As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Judy Meehan.
Thank you, Ms. Meehan. You may begin.
Thanks, Jessie. Good morning, everyone. Joining me today are Robert Hansen, Chief Executive Officer Roger Mark Field, Executive Creative Director and Mary Bolin, Chief Financial and Administrative Officer. Before we begin today's call, I need to remind you that during this conference call, we will make certain forward looking statements. These statements are based upon information that represent the company's current expectations or beliefs.
The results actually realized may differ materially from those expectations based on risk factors included in our quarterly and annual reports filed with the SEC. We have posted a Q3 financial presentation on our website, which we will refer to during this call. Robert will start with a brief overview of the Q3. After Roger and Mary give additional comments, he'll come back and review our longer term strategic initiatives. And then we'll take your questions.
And now, I'd like to turn the call over to Robert.
Thanks, Judy, and good morning, everyone. This quarter marked the 3rd consecutive quarter of double digit top line growth and over 30% earnings growth. I'm pleased that we've seen continued momentum in our business, while executing on our immediate priorities and building our longer term strategic plan. In the Q3, net sales increased 11% and earnings per share rose 37%. Customers continue to respond well to our brand and product driven customer experience.
In a highly competitive environment, we delivered market leading top line growth with fewer promotions. Double digit sales growth was also achieved in conjunction with tighter inventory principles. Favorable merchandise costs, combined with lower markdowns and the leverage of rent expense, resulted in higher profitability and returns. The 3rd quarter operating margin expanded to just over 14%, our best since 2,008. Now I'll review some of the Q3 highlights.
Within American Eagle Outfitters, we were successful delivering highly appealing and fashion right assortments, resulting in broad based multi category strength and a truly differentiated lifestyle offering. Our merchandise, marketing and customer experience teams executed well. With greater trend responsiveness, more frequent flows and embedded inventory management principles, our product teams did a great job driving top line growth and merchandise profitability. Aerie achieved both top line and bottom line growth with strength in its famous for intimates categories of bras and undies. We will seek ongoing improvements centered on Aerie's more sharply focused brand DNA with intimates at the core.
We drove increased traffic into stores and saw 20% growth in our active customer base for both AEO and Aerie. Incremental investments in advertising are proving important as we look to drive further customer loyalty and traffic. Our Real People campaign supports the unique, authentic and inclusive positioning of our American Eagle Outfitters brand and has sparked greater customer outreach and engagement. Sales in our direct business grew 27%, driven by increased traffic. Direct profitability grew 46% due to both IMU improvements and the reduction in the markdown rate.
Cash flow was very strong. We delivered an increase in cash versus the prior year even after we paid a sizable cash dividend of over $300,000,000 in the quarter. Now a few words on our start to the current quarter. We managed through Superstorm Sandy effectively and within a few days most of our stores were up and running. Most importantly, we're grateful that all of our associates were and are safe and I'm particularly proud of how our teams provided immediate assistance and support to each other and others in need.
Our holiday season and Q4 have started off strongly and consistent with our expectations. Against strong double digit sales gains last year, we drove positive comps and record sales volumes on Black Friday and over the Wednesday through Sunday period, completely offsetting the impact of Sandy earlier in the month. Sales metrics were healthy throughout, including a higher average unit retail price, increased ADS and strong conversion. I'm pleased with how we delivered across channels with both stores and our online business posting record results and with major advancements in mobile and tablet commerce. So while we still have important weeks ahead, we feel well positioned for our success this holiday.
I want to thank our teams for driving a strong performance in the Q3 and so far through the Q4. Yet I'm confident in their commitment to remain sharply focused on delivering consistent improvements in profitable sales growth and strong shareholder returns moving forward. I'll come back in a few minutes and provide an update on our strategic progress and some of the key projects driving our performance and product improvement.
Now over to Roger. Thanks, Robert. Good morning, everyone. We were pleased once again by our leading sales and brand momentum experienced during the Q3. In addition to positive traffic and conversion, we delivered strong sales with fewer promotions.
Men's consolidated comps increased in the high single digits and women's increased in the low double digits. We led the back to school season with our signature denim business executing well with new styles, fits, colors and treatments. We are leveraging our core strength in denim and bottoms to deliver ongoing newness and strength across this famous 4 category. In addition, our other famous 4 businesses, shorts, knit tops and color were strong performance in the quarter. There's no question we delivered a compelling color story across tops and bottoms and we're clearly different from competitors in the fashion business.
Sweaters are reemerging as an important category with exciting new trends. Also our uniquely positioned fashion dress business and men's haberdashery shop elevate our brand and enable us to attract wider ranging customer base. During the quarter, the team did a great job with an appropriate wear now business early in the season, followed up with more frequent merchandise flows of both core and fashion to surprise and entice our customers. More newness and tighter inventory buys are an important process improvement, which we expect to drive further productivity gains. We feel confident in our future and the team should be proud of the broad based strength across the business.
Within Aerie, we made solid progress this quarter with comps rising 5% driven by bras, undies, lounge and layering tees. The team is doing a really nice job sharpening our focus and launching ongoing newness, which is supported by advertising to build on going brand awareness. Now a word on holiday. We are pleased with how we've started the season with the continuation of strength in sweaters, fashion tops, bottoms and woven shirts. Our color story once again is strong and we feel well positioned to deliver a solid season.
We have a new fresh fashion merchandise update, which arrives in stores this weekend and we plan to continue our advertising campaign throughout December. Again, I'm proud of our teams and how they are executing across our creative disciplines, including design, merchandising and marketing to deliver the very best experience for our customers. Mary will now cover the financial results. Thanks, Roger. 3rd quarter total consolidated sales increased 11
%
to $910,000,000 compared to $819,000,000 last year. Comparable store sales increased 10%, including e commerce. By business, American Eagle Outfitters increased 8%, Aerie was up 5% and e commerce increased 27%. On a consolidated basis, comps were positive across the U. S.
And Canada. Sales growth was the result of higher traffic and conversion, combined with an increase in the average selling price. For additional sales information, please refer to Page 5 of the financial presentation. Gross profit of $379,000,000 increased 21% to last year. The gross margin rate improved 3.50 basis points to 41.6%.
The merchandise margin increased 2.90 basis points with both favorable product costs and lower markdowns contributing to the improvement. Rent leverage drove the remaining 60 basis points of margin expansion. SG and A expense increased 18% to $219,000,000 and deleveraged 140 basis points to a rate of 24.1% for the quarter. The dollar increase was driven by incremental incentive costs, our planned advertising investments to support the back to school selling season and variable expenses related to our strong top line results. Despite the uptick driven largely by incentive expense this year, we remain committed to our annual targeted rate in the 23% range as we look forward.
Depreciation and amortization declined $3,000,000 to $31,000,000 and leveraged 80 basis points. The dollar decline relates primarily to maturing assets. The operating margin of 14.1% improved 2.90 basis points to last year. We achieved net income of $82,000,000 leading to EPS of $0.41 versus $0.30 last year or growth of 37%. At the end of the Q3, the exit of the 77 Kids business was complete.
In total for the year, we booked an after tax loss of approximately $32,000,000 of which $4,000,000 was incurred in the 3rd quarter. Now turning to the balance sheet, starting with inventory. Please refer to Page 7 of the presentation. We ended the quarter with inventory at cost per foot down 11% due to a decline in both units and average cost. Looking forward, we expect 4th quarter ending inventory at cost to decline in the high single digits.
Year to date capital expenditures totaled $71,000,000 and we continue to expect approximately $100,000,000 for the year. We generated strong cash flow. After dividend payments of $317,000,000 in the quarter, we ended with cash and short term investments of $545,000,000 up from $481,000,000 last year. On store activity, please refer to page 8. Through the Q3, we opened 13 new stores, of which 12 were factory stores.
We closed 19 locations, including 4 Aerie stores. In November, we opened an additional 3 factory stores. As seen on page 9, we have a total of 44 in total international locations in 13 licensed countries, which contributed slightly to our profitability. Now turning to our outlook. For the Q4, we are increasing our EPS guidance to be in the range of $0.54 to $0.56 which represents growth of 38% to 44% over the $0.39 last year.
This brings a revised full year EPS from continuing operations in the range of $1.38 to $1.40 per share. The guidance, of course, excludes the potential impact of store impairment charges. Our guidance assumes comp store sales growth in the mid single digits. We expect to benefit from lower cotton costs and are expecting a reduction in the markdown rate supported by our lower inventory. Similar to the Q3, we expect SG and A to increase due to this year's incentive accruals, incremental advertising investments and variable selling expense.
Beginning next year, as we cycle against incremental incentives, we expect to achieve our targeted SG and A rate of 23% to sales. Our effective tax rate is expected to be in the range of 37% 38% this year, and our share count assumption is approximately 203,000,000 shares. Before I hand it back to Robert, I'd like to remind you of our long term financial targets, 7% to 9% top line CAGR, 12% to 15% EBIT CAGR and ROIC of 14% to 17%. Our annual operating margin target is 14% to 16%. Underpinning our longer term view, of course, is to generate greater consistency in performance and a focus on ROIC.
With that, I'll turn it back over to Robert.
Thanks, Roger and Mary. We've now had 3 consecutive quarters of demonstrated improvements to our fundamentals. We've been delivering upon driving a competitive top line and strengthening margins, instilling inventory principles, repositioning our store fleet and accelerating growth in e commerce. This work has enabled us to achieve growth in both sales and earnings and delivered a higher return to shareholders. Yet, we are still in early stages of driving improvements.
Over the past several months, we've built our strategic plan, which we believe lays out a clear roadmap to creating consistent long term profitable growth and top tier shareholder returns. During the Q3, we completed the plan and are now in implementation mode. Our plan is built on 4 pillars: fortify, grow, transform and return. Fortifying our core assets and growing North America will be our primary focus over the next 18 months. Concurrently, we will begin to lay the groundwork and build the capabilities necessary to succeed as we transform into a company of competitive, global, omnichannel brands over the longer term.
Today, I'd like to highlight the progress we're making on a few of our important projects. Starting with our differentiated supply chain project. We're beginning to see the benefits of this work As our design and merchandising teams work to identify and commercialize trends, we are supporting their work with more frequent merchandise higher production calendars and ultimately faster inventory turns. We are now sourcing our core products continuously and sourcing fashion in differentiated supply models based on the level of fashion. These models are either read and react, test and scale or delayed just in time development.
We expect to drive continued benefits as we respond more precisely and effectively to customer preferences. Next, we have nearly completed a review of our store fleet and are currently executing an upgrade to the fleet, which includes the following. First, we are calling unproductive stores. We expect to close 35 to 40 stores this year and approximately 25 to 40 stores per year at lease provision for the next several years. 2nd, we have opportunities to open a large number of A plus locations in underpenetrated markets, primarily in influential urban areas in the United States and Canada.
In 2013, we expect to open at least 6 new American Eagle Outfitters stores, including locations in New York, Miami and Los Angeles. Next, we are upgrading our existing store base through a robust remodeling program. We expect to improve about 50 stores per year over the next several years. In 2013, this will include our 34th Street store in New York, which will undergo a much needed and extensive remodeling project, making it more competitive on the street. Lastly, we are accelerating factory store openings and over time see the potential for 150 to 175 total U.
S. Locations. In 2013, we are planning to add approximately 40 new factory stores. Looking at our omni channel customer experience and e commerce efforts. For this holiday, we have upgraded the stability, capacity and service levels of our existing e commerce platform.
We have made strong progress towards accelerating our AE rewards program with a single view of our customers' service by an enterprise wide shared inventory pool, including inventory in store and across distribution centers. We have upgraded our in store experience by offering Wi Fi to our customers in 225 of our BetterHelp stores this holiday and piloting tablets for greater customer engagement as a look book in 150 stores. This is allowing us to integrate our e commerce and store fleet customer experience, accelerate our store to door program and provide our associates with more opportunities for enhanced customer service. Finally, over the past several weeks, we have made some important new leadership hires aimed at fortifying our capabilities and laying the initial groundwork for our future multi channel transformation. First, we welcome Joe Megibow to a new position, Senior Vice President and General Manager of Omnichannel and E Commerce.
Joe joins us from Expedia dotcom, where he was the General Manager and is recognized for building the industry leading customer experience in online travel. Joe has been at the forefront of e commerce since the 1990s and is an industry leader in online analytics and online optimization. He brings extensive experience in technology, strategy, marketing and general management. In his role, Joe will lead and further grow our global e commerce business, drive our omnichannel customer experience and guide customer facing technology innovation. Next, Sherry Harris joined us as Executive Vice President, Chief Talent and Culture Officer, with responsibility for all human resources initiatives, communications, government and corporate affairs and the AEO Foundation.
She will work with the team to strengthen our capabilities and culture throughout the organization. I'm thrilled to have Sherry on our team as she brings a wealth of experience including business strategy and communications in addition to an extensive multi disciplined HR career. Finally, Karen James has been appointed as Senior Vice President of Global Real Estate and Construction, joining American Eagle Outfitters from the Gap. Karen is an accomplished executive with vast knowledge and experience within the retail real estate landscape. We welcome Karen as a critical member of our executive leadership team.
To conclude our prepared remarks, we are pleased to have delivered another strong quarter and to be experiencing continued momentum during the start of the holiday season. At the same time, we remain focused on the future and excited about the many opportunities for further performance improvement ahead of us. We will stay humble and hungry as we strive to achieve consistency in our performance, deliver profitable growth and drive top tier returns to our shareholders. Thanks for listening. And now we'll take your questions.
Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Anna Andreeva of FBR Capital Markets. Please proceed with your question.
Great. Thanks so much. Congratulations on the strong quarter.
Thanks Anna.
I had a couple of questions. Question on the TV commercials. I was just wondering if you could talk about the early return on investment that you're seeing there and what are some of the plans going forward for the holiday and spring of 2013? I think your advertising expense had been running at around 2% of sales give or take. How should we think about that going forward?
And just a question to Roger on stores, they look terrific. Could you remind us what are some of the merchandise opportunities in men's and women's as we go through the holiday? Thanks.
Sure. I'll start and then I'll let Mary and Roger chime in. So in terms of the television commercials, Anna, as I mentioned, we saw a 20% increase in our active customer base on our loyalty programs. We also saw in the quarter nice momentum across every one of the store level and direct level metrics that we're tracking from traffic to UPT's ADS conversion. So we feel like that is evidence of our driving a nice return from our marketing.
It gave us the confidence to be able to invest in the advertising that you're seeing during the current holiday period. And obviously, our intent is to continue to build further momentum behind the performance of both the American Eagle Outfitters and the Aerie brands. Mary?
Yes. When you think about our advertising as a percent of revenue, this year we're likely to be in the kind of the 2.6% range. I think as you look forward probably closer to the 3% range as we continue to invest behind our brand. We're opening a significant number of factory stores next year, which will require some marketing effort behind that. We're opening new doors in Mexico next year.
So as we continue to grow the portfolio, you expect to see that advertising start to uptick a little bit.
Anna, as I mentioned, on this Friday night, the stores will do a completely new floor set. This is a new addition to prior years. It's a whole new freshness factor of new fashion and I really invite everybody to visit the store on Saturday. I think it's the best fashion and I appreciate everybody's thanks for being so kind to us and how they think we look. But I think that this new set is even better.
And within it obviously the strength and the core is in sweaters and wovens which are so strong for this holiday.
Okay. Jesse, we'll take the next question.
Thank you. Our next question comes from the line of Betty Chen of Wedbush Securities. Please proceed with your question.
Hi, there. It's Alex Pham on for Betty. I was just wondering if you guys could comment on first on sort of the competitive environment. I know some of the other teen retailers are quite promotional and how you guys were looking at the holiday season. And then, also a quick question on input costs for next year, how you guys are viewing that?
Thanks.
Sure. Well, Alex, as we've said, it's been quite competitive throughout the year and we've seen that competitive environment continue through not only the Q3, but obviously in all the activities we saw during the month of November, including Black Friday weekend. We executed our strategy plan and our roadmap, which was to be competitive when we need to be in the high traffic periods, but selectively pull back on promotions so that we could drive a fundamental improvement in our overall operating metrics. We delivered those results in the 3rd quarter as we reported them today. And as we mentioned, we're pleased with our results throughout the early start to the holiday season.
There's no question it's highly competitive out there, but throughout the year, we've been able to demonstrate the ability to execute our roadmap, which includes a selective pulling back of promotions and still deliver the results that we've been committing to our investors, and that's what we intend to do moving forward.
On average unit cost, for the Q4, we expect to see a slight improvement in average unit cost. And then as we move forward into next year, we still expect to see continued improvement in the first half of the year as we continue to clear out the year over year impact of cotton through the first half of the year. All right. Jessie, next question please.
Thank you. Our next question comes from the line of Evelyn Kopelman of Wells Fargo. Please proceed with your question.
Thank you. Good morning. Congratulations.
Thanks, Evelyn.
I wanted to ask about merchandise margins and markdowns going forward. You said in the quarter you saw lower markdowns and you expected for 4th quarter lower inventories. What how should we think about next year and going forward in terms of the opportunity of gross margin improvement from lower markdowns? What kind of magnitude do you think you can achieve? And do you need to continue to drive lower inventories to achieve that?
And is that part of the plan? Thank you.
Yes. I think as we look into next year, we're in the process obviously of putting our detailed plan together for 2013. So still a little bit up in the air. As we continue to implement our inventory principles, we do expect to see continued improvement or lower inventory as we move into the first half of next year. That should result in a lower markdown rate as well.
Don't have an exact guidance number to provide yet as we're working on the budget, but would expect to see an improvement in markdown rate driven primarily by lower inventory in the first half of the year. Okay. Jesse, next question.
Thank you. Our next question comes from the line of Jeff Van Sinderen of B. Riley. Please proceed with your question.
Good morning. And let me add my congratulations.
Thanks, Jeff. Good morning.
Maybe you can just talk or update us on your thinking about the succession plan for Roger, whom we're sorry to see exit. And then also on Aerie, just anything any other color you can give us there in terms of what you learned in Q3 and over Black Friday weekend at that chain?
Sure. Well, as I've mentioned before, I feel very fortunate to have Roger as a partner and that's going to continue all the way through to the early part of 2014. And by that time, we would have completed the majority of the product for all of 2014. So we still have quite a bit of time to partner together, Roger and I. Roger and I have been working on the plan for his succession together and we'll be particularly working on that robustly in the Q1 of next year.
But the reality is and we intend to introduce you to the depth and breadth of talent we have in merchandising design and marketing across the organization in the early parts of next year, because it's important for you to understand the strength of the team that Roger has built over the last several years. We have, in our view, among the best talent in the industry across all three functions. They've been thriving under Roger's guidance. We're very aligned around our strategy plan, around the positioning of our brands, around the overall architecture to our assortments and how we're marketing them and taking them to the market from a customer service standpoint. So we feel good about that.
Maybe I'll let Roger add some comments and I'll come back and talk a little bit about Aerie.
We were really pleased with the emphasis on the intimate space for Aerie in the Q3. We're really getting a lot of traction on the undies business, on the bra business and on the whole layering tea business. So that really has been our focus. We'll see how Q4 plays out because obviously last year we were in the sportswear business and this year we're still focused on the intimate part of the business. But overall, it was a profitable business for us in the Q3 all in.
So we're really happy with where it stands right now.
Yes. And as Roger said, it was we've been working to get it to breakeven on a four wall basis, which it achieved in the Q3. And importantly, as we said consistently and Roger just reiterated, Aerie is profitable on a total basis.
Okay. Thank you. Jesse, next question please.
Thank you. Our next question comes from the line of Jennifer Davis of Lazard Capital Markets. Please proceed with your question.
Hey, guys. Let me add my congratulations.
Thank you.
I've got 2 clarifications and a question. And first of all, Mary thanks for the financial presentation. That was helpful. Did you give the breakout between markdowns and lower input costs on merchandise margins? If so, I missed that.
Could you repeat that? And could you remind us what kind of impact the 53rd week will have? And then my question is on the mix of product. How do you feel now about the percent at opening price point versus kind of mid priced tier and higher priced here. And it seems like you guys have done a very good job and have been successful with sweaters and wovens and tops.
It looks like that mix has probably increased in terms of sales versus denim. So maybe talk a little bit about the opportunities you have there? Thanks a lot. Okay. Quickly on merchandise margin, we saw about a 2 90 basis point improvement.
The majority of that was driven by favorable product cost. We did have a slight improvement related to markdowns. And then we also had a little bit of rent leverage in the merch margin improvement. And then on the 53rd week, really not material.
And in terms of pricing strategy, Jennifer, as we've talked about, I think we felt, as we looked at our 2011 performance, we were probably over penetrated in the opening price bucket, under penetrated in the mid tier and probably just about right in the highest price tier. So we kept our strategy constant, meaning having those 3 price tier buckets. But fundamentally, we've seen the customer responding quite strongly and Roger can talk about the product comments that you or questions you asked about. But the customers responded quite strongly both to the value we offer at our opening price point and the fashion and value in the mid tier and premium price buckets. As we mentioned, we did see an AUR increase during the start to the holiday season, a lot of that driven by the just tremendous success of the fashion product that we've got out in the market.
Roger?
Yes. As Robert said, we're really happy with the way the fashion merchandise is turning. And as you can see in the store, it's turning actually bit faster than we thought it was going to turn. And fortunately, this Friday night, we'll hit you with another great presentation for the holiday season. And interestingly, on the December 23, which I think we're the only ones in the mall that actually do it, we're going to have a tran set, which is the strongest fashion set that we've ever done as well.
So you can see you'll see 2 new sets in the month of December, which I need not tell you is quite complicated. On the other question, the balance between tops and bottoms, we're such a dominant destination for bottoms. I will tell you that the bottoms business is also running at a double digit clip. So the combination is very powerful.
Okay. Thank you. Okay, Jesse, we'll take the next question please.
Thank you. Our next question comes from the line of John Morris of Bank of Montreal. Please proceed with your question.
Thanks. Good morning, Mike. Congratulations as well.
Thanks, John.
Question would be, Mary, you were really helpful in terms of talking about SG and A and spelling out the go forward on that. I know the I'm wondering about the implications just in terms of explaining the delta a little bit more. I know I think in Q3 you had you guys had talked about or sorry the back half you had talked about running in a low teen rate. It sounds like you're still committed to that. So it's kind of a 2 part question.
Was the SG and A kind of the change coming in year over year up about 18%? Was that all explained mostly by the accruals? And for the Q4, I guess, if it's by our calculations would kind of recede to about a 10% to 11% year over year increase rate. Are you comfortable with that at this point? I'm sort of understanding the difference between the big tick up in Q3, but then kind of goes back down to being kind of a more sort of normal rate in Q4.
Yes. So on SG and A for Q4, we're looking to be in the same range increase that we incurred in Q3. So we are up about 18% in Q3, expect about that same kind of increase in Q4. It's primarily driven by the incentive accruals as we've moved through the year and have delivered the good performance. But we've also have invested in advertising in Q3 and in Q4, which is driving some of the SG and A increase.
Again, really important that we continue to invest behind our brands. And with the good performance that we've seen this year, it's enabled us to do that quite frankly. So we've taken the opportunity to do that. But a large part of the increase, again, driven by the incentive accruals.
Thanks. Good luck for holiday.
Thank you.
Thank you. Our next question comes from the line of Jennifer Black of Jennifer Black and Associates. Please proceed with your question.
Good morning. This is Carla White for Jennifer Black. And let me add my congratulations on a great quarter and thank you for taking my call. Thanks. With regard to your direct business, can you talk about your web exclusive merchandise and what percentage it is currently and what percentage you'd like to see it going forward?
And then also with regard to your Aerie merchandise in your AE stores, it appears that that merchandise in the stores is growing as the brand awareness grows for Aerie in your AE stores. Would you change the store configuration to include a bigger presence of Aerie Prairie like a shop to shop strategy for example? Thank you.
Sure. So on the direct question, about 35% of our customer choices are exclusive to our web business. We ultimately want to maximize the returns we're getting from our total assortment. So we're constantly looking at the productivity of that assortment. And as we have opportunities to add customer choices that will deliver to our hurdle rates, we'll certainly consider it.
But it's obviously a large product offering at the moment. And I think our best opportunity is to improve within the assortment and perhaps to expand it. There are certain categories that we'd look to go after and we'll update you as we develop that business out strategically. We feel really good about the direct business performance. It was extremely strong during the Q3 and as we mentioned had a terrific start to the holiday season.
So we feel good about where we're positioned there. It's a combination of categories like footwear that we don't carry extensively in store as well as extended sizes, unique color pattern offers, etcetera, within the exclusive offer. On Aerie, our intent as we've said strategically is to further leverage the AEO customer base that is cross shopping the Aerie brand. I've mentioned in the past that when we get an AE customer who cross shops Aerie and buys the Brash, it's worth 5 times the value of the average Aerie customer. As a result, our intent would be wherever possible to put side by side or where we have enough square footage under a single roof shop in shop locations for the Aerie brand, but to present it as a total assortment of the Aerie brand rather than tables within the AE presentation.
And we'll keep you posted as we evolve that strategy over time.
Okay. Thank you, Jessica. Thank you. Our next question comes from the line of Oliver Chen of Citigroup. Please proceed with your question.
Congratulations guys. The store is excellent to us.
Thanks Oliver.
Regarding the longer term strategy with your inventory flow, could you update us on where that is and when we should expect impact to the income statement in terms of the core versus fashion flow? As a follow-up, from a bigger picture perspective, how should we think about modeling in terms of your global opportunity and when that may drive the numbers materially? Thanks.
So on the question about flow and the impact on inventory, as I mentioned, Oliver, we've been making good progress on the differentiated supply model. We still have quite a lot of work to do to get to the point where it's built into the kind of core muscle of how we're running the business. But we have seen a linear improvement in our inventory. That's as a result of our executing both the differentiated supply model as well as tighter inventory stock on our continuous products. It's giving us the opportunity to actually appear to the customer that we're flowing a lot more product and a lot more innovation to them.
But in fact, we're doing so, while also managing down. And we're particularly pleased to be able to drive a strong top line, while demonstrating the ability to do that with tighter inventory principles. And you should continue to see a linear improvement in that. As we've said before, our inventory turns are slower than we would like to see. We'd like to see about a 0.5 point improvement in turn annually.
Moving forward, if we can do better than that, we'll certainly strive for it until we get to a more competitive inventory turn position. In terms of the international business, as I mentioned, our focus over the next 18 months is squarely on fortifying our core brand assets and growing our North American business. We now have 44 stores in our international license business, we'll have 48 by the end of the year. Those stores are growing and profitable for us through our royalties. We'll continue to expand that license business, but we intend over the next several years to lay the groundwork to be able to run both the direct as well as the joint venture business.
But we don't anticipate a material impact to our financials within the next 18 to 24 months. After that, having laid the groundwork, we should start to see a nice robust contribution from the growing international presence we have.
Okay, thanks. If I may, just lastly, we're hearing about the opportunity for sales post Christmas. Is that a trend that you guys think will happen given the evolution of buying so close to need? Is that something that you're planning or thinking as an opportunity?
Yes, we do see that, Oliver. And as Roger mentioned, we do have a transfloors set planned for after Christmas, which we're pleased with, and it's an expanded transfloors versus where we've been in the past.
Okay, great. Thank you. All right, Jesse, next question.
Thank you. Our next question comes from the line of Randy Konik of Jefferies and Company. Please proceed with your question.
Yes, thanks, guys. I guess following up from this the analyst meeting, Mary excuse me, a little sorry. But Mary, can you just can we kind of think about how we should be thinking about, I guess, the cash distribution policy going into 2013 share buybacks versus dividends? Again, this year it seemed it was all about dividends, not buybacks. So can you give us some color there?
How should we be thinking about that next year? And then with regards to remodeling stores, I think you said 50 and you're going to keep going with that per year. What should we be thinking about from a return on investment standpoint? And then generally, how should we be thinking about CapEx requirements for your business? Would they increase dramatically, stay the same, go down over the next few years?
Thanks.
Okay. So the first question regarding our cash policy and return to shareholders, as we discussed previously, we're committed to top tier shareholder return and a consistency in our approach to that. We're obviously still working on our plan for 2013, so can't really comment on exactly what we're going to do in 2013. As soon as we know, we'll certainly communicate that to you. But as we talked earlier, again, consistency in our approach and diversity in how we think about our return to shareholders.
Regarding store remodels, we'll continue at the pace to remodel our stores probably in that fifty-fifty store range for the next couple of years. And then CapEx for next year, again, we're still in the process of putting the plan together. But do expect an increase in our capital spend here as we move into the next several years, north of 150 for sure for next year as we think about store remodels, as we think about opening 40 factory stores, as we think about infrastructure improvement, which we've been a little light on here the last couple of years. We need to start building the capability for global growth. We need to start building the capability for the sales growth that we've modeled into our long term strategic plan.
And then of course, every CapEx dollar we spend, we have a maniacal focus on return on invested capital. We laid out our targets of ROIC of 14% to 17% and every investment we make, we look through that lens. Okay. Thank you. Jessica, next question please.
Thank you. Our next question comes from the line of Paul Lejuez of Nomura Group. Please proceed with your question.
Hey, just a couple of questions. One just to follow-up on the last one. What are you thinking in terms of minimum cash balance? Maybe you can share that with us both you guys and the Board. 2nd, just a clarification, Mary, something you said earlier on AUC, I think for the Q4, you said slight improvement.
Did that mean a slight improvement versus last year? Or did that mean that you would improve slightly more than what you saw in the Q3 just in terms of how much AUC would be down in the 4th quarter? And then last, you've talked a couple of times about additional product flows. How are you thinking about F-thirteen versus 2012 in terms of number of flows for the year? Thanks.
Okay. On AUC quickly, my comment was versus last year. So all my comments are versus prior year versus the prior quarter, so again versus last year. Regarding minimum cash balance, look, as we look at our shareholder return, our first priority here is to invest in growth in the company. If we hold on to somewhere around $600,000,000 of cash, I think that would protect us should we have any downside as we go into any year.
Our long term targets and our strategic plan, as we previously communicated, assume that there will be things that won't be executed right or there's external factors. So there's contingency built in. We think about our cash plan the same way to have contingency something not go according to plan. So it's somewhere in that ballpark. We don't have a specific dollar amount we're targeting, but it's in that general range.
And Paul, I would just reiterate that we continue to be committed to an integrated capital allocation plan with investment as our first priority, as Mary said. But we've returned over $1,000,000,000 of cash to our shareholders over the past 5 years. We obviously have a strong dividend. We recently had a nice special dividend and we still have a number of shares under authorization. So we'll keep you posted as we look at how we'll execute that integrated capital allocation plan.
Raj, do you want to comment on flows?
We will have more flows than last year.
Any magnitude, Roger? Any magnitude rather. More flows.
And then just one clarification, Mary, are you saying that the 4th quarter benefit on the AUC side would actually be less than the 3rd quarter benefit?
Yes. I'm just looking here. I just want to make sure. You know what, it will be less than the 3rd quarter benefit. And actually, we're seeing the product cost benefit, but we're actually seeing a bit of offset in mix as we have more denim and a little bit less Aerie products.
So the fundamentals on the product costs are still there, but a little bit offset by mix. So you won't see as significant of an improvement as you saw in Q3. Okay? Okay. We'll take next question.
Our next question comes from the line of Stephanie Wissink of Piper Jaffray. Please proceed with your question.
Hi, good morning, everyone. Just a couple of questions. Robert, if you could, on the loyalty customer, can you give us a sense of how big that base is now to maybe unpack the transaction for that loyalty customer versus the non loyal? And give us any insight into your permission you think you have with that customer to maybe take up take them up the pricing scale or into new categories? Any insights would be great.
Thank you.
Yes. At the moment, we have about 28,000,000 total loyalty members, of which about half are active and we describe active as have purchased within the last 12 months. We've added about 26% to that program versus last year. Half of all the members are kind of in our core demographic of young adults and teens, the other half are parents. They are critical to us.
We don't disclose the percent of our revenue or profit that they represent. But obviously, we get more volume and more profitable volume from those that are mostly engaged with our brand. We've also seen a really nice uptick in our efforts on mobile and tablet commerce and social media. We're up about 20%, almost 30% on American Eagle in terms of Facebook fans and about 65% with Aerie. So we've just seen a lot of progress there and our intent obviously is to really compete to be the sector leader, as our customers increasingly migrate to engaging with brands in a kind of omni technology enabled omni channel manner and loyalty, our credit card programs, everything of that nature are a large part of that program.
And then just one follow-up. How much more penetration can you see in that program in terms of $28,000,000 today? Is there still 10%, 15%, 20% more growth there? Or do you feel like you've got the right base now and it's really just penetrating that base further?
We are going to continue to just push to add customers to the loyalty program to increase the active customer base. I think we would like to see the active customer base at a much higher level than it currently is. One of the reasons that we are making the investments Mary referred to in our capital allocation plan moving forward as well as some of the investments we're making in talent, for example, having Joe Megamo join the company is to make sure that we're maximizing our omnichannel commercial experience for our customers, putting the customers at the center of our thinking regardless of how, when, where they choose to shop. We want to make sure that they're opting for American Eagle Outfitters or Aerie. And so we believe we've got plenty of upside potential, but we wouldn't guide to a specific number.
Okay. We'll take the next question, Jessica.
Thank you. Our next question comes from the line of Dorothy Lachner of Karas and Company. Please proceed with your question.
Thanks. And let me add my congratulations.
Thanks, Dorothy.
For Roger, just a question on accessories and footwear. Those are certainly categories where you're really differentiated as well from the competition. I just wondered what the strengths are that you're seeing there? And what are the opportunities for holiday and beyond? And then just a question on gift card trends, what you're seeing there for the holiday season so far?
Thanks.
On accessories, we really for this holiday versus last year, we kind of didn't put the same pressure on it because we had such a great trend in the sportswear business. We wanted to invest the capital in really in the woven top area and the sweater area. And we really let the e commerce business take the charge on footwear, which they're doing terrific with. And we think we can be a major destination for footwear on the e commerce site.
And Dorothy, it'd be too early for us to call the performance of our gift card business this early in the holiday season. We obviously it was important for us during the start of the holiday season, but we still have 5 important weeks to go.
All right. Thanks for that and good luck. All right. Next question please.
Thank you. Our next question comes from the line of Adrienne Tennant of Janney Capital. Please proceed with your question.
Good morning, everyone. Great job. Stores really do look great, Roger.
Thank
you. Robert, the question is for you. It's on the ever changing landscape of Black Friday kind of traffic shifting to the midnight hours. What percentage of your stores were opened at midnight this year over last year? And do you foresee another shift into sort of the Thanksgiving Day as we kind of keep moving this thing forward?
Thanks.
Sure. This year, Adrian, the majority of our stores were open either starting at 10 pm or up through to midnight and beyond that. So if you look at the AE brand, we had in excess of 800 stores open, the majority of our factory stores opened. The only exceptions to that were where we had street or mall doors that were chosen not to be open. Pretty close to last year, slight increase in the number of doors.
We did obviously see the Black Friday spread through a Black Friday weekend. It was a 5 day event, more so than a single day event. And we did see our sales spread out over that 5 day period. We obviously mentioned it was extremely competitive out there, but our teams I'm very proud of the teams, because they executed like a highly collaborative team and drove incredible operating results, particularly the improvements we made in stabilizing and driving the velocity of our online business as well as how we were able to put the level of customers that we have through our stores without dramatic waiting at the cash wrap. We just had a really strong executional performance over the weekend.
And we believe there will still be potential for us as we look at holiday next year. That will be driven by improvements in what I just mentioned. Obviously, the assortment is the core of it. But then, we think by continuing to put a focus on omni channel e commerce and putting the customer as a set of our thinking and integrating continue to leverage the traffic that comes out to shop for our great brands during this time period. Great.
Thanks so much. Thanks so much. We have time for one more question.
Thank you. Our final question comes from the line of
Dana Telsey of Telsey Advisory Group. Please proceed with your question.
Good morning, everyone, and congratulations.
Thanks, Dana.
Talent and technology have been 2 of the drivers of change, since you arrived. And with the new people in place, whether it's the Chief Chief Talent Officer, whether it is real estate, supply chain, the change that's going on within the organization, whether it's inventory discipline increasing the fashion flows, what process changes should we see? How does this impact the numbers going forward? And Roger, changes within the merchandise organization with the faster flows, how do you see it impacting churn and margin? Thank you.
So, I'll take the first question, Dana. I think the way to look at this as we've been sharing with you throughout my tenure with the company is there's a lot that was that I had the benefit of a lot working when I joined the team, which is great and we've just been pouring fuel on the fire of that momentum. And I give Roger and the team here a lot of credit. Importantly, we've been working on building out our 5 near term priorities and then the longer term strategic plan, the pillars of fortifying our core assets, growing North America and transforming into a truly global competitor. Our talent agenda and our technology agenda and the key projects like the differentiated supply chain are all embedded within the implementation of that strategy plan.
It's a multiyear change that we're driving. We have it cadenced in a way to ensure that we can continue to deliver our competitive top line and drive improved profitability to deliver top tier returns. We'll cadence the changes carefully, but obviously a focus on the differentiated supply model, the ability to have more frequent flows and improve our inventory turns is core to that in the near term. And then as Mary has mentioned, our capital investment plan, capital allocation plan has a number of investments behind technology to ensure that we're the sector leader in both efficient infrastructure, but also in omnichannelecommerce moving forward. Roger?
No, and as Robert said, we have very talented people already within the organization, and we're both very focused on still hiring and interviewing and bringing on best of breed talent that's out there. And with that in mind, next week, we'll have an announcement for you with someone we've just brought on board in merchandising, who's incredibly talented.
Okay. Great. That concludes our call today. We will report holiday sales on Thursday, January 10, and are scheduled to announce 4th quarter year end earnings on Wednesday, March 6th. Thanks for your participation today and continued interest in American Eagle Outfitters.
Thank you. Ladies and gentlemen, this does conclude today's teleconference. May disconnect your lines at this time. Thank you for your participation. Have a wonderful day.