As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms.
Judy Meehan, Vice President of Investor Relations. Thank you, Ms. Weenan. You may now begin.
Thank you. Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Chief Executive Officer Chad Kessler, Global Brand President of the AE Brands Jen Foyle, Global Brand President of Aerie and Mary Bolin, Chief Financial and Administrative Officer. Also joining us for Q and A today are Roger Marksfield, Chief Creative Director and Michael Rumpel, Chief Operating 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. Our comments today include non GAAP adjustments. Please refer to the tables attached to the press release. We also have posted a financial supplement with additional financial details on our website.
And now, I'll turn the call over to Dave.
Looks like a good afternoon. It's great to be here to report like another strong quarter, which has well exceeded our original expectations. In the Q3, we achieved record sales, driven by a comparable sales increase of 9%. Earnings per share increased 59%. The period marked our 5th consecutive quarter of year over year earnings growth.
I believe we are just beginning to hit our stride. Our cash flow was strong. We ended the quarter with $363,000,000 in cash, up $83,000,000 to last year, and we continue to carry no debt. We repurchased 1,000,000 shares for a total of $15,000,000 All channels and brands excelled in the quarter. Both American Eagle and Aerie delivered record 3rd quarter sales, more full price selling and increased profitability.
As a result of an intensely promotional competitive environment, we raised our game by significantly. Achieving these results in this environment is a testament to the quality of our talent, the strength of our systems and operations and the popularity of our brands. Now looking at the brands. Needless to say, it's been an exciting time for American Eagle Outfitters. We are delivering the best merchandise and customer experience in our sector today.
Chad Kessler and the AE brand team continues to execute and win over customers with innovation and quality. As I said on the last call, we have a great opportunity continue to seize market share. I'm more confident at this than ever. Now we look ahead, we see a bigger future for the AE brand. In addition to international expansion, our goal is to make AE America's favorite casual destination.
To that end, we will continue to raise the bar on product innovation and newness each season. Our marketing plans in 2016 will ramp up to include a new loyalty program and more customer engagement. Over time, our goal is to gain greater reputation for quality and value and extend the reach of our brand. Now moving on to Aerie, which delivered another stellar performance this quarter with sales increasing in the double digits. Since taking over leadership role, Jen Poyle has made tremendous improvements.
Under her lead, the team is making strides in gaining new customers and building growth in core categories. In addition, as Jen will discuss, we've been very excited with new offerings, especially a rapidly growing novelty business. We're just beginning to see the true potential for Aaron. Based on the strong performance of our new store formats, we are planning to accelerate store unit growth in 2016. With further success, we expect to ramp up beyond that.
Needless to say, we think the future for Aerie is exceptionally bright. I'll reiterate our goal of doubling the business over the next few years. These investments will put us on the right track to achieve that. We also continue to expand globally. We have made great progress on licensed store growth with 126 stores operating in 20 countries at quarter end.
Recent additions include Chile and Greece. On the company's own side, we are especially pleased with our 23 stores in Mexico. We've seen a great customer response to our brand and merchandise with results ahead of our expectations. Since 2013, we have quietly built a profitable business in Mexico and expect to reach $100,000,000 in revenue in the next 2 years. Our performance overall was supported by strong operations and disciplines throughout the organization.
Inventory and expenses were well managed. We are beginning to realize returns on technology upgrades and omni channel tools. Our new omni fulfillment center is providing greater efficiencies and better customer service. And with this year's launch of Reserve, Try and Buy, we have an even greater ability to engage with our customers whenever, wherever and however they want. Over the past few years, we have made tremendous progress in building our technologies and omni channel capabilities.
Now we will work to maximize these tools to strengthen engagement and deliver the best customer experience possible. Now a word on Tailgate acquisition. We recently had the pleasure of welcoming Todd Steiger and team to the AEO family. Tailgate presents a terrific opportunity to broaden our product line, expand our reach to college campuses. Todd Center New York is an exciting premium brand and Todd's work has been well recognized in the industry.
His iconic sensibility in menswear is an extraordinary asset. We all look forward to leveraging its creative vision and design talent while supporting the future expansion of the brands. Finally, I'm glad I have the Board's confidence and support to continue on as CEO. I know we have even more potential for improvement. I'm very optimistic about future growth and success for AEO.
Our Q4 and holiday seasons have gotten off to a good start. And we're working hard to deliver continued momentum and returns to our shareholders. Thanks. And now I'll turn the call over to Chad. Thanks, Jay, and good afternoon.
I'm very happy to report another great quarter for the American Eagle brand. Back to school and fall are truly defining seasons for us. It was fantastic to see such a positive response to the newness and innovation we offered. We continue to get stronger in all facets of the business, and I'd like to take a moment to congratulate the team for such outstanding results in a tough environment. Now let me review some details of the Q3.
American Eagle brand comp sales increased 8%, which was comprised of impressive results across most areas. We saw strength by channel and by geography. Similar to what we've seen all year, we are running a healthy business with strong AUR increases. Lean inventories, compelling merchandise combined with disciplined promotions led to a higher penetration of full price selling. The average unit retail increase was driven by a favorable customer response to enhanced product quality and innovation infused in our collection.
We are as committed as ever to delivering great value to our customers. We are not taking up tickets on like items. However, our customers are paying for additional quality elevated fabrics and finishes. For example, since launching Denim X and Flex Jeans, our realized price on denim is up nearly 20%. And we see more opportunity throughout our assortments to build better product while offering our customers outstanding value.
Our store traffic outpaced mall traffic even as we were much less promotional than most mall based peers. Online and mobile shopping continued to grow at a fast pace with our direct businesses up well into the double digits fueled by traffic and conversion. On the product side, our men's business comped positively driven primarily by strength in bottoms. Both pants and denim posted nice comp increases. Men's tops, however, did not perform to our expectations.
We've taken steps to improve with internal changes and refocusing the team's priorities. Our goal is to bring a stronger point of view, more newness and innovation to our male customers. As a result of this work, I'm confident we'll see a pickup throughout the spring season. In women's, we have seen exceptional growth. In fact, women's is performing at levels not seen for many years.
In some categories, we experienced record volumes. Growth in denim and pants continued, fueled by further expansion and new introductions in our Denimax line. New fabrics and trends in women's knit tops, wovens and dresses also contributed to the success. In the Q3, we managed inventories and product flow extremely well. We entered with lean inventory and chased into demand.
We will stay vigilant on inventory and continue to make incremental improvements to product flow and sourcing to allow us to execute on this strategy. We are incredibly excited and optimistic about what's ahead of us. The American Eagle brand is highly trusted and well liked. And as Jay indicated, we believe the brand can be much bigger with a broader appeal than it has today. To that end, I'd like to make 3 key points.
1st, building stronger brand awareness internationally is a top priority. We will also aim to elevate our reputation for quality on a global basis as we believe some customers do not fully recognize the actual style and quality we offer. 2nd, we should continue to capitalize on our product enhancements and innovation. For example, in denim, we have a broad customer base, attracting shoppers outside of our core demographic. We will strive to expand their purchases to other categories, while still keeping our edit point on a 20 year old.
And third, we have meaningful opportunity to offer more extended sizes online. This is a significant call out from our customers and something we expect to expand in 2016. Overall, we are excited by the progress, yet we have much more potential ahead. Thank you. And now I'll turn it over to Jen.
Thanks, Chad, and good afternoon, everyone. I'm so happy to be here today to talk about another fantastic performance for Aerie. The 3rd quarter exceeded our expectations with comparable store sales rising 21%. This marks our 6th consecutive quarter of positive comps year over year earnings growth, but stores and digital were strong. Across all categories, all of our major businesses increased well into double digits, including bras, undies and apparel.
Our margins expanded 2 80 basis points, fueled by lower markdowns and more full price selling. Aerie merchandise margins are in line with the AEO brand as we have grown and gained sourcing efficiencies. Our design team led by Andrea Jigar has done an amazing job bringing freshness to Aerie with new and expanded novelty businesses. This includes bralettes, new accessories, a focus on gifting and brand right soft dressing. At the same time, our core bra and undies categories have been working well.
Like AE, we have enhanced the quality while still offering our customers great value. The fabrics, embellishments and exceptional design work are truly surprising our customers. Ongoing product, quality and innovation will remain our priority. Additionally, we will expand personal care, accessories, soft dressing, fitness and swimwear. We are seeing more and more opportunity to strengthen the emotional connection with today's young women.
Our customers believe in what we stand for. AerieReal and untouched models are the core to our brand DNA. So far this year, our active customer base has grown by over 10%. In 2016, we will ramp up our advertising campaigns to further engage our customers in unique ways and focus on continuing to build our brand presence. New store growth is key.
As Jay indicated, we are seeing very strong early results from our new store designs. In addition to 20 side by side stores in the new format, we now have 4 freestanding locations. The stores are more modern, easier to shop and much more relevant to today's target customer. The financials are compelling with sales productivity trending 60% above our legacy stores with higher four wall profit. Based on the success, we will be selectively pursuing growth through new freestanding store openings and remodeling existing stores to our new formats.
We plan to open approximately 10 standalone formats in 2016 and hope to expand beyond that based on the success. Currently, we have meaningful store presence in only 11 states. We know that 90% of our customers are acquired through brick and mortar stores. This highlights the exciting potential to launch Aerie into new markets. Our digital business has been exceptionally strong, representing about 23% of Aerie's total sales.
We see ongoing growth as we ramp up digital marketing and more productive customer outreach. Now before I hand it over to Mary, I'd like to acknowledge and thank my Aerie team for another strong quarter. I'm extremely excited about Aerie's recent performance. We will stay humble and hungry as we pursue the tremendous growth opportunity ahead of us. Thanks.
And now I'll turn it over to Mary.
Thanks, Jen. Good afternoon, everyone. First, I'd like to congratulate the entire team for delivering exceptional results in a truly challenging retail landscape. Our ability to maintain price integrity validates the strength of our product assortments and our brand positioning. Top line growth and higher full price selling drove our 3rd quarter results.
Inventories were well controlled, and we leveraged new technologies and capabilities in our fulfillment and sourcing functions to deliver stronger profitability. Now looking at the details of the quarter. Total revenue increased 8% to a record $919,000,000 from $854,000,000 last year. Consolidated comparable sales increased 9%. By brand, AE comps were up 8% and Aerie increased 21%.
We are pleased that consolidated traffic increased year over year in the quarter. The average transaction value increased in the low double digits, driven by a high single digit increase in the AUR and a higher EPT. The strength in our AUR was driven by a combination of more gold price sales and fewer promotions as well as a favorable sales mix. Additional sales information can be found on Page 8 of the presentation. Total gross profit increased 17% to 368,000,000.
The gross margin rose 310 basis points to a rate of 40%, the first time we have hit 40% since the Q3 of 2012. Approximately 2 50 basis points of margin improvement was due to lower markdowns as the company continued to reduce promotional activity. Buying, occupancy and warehousing leveraged 50 basis points, reflecting rent leverage, partially offset by higher incentive costs. As a rate to revenue, SG and A remained flat to last year at 24%. SG and A expense dollars increased 8% to $221,000,000 primarily due to higher incentive costs related to strong sales and margin performance.
Planned investments in digital marketing also contributed to the increase and had a positive effect on AEO direct sales this quarter. Depreciation and amortization increased to $38,000,000 and leveraged 10 basis points to 4.1% as a rate to revenue. Operating income grew to $109,000,000 from $74,000,000 last year. The operating margin expanded 320 basis points
to 11.9
percent. EPS of $0.35 increased 69% from $0.22 last year. Now turning to the balance sheet. Starting with inventory, which can be found on Page 9 of the presentation. We ended the quarter with inventory up 2%.
We expect 4th quarter ending inventory at cost to increase in the high single digits. The increase is primarily due to earlier receipts this year as we lap the delays caused by the port slowdown a year ago. Cash increased to 3 $63,000,000 at quarterend compared to $280,000,000 last year. And during the quarter, we repurchased 1,000,000 shares for a total of $50,000,000 Capital expenditures totaled $30,000,000 for the quarter, bringing us to $109,000,000 year to date. We continue to expect CapEx to be approximately $150,000,000 for the year.
And 2016 capital spending is expected to be in the range of $150,000,000 to $175,000,000 Our store rationalization efforts are still tracking to our expectations with 150 store closures expected by the end of next year. Additionally, we currently have 145 stores on short term leases. Now regarding our 4th quarter outlook. Based on a mid single digit increase in comparable sales, we expect 4th quarter EPS of $0.40 to $0.42 Our expectations include improvements to our merchandise margin, partially offset by higher incentive costs and variable selling expenses. The guidance compares to EPS of $0.36 last year and excludes potential impairment and restructuring charges.
Based on these expectations, our annual EPS of $1.07 to $1.09 represents a 70% to 73% increase from adjusted EPS of $0.63 last year. As I stated last year, our 2015 financial priorities were to reduce markdowns, drive inventory efficiencies and deliver expense savings and rent leverage. In addition to the great product newness and innovation we brought to the assortment, I am very pleased that we are on track to deliver on all of these financial priorities. At the same time, while delivering on these priorities, we continued our strategic investments, including building our omni channel and digital capabilities, global expansion and incremental digital marketing investments. We are beginning to see the benefits to our business and returns from these investments, which we expect to continue into the future.
We will stay focused on our priorities and look forward to delivering further growth in 2016. Thanks, and now we'll take your questions.
And our first question is from Janet Kloppenburg of JJK Research. Please go ahead.
Hi, everyone, and congratulations on a great quarter. Gross margin improvement was impressive as were the traffic improvement. I was wondering if you could talk a little bit about the opportunity for gross margin recapture in the 4th quarter, the extent to which we could expect the same level of improvement or perhaps more? And Mary, if there's any AUC opportunity there? And just if Chad and Jen could give us a peek as to what happened over Black Friday weekend, that would help a lot.
Thank you. Okay. In terms of gross margin for the Q4, we expect it to increase probably somewhere in the area of about 150 basis points over last year. And how we will achieve that is through continued markdown improvement, but also with some expected improvement in our AUC, so a combination of markdowns in AUC. And then in terms of holiday and green weekend comments, why don't I kick that off.
So we were really pleased with our results over Thanksgiving weekend, including Cyber Monday. It's widely reported across the malls, traffic was down over Thanksgiving. Our AEO store comps were up slightly through Monday. And based on the external reports about mall traffic would indicate that we pretty significantly leveraged the mall traffic. Our digital business was exceptionally strong.
So the combination of the 2 producing a nicely positive comp on a consolidated basis. So the retail environment was intensely promotional. The box office promotions range from 50%, 60% to 70% off in the mall. We planned over the holiday weekend to match last year's promotion of 40% off the store. Yet we ran it for 1 less day than we did last year in stores and 2 days less than last year online.
So in the Q4, we're on track to continue our strategy of lowering this promotional activity and driving higher merchandise margins and that's all reflected in our Q4 guidance.
Thank you. Our next question is from Brian Tunick of Royal Bank of Canada. Please go ahead.
Yes. Hi. This is Kate on for Brian. Thank you for taking our question. I guess just to piggyback on that Black Friday question, just given the mid single digit comp guidance, what does it imply as the quarter progresses just given your positive comments on Black Friday and knowing that you guys are facing some harder comparison as the quarter progresses?
And then secondly, I guess just on the AUR opportunity as we think about it into 2016, You guys have done a really nice job of pushing innovation and driving the AURs there. I guess, Chad, what are you thinking about as the AUR opportunities next year from a merchandise or mix perspective that can help us think that AURs can keep pushing higher from here? Thank you.
In terms of comps for the balance of the quarter, our guidance is mid single digit comps and we'll see how that plays out here as the month progress us. I think on AUR, and then I'll let Chad join in here after for next year. There is always opportunity to fine tune AUR and to continue to reduce our markdown slightly and more efficiency in terms of inventory, which should also help markdown. So still a little bit of room for improvement next year.
And I would say that from a product point of view, it's really 2 folds. 1, continuing what we've been doing, which is continuing to sell closer to ticket with product that our customers responding better and better to, offering greater value in what we have and then the customer buying a ticket. And the second thing I would say is the continuing focus and drive for innovation. As we see that we offer greater innovation that enhances the value of the product and we're getting paid a little bit more for that. And I think that mix can be part of it as well.
With the continued expansion of our bottoms business and some of the fashion categories that can help the AUR mix as well.
Thank you. The next question is from Adrienne Yih of Wolfe Research. Please go ahead.
Good afternoon, everybody. Let me congratulate you. The stores really look great. So nice job on the product, both Chad and Jen. Yes.
Okay. So my question now. Mary, can you talk about the inventory at the end of the 4th quarter, if you excluded the amount that is early arrival? And then Chad, there's been a lot of question about, from an industry perspective, whether this denim cycle and the movement toward a wider opening at the bottom, wider leg opening and away from the kind of peg leg skin jeans is actually coming? And if it is coming, how long do these cycles take to kind of get mass adoption?
And should we expect next year for this to continue to kind of evolve? And is it real? I mean, that's the question I keep getting, is there a real denim trend that's actually going to happen here? Thanks so much.
When you clear out the impact of the timing of receipts related to last year's port strike, where inventory will be up just slightly.
Right.
I think in terms of denim, when you look at our business, we're the bottoms destination. And we offer a very democratic range of fits and are not well, of course, we distort inventory to where we see trend in the business. We're very we have the broadest range, largest size offering. We're really looking to satisfy every customer. I think there's a lot of conversation about the flare.
And we do have flare in the assortment. We'll continue to test and we'll react as the customer responds to it. It definitely takes when you have a business the size of ours, it definitely takes a long time, can take years, I think, for a trend to go from the most fashion forward stores to the most mainstream stores. But with the way we test and continually fine tune our bottoms assortment, I'm confident that the team will be covered.
Thank you. The next question is from Tom Pallandero of SIG. Please go ahead.
Thank you. I would like to add my congratulations on the execution and congratulations to you, Jay. So, Chad, a question I had like you mentioned capitalizing on the broad denim reach, which I think is interesting. Are you guys given any consideration to a wholesale strategy?
And I'm really curious
to hear how that denim only store performed? Can we expect to see maybe a further rollout? And then, Mary, just on SG and A, with this a couple of comments here about increasing the awareness of the brand, a new loyalty program next year. Just how should we think about SG and A maybe in terms of what comp you need to leverage SG and A next year? And any thoughts around marketing spend year over year?
Thank you so much.
I think denim and broader than denim is definitely our lifeblood. We've talked about wholesale opportunities for denim. At this point, we aren't looking to pursue any. We are part of the Tailgate acquisition, and we're excited about the opportunity to roll out or to test and see if there's an opportunity to roll out Tailgate stores, which would include some AE Jeans as part of that, which is potentially a few 100 more points of distribution for American Eagle Denim through our own vertical channels. So while we've talked about wholesale at this point, it's not something we're pursuing.
And then Tom, in terms of SG and A next year, the plan is to maintain a similar philosophy that we had this year of trying to keep our fixed expenses flat to down with variable expenses moving obviously with the top line. And that will fluctuate as the year goes on next year. I think in terms of marketing specifically, my guess is we're still in the process of building a plan for next year, but likely to be up slightly next year. I think the digital marketing that we put in place this year, we're seeing a really nice return on that investment and certainly an area where I think we need to probably pour a little more fuel on that fire. So that's our current thinking right now.
Thank you. The next question is from John Morris of BMO Capital Markets. Please go ahead.
Thanks. My congratulations to the whole team as well and including Jay. So good job you guys.
Thanks.
I think kind of a question maybe for Chad and a little bit for Jen as well. The way that I look at it, you guys have done a really good job with the product sub brands, Soft and Sexy, Denimax, even Aerie, not even a sub brand, but a real brand in its own right. It's really creating differentiation and makes the stores more of a product destination. Chad, as you look ahead, I know you can't get into specifics, but should we expect to see more of this? And I just want to get thoughts really in that direction, because it's so important to the brand.
And then just a small quick follow-up was just any kind of commentary on sweaters and outerwear. I know you had said there's more work to be done in men's, but any kind of commentary you've got on your first reads of performance in those classifications? Thanks.
Sure. Yes. The sub brands, I think as we look, we definitely have found that as we've named some of the innovation, we've given marketing names to some of the innovation, the customers definitely responded to that. And we find it's great from a marketing point of view, from a digital engagement point of view, from a store engagement point of view to be able to speak to the customer about what's special about that product and have them be able to come in and be seeking out those kind of sub labels. So as we continue to innovate and bring newness within the assortment, that is something we definitely plan to continue trying to do.
We really are putting a lot of effort and work into differentiating and bringing terrific new ideas to the customer. And so getting credit for those with some of these sub labels is definitely something that we feel is working and something we plan to continue going forward. Sweaters and outerwear. It's definitely been we just heard yesterday it's the warmest November on record, and that doesn't make it easier to sell sweaters and outerwear. But we are actually seeing we made outerwear a big strategy this year in terms of bringing additional quality and value to the customer in outerwear, and we're seeing a really nice response there.
And in terms of sweaters, we're seeing some really strong selling and big volume out of our key item sweater programs. So I feel good about what sweaters are going to bring to us through the quarter.
And then Aerie, it's
the same. We're continuing to launch new product and innovation. But to your point, I think Aerie is starting to earn its right to stand on its own 2 feet here and we really want to go after this business. It's a growth opportunity for the company. Certainly, the AerieReal campaign has really started to light on fire here and we will continue to maximize that opportunity because it really does speak to young women in a really new way, in a really positive way and that's what we're really going to continue to work on.
Thank you. The next question is from Simeon Siegel of Nomura. Please go ahead.
Thanks. Good afternoon and congrats. Sorry, Mary, if I missed it, did you give any color on what e comm added to comps in the Q3? And then at this point, how big is the licensing business and what do you expect EBIT contribution could become in time? Thanks.
We don't provide the split on comps between store and mainline. So again, for our Q4 guidance, we're projecting that single digit comps, which is a combination of both.
And then on the licensing side?
Yes, we expect to see nice growth to continue on the licensing side of the business. The team has done a great job of driving that business here over the last couple of years. We still have more opportunities in Asia to grow that. And then I think we're just barely starting our journey in Europe. And over time, we'll see some growth there as well.
We don't break out specifically the details behind licensing. So just know that it's growing and we're really confident about the future there.
The next question is from Oliver Chen of Cowen and Company.
Congrats to the whole team, the stores and the products, it was great. As we look at 2016, you had such a great year this year in 2015. Just from a bigger picture perspective, what do you think the biggest levers are for the comp and also kind of the gross margin drivers? Just curious about that. And then also if you could just talk briefly on what you're seeing with online and offline integration in terms of bricks and clicks and what's next in that chapter as you think about post millennials and how the customer is behaving?
Thank you.
So when I think about 2016, I think about the planful deliberate approach that Jay put in place here in 2014. And we will continue along those lines in 2016. So clearly driving for profitable top line growth, plenty of opportunity in our direct business, international growth. Chad already talked a little bit and Jen about product innovation. Harry, we're going to put fuel on fire because it's a business that's growing at a very rapid pace.
We'll look to continue to drive store productivity. We still have some store closings to do yet, which will help. And then it's about the rest of the
disciplines in the business about
really managing our inventory, continue to focus on about really managing our inventory, continue to focus on our expenses, while at the same time delivering the great products that Chad and Jen talked about and provide a great customer experience. So if you think about just those basic disciplines and a very planful approach that we've deployed here, expect to do the same here in 2016. And that certainly should help drive some upside in our gross margin next year.
And Oliver, this is Michael Rempel. As it relates to your question about how we plan to integrate the channels, I think you're aware. But earlier this year, we combined our buying and planning teams into one organization, an omni organization, whereas before we had separate direct and retail organizations. And this year, we really got to see the culmination not just of those org changes, but we got to see that combined with the rollout of new capabilities that we had been working on for quite a while that I really feel delivered a breadth and depth of capabilities that are pretty special. So the capabilities include our buy online, ship from store, reserve online, pickup in store, order in store and through an iPad or iPad, we'll ship it to your home and having a single pool of inventory in the DCs.
They really allowed us to uniquely service customers and leverage the inventory that we have anywhere in the company to make it more efficient. There were huge contributors, like Mary was saying earlier, to our extremely strong e commerce businesses holiday. And what it shows us is how much opportunity was left unfulfilled previously, how much demand we weren't meeting out there that we're now able to meet. And the numbers are just they're pretty incredible. If you take this week alone, our stores over the last 2 days were able to ship to customers 175,000 packages, okay?
So that's demand that Okay? So that's demand that previously we weren't able to meet to those customers. And that's just not a technology effort. That's really a transformation of the company in terms of looking at how we operate and how we leverage both our tools and our infrastructure. The other piece that we're going to build on for next year is our mobile capabilities.
This year, we or the end of last year, we launched a new mobile app. We've seen great success with that app. It's in the Apple Store. It's got a 4.5 star rating. It gets a lot of positive feedback.
And we had talked in a previous call, we've been working on a new website designed to work on mobile devices first. That website is going to roll out in Q1 next year, but we piloted it this year. And we saw positive results in all operating metrics from that pilot. So we know mobile is changing the way our customers shop and we feel we're going to be right there with them to meet their expectations.
Thank you. The next question is from Lorraine Hutchinson of Bank of America. Please go ahead.
Thank you. Good afternoon. I wanted to follow-up on Aerie opening 10 new stores next year. Can you talk a little bit about what you think the total store potential could be? And also is Aerie part of the tailgate store rollout potential?
Would you consider including some Aerie products in those stores?
Regarding the tailgate, we might do some testing in the tailgate store for sure. And regarding the store rollout, listen, we're so pleased with the results that we just saw with the smaller formats and the productivity that we're seeing in those. We're going to do what we always do. We're going to look at any opportunity that's available to us and assess it. And if it makes sense, we will open up stores.
We're only in 11 states right now. So certainly, we have a lot of opportunity to grow. And like I said, we'll take every opportunity as it comes. So thank you.
Thanks.
Thank you. The next question is from Anna Andreeva of Oppenheimer. Please go ahead.
Hi. It's Janet Lynn on for Anna today. Congrats on the strong gross margin beat. We were hoping that you could give us some color on how the business was performing leading up to Black Friday. And then on inventories, they look very clean going into 16x support.
As you lap the inventory declines, will there be additional opportunity to cut back? And then finally, can you just remind us of what comp we need into 2016 to leverage occupancy? Thanks.
We won't provide the detail on kind of week by week in the month of November. So our comp guidance of mid single digits is all in for the quarter. If I think about inventory as we move into 2016, look, there's always a little bit more room for inventory efficiency, but I would expect our inventory to be up slightly as we go through the year, given we are up against some pretty significant decline in the last couple of years. But it will certainly increase at a rate lower than our revenue expectation. And then the leverage point is about low single digits.
Thank you. The next question is from Matthew Boss of JPMorgan. Please go ahead.
Hi, it's Christina Brathwaite on for Matt. Thanks for taking our question. Just looking at your mid single digit 4Q comp guidance against the flat compare, how should we be thinking about your ability to comp the comp going forward at both brands as you're up against significantly more difficult compares in 2016? Is the mid single digit comp sustainable over the next couple of years? And then as you look at Aerie and it continues to be
a bigger piece of the overall company,
how should we be thinking about merchandising margins going forward? Should we be expecting any kind of mix shift there as the penetration increases?
I think as we look forward next year, we have so much opportunity here in the company to grow our business across a multitude of channels. And I'm really excited about the work Chad and Jen are doing with our assortment and bringing that newness and innovation. So it is our expectation we'll continue to comp next year. We'll see at what rate, but that is our expectation. And I think there's enough going on here that gives us the confidence that we can do that.
In terms of Aerie, I would say we've seen great improvement in the Aerie margin here over the last couple of years. And it's pretty comparable to the AE brand. So as Aerie continues to grow, I think we'll see nice margin growth overall for the company.
I think just some color on the product side of the comp opportunity. We've seen we talk a lot about our bottoms business, which continues to set records for us. But there's still we're still getting started in the rest of the business. We've seen great growth in women's over the last few quarters, but even that has been some categories, knit tops, dresses outpacing other categories. I think we have opportunity throughout the fashion categories of women's.
And in men's, while we've seen strong growth consistently in the bottoms area, we haven't seen that consistency in tops. And so I think we have a lot of opportunity there. And then we'll continue to look at category expansion as opportunities to drive comp growth.
Thank you. The next question is from Nealey Tumminga of Piper Jaffray. Please go ahead.
Great. Good afternoon. If you could talk a little bit about a peek into next year on the loyalty program. Could you just remind us what you're gaining in terms of relaunching that loyalty program in terms of the customer facing perspective as well on the back end with your analytics and flexibility and then also the timing of the launch of that loyalty program? Thank you.
So our loyalty program, right now we have about 13,000,000 loyalty customers, which is a great base to work with. We just started our pilot of our new loyalty program, which has a multitude of different assets, and we'll launch that at the back end of next year. We think our new program will be a bit more relevant to our customers today. It will have a very strong digital focus and more emphasis on engagement and ways to earn rewards outside of simply making a purchase. Our current loyalty program has been in place for quite some time and so we're really excited about updating the program.
So expect something towards the end of next year.
Thank you. The next question is from Paul Alexander of BB and T Capital Markets. Please go ahead.
Hi, great. Thank you. Mary, could you talk a little bit about non comp growth? With the store rationalization, you're slowly moving into a square footage decline period here. And this quarter you had a higher comp than total sales growth.
So how should we expect that comp sales spread to look in the coming quarters? Thank you.
Yes. It will pretty much that spread will pretty much disappear. Our square footage, as we look into next year, we expect it to be down slightly, about a minus 1. So expect that spread to really pretty much go away to be flat.
The next question is from Richard Jaffe of Stifel.
Looking forward, a lot of talk about building the brand, getting global recognition. I'm wondering if you could talk about some of the tools you're going to use to get there, obviously TV, print, social media, if you could be a little bit more specific and let us know if it's going to be brand specific as well, Aerie versus Eagle? Thank you. I think we're we definitely think we have a big opportunity to grow brand awareness internationally as well as to work on the perception of the brand domestically to try to expand. We're just getting underway in some of that, how we'll deploy this.
So at this point, we're not we can't really talk about what will be print versus out of home versus digital, but it will include all of those areas. I think I do think digital will be a big is a big opportunity for us globally, but how it breaks down, we aren't going to go into.
And for Aerie, it's really, again, just continuing the AerieReal campaign. It's resonating with this our customer and socially, it's really catching on fire. And we just we love what it stands for. And I think as we add fuel to that fire and talk socially to this girl through all the different platforms, it naturally will take hold. And again, it's just it's part of our DNA.
So it will continue to pour fuel on the fire, as I mentioned.
Thank you. The next question is from Susan Anderson of FBR. Please go ahead.
Good evening. Congrats on a very good quarter. I was wondering if you could update us on the international business, both in Canada and then outside of Canada, the owned stores. Are you seeing just as strong of trends there as you are in the U. S?
And then maybe give us an update on the margin trajectory for the owned stores? And then finally, if you can update us on your capital return plans, any thoughts to accelerate your share repurchases given the growing cash down? Thank you.
Yes. Our Canadian business continues to be very, very strong. They're really having a nice year this year and a nice call out to the Canadian team. I'll take the last question, I'm not sure I quite got your second question. Return on capital will continue our same approach of a very balanced approach.
Obviously, our first priority is to invest in the business. We'll continue to return to the shareholders to a really strong dividend. And then where we have the opportunity to repurchase, we will. Can you repeat your second question?
Yes. Just on the margin trajectory of the stores out the owned stores outside of Canada, how can we think about that over time?
Yes. Look, every country, every region is different, so it's hard to make a bit of a blanket statement about those stores and our growth plans. I mean, we're really bullish on our Mexico business. As Jay mentioned earlier, we think that's on a path to $100,000,000 business here in the very near term. Canada is growing well.
Our U. K. Stores are starting to pace here to plan. And then our Asia stores are also performing well. So we're seeing good work.
We will take a very planful approach as we scale this business outside the U. S. Because it is all about profitable growth.
Thank you. The next question is from Pam Quintiliano of SunTrust. Please go ahead.
Great. Thanks so much for taking my question, guys. And let me add my congratulations on the quarter and to you, Jay. And then I had a quick question for you Jay. Just given your long tenure in retail and with Eagle, can you talk to us about just how you're feeling about the health of the core consumer now?
We've had some positive macro commentary, obviously, offset by the weather and the heightened promotional landscape. Just how do you feel like he and she, how they're doing? And then also when we think about just your thoughts on juggling competitive environment with your successful reduction in promotions? And what you do or how you think about the approach for holiday just reflecting all of that? Thank you.
First of all, we are a brand. And part of our job is to have a promotional attachment by the customer to our brand. In the last 2 years, we worked very hard to emphasize that as far as the customer attachment, we didn't want to be in the business at discount like our competition. We worked hard the last couple of years to say, look, we want to make the best product out there. We want to make it a product that customers want to buy.
We want to be on trend the right way. We want to and that we want to be the leader in denim. We made it a goal that we're going to lead in denim, whether it's through the denim X program, whether it's through the flex denim program. So you have to keep the customer excited. And on the next 12, 18 months, our goals are want to make the shopping experience an exciting experience for the customer.
We're working on different concepts right now. We're also looking how our product can keep evolving itself. And we have a lot of challenges. But the good news is that the company is running well on all cylinders. Sometimes you have a company where maybe one part is doing well, the other part is not doing well.
In this case, in all the different channels, we're doing well. So we have very good things to build on, whether it be Aerie, whether it be American Eagle, whether it be the direct business, whether it be the international business, everything is positive. So the team's goal is and this is a team that works here is to prioritize where we think we'll get the best return to start with, where we want to put our investment. We know we have a lot of work to do out there. The good news is there's a lot of work to do out there.
If we were doing if this was our best, I'd say, well, how can we improve ourselves? The good news is we have a lot of initiatives as far as the team is working on. We've got plenty to do the next couple of years and I'm very excited about the company. I think this is the greatest opportunity that I've seen in this company in the last 20 years. And that's why I'm excited.
We worked hard, the teams worked hard, Chad, Jen, the whole entire team, whether it be Mary, Michael, Roger, everybody has worked very, very hard on this team. And we see a lot of opportunity. And that's what in the next 12 to 18 months, that's going to keep us pretty occupied. The good thing is we see the customers responding without getting big discounts. And part of our goal is to keep building that emotional attachment to the brand.
Manny, we'll have time for one more question, please.
Certainly. The next question is from Paul Lejuez of Citigroup. Please go ahead.
Hey, guys. It's actually Jennifer on for Paul. Good afternoon.
Hi, Jennifer. Hey, I had a
question on Aerie. Jen, did you say that merch margins were in line with the American Eagle brand? And then if you did okay. Is there an opportunity for merch margins there to be higher? I thought that for other
retailers that are in that kind of intimate category, that's generally a higher margin business. So that's kind of okay.
And then how do you sorry,
go ahead.
You can finish, sorry.
And then just kind of another follow-up on Aerie. Just wondering, I know it's only 10 stores and you guys are
going to go slowly in test, but are you where
are you planning on opening those stores? Like you said standalone, but is it going to be near an Eagle store? And will you be pulling Aerie product out of
the Eagle store when you do that? Thanks. We will continue to leverage the side by side locations where it makes sense because we've seen really nice a great response there. And with the test of the standalone stores, the initial reads are great. So of course, like I said, any opportunity.
We've seen great success in Canada for sure. So we're looking at opportunities there. And internationally, in the little exposure that we have internationally, of course, we will open along with a right now internationally, we're mostly in shop within shops inside of AE. But of course, we're going to open up more than 10 stores. Like I said, we're only in 11 states and you can see digitally all of our business comes out of those 11 states on the web as well.
So, wow, what an opportunity when we look at that. And certainly, we see opportunity in margin growth for sure. Some of our newest businesses that we've launched, some of the novelty businesses in bras, we can certainly penetrate higher. And as we do that, we'll see margins come along with that. So thank you.
And I didn't mean to interrupt you earlier. My apologies.
No worries. Thanks a lot.
Thank you. Great. That concludes our call today. So thanks everybody for your participation and your continued interest in American Eagle Outfitters. Have a great evening.
Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.