Everybody. For everybody on the webcast, I'll introduce myself. I'm Judy Meehan. I'm the Head of Investor Relations. Joining me here in the room are Robert Hanson, our Chief Executive Officer, and Mike Mathias, our Chief Financial and Chief Administrative Officer. Just a little bit about the structure today. We're going to go through the slideshow. It'll take approximately 30 minutes. We're asking you to wait and hold off on your questions till we get to the Q&A section, and we'll promise you a nice, robust Q&A segment. Before we get started, though, I do need to remind you that any forward-looking statements we make are subject to our safe harbor statement, which can be found in all of our SEC filings. With that, I'll turn it over to Robert.
All right. Good morning, everybody. Thanks for coming. We appreciate your continued interest in American Eagle Outfitters. We're here to talk about our strategy plan for the next several years. We're not here to talk about third quarter. We still have a week left to close the quarter. We'll obviously be reporting our third quarter results post Thanksgiving. With that said, we're pleased with our results through the quarter and are tracking to our guidance. With that said about the third quarter, we'd like to turn our attention to our long-term strategy plan, which is what we're here to talk about today. A number of the principles that we've been talking about since I joined the company, learned the company and the sector, and started to get to know all of you. Really, the foundation of that is creating a consistent, long-term, profitable growth pathway.
We've talked very consistently about the need for consistency from this company. The sector has been known for spike and trough performance. We are very focused on delivering consistent long-term profitable growth and strong top-tier shareholder returns. Before we talk about the plan, we just wanted to remind you of the 2012 immediate priorities that we've been focused on and update you on our progress. Roger and the team have been delivering a really strong brand of Aerie. A very strong focus has been on instilling inventory flow through, and we're on track to deliver against that objective this year as well. We've conducted a North American fleet review with the intent of rebalancing our fleet for both greater profitability as well as brand relevance.
We said we would, we have been distorting our focus on our e-commerce business, on our existing platforms in order to drive market share growth, and we're delivering against that. Of course, always looking for opportunities to gain leverage on our infrastructure. We're on track against these immediate priorities. What is important to us in terms of how we engage you guys moving forward is just to make sure that you understand the tenets of how we'll engage with our investors, with our partners, and with our employees. Consistency is a word you're going to hear from us a lot. You know now that the company, myself, Mike, and the team are very focused on shareholder returns on invested capital. It's a major focus for the team and will be for the future.
Obviously, we want to be as transparent as we possibly can be with you so that you can see us delivering that level of consistent performance over time. I'll come back after Mike's talked about our financial goals and opportunities and take you through the roadmap with how we're going to deliver against that. With that, I'll turn it over to our new Chief Financial and Administrative Officer, Mike Mathias.
Thanks, Robert. Really looking forward to getting to know all of you as I continue on my onboarding process here. It's been a fun three months and really looking forward to the journey that we have in front of us. Really excited about the opportunities, and I have to say that the team at American Eagle is equally as excited and looking forward to our growth opportunities that we have in the coming years. Let me flip here to the financial targets. Sales CAGR targets over the future are targeted to be about 7%-9%, with a clear focus on profitable revenue growth. No comps for the sake of comps. We're targeting to drive profitable revenue growth. EBIT CAGR of 12%-15%, and ROIC of 14%-17%.
I'm going to walk you through a bit of the how we're targeting to achieve these objectives. Page eight is annual sales. You can see historically, we've kind of hung around the $3 billion kind of range in revenue. For 2012, based on the guidance that we provided, we'll be about the $3.4 billion kind of number. Clearly, we have opportunity based on historical runway to grow our revenue as we look forward. How are we going to do that? It's easy to put a number on a chart. What's the how behind it? One of the drivers of revenue, obviously, is sales per square foot. Historically, if you look back, we peaked through in 2006. We were at about $525 per square foot. We troughed in 2010, about $413 as displayed on the chart.
Again, based on our guidance, we expect to be at about $468 per square foot. We are targeting to be $525 plus. I think our ability to achieve that is driven by a couple of things. One, as we look at our current fleet and reposition our fleet, our top 150 stores average about $750 per square foot. As we look at our fleet and do a little bit of repositioning, clearly opportunity to take that $468 up a bit. We'll talk in a minute about growth in factory stores. Factory stores are much more productive, about $675 a square foot. Clearly well above that $468 average we've been running. Again, just driving normal productivity improvement. We do see a clear path to get us to that $525 plus in the future. On page 10, the pathway to that revenue CAGR.
Obviously sales per square foot is a driver, we're really focused in the near term on fortifying and growing North America, Robert will walk you through the specific initiatives behind that. We're looking at continued growth in mainline as we reposition the fleet. We will add some new doors in mainline. Robert will talk to you about where we have the geographic opportunities to add mainline doors. Built into this plan is modest comp flow, low single digits. This plan's not based on having to hit a home run on every element of growth here. It's fairly modest, that should give us the ability to achieve these targets over the long term. Factory stores are a growth opportunity for us. We're looking at opening about 30 to 40 doors next year.
That's off of a base today of about 75, roughly, by the end of the year. Clearly growth opportunity there for us. E-com, our business today is about 14% of our revenue is driven by e-com. Clearly, we see a path to get that closer to 20%. We've already announced opening doors in Mexico, about five doors in 2013. We see that portfolio growing beyond 2013, depending on the success of the first five doors. We have some international presence today through a multitude of franchisee partners. We see great opportunity for growth, that's further out in the plan. Robert will talk through the pacing of these initiatives and the timing here in a couple of minutes. As you can see, the majority of the growth here is driven primarily in the North America arena. Okay, turning to gross margin.
We've been as high historically, this is page 11, of 48.5%. We are likely to end this year based on our guidance at about 40% as we start clearing through some of the cotton economics as well as the deployment of the inventory principles that Robert put in place upon joining the company. We see as our target long term, again, this kind of consistent way of looking at the business somewhere in the 42%-44% range as we look forward. Okay. How are we going to do that? Page 13. There's three basic areas that we see. The first being markdowns. We currently are running or had previously been running in the 35%, 36%, 37% range in markdowns. Part of the deployment of the inventory principles is obviously to better manage our inventory, which therefore results in lower markdowns at the end of the season.
We see a path, we're kind of targeting about a 30% markdown rate here in the near term. That will drive about half the improvement in gross margin. The smarter management of inventory, therefore driving lower markdowns. We still have some opportunity on product costs as we go into next year. The first half of the year in 2013, we're still clearing the year-over-year comparison of cotton. We'll see a little bit of year-over-year improvement next year in our product costs. We're now, as we provided previous guidance here, cleared through the cotton here in the Q3 and Q4 of this year, but we still have the year-over-year comparison in the first half of next year. A little bit of opportunity there, obviously some leverage on our buying efficiency and warehousing costs.
That's kind of the roadmap that we see to that gross margin target of about 42%-44%. SG&A to sales. The company has hovered historically, page 14, around 23%, some years a little higher, some years a little bit lower. Our guidance that we provided here a few months ago said that our SG&A would creep up a little bit at the back half of this year, driven by two things. One, based on the good first half year results, our incentive compensation costs have increased as we accrue for that in the back half of the year. We also took the decision based on the good first half of the year to invest more in advertising. We need to support our brands. We've got great brands.
We need to continue to get the word out on the street to our consumers, we took that decision to make some investments in the back half of the year. I think the long-term target that we've put out there, it's somewhere in that 23% range. It won't be linear year after year as we make investments and leverage against the SG&A as we look forward year by year. The 23% seems to be about the right range for us as a company. We'll stay diligent on this. This is an area that both Robert and I will be maniacally focused on to make sure we continue to drive some leverage on SG&A. The result of all of that is operating margin. We expect our 2012 operating margin to be in about 12.5% range based on our guidance.
As we look forward, based on the revenue CAGR and gross margin improvement that I just talked through, we're putting our target at about 14%-16%. Turning to capital expenditures. We've been pacing the last few years around $100 million of CapEx. We've gone significantly higher in some previous years. I would expect next year that number to increase probably more in the 150-ish range. We're looking at opening, again, some factory stores, which I just talked about a minute ago. We do have some technology investment that Robert will discuss here in a couple of minutes. As we continue to grow the company with that revenue CAGR rate that we just talked about, there will be a need for probably some infrastructure investment as we go through year by year.
I do think we've underinvested a little bit here in the last couple of years in some infrastructure areas. Again, we'll see that number start to creep up, especially as we get into next year. Capital allocation. I would say historically, we've returned about $1.5 billion to our shareholders since 2007, which is a pretty good return to our shareholders. What I would say is that it's been a bit episodic, part of what we're trying to do here is deliver consistent financial and business results, we're looking at shareholder return the same way. How do we get this more consistent, more predictable? Our first priority here in terms of capital is obviously to invest in growth. That's our highest priority.
As we move forward in terms of shareholder return, we'll look at a mix of share repurchase, more importantly, an offset dilution, a dividend payout, perhaps special dividend, if it makes sense at some future point. Again, a consistency of approach, both in terms of business results as well as shareholder return. Then ROIC, page twenty. We should end the year somewhere around the 14% range. Our target, again, long term, year-on-year is 14%-17%. As Robert mentioned earlier, again, a maniacal focus here on the company around ROIC and making sure every dollar we invest meets our hurdle rates and is well within that target range. Quick summary, page twenty-one. Again, 7%-9% top-line CAGR, and we'll get that through productivity. The North American growth that I talked you through around mainline factory stores and growth in Mexico.
e-commerce growth, our EBIT CAGR, clearly driven in part by top-line growth, but more importantly on margin improvement. Clear focus on inventory management, which should drive down our markdown rate as well. Then our ROIC target of 14%-17%, with driven by a very disciplined approach to all of our investments. Okay. With that, I'll turn it back to Robert.
All right. Thanks, Mathias. Let's talk about how we're going to get there. Mathias 's talked to you about our financial goals and opportunities. What I'd like to do is just lay out the roadmap around our strategic plan. Our plan is built around these four pillars. We want to keep it very focused, and we want to drive a linear progression in how we'll execute the plan. You will hear us consistently talk over the next couple of years about the fortification of our core assets, pillar 1, fortify. The growth of our North America business, pillar 2, grow. The transformation of the company from being the leading domestic teen retailer to being a competitor on the global stage, pillar 3, transform. As Mathias has consistently said, and I've reinforced, driving top-tier shareholder returns all the while during this strategic plan implementation.
Pillar 4, driving top-tier returns. Fortify, grow, transform, and return. What's critical for us is that we can communicate to you that there is a linear progression in how we're planning to execute this plan, in order to enable us to achieve strong results throughout the front plan horizon. If you look at the four pillars, the first two, fortifying our core assets and growing North America, are really the primary focus between 2013 and 2015. It's going to be quite a lot of work to fortify our brands, our processes, and our capabilities, and we want to make sure that we've got extremely strong business domestically in order to build the foundation for further future growth on global e-commerce and international. With the fortification of our core assets, we believe we have a nice runway of growth in North America across select markets.
We've got platform growth in terms of factory stores and e-commerce as well as we've recently announced our expansion into Mexico. Think about fortification and growth of North America happening between 2013 and 2015. While we are doing that work, we'll be laying the foundation for longer term profitable revenue growth as we transform the company to be a competitor on the global stage. We'll do it in a very thoughtful way over the next couple of years, building the capability in global omni-channel commerce, as well as the robust capabilities required to successfully compete outside of North America as we enter more markets on the global stage, and I'll talk about that. Importantly, this plan has been built in a very balanced and flexible way so that there's no real silver bullet that we're relying upon to deliver the results.
It's a very balanced plan that will enable us to deliver strong shareholder returns throughout the plan horizon. That's how we've built a linear progression of the plan. If I talk about pillar one first, the fortification of our core assets, we're really talking about our brands, our processes, and our capabilities. I want to dig into this in a rather large amount of detail because it is critical for us to make sure that we are as strong as possible domestically in order to achieve the longer-term growth potential in North America, as well as the opportunities we have for further expansion beyond North America. As I look at our brands, the team and I have been really focused on sharpening our brand DNA.
We're clearly a company that's rooted in an older teen and young adult target with, let's say, a bull's eye demographic target of a 20-year-old. However, a large amount of the work that we've been doing has been focused on sharpening our brand DNA for both American Eagle Outfitters and Aerie in order to expand and deepen our customer reach. It's, we believe, possible to be extremely precise in our positioning, but at the same time, promote brand values that would be broadly appealing, and that's our intent. We believe, and I'll show some evidence in a moment, that we've achieved that with our integrated marketing approach that we launched during this back-to-school season. I'll cover that in just a moment.
If we start with the American Eagle Outfitters brand, what we like about what is at the core of our brand positioning is our brand is very consistent with not only the U.S. youth values that we track, but also the global youth values that we've tracked. The brand at its root is extremely optimistic. It's also consistent with youth values of individualism. Importantly, there is a classic American style to the core of what American Eagle stands for. Although we're hitting a nice balance between classic American styling in our assortment and faster-turning fashion, the root of the brand is in optimistic individual classic American style. We feel really good about the brand positioning for American Eagle Outfitters. It's probably best exemplified by the recent extension of our Live Your Life advertising campaign for back to school.
We feel really good about what we achieved there because we drove a nice uptick in metrics across the board, from traffic all the way through all of the metrics that we tracked in terms of store performance. Most importantly, we were able to demonstrate the return on investment in terms of the increases that we're getting in the members of our CRM and loyalty programs. We have 33 million members in the program at the moment, 18 million active, which means having purchased in the last 12 months. Importantly, we've added about 30% to the base of our loyalty programs since the beginning of the year. We feel really good about that. Importantly, though, we also feel like we're reinforcing the authenticity of the American Eagle Outfitters brand. We featured real people in our products.
That is a distinctive positioning that we think is creating a unique competitive positioning for American Eagle Outfitters relative to our direct competition. We feel terrific about the returns that we're getting from the investments we've made so far. Just to give you a quick reminder of what that looks like, I'm going to show you the television advertising spot as well as the promotional spots we featured online to promote our customers' opportunities to be in the next version of this campaign in spring 2013. We feel really good about what we've achieved so far in bringing this sharpened brand DNA to life. We're focused also on doing the same with our Aerie brand. We think that there's an opportunity for a challenger in the intimate space in this category. We're excited about what we've achieved so far.
With Aerie squarely rooted in intimates now: bras, undies, sleep, lounge, swim, personal care, and fragrance. We've got a very focused approach to how we're bringing this brand to life. Importantly, also, we think although intimates is an incredibly sexy category, we think about the Aerie girl as not only beautiful but smart and confident. If you will, pretty inside and out or beautiful inside and out. We've got a strong intimate positioning and a clear and distinctive brand positioning. Most importantly, with Aerie, the asset that we have to leverage is the American Eagle Outfitters customer. The woman that cross-shops Aerie from American Eagle and buys a bra is worth five times the value of the average Aerie customer.
Our intent is to leverage that through our loyalty programs as well as side-by-side distribution platforms, with American Eagle Outfitters wherever possible moving forward across all of our distribution, from mainline stores to factory stores to our direct business. Just to give you a feeling for the sharpened brand positioning of Aerie, this is a view of how we're bringing our Aerie brand and our Aerie customers to life. We're feeling really good about where we are with both American Eagle Outfitters and Aerie in terms of bringing this sharpened brand positioning to life. We've shifted our focus in terms of how we're talking about our brands. Again, when I was learning to get to know you guys as well as the brand, the company, and the sector, there was a really strong, in my view, overemphasis on price.
Every available quantitative survey would indicate that although price is an important part of the purchase decision, it's usually in the bottom number of choices in terms of what drives a customer to purchase. We've really shifted our focus to balance brand, the product at the center of what we do with our brand, and intrinsic value as the way that we're talking about our brands moving forward. This has enabled us to selectively pull back on what was an overly aggressive promotional cadence in the past and really focus on delivering against this proposition of growing our business with brand, product, and value being equally balanced as we take our brands to market. Our intent is to continue to do this. I will say we own the largest market share in our core segments. We are the largest individual brand with American Eagle Outfitters against our direct competitors.
We do not intend to lose market share in any categories that are critical to our long-term growth. At the same time, we believe we can achieve that result by balancing a brand, product, and value message very carefully with selectively pulling back against the promotional cadence of the past several years. If we look at the reason why in terms of fortifying our core processes, it's all about assortment architecture. The product is at the center of this business that we're in, as we all know. What we were trying to do, I think, is to focus on everything with the same degree of emphasis. What we have now is an assortment architecture that really distorts our focus as a leadership team in guiding our entire associate team to perform.
We talk a lot about these famous four categories, and I'll review them for both American Eagle Outfitters and Aerie. These are categories we want to distort our attention on. They're categories we intend to lead in, both from a trend standpoint and own the highest market share in, and we'll be very aggressive in making sure that they're the core platform of how we grow our company. They're also rooted in the classic American style that I referenced earlier that is essential to our brand positioning. We have categories that are near into those, essentially on deck or being focused on next. Some categories that we would just turn faster to compete directly with the fast fashion competitors that we compete in.
Having a balanced assortment between, let's say, 30% core, 45% core fashion, and the balance being fashion in these categories of famous four near and in competitive assortment architecture. If I review those categories for American Eagle Outfitters, the famous fours are the categories we've talked to you about for a number of months now. Obviously, denim. We're the market share leader in denim. We intend to compete and extend that lead. Solid knit. We're a store that is also famous for shorts during the spring and summer season, and we're being an optimistic individual American-style brand. We're a store of color. Those would be what we consider our famous four categories. At the same time, on deck, we have these nearing categories of wovens on the women's side, more core fashion-driven wovens, as evidenced by our HAB shop recently. Our haberdashery shop is our men's button-down program.
We also have had really strong success in dresses recently to feminize the store and give her a number of reasons to more frequently visit American Eagle Outfitters stores or a direct dotcom business. Competitively, represented by categories like jewelry and accessories or outerwear, there are just certain categories that we want to turn faster, buy to sell out, and compete on trend with the faster fashion retailers that we're competing with today. Having a balanced approach is critical. If you look at Aerie, obviously bras and undies are the famous four categories. Lounge, fleece would be categories that we'd consider to be near in, and then having layering tanks and T-shirts as an add-on sale would be examples of how we're maintaining competitiveness in the Aerie brand. That's all about our assortment architecture.
One of the most core aspects to how we're working as a team to deliver consistent, profitable growth is our inventory principles. We now have our inventory aligned with our sales plans in a much sharper way. We've really focused as a team on making sure that we are balancing our sales and inventory investments that are open to buy as highly productive, and that we're really focused on improving our inventory turns to drive a greater return on our working capital investments. We've got refined presentation requirements from core to core fashion to fashion. How we're buying is enabling us to really focus on differentiating the replenishment models we have by each category, with a strong focus on increasing our turns and, of course, reducing our markdown rates, as Mike talked about earlier. We have an unacceptably low turn rate at the moment.
It hovers in the three to three-four range. Mike and I have targeted the team to at least increase turns by about a half a point a year. We'd like to do better than that with the long-term target of getting into the kind of five and a half range, if not better than that. We are making good progress in this goal, and obviously, our focus is to continue that. The way to achieve that is to having a differentiated supply model in order to deliver the right product at the right level, to be in stock, to deliver against the customer's demands, how and when and where she or he wants to engage with our brand. This is a lot of work that we'll be focused on over the next couple of years in differentiating how we source each component of the range.
This is critical to our long-term success, and it's a major focus for me personally. We'll be focused on sourcing our core basic programs with a continuous production process, meaning in stock at the SKU level, but on a more limited number of absolutely in-demand, famous for customer choices. On core fashion, we have the capability to test and scale those ideas to make sure we're making the right investments behind these programs and also making sure that we minimize any potential investments that might be overinvested in. In fashion, we have the ability to delay our production decisions a bit in order to read and react to selling and have positioned both production and raw materials to be able to chase after the selling on the fashion. Importantly, with true in and out fashion, that program we would call Chase.
It's where we've delayed the development to the point where we've got positioned production and raw materials. We can make the call decision on production as late as possible and only buy into the true demand with the intent of selling out or selling the majority of the goods at ticket. Improved lead times, just-in-time inventory, and optimized product costs would all be the result of being able to implement this strategy. Focusing on our processes, one of the final things that we need to do as a team is get more sophisticated in how we execute a customer segmentation-based allocation strategy. Right now, we have a very simplistic approach to how we allocate. We've got balance of chain, hot, and fashion stores.
Most global competitors have a more sophisticated approach to segmentation. Over time, we'll have customer segment-based defined store profiles that will enable us to assort by customer type much more precisely and optimize the productivity door by door, segment of business, mainline factory stores, and direct by segment of business. A lot of work to do there, but we're well on our way. Shifting our focus on fortification to capabilities. Outside of our brands, our most important asset is our talent. To enable our talent to work more effectively, we have to provide them with a much more effective technology platform in order to be as productive and as innovative as they possibly can be. We could probably spend an entire day on technology. I'm going to do it in a single slide, which is to give you a view of what we've been up to.
We've completed an entire enterprise-wide application review. The intent here is to, simply put, dramatically simplify our overall processes, work with fewer core partners that are global players that have the capability to scale our infrastructure in a consistent way on a global basis. Think about partners we've worked with, like Oracle, like eBay, like Google, that have that global scale so that we have fewer ways of working that are scalable globally, that would be more efficient over time, so we can release some productivity to invest behind the next set of initiatives, which is all about customer-facing technology investment. We must focus on supporting a sector-leading omni-channel commercial experience. We want to have a single view of our customer within our loyalty programs and a single view of inventory.
Although we have the capability to do that at the moment, we have not put all of this together in an integrated system that enables us to deliver against the service level requirements of our core customers. In the next 12 to 18 months, we want to have a single view of our customers as we roll out to new markets, maintain that, be able to have a single view of inventory so we can ship to our customers and meet their demand how, when, and where they want to shop, regardless of where we own the inventory. Whether it's in our distribution centers or whether it's in our stores across channels. Importantly, to do that, we obviously need to consistently get leverage on our infrastructure, both in the headquarters as well as in our store base.
One of the other and most critical aspects of my focus has been really looking at our capabilities in terms of both structure, process, and talent. The benefit of the strong performance in brand and product-driven customer experience that Roger and the team have been driving. I've spent my initial months here looking at our corporate infrastructure and then our geographic and channel business development capabilities. On the corporate infrastructure side, under the leadership of Michael Rempell, our Chief Operating Officer, who's leading the end-to-end supply chain as well as our IT organization, we've got strong leadership there. Mike's joined us recently as our Chief Financial Administrative Officer and is building the capability across the functions she's accountable for, including finance and FP&A.
We're in the process of recruiting and should be able to announce shortly, a new chief talent and culture officer to join the team on the corporate side, all of which would be helping to build that leverageable corporate infrastructure, to drive the support of the geographic and channel teams, as well as the brand management team. I shifted my focus to the business development side of the equation. We've got a lot of work to do to drive growth in North America, and we need strong commercial general management across the U.S., Canada, Mexico, and the balance of the Americas in order to achieve that over time. We're upgrading our capability there.
As we lay the foundation to become a global player, we'll be putting in place general management to run the Europe, Middle East, and Africa region at the appropriate time, Asia-Pacific at the appropriate time. Of course, because the new flagship experience is going to be starting with a mobile device or a tablet, that omni-channel commercial leadership. I'm squarely focused on these two areas for the time being. In 2013, because as many of you know, Roger is intending to retire in the early part of 2014. Roger and I have been partnering to really work on how to both build on and fortify the core capabilities we have. We have a tremendously talented merchandising and design organization now at all levels across American Eagle Outfitters and Aerie.
We look forward to introducing many of the folks you don't know to you in 2013, as well as have built that capability in marketing. We obviously need the time to properly prepare for Roger's succession, and he and I will be working on that together in partnership over about a 12-month period of time starting early next year. We feel good about where we are capability-wise. That was all about Fortify. I'm going to quickly clip now through the growth, the transformation, and then obviously the returns. Because in order to grow in North America, we have to have strength, and the fortification is all about building strength. As Mike said, we believe we can deliver that 7%-9% revenue CAGR and 12%-15% EBIT CAGR by growing our North American business as our primary focus in this plan horizon.
We've got growth opportunities across our mainline doors for both American Eagle Outfitters and, obviously, we've got a profitable store fleet. I'll talk about that in a moment. We think we were under-penetrated in certain areas, and I'll talk through how we think we should be growing our store fleet slightly in certain underdeveloped areas as we also call a certain number of underperforming doors over time. Aerie, we've talked about side-by-side distribution, leveraging the core American Eagle Outfitters customer. E-commerce. Even on our existing platform, we can grow our market share here. We're under-penetrated in factory stores. If you think about all of that's in the U.S. Let's repeat that in Canada. As we've announced, we're going to be going into Mexico in the spring of 2013. Let's repeat that in Mexico over time.
We'll talk in detail now about each one of those. I mentioned that we have American Eagle Outfitters mainline opportunities. I wanted to frame this up by saying we are a company that skews to the East Coast. If you really look at the concentration of our stores, and frankly, just the bias of our business at the moment, it's very much an East Coast skewing, kind of middle of the country to East Coast skewing business. We have an opportunity to address a number of under-penetrated markets from the middle of the country to the West Coast. That will be a major focus. If you also take a look at it, we are very much a regional mall-focused company, and we have underdeveloped key urban, both mall and street mall locations. If I just give you a few examples of that.
I've traveled around to I've been in Miami, I've been in New York, I've been in Chicago, I've been in San Francisco and L.A. a tremendous amount of time recently. As I've looked at this, if I just take Miami as an example, we're not in Dadeland Mall at the moment. We're not on Lincoln Road. If I look at New York, we're not on the Upper East and the Upper West Side, nor down on Wall Street or the Financial District. If you look at San Francisco, we have really just one store in the core of the city. You look at L.A., we're not in Fashion Valley, for example, one of the most important fashion malls. I can quickly get to probably myself without trying too hard, kind of 25, 30 stores.
We have a new head of global real estate that's going to help us penetrate both the West as well as key cities. These are going to be productive doors. They'll be AA plus locations. We see about a 1% square footage opportunity in mainline, even as we're calling about 20 to 30 doors a year. We have a very profitable fleet with only about 21 doors not delivering profitability at the moment on American Eagle Outfitters, so see an exciting opportunity here. Factory stores. Let's talk about this for a moment. We have about 73 stores open at the moment. Our competitors typically have 15%-20% of their business in factory. We, as Mary said, have about 10% of our business there now, so that's an obvious growth opportunity across the country.
Consistently, you'll see us being able to add somewhere in the range of around 80 additional doors. There's probably 150-200 locations, but we'd like to manage the business into that kind of 15%-20% range over time, and are very focused on developing this as a legitimate additional channel of distribution to a distinctive customer. This is critical because of the economics of the channel. We make about a 20% four-wall margin in our mainline doors, about a 28% in factory stores, and about a 30% in equivalent four-wall margin in our dotcom business. Current penetration is 76% mainline, 10% factory, and 14% dotcom. With all three channels growing, our target penetration would be 65% mainline, 15% factory stores, and about 20% dotcom, even on our existing platform.
This channel mix would be more profitable than the current mix that we're running today with all three channels growing. We feel good about that. Just to validate this, of the 16 stores that we have had open over the past 12 months, 10 of which were factory, we're delivering really strong results. Net sales of about $4.6 million, a four-wall profit margin of around 23% or $1.1 million. Not bad for the first 12 months of their life. A return on store investment of 74% against a net investment of a little under $1 million. We're feeling good about that. Looking at how we're doing that, this is an example of our Garden State Plaza American Eagle Outfitters store. A version of this is what we're intending to roll out for all new stores, as well as any major remodels.
Any of the stores that are getting a smaller remodel would be getting the look and feel of this in a more efficient way to deliver our ROIC goals. Our factory stores are very much the premium factory expression of American Eagle Outfitters. You see here a center lead table with exclusive factory store signage and merchandise, and then a key wall program that distorts those famous four categories that we've talked about for some time. We've mentioned Mexico. This is a company-owned model. We'll be doing this business direct. We've already launched our e-commerce business in Mexico. Our intent is to enter any new international market with a six-month lead in our direct business, because, again, the new flagship experience being mobile and tablet, it'll be the first engagement opportunity for customers.
We'll have our first store open in the spring of 2013, and we see a run rate potential of around 50 stores, given the current market composition in Mexico. That's just mainline doors. There's obviously a factory store opportunity over time in Mexico as well. We feel excited about this opportunity. It's frankly an under-focused upon opportunity, in my view, of a lot of U.S. companies, and we're excited to go to Mexico with a lot of confidence. We've got strong border store performance and really strong brand affinity in Mexico. We feel very confident about our ability to compete successfully in this key market. Growing our e-commerce business is critical. Same structure. We have our famous four categories.
We have a customer experience we want to distort through unique product offers, size runs, as well as the ability to personalize a product in our e-commerce business and providing unique online product that can only be found in our dotcom business. If you look at how we're bringing that to life, obviously denim, shorts, knits, color, our famous four categories are distorted online. We've got our near-in categories well represented seasonally in terms of dresses and our Hab shop, for example, on the men's shirt side. Then some competitive categories, especially categories that are SKU intensive and difficult to service, but important to our customer, like footwear, are opportunities for us to support our e-commerce business. Footwear is a particularly strong business in our store-to-door capability.
We have the capability to ring up every item we sell online in the same ticket at the register for anyone shopping in our stores at the moment and ship those products directly to their home. With Aerie, it's obviously the same structure of bras and undies for our famous four categories, loungewear and tees, for example, and near-in and competitive. Now I want to shift, if that's growing North America, which we feel again, very confident is our near-in focus the next couple of years to deliver that 7%-9% revenue CAGR, 12%-15% EBIT CAGR. What are we going to do to transform the company to compete on a global stage? There's two points. We need to be the sector leading omni-channel commercial competitor, and we need to have the capability to profitably expand on the global stage as we look at more international markets.
Let's briefly talk about both of those. Clearly, the new global flagship model is going to be driven by mobile and tablet experiences. The first entry point for almost every customer to our brand is going to be through technology, not by walking through a lease line. We have, on average, about a 30% awareness of American Eagle Outfitters, which is competitively comparable to leading against the majority of our competitors in every market that we've evaluated our brand in thus far. By building on this omni-channel customer experience, having a technology integrated multi-channel approach to international expansion, having built a single view of customer and inventory as we enter a market, enables us to lead the international expansion in a more future-focused manner, especially in a strong ROIC-focused manner.
It's our intent to obviously enter each market six months in advance of a store opening with a global omni-channel commercial experience, which really positions our brand for sector leadership market by market. As we look at our international opportunity, it's really a blended ownership model between direct joint venture and licensing. Our overall approach here is to make sure that our international expansion is self-funded with the licensing royalty revenues that we're generating. As we go direct or joint venture into a limited number of markets, it will be funded by that licensing royalty. It's asset light entry with a cost share model into each country, also rooted in that omni-channel vision.
Just to give you a feeling for that, we've analyzed all of this quite thoroughly and see in the end, as we get to a nice medium to longer term run rate, 5 to 10 markets that we would do directly or with company-operated businesses. We look at about one to five markets being joint venture, and the balance of the markets, let's say 50+ over time being done through country licenses. It's a very balanced approach. Again, no silver bullet, and important, these country licensing revenue, royalty revenue would fund the direct investment from a JV or owned standpoint. This is critical for us to get right from a balance standpoint, and we look forward to laying out for you which markets we see falling in each one of these models moving forward.
We feel really good about this approach to international expansion, and we have some strong success in our early license programs, which we can talk about during Q&A. Just to wrap up, obviously Mathias talked about the three core return to shareholder goals that we have. The most important thing that we're focused on, obviously, we've got a strong cash position, is investing behind long-term profitable and consistent revenue growth with a strong return on invested capital focus. We have to balance that, though, with obviously a consistent return of capital to shareholders, and that would be balanced between regular dividends when appropriate, special dividends, and share repurchases. To finalize, I think we feel good because we're executing our near-term priorities. We see a consistency in our performance through this part of the year and in how we're talking about our plan.
The ROIC focus is very much rooted in everything that we're doing, and hopefully you feel the sense of transparency that we're providing. We feel confident about the balance in this plan and its flexibility to deliver the 7%-9% revenue CAGR, 12%-15% EBIT CAGR, and getting that ROIC firmly and consistently in that 14%-17% range. Again, all of that rooted in this fortify, grow, transform, return focus on the pillars that we have at the foundation of our strategy plan. We really appreciate your attention. Thank you for listening to this, and we're excited to take your questions.
If you're going to ask a question, just ask that you lean into a microphone here so our webcast participants can hear. Yes, Tom.
Thanks for the comprehensive overview. Two quick questions. One is, on the productivity opportunities you talked about, that roughly 12%, can you guys tell us a little more about how you get there? Meaning, what are the metrics that drive that productivity? Is it transaction based, is it UPT, is it AUR? Then on the marketing side, maybe Mike, could you give us a little more color on the actual spend compared to last year, how we should think about marketing? Robert, maybe a thought or two on TV, radio, social. Thanks very much.
Regarding productivity, what I would say, it's a combination, honestly, of all of the above. When you look at our high performing doors, we generally have a higher UPT. We have higher conversion. I would say the entire fleet is focused on that higher conversion rate. Those are all the drivers of productivity. Obviously, having a strong assortment, which is what's driving a lot of those metrics, is the key driver here as well, too. I think when you look at the mix of our portfolio, I think what gives me a bit more confidence around being able to achieve that kind of 525 per square foot, is also the mix of the portfolio. Again, as I mentioned, factory stores are much more productive. We have stores today, about 150 stores that really drive significantly higher productivity per square foot.
They're larger stores and in A malls. Robert talked a bit about looking at the fleet. We have opportunities geographically. We have opportunities around moving between B or C malls and A malls, et cetera. That will all help drive that. To answer your question on advertising, as we provided guidance for the back half of the year, we said that our SG&A would increase, primarily driven by incentive comp, but also by advertising, we didn't really disclose a specific dollar amount. I think we had not been on TV in quite some time as a brand. As we looked at the back-to-school assortment, very strong assortment, clearly opportunity to get the word out around our brand and our product.
As we look forward, we're still in the process of thinking about our specific budget for next year, but really important that we continue to invest behind the brand. We'll provide that guidance once we sort out where we're going to land for next year.
Tom, just briefly, the mix of marketing we're putting forward is obviously, we have television advertising, and films are an important part of how we show up because it is a way of communicating the emotion of our brands. Films can be used not only in television, they could be used broadly in terms of how we communicate through technology these days, which we're doing much more of. We're putting a strong emphasis on mobile, on social, on tech-driven communications that are the emerging, and obviously, communications vehicles of choice for our core target. We need to be squarely and firmly rooted in there, and we'll continue to push that as a major emphasis for our marketing. Just coming back to store productivity for a moment, because I want to add on what Mike said.
We trough, as you've heard from us, in the low 400s, around 425, 430. We've gotten about a third of that back at the moment, just based on the strong comp performance that we're driving. Through a number of the initiatives we've talked about, we think we can get to a much higher level. Goal is to get back to our peak at 525. We've got stores that perform well above the store average in the kind of mid-400s, that we've got stores at the top 150 of the fleet are performing in the mid-700 range, and the outlet stores perform in the kind of high 600 range.
By distorting our investment behind those portions of the fleet and making sure we're focusing our capital investments there, we believe we've got plenty of opportunity in terms of how we execute across the breadth of the fleet that we have across all channels. Okay?
Yeah.
Yes, Randy.
I just want to ask a question regarding the operating margin targets.
If we're going to end the year at 12.5%, yet the guidance is 14%-16%, then when you think about, you go through all these numbers, right? You say we're at $468 per square foot in sales, then we want to go to $525.
Right.
Add leverage, right? To the model. When you think about moving of the business more towards outlet, more towards international, more towards the e-commerce. You looked at the economics of the outlet and the e-commerce, much higher, 800-1,000 basis points higher than a regular store. It seems like the opportunity for margins is much higher than 200 basis points, right? Or 300 basis points. Seems like there's a lot of opportunity to get SG&A leverage, yet the guidance or the target for SG&A % of sales is kind of flattish. Meaning that the operating margins are really just coming from gross margins, not from SG&A.
If you think about sales productivity going up, e-commerce becoming more important, geographic, internationally, et cetera, why wouldn't there be more SG&A leverage, and why wouldn't there be an opportunity for the operating margins to get higher?
Yeah. It's a fair question, and I think as we look through the plan, our financial targets, I mean, we take our commitments seriously, right? It's just not a number on a piece of paper that we hope and pray we'll achieve at some point. We take that very seriously. As we look through all the elements of our plan, what we wanted to make sure is what we protected against is the stuff that will happen, rather than committing to everything going right, every element of the plan hitting it spot on this given year, this given quarter, because that's not reality.
What we wanted to make sure is that we had enough contingency to cover stuff will happen, whether it's our execution, we don't hit it all right, or external issues in the market that are forcing our revenue go down or our margin down, for whatever issue. If everything goes right, sure, there could be upside to these numbers, but we're making a commitment here today around consistency year after year, kind of despite what comes at us that we create ourselves or comes at us externally in the market. The goal is to get leverage on SG&A. I mean, there's no doubt about it. It's clearly a focus of ours.
If I look at the economic numbers in the packet, it would imply if you, if the factory is 800 basis points higher and e-commerce is 1,000 basis points higher, then you layer in Mexico, franchising, et cetera, that the operating margin capability of the business could be above 15%, no?
Just to reemphasize what Mike said, Randy. I mean, it's a fair point, and we take it. The reality is we've had operating margins that have been 1,000 basis points higher than what we're going to deliver this year with our guidance. As I've said in the past, I think we were probably a few points, if not several points greedy at the moment because we probably should have taken some of that margin and reinvested in longer term growth potential. That's what we intend to do. We don't expect to get back to that level of a run rate, because I think our operating margins kind of peaked in the 22-ish% range. However, as Mike said, what we don't, and will not do is communicate a silver bullet solution here. We have a balanced plan. It's a flexible plan.
It's got the flexibility to be able to ebb and flow with all the factors that Mike Mathias just articulated. As things break in our favor, there should be upside opportunity. We're girded for any risk so that we can deliver in that. We want to be an investment grade company. That 7%-9% revenue CAGR, 12%-15% EBIT CAGR, getting that ROIC in that range is something we will do year in, year out. We want to have the flexibility to make sure we can withstand any pressure against that, but at the same time, pursue opportunities in a considered way, a well-cadenced way, so we can do that consistently over time.
I have one more unrelated kind of question. If you look at this financial appendix.
There's a lot of variability between dividend payouts and share repurchases.
Right.
For example, this year, you did the special dividend.
Right.
This huge dividend payout. You have dividend focused investors, you also have investors that are focused on share purchases. You haven't done any to date.
Right.
What's the philosophy on balancing those two buckets? How should we be thinking about that? Is there going to be lumpiness year to year and we're going to be focused on share purchases this year versus dividends, or how should we be thinking about that?
Yeah. I think the key word here is consistency. As I mentioned earlier, we have been episodic in our shareholder return and have bounced back between dividends, special dividends, et cetera. As we look at the shareholder return going forward, we're looking for a more balanced approach. That decision we'll take every year as we look at our cash needs, our investment for growth, which is our first priority, but looking to a more consistent and balanced approach.
Okay.
When you think about the opportunity to grow margin in AUR and AUR, the cost tailwinds drop off at the second half of 2013. How do you think about AUR and pricing going forward?
I think other than what I would call just normal mix of the assortment, and as we look at the different channels between factory, no significant change in our AUR thinking or philosophy or where we're at. On the cost side, as I mentioned, we'll see the cotton clear through as we get through the first half of next year, the year-over-year comparisons. Don't see any significant change in cost, either upside or downside. There's been a fair amount of discussion about labor economics, as one example. We've gotten a lot of questions about that. Who knows where that will be. We're not seeing, at this point, any significant pressure that would change our long-term run rate at this point.
Dana, just to re-emphasize something we've said for some time, the merchants are very focused on maintaining the intrinsic value of our brands. At the same time, by shifting our mix in terms of the number of customer choices we have at opening price, mid-tier, and our premium tier price point, and making sure that we're buying in a way that would be selling more at ticket versus at markdown, we should see some average unit retail opportunity. It's not because we're going to be changing our pricing structure. It's going to be because we're mixing our business differently in order to have that opportunity materialize, but at the same time, maintain that intrinsic value messaging to our core customer base.
Hey, everyone. Thank you. Two questions. One is on the assortment architecture. The famous four categories, what % of sales is that, and will that change going forward? Will it increase? Also, where do the famous mix, not the famous fashion tops, like on those mannequins, where does that fit?
Let me take both of them. The famous four categories are a more limited number of customer choices. They would be defined more around our core customer choices, but they represent more of our volume. If you think about our core customer choices being around 30% of the actual product mix, but they represent in the range of around 50 to 50-plus of the total volume. That's why those are so critical for us. They're the core of the American classic styling that's at the core of American Eagle Outfitters and of the pretty inside and out styling of Aerie.
The intent is to have a balanced assortment, let's say 30% of the customer choices in core, which would be more equivalent to famous four, about 45% of customer choices in core fashion, which would be doing a more seasonal or in and out flow of core products with the fashion trends applied. Think about color, think about trends, think about patterns. True fashion, which would be truly bought to be in and out, whether it's on a few months flow or literally a four-week flow, is bought in order to compete with the faster fashion players.
What's making, I think, our performance at the moment deliver the competitive comparable sales that we are is we've got a balance between the famous four core fashion products and, let's say, 30%-20% of our customer choices, depending on whether you're talking women's or men's, being in the fashion business, true fashion, and turning that faster. We want to sell out of it, pull forward from the next flow. We built our color palette in order to be able to do that and maintain the integrity of the overall look and feel. Those types of items that you pointed to that are on the mannequins would be examples of those that we are buying to compete with fast fashion players and sell out of.
Okay. Second question on the supply chain. What you have here, how is the supply chain different today than this?
Yeah. One, to give compliments to the team in terms of the ability for them to source around these four supply lanes at the moment, because the core capability to do this exists at American Eagle Outfitters, and I was impressed by it. What we need to do, though, is to get more focused and more disciplined in how we're applying it. We have the capability to conduct around 250 tests a year with our Eagle Eye program, which is a number of customers in our loyalty program that we have the ability to engage with to test anything from parts of the assortment all the way through to lease line execution and promotional ideas.
We can source continuously to be in stock in those core products and around our famous four categories, and at the same time, leverage our test and scale, read and react, or delayed development capabilities to make sure we're making the right investment. What the team and I need to focus on is this is going to be critical to our long-term success. It's going to be critical to our flexibility. It's going to be critical to our ability to compete both with classic American-style competitors on our core categories, but at the same time, the really fast-turning fashion competitors that have come in and I think had an impact on market share for a number of U.S. vertical retailers over the past couple of years. Really fortifying that capability and making sure we're the best at it.
Can you just tell me overall, in planning, how does that help you or hurt you then deliver on all this stuff today?
Okay, Howard. As Mike Mathias had mentioned, I think a couple of times, we're broadly aware of everything that's happening. We've got good horizontal lens in looking at the economic realities of where we're competing. We've got a slow growth economy. We've got higher teen unemployment and young adult unemployment than we'd prefer. We are aware of how our competitors are positioned, those that are strong, those that are recovering, those that are slightly mispositioned. That does have an impact, obviously, on the promotional cadence, in particular, inventory strategy and promotional cadence, that some of our competitors are executing. Our intent is to execute this playbook. We've been really clear about our strategies. So far, our ability to both be aware of what our competitors are doing, but execute our playbook on our field has led to the results that we've delivered thus far this year.
This, we believe, will enable us with some flexibility, to Randy's earlier question, to deliver the consistent financial metrics that Mike Mathias's laid out. We feel good about that. In part, why we're not committing 100% of what you see as the opportunity is because we don't have control over the consumer marketplace. What we have control over is our brands, our brand DNA, and how we execute the brand and product-driven customer experience within that context. We've been able to selectively pull back on promotion, let's say price promotion specifically, while focusing on brand, product, and value. We intend to do that moving forward, we want to have the flexibility to push hard when things are breaking in our favor and maintain this roadmap and our playbook performance when things are tougher. Having that flexibility is going to be key to our more consistent performance over time.
Yep.
Okay. Can you talk a little bit more about technology and how that's changing either the culture or even just the pace of the organization?
Yeah. Thanks. Technology is, we're sort of obsessed about it, which is why one of the most important things we did at the beginning was an enterprise-wide technology review, why we intend to focus on fewer partners that have global potential, especially on the core infrastructure part of our technology infrastructure and platforms. We want to become more efficient so we can release both people power and financial productivity to focus on the areas we need to, which is really customer-facing technology. Our view clearly is that the new flagship experience moving forward will be mobile and tablet or desktop driven. That entry point for any customer coming into our brands will be rooted in their experience first through technology. As I mentioned, we have close to about a 30% awareness on average in the markets that we have measured globally.
Clearly, the majority of that awareness is going to be built through technology. The way in which customers are increasingly engaging with apparel is tech-driven, our ability to make sure that we put a technology-integrated multi-channel experience out there, having the customer at the center of our thinking, a single view of them, a single view of inventory. Making sure that it's not about how we want them to engage, but facilitating how they want to engage with us has got to be the center of our thinking, a very customer-centric approach to this. It has not been the level of focus that we've needed to have in the past. Our intent is to be the sector leader in this moving forward.
As I've mentioned in the past, we're over paranoid about making sure that a decade from now, people look back on the company and say they had those tough discussions now, they made the right trade-offs, and they've invested behind the customer-facing technology required to be an omni-channel commercial leader for the future. That's our intent, which is why we're looking to get efficiency on the infrastructure to invest more behind customer-facing technology. You'll be hearing not only about investment but about people capability that we're bringing into the company to make sure we're a leader in the next several quarters.
Okay. Nancy was next.
Hi.
I'm Nancy Delicker. I'm filling in for Oliver Chen at Citi. My question actually goes back to the supply chain and processing and everything. I was just wondering if you have specific areas where you see the strongest opportunity for a reduction in lead times and also going into holiday, how you see the inventories positioned. Specifically, how soon will we see an improvement into the earnings and whatnot based on more efficient inventories?
I'll let Mike take the last two questions because we've obviously provided guidance for the balance of the year on those questions. Related to the differentiated supply model, we have the capability, frankly, to source in the lead times that would be comparable to almost any best-in-class competitor in terms of core competitors all the way through to fashion competitors at the moment. For example, we have the ability to react within four to six weeks on a fast returning fashion item at the moment. The key, though, is making sure that it's built into the muscle of how we run the company. As I said when I answered Evan's question is, we've got the ability to continuously source to be in stock at the size level in our core programs, and that's typically a lead time that enables us to maximize profitability.
Call that three to four months. On the core fashion to fashion, whether we're reading and reacting, testing and scaling, or delaying development, that goes anywhere from three months down to around Four weeks, depending on the source market and whether or not we're air shipping. We can do a bit better than that. In terms of building systemic capability, we would say we'd be really pleased if we could source our core fashion to fashion in that kind of three months to one month lead time on a systemic basis. We can do it, but it's more tactical at the moment. We're responding to opportunity versus having built our capability to do that day in and day out. That's what we need to do, which is why we're fortifying that as a major part of our growth initiative moving forward.
The goal is to shorten those lead times going forward or long term?
Our goal is to be competitive with the appropriate players in each one of those segments. For fashion and even some core fashions, those would be the fast fashion competitors. In the core or famous core categories, those would be probably our more direct competitors. As long as we are on the leading end of the lead times for our famous core categories and competitive with the fast fashion players in the fashion categories, we'd be satisfied with our ability to compete in a balanced way.
In terms of our guidance for Q3, we said that cost per foot would be down mid-single digits, and units per square foot would be down low single digits. We'll see the difference between these. Obviously, the cost of cotton coming through. I would say as we go into the fourth quarter, that will continue to show even more favorability. The inventory principles that Robert put in place when he joined the company, we're starting to see that benefit as this year is progressing on, and then we'll see more as we get into the first half of next year. Where that kind of levels out, not sure yet. I don't have a clear view yet well into next year, but still room for improvement when we look at our overall inventory.
Okay.
To your point about the breakdown or the opportunity in the mainline in the A+ malls going forward, can you talk to maybe the breakdown between the current penetration between A, B, and C malls and maybe within that 20% four-wall, how that kind of differential between maybe A+ and B to C?
Sure. I mean, we haven't provided any guidance in terms of how we break down our revenue by A through F malls. What I can say is that we've been skewed towards the regional malls, which would imply a strong penetration, although, obviously East Coast skewing in that kind of mid-market, regional mall business. We're under-penetrated in the A plus to B mall locations, and I mentioned a number of the A to A+ locations that we need to go after. What we find, though, is if you really look at the profitability, if you take American Eagle Outfitters, we've got around 915 stores, give or take 10 or 115 stores. All but 21 are profitable. Even half of those are cash flow positive. About 75% of the loss, which is insignificant, is generated by a couple of stores. It's a profitable fleet.
Those regional malls, unlike perhaps some of our competitors, we are not under pressure to close stores. We have a very disciplined approach to hurdle rates in terms of revenue and minimum operating margin that we would accept before we close a store, which is why we're looking at opening probably 20 to 30 of those kind of been through all mall stores a year over the next couple of years and redistributing the fleet so that it is more reflective of the customer demand out there. The reality is the A, B to A+ malls are generally generating the sales per square foot well above the fleet average. Let's say those regional malls are in the fleet average range of kind of the mid-400s, whereas the B to A+ malls are typically in the mid to high 700 range, if not higher than that.
Obviously, we have a similar opportunity as we look to get further penetration in the factory stores, which are in that kind of high 600 range, well above the fleet average. That's how we're thinking about targeting our capital investment. We've got a balanced brand positioning and customer demand shift, we'll do all of that, but we'll do it through an ROIC lens that we think will deliver more consistent returns over time.
I guess so much of your focus is this or we're seeing this opportunity through the mix and just through the margin differential. Just understanding that margin, does the higher sales per foot and productivity give you that leverage? The A+ malls are, let's say, in excess of that 20% and it works that way? Is there the rent that we need to consider and it's below. I'm just trying to Is it 20% kind of across the average or do you maybe get a lift from that as well?
Clearly there is a cost associated to those B to A+ locations that have to be factored in. We feel confident that in those locations we can deliver our hurdle rates. We wouldn't invest in operating margins diluted capital investments, and we're very focused on that. I think as you think about it, and you'll have some evidence of this moving forward, we'll get into some of those locations that I mentioned on, frankly, smaller square footage stores that are on the 50-yard line that have the potential to do really strong sales per square foot so that we can maintain the cost base while adding that level of productivity to get to a margin accretive execution in those stores. That's the intent. We want to demonstrate the ability to do that over time to you.
As we start having examples of that, we'll bring them forward to you.
Yeah.
Clarify in terms of the mainline stores, that it really sounds like the 20, 30 stores that we're going to see in the A to B malls is really because you're also closing the C to F mall locations. Really from that perspective, the American Eagle store count is relatively flat. If you can clarify that. Also in terms of Canada, can you talk a little bit about what you think is the ideal number of stores in Canada? Are those stores performing in line with what we see in the U.S. market? After that, in terms of the international strategy, I think you've outlined the number of directly owned markets versus JVs or licenses. Can you talk a little bit about any other countries that we can see happen after Mexico?
What are the profitability targets that we should see in directly owned businesses? Thanks.
Well, you're pulling a play off of Randy's playbook and asking three questions in one. Well done. I like it. Let me take the questions, and I want to have Mike add in the financial considerations around it. I think in terms of the way to look at square footage is we actually see a modest square footage expansion. When you think about it may not be store count driven, it may be square footage driven, a modest increase in square footage because we may be closing smaller footprint doors, opening slightly larger footprint doors in those B to A-plus malls. Let's call it a modest, let's say 1%, 1%-2% square footage growth rate in mainline stores within the U.S. and Canada. That doesn't mean store count per se and square footage expansion.
In general, I would say a flattish store count is probably the way to look at it. The obvious store count expansion opportunity is with the factory store locations. Obviously, both of those, though, B to A-plus mall stores and factory stores would be both sales per square foot and margin accretive. When we look at Canada, we feel that we're in a similar situation in our mainline stores, slight square footage expansion opportunity. We have no factory store business to speak of in Canada. There's a similar penetration, call it 10%-15%, 15%-20% opportunity in Canada. We're under-penetrated in our direct business in the Canadian market relative to the U.S. To go off of our current platform, that's an opportunity. Mike can talk more specifically about the productivity between Canada and the U.S. in a second.
Relative to your third question, our intent would be to look at around 5 to 10 countries or country clusters. Not surprisingly, those are the same markets that everyone talks about. If you look at Asia, greater China is attractive. We currently have that business licensed. If there were an opportunity for us to drive that business directly moving forward, that is something we'd be interested in. It's currently licensed. We're working with our partner, and over time, we'll see how that evolves. Korea is obviously an interesting market. We have our Japan business licensed. We don't have a business in India, one of the most attractive markets, just given the affinity of the youth population to American Eagle Outfitters and the youth population with ever-increasing economic buying power. That would likely be a joint venture, though.
The rest of Asia we would see as most likely to be licensed. If you look at this part of the world, we're direct in the U.S. and Canada. Of course, Mexico, we're entering directly. It leaves the balance of Latin America. Most of it would be licensed. We look at Brazil most likely for a joint venture. Europe is no longer Europe anymore. We have to look at it country by country, and we're obviously interested in the northern European countries and are taking a very careful look at how we would compete in the balance of Europe and would probably look to do that in some form of a partnership. The balance of our Middle Eastern, Northern African business and the balance of Eastern Europe are currently considerations for licensing.
In terms of the Canada profitability, it fits well within our average portfolio numbers that we review with you. Nothing there of significance, either above or below. In terms of our international stores, honestly, haven't even set targets yet. That's somewhere down the road here in the future for the plan. Really haven't had an opportunity to think through that myself yet, given my newness to the company. The one thing, though, that I feel very strongly about is the ROIC focus. Every store we take a decision on has to meet our ROIC objectives that we've articulated. Of course, we are looking for everything to be margin accretive. We want to be able to do better than this. The only way you can is to make sure your decisions are accretive to the business and not dilutive.
That would be the goal. Haven't set specific targets yet, honestly. Yeah.
I know you haven't given out 2013 guidance per se, do you have any early view on what square footage could be in 2013, and what the growth could be in 2013? Any reason why your long-term sales and EBIT targets by 2013 would be much different from what you've laid out versus your long term?
In terms of our commitments, we obviously haven't provided guidance for 2013. Our goal is to consistently deliver in that 7%-9% revenue CAGR range, that 12%-15% EBIT CAGR range, and to get to the ROIC in that kind of 14%-17% range, Lindsay. Although we want flexibility to be able to withstand some of the pressures of a tougher year and to push hard through years where everything's breaking in our favor. To deliver those CAGRs, we have to deliver pretty consistent performance year on year. Our intent, obviously, is to deliver in that range as consistently as we can over the years. In terms of the square footage opportunity, as I've been asked this question a number of times. The ways to look at this is on mainline, we're looking at rebalancing the fleet.
The A, B, A+ locations that I've mentioned are not easy to come by. It's a scientific relocation. We want those 50-yard line locations, the right stores, right size, ideally with Aerie side by side. To get all of those conditions met, it will take some time. All of our landlords work partners are very clear on what we're looking for. It's a matter of just making sure that we're working against that. Where we have spent a good deal of time because of a level of under-penetration that we have in that business is in our factory store business. We see a pretty strong expansion opportunity in 2013. When we are ready to provide some direction in what we expect to deliver in 2013, we'll be able to get more specific on that.
Jeff.
Yes.
I guess there's a lot of things going on. You did mention that.
You moved off the mic. Sorry.
You mentioned you're pleased with the quarter thus far. You've got a lot of strategies evolving. Where do you think you're getting the most traction thus far if we look at back to school? Where are you hitting the nail on the head? What makes you happiest? As we look into the back half, how should we look at comps? You're going up against a lot more promotional activity. What's the trade? How do we sort of assess that? How do you sort of assess that? Do your plans incorporate the level of promo you're seeing out there right now? If all things stay the same or get a little worse, are we still going to be in the same place in Q4, is the question, I think.
Yes. I want Mike Mathias to just reinforce the guidance that we provided for the balance of the year that had guidance, obviously, across revenue, comp sales, earnings, as well as what we expect in terms of improvements in working capital investment. Before I do that, kind of strategically, what we feel good about is that we're delivering a competitive top line. Up to the moment, it's been, let's say, through what we reported in early back-to-school selling. It was at the top range of the competitive set. We feel good about that. Why? We feel that we're delivering a very balanced assortment across our famous four categories, core fashion, and especially having some really strong fashion performance, particularly on the women's side. That has enabled us to compete more effectively with a broader set of competitors.
As Roger mentioned in our last earnings call, we had broad-based strength across our assortment in the second quarter, which enabled us to deliver increases in revenue, which were driven by traffic. Our stores team executing extremely well with converting that traffic, driving all metrics up, actually. ADS was up, UPTs were up. We saw an increase in average unit retail, which was driven by mix. We just have a broad-based strength at the moment, but it's because of the balance of the assortment. We feel like we're competing for share in our famous four categories against our core competitors and competing for share in our faster turning fashion categories against newer competitors in the fast fashion sector. All of that, in our view, is enabling us to maintain that discipline of brand, product, and intrinsic value in how we're going to market versus focusing overtly on price.
We've built our efforts in the back half of the year to be able to deliver a competitive top line on improved inventory investments and a very structured approach to our promotional cadence, which is consistent with how we've delivered in the first part of the year. That said, we won't give up market share. We are bought to compete and not give up market share. At the same point, chasing everybody to the lowest price in the category is not a way of consistently winning over time or delivering the financial metrics that we've laid out as our goals. We feel good, we feel balanced, and it's our intention to execute our playbook as we have in the first part of the year.
In terms of guidance on comps that we provided, we said Q3 would be up mid-single digits and Q4 would be up low single digits. That's to your point, very promotional. Q4 of last year, we drove an 11% comp. I think when you look at kind of those two years combined, we feel comfortable with the guidance we provided. In terms of EPS, for Q3, we provided guidance of $0.37-$0.38 a share, which is a year-over-year growth of 23%-27%. For the year, guidance of $1.33 or $1.36. That's kind of that 37%-40% growth. I think the bottom line of that is that despite the promotional environment, our performance has remained as strong as Robert indicated. We still feel very comfortable with our guidance. Okay.
How should we think about it this year and also for next year? What's changing then on the people? Roger retiring, Chief Talent and Cultural Officer. Had you had that before? What will they do? What do you want them to do? With Roger's replacement, anything different than what Roger's doing now? How do you see that coming about?
Again, three at once.
Yeah.
That's our strength. Exactly. In talking about, let me go to the people issues first. Roger's an incredible partner. I give Roger a lot of credit for being the catalyst behind the brand positioning and the overall brand and product-driven customer experience. He's galvanized the team to deliver the competitive top-line results that we're delivering at the moment, and we've got a great partnership. The nice thing about Roger's announced retirement in early 2014 is it gives he and I the opportunity to spend the next 14, 16 months working on that transition. The key that Roger and I both want as we think about his succession is we want to have a merchandising and design team that is balanced with merchants that have good right brain, left brain capability, meaning very operationally and financially focused, but at the same time, exceptional product pickers.
To be able to have that balance enable our design team to be really focused on leadership, both in terms of our famous four categories as well as trend leadership and fashion. Having a leader in the organization to succeed Roger that would enable him or her to galvanize the team to deliver that kind of balanced overall approach is going to be critical, and to be a strong partner with me. The nice thing, again, with that level of runway is we've got plenty of time to achieve that goal. What I would say, though, Dana, is there's a large amount of talent inside the company that you don't know, and we'd like to introduce that talent to you over time.
I think you'll be surprised when you're able to meet the senior leadership as well as the talent deeper in the organization on the merchandising and design side, the capability that we have across the board, both American Eagle Outfitters and Aerie. I'm not going to mention specific names to you at the moment because, of course, everybody would be after them, and it's our intent to retain them. We feel really good. There's always opportunities to fortify. Over the next 14 months or so, Roger and I are going to go person by person, level by level, and make sure we have the sector-leading merchandising, design, and marketing team out there to complement the existing capabilities we have. The Chief Talent and Culture Officer is not really a new role per se.
Obviously, we've had a head of HR in the past, but it's an important way of talking about the role because fundamentally, outside of our brands, our talent are our most important assets. We want to make sure that we built a high-performance, innovative culture that is the lead talent draw for the best and brightest in our sector to come. We want people to see American Eagle Outfitters as a must-stop place in their career building within the specialty retail environment. To bring in a partner to work with me, Mike, and the balance of the executive team to build that high-performance innovative culture is essential to our long-term success. I think when you hear about the types of folks that we've been targeting and who we ultimately hire, I think you'll see that, and we hope to have that announcement in the not-too-distant future.
Ultimately, I'm feeling good about the capability transformation that we're driving. Sorry, the first question that you asked, marketing spend, I'll let Mike take that one.
Yeah. Overall, we've been tracking as a percent of revenue below 2%. That will increase here as the year goes on. I think long term, we didn't specifically break out our SG&A and say, "Hey, this is our plan for advertising or marketing in particular." Really not prepared to give a long-term advertising marketing target at this point, but somewhere in that 2% range probably seems to make about the most sense. We've got work to do on that. I don't know yet what that is long term. Okay.
Really?
It's going to be good. Can we go to slide nine in the packet? Because I feel like this is going to be very important for the stream over the next three to five years. Can we get a little more granular once again on this 7%-9% revenue CAGR? Because this year, the revenue growth will be like 9%. Comps will be up 8%, 9%, right?
Yes.
Comps matching revenue.
Yes.
You're guiding us going forward a low single-digit comp, yet a sales CAGR of 7%-9%. You have these other categories to grow that.
Yes.
To fortify that growth.
Yes.
Can we get just a little bit more, if we had to piecemeal it, how it would break down to get to that 7%-9%?
Let me give this a shot. About 10% of that growth, roughly, would be coming from mainline. If you just look at the size of the bars. The size of the bars are there for display to give you a rough feel for what's the contribution to that 7%-9% growth. Then again, that mainline growth, again, driven by productivity per square foot, which again, looking at the mix of malls, et cetera, traffic conversion, et cetera, that we believe we can drive. The factory store growth is roughly 30%-ish of CAGR. That's based on a specific factory store rollout plan that Robert walked you through. The e-com growth is about roughly 25% of that growth. That's really getting us from that 14% of revenue e-com up to about 20%.
Mexico long term could be roughly 15%, and then international, roughly 20%. I think generally, that's how the CAGR breaks down. Again, different by year, different by initiative, but high level over the term of the strategic plan, that's generally how it would break down. International is later in the plan. Factory stores are earlier in the plan. It'll be a little bit different by year. But that's the general makeup.
Randy, just to add an emphasis on the point that we've been making is instead of us coming and talking to you just about how fantastic our product development is, which we will continue to do, and just about the fact that this is all built on our ability to hit the ball out of the park every season on comp. What we've tried to do is to build a very flexible plan that has, we think, a focused set of strategic initiatives from Fortify and growing North America being the two pillars that are going to be the ones we really talk about over the next three years. The mix that Mike just talked you through, is it going to play out exactly like that? Of course not. But what we feel we have got now is the ability to drive a competitive top line.
We built in modest assumptions on the comp. We've got organic growth opportunities between new mainline doors, factory store growth, the direct business on our existing platform, extending off of our core assets into a market we're not in, Mexico, before we even start banking on the opportunities, again, in an asset-light, balanced approach in international expansion. Our intent is to make sure that we've got the flexibility within all of these to deliver consistently in that range. It won't come out exactly as Mike laid it out, of course not, but we feel that we can deliver consistently to the targets with this mix.
The introduction there. The factory store opportunity. First, I think you said 35-40 new next year.
It seems kind of straightforward. It's high margin, high productivity. Why do you think the prior management team hasn't focused as much on the factory opportunity? Secondly, in your projections, do you assume the sales productivity remains flat at the factory outlets given all the square footage growth that is to come? Do you assume some sort of cannibalization or something like that?
In terms of our plans moving forward, look, everyone, I can't really comment on the decisions that were made in the past. I think Tiffany and I are really focused on how to compete for the future. What I would say is we've just taken a long, hard look at the customer marketplace. As we look at mainline factory stores and direct, we look at our brands and who shops our brands by channel, who they are, and how much opportunity they represent. It's a very customer-centric approach to the expansion in this channel. There is a competitive mix of 15%-20%. Most importantly, we know this customer. There are, for example, 2 types of customers that shop our stores in the factory channel. There's a value customer. The majority of Americans are paying on average about $25 for a pair of jeans.
That's below the average price point that we sell in our mainline stores. There's a value customer who shops the outlet channel as their primary channel of distribution that we want to be able to access. There's also a fashion shopper that shops the factory store channel. Generally skews female, and she's looking for treasures. If we balance the fact that there's traffic there that doesn't typically frequent the mainline malls, there's a fashion shopper that's looking for treasures. If we can execute our brand proposition in a premium way within the factory stores, it's just a legitimate incremental channel of distribution. To your question about cannibalization, we expect both comparable sales growth and productivity in those factory stores. We're very careful about where we're putting them, both relative to existing factory stores, but also where our regional mall penetration is.
At the same time, if we see pattern shifts occurring in terms of the traffic, we need to follow the customer versus try to retain our fleet footprint. The reality is, whether it's stores or our direct business, we have not seen cannibalization. We've seen the opposite. We've seen an improvement in productivity across both all three points of distribution, from mainline to factory to our direct business, because we now have a factory store castle within our e-commerce business as well. We'll obviously look for that. We want everything that we do. We won't have 100% hit rate, but we want everything we do to be accretive, and that's our intent.
If you look at the map that Robert showed earlier in his presentation, plenty of opportunity where we are not located today, either with a mainline or a factory, to open up a door, which would say probably not a lot of cannibalization because we're not there today anyway.
Go ahead. Yeah.
Is there a scenario where you could lead with a licensee that could also maybe become a JV or a direct store? Is there a phase for that?
Yeah, great question. I'm glad you asked this. I forgot to mention up front. Our intent is to sign up with partners that we would like to have long-term relationships with, but we're writing our licensing agreement to have a five, seven, and 10-year exit ramp to either joint venture or to direct ownership. We know our brands best. They're our core assets, and we hope to be in the cash position to invest behind growth. Our number one focus on acquisition would not be incremental businesses in the portfolio. It would be to acquire our assets back. We know them, we can run them well, but we just need a runway to build this strategy plan out. We need that linear progression.
I think to Jeff's point, we have a lot to do, but if we do it in a linear way and we're not taking on too much, and we can leverage a balance between direct JV and license with the licensing business Funding the direct or JV investment. Over time, this becomes a high return approach to international expansion. We just want to be balanced about it. Mike Mathias and I both have experience in leveraging this kind of model, and we're not afraid of it because we know that it can deliver both a great and strong and well-controlled and well-governed brand experience, but a really considered approach to consistent returns for our shareholders over time.
On our current franchisees? Yes. It's a license arrangement, so that just will grow. Correct. Correct. Yes, we are. Yeah. We're selling the
Maybe to add on a little bit. Is there a hybrid model also, perhaps, where you kind of have a flagship type in the market, building the brand and let the licenses expand out? Is that a possibility? You mentioned flexibility a lot with regard to international. You mentioned the six-month lead time with online before you enter the market. Are you approaching this as a test for some of these markets where, if a country just doesn't meet par, you just say, "You know what, we made our investment or kind of a minimal investment given the capital light and let's move on to a different market." Is that going to be a little bit of the focus?
In terms of your first question, our intent, if we're going to enter a market, would be to enter it with a pretty clean model. It's either direct through joint venture or it's licensing. That said, if you take a look at a type of market like Greater China. There is clearly an opportunity to enter a market like that directly, but still consider, I wouldn't call it licenses, I'd call it, let's say, local or regional franchisees to expand your business. It's a blended model. We certainly will look at that. I would say in key cities, our intent, wherever we're entering direct through joint venture, would be to do exactly that. We would only leverage a license or a franchise partner capital if we're going beyond what we want to directly manage or control ourselves.
In terms of your question around testing and scaling, I would just come back to the ROIC focus we have. We want to make sure that everything that we invest behind delivers to that goal of 14%-17% consistent returns. Obviously, we'd like to do better than that. If we find ourselves in a situation where we are not delivering our expected returns, we're not going to continue to pour fuel on that fire. It just doesn't make sense for us. It doesn't make sense for our shareholders. I don't expect that we'll face a lot of that, just given the level of consideration scientifically we're putting into our expansion strategy. If we do face that, we won't fund margin-dilutive businesses.
Okay. We have time for one more question. Randy, go ahead.
Two quick things. Just real quick, are you seeing any lift in malls where you may have seen a closing of an A&F store? Secondly, could you answer or could you talk about a little bit the difference in productivity goals you have between Aerie stores that are combined with AE stores or those that are separate or those that are in-store?
Sure. The short answer to your first question is we are definitely seeing an improvement in productivity in locations where some of our competitors have closed stores. We track our productivity performance against all of our competitors, whether they're in-mall or not in-mall, whether they've been there and have closed, and also whether they're entering the marketplace. We understand the dynamic in terms of how we perform. We've been pleased to see a pretty significant uptick in the comparable store sales performance in those stores where we've had a competitor exit. That, again, in locations where we're hitting our hurdle rates and are highly profitable as well. That's why when we've been pushed on this question about store closures, we are not in the position of needing to close stores.
If anything, what we'd like to do is make sure we're maximizing the returns from those stores and only look at culling the fleet as consumer traffic trends shift with shift in demand that's driven to direct or new mall openings or new factory store businesses. We'll follow that. Your second question, sorry, was?
Just regarding Aerie, any difference in productivity goals.
Right. Clearly, our side-by-side locations are incredibly productive. I've mentioned in the past that the top performing side-by-side locations and shop-in-shop locations have scaled productivity in the range of the top 150 stores in the American Eagle Outfitters fleet. Call that high 700 to even mid to high 800 range. The average sales per square foot in the Aerie four-wall fleet is well below that. Call it a quarter to a third of that. We have seen a dramatic improvement in the Aerie four-wall performance over the past several quarters as we've talked about. We do believe that although we still are pushing those stores to get beyond close to breakeven, to profitability, and then hitting our hurdle rates so they're margin accretive, we have some work to do there, which is why our focus is more on expanding any new doors ideally would be with side-by-side locations.
It's a proven model. It enables us to leverage the AE customer. Again, she's worth five times the average Aerie customer. It's a question of making sure we've got the traffic to convert because the assortment, the positioning, how we're marketing the brand, all of that is dramatically improved. We just need the traffic to be able to deliver the level of productivity and margin accretive business that we know we can do on this. Do you want to add anything?
Nope.
No.
Nope. Not of the average.
No, of the high end of the range.
Oh, okay.
I would say, look, the Aerie four-wall sales per square foot productivity is below our average fleet, which is in the kind of mid four range. It's probably a third, I would say, is a way to look at it as the side-by-side performance, which is why we're focused on that. We think we can get the Aerie doors that we will keep open to the average of the fleet. If we do, they'd hit our hurdle rates. We've seen a number of doors kind of cross over that line over the past several quarters. The focus for us on Aerie moving forward, including our international expansion, is in that side-by-side locations for the obvious reasons.