings per share of $0.41 increased 17% from $0.35 from continuing operations last year. Turning to the balance sheet. We ended the quarter with inventory at cost of $493,000,000 up 3% from last year and consistent with our expectations. The ending average unit cost was up 8% due to product mix and continued investments in merchandise composition.
Like for like, average unit cost was down the last year. Ending units were down 5%. We ended the quarter in good shape with clearance inventory down to last year's level versus last year's levels. Looking ahead, we expect 4th quarter ending inventory cost to be up high single digits. Units are expected to be down with average unit costs up consistent with our merchandising initiatives.
We are comfortable with our inventory levels and composition in currency. We ended the quarter with $292,000,000 in cash compared to $363,000,000 last year. Our lower cash balance was a result of $212,000,000 in share buybacks in the Q4 of last year. In addition, over the past year, we returned $92,000,000 in cash dividends to shareholders and spent $152,000,000 in capital expenditures. In the Q3, capital expenditures totaled $47,000,000 $108,000,000 year to date.
We continue to expect CapEx to be approximately $160,000,000 for the year with nearly half related to store remodeling projects and new openings and the remaining half supporting digital and omnichannel investments and initiatives. During the quarter, we opened 4 American Eagle stores, 6 Aerie stores and 1 Tailgate store. In the same period, 3 American Eagle stores were closed. Additionally, there were 8 international licensed store openings and 3 closures, ending the quarter with 163 licensed stores across 23 companies. We're on track to close approximately 25 to 30 underperforming stores this year upon natural lease expiration.
We have a good amount of flexibility in our fleet with over 500 store leases expiring in the next 3 years with 185 in the next 12 months alone. Now regarding the Q4, although we posted solid results over the holiday period and we're encouraged by the customers' response to our collections, we still have a good bit of business ahead of us in the quarter. The retail climate, particularly in malls is tough and the pace of traffic is choppy. We're therefore taking a cautious view. At this time, we're providing 4th quarter earnings per share guidance of $0.37 to $0.39 which is based on comp sales in the range of flat to a low single digit increase.
This guidance excludes potential impairment and restructuring charges. This compares to an adjusted earnings per share of $0.35 Last year's Q4 recorded earnings per share of $0.42 and included approximately $0.07 of non recurring items. As a reminder, in the Q4 of last year, we had a gain on the sale of a distribution center of $9,400,000 which was included in SG and A expense. Additionally, the tax rate was 27.9% in the Q4 of last year as a result of income tax settlements, federal tax credits and tax strategies. This year, we expect the Q4 effective tax rate to be approximately 35%.
Please refer to Page 15 of the financial handout for a summary of these items. In conclusion, we have a great foundation in place at American Eagle Outfitters. We have well positioned brands, tremendous international opportunity and a best in class omnichannel infrastructure. I'll be working with the teams to continue strengthening the brands and ensuring we're focused on driving improved quality of sale metrics. We continue to instill strong financial disciplines and return on investment based investment decisions.
And lastly, we will continue to focus intensely on our top six priorities, which Jay outlined, to drive profitable growth and ensure that we're well positioned to compete and win in today's challenging and changing retail environment. Thank you. And now we'll take your questions.
Thank you. At this time, we'll be conducting a question and answer session. Our first question comes from the line of Randy Konik with Jefferies. Please proceed with your question.
Great. Thanks a lot. I guess I want to ask Jay a couple of questions, just medium term thinking. So it's very pleasing to hear about the continued strong comps at Aerie. And we've done some work where if you look at where the company has or the brand has a strong store presence, you seem to do very well at least from a search interest perspective versus your key competitor.
So you've kind of taken down the store count, you're now regrowing it. How do you think about your market share market penetration from a physical store perspective over the next, let's say, 3 to 5 years? How do you think about grasping more of that market share and this momentum you're building? And also if you could expand upon the idea of do you want to get more into apparel again where one of your key competitors has a heavy apparel business within that intimates category? And then I guess the second question, medium term thinking, it was you've spoken about that really strong real estate flexibility you guys have over the next few years.
And you talked about in your opening remarks about the changes that are going on in the industry. How do you think about the physical presence of the business from a store standpoint and Internet optimization over the next 3 to 5 years? Just how you think it all plays out for your business versus the industry? Thanks.
Okay. Well, that's a big question. Like the way we look at it is in the Erie area, and this also will go will also go for like American Eagle 2, is that when you look at the stores, you have to look at the omni business the same time. You have to look at the online and you have to look at the stores. And we're in the process of taking certain markets and localizing those markets and figuring out in those markets where the extra opportunity is.
We may have certain markets where we have mall presence, but we don't have certain street presence where it may make sense to have that street presence. So we're taking our most productive markets and we're starting to do certain testing in them to see can we increase the bottom lines in that market, not just by a store by store basis, by the market itself, taking the online business in account and seeing how we maximize the bottom line for this particular market. So that's a plan that's being put in right now for the strategy that's being tested right now. On the Aerie side, we see a big opportunity. We know some of our competitors have given up certain businesses that we think could be a particularly opportunity for us.
And we'll be kicking some of that off this coming spring. At the same time, we introduced this past season like the compression pants in my Aerie has been very well received. So we see there's plenty of categories that can be added to Aerie and Jen and the team have been working very hard on identifying what particular categories to be added and maximizing the return right away on We also believe that there's plenty of growth for Aerie. As far as the markets go, we have plenty of opportunity to grow there. At the same time, it is a developing business.
There are categories that we don't carry that we think in the future will be very good for the company. And it takes time. You don't do it overnight. The same with American Eagle. Even though American Eagle is a more seasoned company, we see opportunities in different categories.
And between Chad and myself and the team, we keep pushing each other to see where those categories are and how fast can we get them tested and get them rolling. Right, Chad?
Thank you. Our next question comes from the line of Oliver Chen with Cowen and Company. Please proceed with your question.
Hi. Great collection here in denim and the skin to go and the super, super stretch, really the best in them all. We just had a question regarding the guidance because the comparisons do get easier and you sounded very pleased with Thanksgiving. Are you still expecting average unit retails to be upish and are transactions kind of the riskier point? And then as we you gave some nice color on the inventory plans.
Just could you elaborate on the average unit cost in terms of what's happening with the mix and how you're evolving that? Thanks.
Yes. Sure, Oliver. I'll take that question. Yes, we are expecting average unit retails to continue to be up year over year. They were up mid single digits this quarter.
We're expecting similar performance, not only in Q4, but as we look to FY 2017, which we're deep in the middle of our budgeting process as we speak. We do expect transactions to be pressured. Transactions were down mid single digit this quarter and we're expecting a similar performance looking out to Q4 and incorporated within the guidance that we gave. Regarding average unit costs, we're putting additional make into certain categories of our product, which is driving up our average unit cost. But having said that, with our average unit retails going up to the levels they are, it's driving gross margin rate improvement year over year, quarter over quarter.
So we believe it's a very healthy mix in light of very challenging retail environment and we're winning relative to our competition, which is what we're striving to do and we'll continue to do. We've got innovative product. The consumer sees the quality, they're paying for the quality, but when you look at where our price points are, we're not pricing ourselves out of the marketplace at all. So we think it's a strategy that serves us well and we're going to continue down that road going forward to Q4 and looking at FY 2017.
Thank you. Our next question comes from the line of Janet Kloppenburg with JJK Research. Please proceed with your question.
Good morning, everyone, and welcome, Bob.
Thank you.
I wanted to ask Jen just quickly on bralettes.
If you could talk up
can you speak up a little, Janet? Yes.
If you
could talk up a little bit,
we could hardly hear you.
Okay. Is that better? Is that better?
Yes. Thank you.
I wanted to ask Jen on bralettes. Is this a fashion moment or is this category here to stay? And Victoria's Secret has been very promotional in that area, and I'm just wondering if you're feeling any promotional pressure as a result of that. And Chad, if you could just talk about the women's business a little bit. Is the strength in comp coming all from bottoms?
Maybe you could just talk a little bit about the tops versus bottom growth that you're seeing there? Thanks so much.
Hi, Janet. How are you? Good.
How are you?
Very well. Thank you. Regarding bralettes, I feel really good about the category. We really launched that category first. I think I said this on one of the last calls.
And we sort of own that category. So I feel really proud of that. That said, Janet, there's a whole runway here as far as the lightly lined category and unlined categories that I think are going to be strong and will continue to be strong because what's nice about these categories is they really live by our DNA, aerial, right? So being a little bit more true to your body and your silhouette. That said, yes, competitors were highly promotional.
And what I'd like to say on that is we held our own. We price pointed bralettes where we have been in the past and we set our ground and we saw great momentum in bras over green. So really proud of what the team did and our quality and our price value equation is really strong and I think the customer sees that.
Glyn, Janet, turning to women's, thank you for giving me a chance to talk about women's apparel because it's really so much more than just bottoms. The women's tops business has been accelerating, accelerated through Q3 and I still feel really strong about it. We have we've built a new team over the last couple of years in both design and merchandising that's really hit their stride and is just fantastic and their performance, I'm very pleased with. And it's really about balance for us. We're seeing performance in women's apparel across the departments, across silhouettes.
The customer, I think we know our customer loves our bottoms, and I think they finally are realizing that we offer the same level of innovation, quality value and trend right fashion within tops. And I'm very pleased to see the balanced performance. I mentioned the shirts on the call, the flannels, and those have just been the customers are just in love with those. It's been great.
Thank you. Our next question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.
Thanks. So on the mid single digit traffic decline in the past two quarters, what's actually driving the negative inflection that you've seen? And then just on the holiday season, what did you see in the 1st part of November versus what you saw over that Black Friday weekend? And just any insights that it provides as we think about December and beyond?
Yes. So on the mid single digit traffic decline in the past two quarters and what's driving the negative inflection. I'm not really certain what that refers to. It's been a trend that we've experienced for a little while now. The good news and we don't necessarily typically give any intra quarter performance, but holiday is such a big piece of our business this quarter.
I can give you some indication of how we performed. We did see an improvement in the traffic trend over the holiday period, where we've been tracking mid single digits. That reverted to a single digit decline, which was fantastic. And we experienced positive comps in the quarter, which is contrary to the traffic levels that were experienced in the mall. We had been trending similar to the mall traffic rates, so that was a huge break for us in the holiday.
And I just think it speaks to the quality of our product being trend right and the perceived value that the customer sees in that.
That's great. Good luck. Rest of the quarter. Thanks, Matthew.
Thank you. Our next question comes from the line of Adrienne Yih with Wolfe Research. Please proceed with your question.
Good morning. Great execution in a very, very difficult environment. Chad, I'm going to piggyback off of Janet's question about the fashion apparel. Can you give us some perspective on how strong do you think it is? How it builds into spring?
And then the follow on as we kind of move from early adopter into more kind of a saturation mode maybe next year, if you could kind of give us some color on how you think about that. Jen, congratulations. A 20 comp is best in the space, I mean, in the whole sector in the mall. So congrats there. Can you talk about the longer range store footprint?
How big you think Aerie can be over time? And then finally, Bob, merch margins, if you can just talk a little bit about that in the Q3? And then, how we should think about that gross margin? What's implicit in the 4Q guide? Thank you very much.
So in terms of women's apparel, again, I just want to reiterate, we're really excited with what we're seeing in women's apparel. And we do see great balance across the departments. And I think we're also starting to see, I know there's is a lot of conversation out there, I think this is where you're getting to around some of the silhouettes changing. We have we our customer base is still the majority of our business is still a bigger top over a smaller bottom, and we sell hell of a lot of jeggings. So that's not such a bad place to be.
But we've got the way our process is built, I'm confident that we'll find the right balance, as that as the silhouette shift with our customer, not only how we test our top, but also with the size of our bottoms business, we really get an indication of where the customer is moving on the bottom and where she's moving on the bottom can help give us some indication as where we need to how we need to complete our outfit with what we have on top. Right now, we do have a balance in terms of fits and we are seeing some of the smaller tops beginning to turn on. I personally think it looks great, so I'm excited to see that change. But we have I think we get so much insight from the customer through the breadth of our assortment, through the pace of sales to start seeing how trends shift and then also through our testing process. So I'm excited to see a change in silhouettes.
I think it's a great opportunity anytime the customer needs to update their closet. So I'm looking forward to it. I'm confident that we'll pace it as well as anyone.
Great.
And Adrienne, thank you so much for the compliment. We're pleased with the results as well here, Harry. Looking at the store front, we plan to open 25 standalone stores next year that will be slightly smaller than our current the original footprint, which was an average of roughly 3,800 to 4,100 square feet. We're seeing really nice results from the smaller footprint and certainly we're going to take advantage of that. I think the biggest conversation here is what Jay said that we have to look at this from an omni approach.
So the nice thing is we still only have 87 standalone stores in front of us. So we're not over penetrated and we're going to evaluate each market as a holistic approach to an omni share approach where we're going to invest in direct as well in that market. As a reminder, we're highly focused and concentrated in 11 states only today. And where we see that concentration, we see great results on online as well as those places that we have mature market presence. So and lastly, I guess I would say is thinking about AerieReal and that just incredible platform that we have, there's an amazing road ahead of us using that platform to gain market share.
Yes, and Adrian, this is Bob. Just to your question on merch margins, as I pointed out, we experienced a 20 basis point improvement this quarter. Looking forward to Q4 guidance, we're expecting gross margin rate improvement to continue and probably at a more significant level than we experienced in Q3, really driven by a couple of things. We continue to experience lower average unit costs on like for like product really driven by decreased raw material prices, cotton and fiber costs, etcetera, in addition to our ability to negotiate lower costs due to oversupply or overcapacity in the marketplace. The other thing that's driving a healthier margin in Q4 relative to the guidance we gave is that last year, in Q4, we had a significant number of clearance units that we had to work through.
Our inventories are much tighter this quarter. As I pointed out, our units are down 5% at the end of Q3, and we are not going to go into Q4. We've not gone into Q4 with that same level of clearance inventory, which is also going to help us too. Combine that with continued improvement in average unit retails, and that's driving the improved result.
Thank you. Our next question comes from the line of John Morris with BMO Capital Markets. Please proceed with your question.
Thanks. Good job in a difficult environment, which is sort of my first question. Maybe, I guess, a little bit of the elephant in the room is, are these Aeropostale liquidation inventory liquidation sales that are going on. So, Jaeme, just wondering if you can kind of give us your take on that. I mean, is that something that did steal a little bit of attention and factor into kind of the traffic numbers you guys saw?
And then Chad, the new floor set coming mid December, is that incremental? What might we see there? What's a little bit different? And then finally on Jen, maybe talk a little bit about the new pop up in SoHo with the new brand experience and what's different about the brand experience that we should expect there? Thanks.
All right. On the Aeroplastale, you know that you're like in the process of doing a store closing, but then they're going to have like a store like reopening. Remember the store closings, they bought the inventory at a certain price. But when they go bring the new inventory in, it's going to be at the new cost. And they'll have to merchandise it just like they did the way before.
And what's going to be different? Well, only time will tell. At the same time, I would tell you, if you walk the malls and you looked at the stores, whether it be their stores or our competitors' stores, I thought we had the best looking stores in the mall this last week. And when you also walk the store the mall, I think that everyone's promotional, but I think ours was better value and we didn't have to go and steep a discount as a competition. And what's interesting we find is that when you look at the shopping pattern of the customer, which is hard to figure out, is that when they do come, we get our fair share of it.
And it's going to be a strange season because they're going to come, but when they come, they may come on the weekend stronger. And we're just watching it out. I mean, we're offering great value. We're offering great selection. And we're constantly being like ready for the business.
And when a customer comes, we're able to satisfy them, and we're getting our fair share.
Yes. Just to add a little more color to Jay's question or answer to your question, where there were Aeros stores, Aeropostale stores that were closing or closed, next to locations that we had, we did see a 2 to 4 comp point decrease in those store locations and it clearly had an impact on traffic too. That has dissipated quite a bit as we look to Q4 and we're not experiencing the same impact, but it definitely did have impact to us in Q3. Having said that, we had strong results across the board. Every single P and L line item were up.
All of our almost all of our quality sale metrics had improved. We hit record revenues. So I think the team has demonstrated that we're pretty flexible with what's going on out in the marketplace and are able to move the business accordingly.
And Chad?
In terms of the floor set, so we're doing a couple of things. One, I mentioned we have a new online exclusive capsule that launches today. And then our trans floor set, spring transition floor set, we usually set the day after Christmas. We're pulling that up this year. So when we've set that in the past, we see so much such strong reaction to new goods.
The customers shopped us heavily already for holiday and through Black Friday and Cyber Monday. And so we believe that there's an appetite out there for new product, new trends, some of the new fashion that's happening in the marketplace. And so we're going to transition the floor earlier this year than we usually do. We'll still have holiday product at a great value, protecting the key items there, but we're going to bring the give the customer something new that week before Christmas, when she can no longer when online shipping is deadlines come and they have to be in the mall, we want to give them something new, something exciting that they can shop that week before Christmas and the week after. So we're pulling it's something we've done in the past, but we're pulling it forward this year.
I think it's a great opportunity to drive both sales and drive margin.
And John, hi, how are you, John? Around the, SoHo store, the team really rallied around this store thinking it would be a great opportunity not to only gain, some more share here in the New York area, but also get some global awareness since it is a highly international market. So, but what we really focused on is just creating an authentic experience. And so that's what I think you're going to see. I think when we approached it, we approached it from a place of real.
So that's our baseline DNA. And I think the experience you're going to see is more intimate shopping, more face to face conversations with our customers and also some live experiences. So without sharing too much, I think the grand opening is going to be amazing. We have some great things in front of us with that store. We're planning weekly events.
So there's more to come there, but hopefully you'll come and see it.
Thank you. Our next question comes from the line of Brian Tuncay with Royal Bank of Canada. Please proceed with your question.
Thanks. Good morning, guys. Guess two questions. Just following up on the Aeropostale liquidation question. Can you maybe talk about what you saw in your traffic trends among the different mall types or even on the outlet centers?
Just curious what's going on with you guys in the A and B and C malls? And then we're getting a lot of questions about the Q4 comp guidance relative to your statements about the strong holiday. So we're just making sure that primarily that the comp guidance for Q4 is due to your expectation for January to be weak because you're entering with less clearance inventory. Is that how we should be reconciling that? Thanks very much.
Yes, Brian. So relative to traffic trends and what we're seeing in the A, B, C malls, clearly, different trends across those. The A malls are low single digits. The B and C malls are anywhere from mid to high single digit traffic declines, generally speaking, across the board. And that's been pretty consistent, I would say, throughout the year.
Relative to the Q4 guidance, a couple of things. Yes, although we are much cleaner in inventory and we are seeing and expecting gross margin rate improvement versus last year. As we pointed out or I pointed out in my opening remarks, we had $0.07 worth of earnings per share last year in the quarter due to nonrecurring type items, the sale of the distribution center and some very significant tax rate effective tax rate items that drove that down to a non normal, let's call it, 27 plus percent range versus we average on the 36% effective tax rate range. So when you look at the compares between the guidance we gave relative to last year's adjusted earnings per share number, we're communicating a very healthy earnings per share increase year over year, which I'm not sure is being recognized in the reaction happening to the stock price this morning.
Thank you. Our next question comes from the line of Rebecca Duvall with Bluefin Research Partners. Please proceed with your question.
Good morning. Thank you and thank you for taking my call. I just had a question a few questions. First on the markdowns, you guys have always been really good about chasing business, ordering lean and then chasing into it. So were the markdowns primarily due to an unexpected drop in traffic?
And then secondly, how are you feeling in terms of being nimble, should you see additional variances in traffic trends? And then for Jen, I went to the Chill, Play, Move event here in Boston, it was fantastic. So congratulations on that. The yoga line was great. And I'm just wondering, you talked about the expansion.
Is that something we should be looking for in Q1? And then lastly, Chad, you talked about a continuing weakness in men's tops. And I'm just wondering what's going on there? Do you think that there's just I mean, we've heard that men's categories
and other retailers have also been a
little bit weaker than expected. But I'm just wondering if you just not have an appetite for anything new or any more color on that would be great.
Sure. Thanks for the question. Yes, I will kind of answer 0.1 and 0.2 together 0.13 together because they relate. Part of the markdown increase we saw, I think there's some we believe there's some impact around aero, which Bob and Jay talked about. But also, the men's business was not as strong as we had anticipated.
And so we had to take a few more markdowns in those categories than we had originally planned, and that drove some of the markdown rate. In terms of men, the good news is we're definitely still getting that men's customer. Our men's bottoms business is fantastic and actually set records in Q3. So we know we're getting the men's customer in the store, and they're converting and they're buying the bottom. So that's good news.
The challenge is we just haven't seen the turnaround that I've been hoping for all year in the rest of the men's apparel categories. And I'm working really closely with the team on that. I do think, as you mentioned, I don't think anyone's out there, shouting about how fantastic their men's business is. We've come off some strong years of men's growth, and I do think there hasn't been that much compelling newness. I think that what we're delivering going forward is more compelling.
It's I think more fashion forward with some of the active trends that we're seeing out there and some of the active fabrications that we are seeing our customers respond to. So we're working to bring the same level of innovation value in fashion in men's that we bring in women's. And I am hopeful that we'll start to see more of a turnaround there. But so far, that meant the softness in men's in Q3 did lead to some of the increase in markdowns. In terms of nimbleness, I'm the team continues to amaze me at how fast we can get into stuff and get out of things.
Across the board, the supply chain that we've built is quite fast and quite nimble at both helping us with upside and downside, and that does help us even in the men's business, they're reacting to inventory levels throughout the rest of the season. But then even I've been raving about the women's business and looking at how fast we got stuff we have stuff that we set for holiday initial in November that's flowing back we got amazing reads and those goods are flowing back into stores this week. So even for the scale and size of our business, our supply chain can really, really help us impact sales even within the quarter. So it's fantastic.
And yes, Rebecca, how are you? Thanks, by the way, for attending that event. That was a great event, by the way. We got a lot of great hype on that event. So and it was exciting and the marketing team certainly did a great job there.
Around yoga, we went at it very aggressively in September and there's always learnings to take away, but we had nice results, as you can see in the comps from Q3. We are looking to grow this business. As Jay mentioned, we're going to grow some of these ancillary businesses. And the nice thing is that we have other businesses. So we have swim, we have sleep in Q4 and we are a lifestyle business.
And that's what I love about Aerie, it's how we show up in these categories that sometimes aren't so unique. So yoga is out there in a big way right now, but I think the way we're playing in that game is very different in the way we're showing up and we'll continue to do that.
Thank you. Our next question comes from the line of Simone Siegel with Nomura Instinet. Please proceed with your question.
Good morning, guys. This is actually Gene Vladimirov on for Simone. Thanks for taking my question. I was wondering how we should be thinking about the SG and A spend into 4Q and next year. If you could talk a little bit about your flexibility there?
And then specifically, any color on the marketing spend in 4Q and how that may compare to 3Q?
Sure. So looking to Q4, you should be expecting SG and A spend to be up slightly, low single digits. And then looking to next year, as I said, we're right in the middle of our budget process. I'm 4 weeks into it, but I can tell you that we're definitely targeting ourselves to experience SG and A rate leverage next year for sure. I Can't really give you the exact range right now as we're working through a few things.
And then relative to Q4 SG and A and advertising spend specifically, we will see a slight increase in spend versus last year, but and that's going to drive SG and A deleverage, slight deleverage in the quarter, but that's pretty much the answer.
Great. Thanks. Good luck for holiday.
Thank you.
Thank you.
Our next question comes from the line of Michael Binetti with UBS. Please proceed with your question. Hey, guys.
Good morning. So I know this was Bob, welcome to the new offices. Nice to hear
from you. Yes. Hey, Michael.
So I guess this was asked a
little bit earlier, but I just want
to ask again, I'm trying to understand how much longer the AUR tailwind is going to be helping you guys at this rate, I mean, maybe even longer term. I know you mentioned that it should carry into 2017, but is this something you can see carrying multiple years to help offset the traffic or how you're thinking about more of the mid range planning? And then also on brawlitz, obviously, this is one of the very few clear strong trends in the space right now. Can you help us think about the category a little bit? And obviously you guys were first and furious there.
How do you think about how fast the category is growing versus whether you're taking share to help us think about the dynamic the competitive dynamics and sustainability of growth in that category for you?
Sure. So on the AUR question, I'll answer that. So definitely expecting continued AUR improvement and growth in Q4 and also for budget 2017. When you look forward to 2017 and even beyond, but with a lens really focused on 2017, the reason we're able to do that is, again, the innovative product that we have, the different fabrications that we're bringing to the table, the quality of the merchandise and how trend right our product is. When all those things are clicking, you're able to drive AUR increases.
We've demonstrated that we have the ability to do that on a sustained basis. And I would expect that when you look forward beyond 2017, that we will still continue to have some level of AUR growth opportunity. I can't tell you specifically how much or if it will be sustained at the levels it is, but I do expect it to continue at some level going forward. Where it bottoms out, Michael, I've got to get a little more experience here with the business and working with my team and my friends here. Okay.
Thanks.
Hi, Michael. Thanks for the question. And Bharat, the $1,000,000 question out there, we certainly hit on the trend, but we believe that there's a market change in the intimates business going forward. And I think Aerie plays nicely in that space. We still will own the push up business because our campaign is Aerie real.
Are real and there's some girls that need that level of adjustment, shall I say. So we'll still participate in that. But what I love about the bra lap business is it's like I said, it just it ties into what we do best and that's lightly lined. And we will continue to evaluate trends as we move forward, Michael, and where we need to flex. So and we think there's some big trends coming our way out there that we are on the pulse on.
Okay. Michelle, we have time for one more question.
Thank you. Our next question comes from the line of Richard Jaffe with Stifel. Please proceed with your question.
Thanks very much, guys. And if we could go back to the ability to close stores and the rapid growth you've seen through the online channels, wondering how you view the equilibrium over the next couple of years in terms of store closings, e commerce growth and where you're going to prioritize both your investments and your ability to perhaps close stores?
Sure. So as I pointed out, we've got 500 leases with natural expirations coming up over the course of the next 3 years, which affords us a lot of flexibility, in closing stores, which are underperforming relative to our expectations, without any financial implications whatsoever, lease liabilities, etcetera. With the rapid growth in online channels, the one thing that we've definitely seen is where we have a brick and mortar presence or have established a new brick and mortar presence, it drives increased demand on digital. So having that brand awareness within the marketplace represented by a brick and mortar store is driving an entire omnichannel experience that's driving incremental sales within that marketplace. And looking at prioritizing our investments and our ability to close stores, With the size of our portfolio, I was pleasantly surprised and amazed at the small number of unprofitable stores that we have.
So it's not a burning issue for us at all. It's not a material financial overhang for the organization. And we're very disciplined when we're analyzing and assessing stores that are coming up for expiration as to how they are fueling the omnichannel experience. And there's a lot of in-depth analysis that goes into that decision. We even in our C malls, our C Mall stores are extremely profitable, in addition to B and A.
So I don't feel early days, but I don't feel as though we're significantly over stored as across the AE brand. And again, we're very disciplined about analyzing whether we want to continue with the store that's expiring or not. But like I said, it's very important to recognize, Richard, how the brick and mortar presence fuels the entire omnichannel, experience and the results within that marketplace.
Okay, great. Okay, everyone, that concludes our call today. Thank you for your participation and continued interest in American Eagle Outfitters.
Thank you.
Thank you. This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.