Everybody. And 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 Mary Boland, our Chief Financial and Chief Administrative Officer.
So just a little bit about the
structure today. We're going to go through the slide show. It will take approximately 30 minutes. So we're asking that you ask, wait and hold off on your questions until we get to the Q and A section, and we'll promise you a nice robust Q and A segment. So 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.
And 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 plans for the next several years.
We're not here to talk about Q3. We still have a week left to close the quarter. We'll obviously be reporting our Q3 results post Thanksgiving. But with that said, we're pleased with our results through the quarter and are tracking to our guidance. So with that said, about the Q3, we'd like to turn our attention to our long term strategy plan, which is what we're here to talk about today.
In a number of the principles that we've been talking about since I joined the company, learned the company in 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 price and cost performance. We are very, 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 area. 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 and we have been distorting our focus on our e commerce business on our existing platforms in order to drive market share growth that we're delivering against that.
And of course, always looking for opportunities to gain leverage on our infrastructure. So we're on track against these immediate priorities. What is important to us in terms of how we engage you guys in the board 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, Mary and the team are very focused on invested capital, the major focus for the team and will see for the future.
And obviously, we want to be as transparent as we possibly can be with you. So you can see us delivering that level of consistent performance over time. I'll come back after Mary has talked about our financial goals and opportunities and take you through the roadmap about how we're going to deliver against that. And with that, I'll turn it
over to our new Chief Financial and Administrative Officer, Carrie Bolin. 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 3 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. Okay. So let me flip here to the financial targets.
So sales CAGR targets over the future are targeted to be about 7% to 9% with a clear focus on profitable revenue growth. So no comps for the sake of comps. We're driving profitable we're targeting to drive profitable revenue growth. EBIT CAGR of 12% to 15% and ROIC of 14% to 17%. So I'm going to walk you through a bit of the how we're targeting to achieve these objectives.
So Page 8 is annual sales. You can see historically, we've kind of hung around the $3,000,000,000 kind of range in revenue. And for 2012, based on the guidance that we provided, we'll be about the $3,400,000,000 kind of number. So clearly, we have opportunity based on historical run rate to grow our revenue as we look forward. So how are we going to do that?
It's easy to put a number on a chart. What's the how behind it? So one of the drivers of revenue obviously is sales per square foot. And historically, if you look back, we peaked in 2,006, we're at about $5.25 per square foot. We troughed in 2010 about $413 as displayed on the chart.
And again, based on our guidance, we expect to be at about $4.68 per square foot. We are targeting to be $5.25 plus. And I think the our ability to achieve that is driven by a couple of things. 1, as we look at our current fleet and reposition our fleet, our top 150 stores average about 7.50 per square foot, okay? So 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 $6.75 a square foot. So clearly, well above that $4.68 average we've been running. And again, just driving normal
productivity improvement. So we do see a
clear path to get us to that 5.20 improvement. So we
do see a clear path to
get us to that 5.25 plus in the future. On Page 10, so the pathway to that revenue CAGR. So obviously, sales per square foot is a driver, but we're really focused in the near term on fortifying and growing North America. And Robert will walk you through the specific initiatives behind that. But 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. But built into this plan is modest comp growth, so low single digits. So this plan is not based on having to hit a home run on every element of growth here. So it's fairly modest and 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 day of about 75 roughly by the end of the year. Clearly, growth opportunity there for us. Ecom, our business today is about 14% of our revenue is driven by ecom.
Clearly, we see a path to get that closer to 20%. We've already announced opening doors in Mexico, about 5 doors in 2013. We see that portfolio growing beyond 2013, depending on the success of the first five doors. And then we have some international presence today through a multitude of franchisee partners. We see great opportunity for growth, but 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. But 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 kind of 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 kind of long term again this kind of consistent way of looking at the business somewhere in the 42% to 44% range as we look forward. Okay. So how are we going to do that? Page 13.
So there's 3 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. And we see a path and we're targeting about a 30% markdown rate here in the near term.
That will drive about half the improvement in gross margin. So 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. So 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. So a little bit of opportunity there and then obviously some leverage on our buying occupancy and warehousing costs. So that's kind of the road map that we see to that gross margin target of about 42% to 44%. Okay. SG and 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 and A would creep up a little bit at the back half of this year driven by 2 things. Based on the good first half year result, our incentive compensation costs have increased as we accrue for that in the back half of the year. But 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 need advertising. We need to support our brands. We need we've got great brands. We need to get continue to get the word out on the street to our consumers.
And we took that decision to make some investments in the back half of the year. But 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 and A as we look forward year by year, but the 23% seems to be about the right range for us as a company. We'll stay diligent on this. I mean, 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 and A.
Okay. The result of all of that is operating margin. We expect our 20 12 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 focusing or putting our target at about 14% to 16%. Okay.
Then turning to capital expenditures, we've been pacing the last few years around $100,000,000 of CapEx. We've been significantly higher in some previous years. I would expect next year that number to increase probably more in the $150,000,000 ish kind of 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.
And then 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 kind of 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. So again, we'll see that number start to creep up, especially as we get into next year. Okay. Capital allocation.
I would say historically, we've returned about $1,500,000,000 to our shareholders since 2007, which is a pretty good return to our shareholders. But what I would say is that it's been a bit episodic. And part of what we're trying to do here is deliver consistent financial and business results and we're looking at shareholder return the same way. So how do we get this importantly, return, we'll look at a mix of share repurchase, more importantly to offset dilution, a dividend payout, perhaps special dividend if it makes sense at some future point. But again, a consistency of approach, both in terms of business results as well as shareholder return.
And then ROIC, Page 20, we should end the year somewhere around the 14% range. Our target, again, long term year on year is 14% to 17%. And as Robert mentioned earlier, again, a maniacal focus here in the company around ROIC and making sure every dollar we invest meets our hurdle rates and is well within that target range. So quick summary, Page 21, again, 7% to 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 markdowns markdown rate as well, and then our ROIC target of 14% to 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, Mary. So let's talk about how we're going to get there. Mary has talked to you about our financial goals and opportunities. And what I'd like to do is just lay out the road map around our strategic plan.
Our plan is built around these 4 pillars. We want to keep it very focused, and we want to drive a linear progression in how we'll execute the plan. But 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 American 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 transforms. And as Mary has consistently said and I've reinforced, driving top tier shareholder returns all the while during the strategic plan implementation, pillar 4 driving top tier returns. So fortify, grow, transform and return.
What's critical for us is that we 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 4 pillars, the first two, fortifying our core assets and growing North America, are really the primary focus between 2013 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. So with the fortification of our core assets, we believe we have a nice runway of growth in North America across select markets. Obviously, we've got platform growth in terms of factory stores and e commerce as well as we've recently announced our expansion into Mexico.
So think about fortification and growth of North America happening between 20132015. 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 omnichannel 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. And 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.
So that's how we've built a linear progression of
the plan.
If I talk about Pillar 1 first, the fortification of our core assets, we're really talking about our brands, our processes and our capabilities. And 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. So as I look at our brand, 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. And 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.
Use values that we track, but also the global use values that we track. The brand at its root is extremely optimistic. It's also consistent with use values of individualism. And 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.
And 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 have 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 track 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 33,000,000 members in the program at the moment, 18,000,000 active, which means having purchased in the last 12 months.
And importantly, we've added about 30% to the base of our loyalty programs over the last since the beginning of the year. So 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, and we feel terrific about the returns that we're getting from the investments we've made so far.
And 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' opportunity to be in the next version of this campaign in spring 2013. So we feel really good about what we've achieved so far in bringing this Sharpen 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. So if you will, kind of pretty inside and out or beautiful inside and out. So 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 the American Eagle Outfitters customer. The woman that cross shops Aerie from American Eagle and buys a bra is worth 5 times the value of the average Aerie customer. So 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. And to just give you a feeling for the Sharpen brand positioning of Aerie, this is a view of how we're bringing our Aerie brand and our Aerie customers to life. So we're feeling really good about where we are with both American Eagle Outfitters and Aerie in terms of bringing the Sharpen brand positioning to life.
And 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, 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 brands, 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.
And 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 category that are critical to our long term growth. But 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.
And if we look at the reason why in terms of fortifying kind of our core processes, it's all about assortment architecture. I mean, 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. And we talk a lot about these famous 4 categories and I'll review them for both American Eagle Operators and Aerie.
These are categories we wanted to store 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 there's a 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. And then we have categories that are near into those, essentially on deck or being focused on next. And then some categories that we would just turn faster to compete directly with the fast fashion competitors that we compete in.
So having a balanced assortment between, let's say, 30% core, 45% core fashion and the balance being fashion in these categories of famous or 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. So those would be what we consider famous 4 categories. At the same time, on deck, we have these nearing categories of wovens on the women's side, more fashion driven wovens, as evidenced by our HAB shop recently, our haberdashery shop is our men's button down program.
And then we also have had really strong success in dresses recently to feminize the store, give her a number of reasons to more frequently visit American Eagle Outfitters stores or a direct .combusiness. And then competitively, represented by categories like jewelry and accessories or outerwear, there are just certain categories that we want to turn faster, buy the sellout and compete on trend with the faster fashion retailers that we're competing with today. And having a balanced approach is critical. If you look at Aerie, obviously bras and undies are the famous 4 categories. Lounge, fleece, swim 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. So 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 Mary talked about earlier. We have an unacceptably low turn rate at the moment, kind of it hovers in the kind of 3% to 3% to 3% range. And Mary and I have targeted the team to at least increase turns by about 0.5. A year.
We'd like to do better than that with the long term target of getting into the kind of 5.5% range, if not better than that. So 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 customers' demand, how and when and where she or he wants to engage with our brand. So we 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 over invested 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. And 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 in 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 Pickett. Improved lead times, just in time inventory and optimize 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. And over time, we'll have customer segment based defined store profiles that will enable us to sort by customer type much more precisely and optimize the productivity store by door segment of business, mainline, factory stores and direct by segment of business. So 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 and 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. To.
We've completed 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. So 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 omnichannel commercial experience.
We want to have a single view of our customer within our loyalty programs and a single view of inventory. And 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 shift 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. And 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. 1 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.
I've had the benefit of the strong performance in brand and product driven customer experience that Roger and the team have been driving. So I've spent my initial months here looking at our corporate infrastructure and then our geographic and channel business development capabilities. And on the corporate infrastructure side, under the leadership of Mike Rumpel, 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. Mary joined us recently as our Chief Financial Administrative Officer and is building the capability across the functions she's accountable for, including finance and P and A. And then 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 then shifted my focus to the business development side of the equation. We've got a lot of work to drive growth in North America and we need strong commercial general management across the United States, Canada, Mexico and the balance of the Americas in order to achieve that over time. So 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. And of course, because the new flagship experience is going to be starting with a mobile device or a tablet, that omnichannel commercial leadership.
So I'm squarely focused on these two areas for the time being. And 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. But 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 12 month period of time starting early next year.
So we feel good about where we are capability wise. So 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 North America, we have to have strength and the fortification is all about building strength. As Mary said, we believe we can deliver that 7% to 9% revenue CAGR and 12% to 15% EBIT CAGR by growing our North American business as our primary focus in this planned 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. But 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 and we're under penetrated in factory stores. So if you think about all of that, that's in the United States.
Let's repeat that in Canada. And 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. And 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. So we have an opportunity to address a number of underpenetrated markets from the middle of the country to the West Coast. So that will be a major focus. And then if you also take a look at it, we are very much a regional mall focused company and we have underdeveloped the key urban both mall and street mall locations.
And 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 Los Angeles a tremendous amount of time recently. And as I've looked at this, if I just take Miami as an example, we're not in Gaze Land Mall at the moment, we're not in 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 in the Financial District. If you look at San Francisco, we have really just one store in the core of the city. You look at LA, 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 that 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, this is 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% to 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.
So consistently, you'll see us being able to add somewhere in the range of around 80 additional doors. There's probably 150 to 200 locations, but we'd like to manage the business into that kind of 15% to 20% range over time and are very focused on developing this as a legitimate additional channel of distribution to a distinctive customer for our company. This is critical because of the economics of the channel. We make about a 20% 4 wall margin in our mainline doors, about a 28% in factory stores and about a 30% in equivalent 4 wall margin in our dotcom business. Current penetration is 76% mainline, 10% factory and 14 percent 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. Obviously, this channel mix would be more profitable than the current mix that we're running today with all three channels growing. So, we feel good about that. And 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 $4,600,000 a 4 wall profit margin of around 23% or $1,100,000 not bad for the 1st 12 months of their life, a return on store investment of 74% and against a net investment of a little under $1,000,000 So we're feeling good about that.
I think looking at how we're doing that, this is an example of our Spartan States 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 and then 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. And 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 4 categories that we've talked about for some time. We 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 6 month lead in our direct business because, again, the new flagship experience being mobile and tablet, it will be the first engagement opportunity for customers. We'll have our first store open in the spring of 'thirteen, and we see a run rate potential of around 50 stores given the current market composition in Mexico.
And that's just mainline doors. There's obviously a factory store opportunity over time in Mexico as well. So 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, so 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 our product in our e commerce business and providing unique online product that can only be found in our dotcom business. And if you look at how we're bringing that to life, obviously, denim, shorts, knit, color are famous for categories are distorted online. We've got our nearing categories well represented seasonally in terms of dresses and our HAB shop, for example, on the Vinshirt side. And then some competitive categories, especially categories that are SKU intensive and difficult to service, but important to our customers like footwear, are opportunities for us to support our e commerce business. And 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 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 4 categories, lounges, loungewear and tees, for example, and near end and competitive. So now I want to shift that that's growing North America, which we feel again very confident is our near end focus the next couple of years to deliver that 7% to 9 percent revenue CAGR, 12% to 15% EBIT CAGR. And 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. So 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.
So by building on this omnichannel customer experience, having a technology integrated multichannel 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 and especially in a strong ROIC focused manner. So it's our intent to obviously enter each market 6 months in advance of a store opening with a global omni channel commercial experience, which really positions our brands for sector leadership market by market. And 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. So as we go direct or joint venture into a limited number of markets, it will be funded by that licensing royalty.
So it's asset light entry with a cost share model into each country also rooted in that omnichannel vision. And 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 1 to 5 markets being joint venture and the balance of the markets, let's say, 50 plus over time being done through country licenses. So it's a very balanced approach. Again, no silver bullet.
And importantly, 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. So 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 and A. So just to wrap up, obviously, Mary talked about the 3 core return to shareholders 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. So 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 plans. 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% to 9% revenue CAGR, 12% to 15% EBIT CAGR and getting that ROIC firmly and consistently in that 14% to 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. So we really appreciate your attention. Thank you for listening to this, and we're excited to take your questions.
So 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. So two quick questions. One is, on the productivity opportunity you talked about, the 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?
If you see this in AUR? And then on the marketing side, maybe Mary, can you give us a little more color on the actual spend compared to last year? How we should think about marketing? And Rob, maybe a thought or 2 on TV, radio, social? Thanks very much.
Regarding productivity, what I would say is, it's a combination, honestly, of all of the above. And when you look at our high performing doors, we generally have a higher UPT. I mean, we have higher conversion. And I would say the entire fleet is focused on that higher conversion rate. So 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. So I think when you look at the mix of our portfolio and I think what gives me a bit more confidence around being able to achieve that kind of 5 $25 per square foot is also the mix of the portfolio. So 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, still larger stores. And then 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, etcetera. So that will all help drive that. To answer your question on advertising, as we provide the guidance for the back half of the year, we said that our SG and A would increase primarily driven by incentive comp, but also by advertising and we didn't really disclose a specific dollar amount. I think we had not been on TV in quite some time as a brand.
And as we looked at the back to school assortment, very strong assortment,
clearly opportunity to get the word
out around our brand and 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.
And Tom, just briefly, the mix of product marketing we're putting forward is obviously we have television advertising and it's an important films are important part of how we show up because it is a way of communicating the emotion of our brands, but 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. But 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. So 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 Mary said. We trust, as you've heard from us, in the low kind of 400s, around 425, 430.
We've gotten about a third of that back at the moment, just based on the strong comps performance that we're driving. But through a number of the initiatives we've talked about, we think we can get to a much higher level. The goal is to get back to our peak at 5.25. We've got stores that perform well above the store average in the kind of mid-four 100s that we've got stores, the top 150 of the fleet are performing in that mid-seven 100 range and the outlet stores perform in the kind of high 600 range. So 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 fleets that we have across all channels.
Okay?
Yes. Yes, Randy?
I just want to ask
a question regarding the operating margin target. So if we're going to end the year at 12.5, yet the guidance of 14% to 16%, and then when you think about you go through all these numbers, right, you say we're at $4.68 per square foot in sales, then
we want to go to
5.25 That's going to be as leverage, right, the model. Then 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, it's much higher, 800 to 1,000 basis points higher than a regular store. So it seems like the opportunity for margins is much higher than 200 basis points, right, or 300 basis points. And there's a it seems like there's a lot of opportunity to get SG and A leverage yet, the guidance or the target for SG and A percent of sales is kind of flattish. So meaning that the operating margins are really just coming from gross margins, not from SG and A.
So if you think about sales productivity going up, e commerce distribute e commerce becoming more important, geographic, internationally, etcetera, why wouldn't the wouldn't there be more SG and A leverage And why wouldn't there be an opportunity for the operating margins to get higher?
Yes. So it's a fair question. And I think as we look through the plan, our financial targets and we take our commitment seriously, right? So it's just not a number on a piece of paper that we hope and pray we'll achieve at some point. So we take that very seriously.
So 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. So 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 growth down or our margin down for whatever issue. So 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. And the goal is to get leverage on SG and A.
I mean, there's no doubt about it. That's it's literally a focus of ours.
If I look at the economic numbers in the packet, it would imply if you if factory is 800 basis points higher and e commerce is 1,000 basis points higher and then you layer in Mexico franchising, etcetera, that the operating margin capability of the business would be could be above 15% now.
Just to reemphasize what Mary said, Randy, I mean, it's 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. So 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 percent range.
However, as Mary 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 Mary just articulated. And as things break in our favor, there should be upside opportunity.
But we're girded for any risk so that we can deliver in that. We want to be an investment grade company and that 7% to 9% revenue CAGR, 12% to 50% EBIT CAGR, getting that ROIC in that range is something we will do year in, year out. And 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.
One more unrelated question. If you look at this financial appendix, there's a lot of variability between dividend payouts and share repurchases. So for example, this year, if you did a special just
a special
dividend, a huge dividend payout, you have dividend focused investors and then you also have investors that are focused on share repurchases, you haven't done any to date. So is there what's the philosophy on balancing those 2 buckets And 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 versus this year versus dividends? Or how should
we be thinking about that?
So I think the key word here is consistency. And as I mentioned earlier, we have been episodic in our shareholder return and have bounced back between dividends, special dividends, etcetera. So as we look at the kind of the shareholder return going forward, we're looking for a more balanced approach. But 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.
When you think about the opportunity to gross margin in AUC and AUR, the cost tailwinds drop off to the second half of twenty thirteen, how do
you think about AUR and pricing going forward? Yes. I think other than kind of what I would call just normal mix of the assortment and as we look at the different channels between factory, no significant change in kind of our AUR thinking or philosophy or where we're at. On the cost side, as I mentioned, we'll see the cotton kind of clear through as we get through the first half of next year, the year over year comparisons, but don't see any significant change in cost either upside or downside. There's been a fair amount of discussion about, hey, labor economics is one example.
We've got 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 kind of our long term run rate at this point.
And Dana, just to reemphasize something we've said for some time, the merchants are very focused on maintaining the intrinsic value of our brands. But 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. But 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. Yes.
Hi, Kevin. So two questions. One is on the assortment architecture. The Famous four categories, what percent of sales is that and will that change going forward? Will it increase?
And also, where do the Famous Knit not the Famous Fashion tops like on those mannequins, where does that
Those are so let me take both of them. So 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. So 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. So that's why those are so critical for us.
They are the core of the American Classic styling that's at the core of American Eagle Outfitters and of the kind of 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 Stores, about 45% of customer choices in core fashion, which would be doing a more seasonal or in and out flow of core product with the fashion trends applied. So think about colors, think about trends, think about patterns. And then true fashion, which would be truly bought to be in and out, whether it's on a few months flow or literally a 4 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 top the competitive comparable sales that we are is we've got a balance between the famous core core fashion product and let's say 30% to 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've built our color palette in order to be able to do that and maintain the integrity of the overall look and feel. So 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. And last question on the supply chain, what you have here, how is the supply chain different today than
this? Yes. I want to give compliments to the team in terms of the ability for them to source around these 4 supply lanes at the moment, because that 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 associates or a number of customers in our loyalty program that we have the ability to engage with and test anything from parts of the assortment all the way through to lease line execution and promotional ideas.
So we can source continuously to be in stock in those core products and around our famous core categories and at the same time leverage our fast and scale, read and react through delayed development capabilities to make sure we're making the right investments. 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 in the past several years. So really fortifying that capability and making sure we're the best at it in our competitive set is going to be a multiyear effort. But the foundation is already built within the company.
How does
that help you or hurt you kind of deliver on all this stuff today?
Yes. Okay, Howard. Well, we're as Mary had mentioned, I think a couple of times, we're broadly aware of everything that's happening kind of we've got good sort of horizontal lens and 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 that we 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. But 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 that execute our playbook on our field has led to the results that we've delivered thus far this year. We believe will enable us with some flexibility to Randy's earlier question to deliver the consistent financial metrics that Mary has laid out and we feel good about that. In part why we are 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. And 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, but 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. Yes.
Can you talk a little bit more about technology and how that's changing, is it a culture or is it the pace of the organization?
Yes. It's 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 kind of 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 is going to be that awareness is going to be built through technology. The way in which customers are increasingly engaging with apparel is tech driven. And so 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 is got to be the center of our thinking, a very customer centric approach to this. And it has not been the level of focus that we've needed to have in the past.
And our intent is to be the sector leader in this moving forward. As I've mentioned in the past, we're kind of uber paranoid about making sure that a decade from now people look back on the company and say they have those tough discussions now, they made the right trade offs and they've invested behind the customer facing technology required to be an omnichannel 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. And you'll be hearing not only about investment, but about people capability that we're bringing to the company to make sure we're a leader in the next several quarters.
I think Nancy is next. Hi. Hi. Hi. I'm Nancy.
I'll go ahead and filling
in for all of our China 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 reduction in lead times? And also going into Holiday, how you see the inventories positioned? And basically, how soon will we see like an improvement into the earnings and whatnot based on more efficient inventories?
So I'll let Mary take the last few questions because we've obviously provided guidance for the balance of the year on that on those questions. But 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. So for example, we have the ability to react within 4 to 6 weeks on a faster turning fashion item at the moment. The key though is making sure that it's built into the muscle of how we run the company. So 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, so call that 3 to 4 months.
And then on the core fashion to fashion, whether we're reading and reacting, testing and scaling or delaying development, that goes anywhere from kind of 3 months down to around 4 weeks depending on the source market and whether or not we're air shipping. And we can do a bit better than that. But in terms of building systemic capability, we would say we'd be really pleased if we could source our fashion our core fashion to fashion in that kind of 3 months to 1 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 in the quarter.
And the goal is to shorten the lead times going forward the long term?
Our goal is to be competitive with the appropriate players in each of those segments. So, things for fashion and even some core fashion, those would be the fast fashion competitors and 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 Famouswear category and competitive with the fast fashion players in the fashion categories, we'd be satisfied with our ability to compete in a balanced way.
And then 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. So we'll see the difference between these obviously the cost of cotton coming through. I would say as we go into the Q4 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 enough view yet well into next year, but still room for improvement when we look at our overall inventory.
To your point about
the breakdown or the opportunity in the main lines in the A plus malls going forward, can
you talk to
me about the breakdown? Sorry, can
you talk to maybe the breakdown between the current penetration between A, B and C malls and maybe within that 20% 4 wall, how that kind of differential between maybe A plus and B to B?
Sure. We haven't provided any guidance in terms of how we break down our revenue by A through F mall. But what I could 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 underpenetrated in the A plus to B mall locations, and I mentioned a number of the A to A plus 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 9 15 stores, give or take 9 or 10, 15 stores.
All the 21 are profitable. Even half of those are cash flow positive. About 75% of the loss, which isn't significant, generated by a couple of stores. So it's a profitable suite. Those regional malls, unlike perhaps some of our competitors, we are not under pressure to close stores.
But we have a very disciplined approach to hurdle rates in terms of revenue and minimum operating margins we've assessed before we close the stores, which is why we're looking at probably 20 to 30 of those kind of see through F mall stores a year over the next several years and redistributing the fleet so that it is more reflective of the customer demand out there. The reality is, is the A and B to A plus 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-four 100s, whereas the B to A plus malls are typically in the kind of mid- to high 700 range, it's not higher than that. And then 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. So that's how we're thinking about targeting our capital investment.
We've got a balanced brand positioning and customer demand shifts that will do all of that, but we'll do it through an ROIC lens that we think will deliver more consistent returns over time.
So I guess there's so much of
your focus is this
per week. We're seeing this opportunity through the mix and just through the margin differential. So just understanding that margin, does the higher sales per foot productivity give you that leverage? So the A plus malls are in excess of that 20% and we look that way? Or is there the rent that we need to consider and it's below?
Is it 20% kind of across the average? Or do you maybe get a lift from that as well?
I mean, clearly, the there is a cost of goods in those key to A plus locations that have to be factored in. But we feel confident that in those locations we can deliver our hurdle rates. We wouldn't invest in operating margin dilutive capital and we're very focused on that. So 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. So as we start having examples of that, we'll bring them forward to you.
Clarifying 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. So really, from that perspective, the American Eagle store count is relatively flat, if you can clarify that. And then also in terms of Canada, can you talk a little bit about what do 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? And then after that, in terms of the international strategy, I think you've outlined a 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? And what are the profitability targets that we should see in directly owned businesses? Thanks.
You're playing out a brand new playbook and I can ask you 3 questions in one. Well done. I like it. Yes. Let me take the questions, and I want to have Mary add in kind of the financial considerations around it.
So 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 door 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. So let's call it a modest, let's say, 1%, 1%, 2% square footage growth rate in mainline doors within the U. S. And Canada. But that doesn't mean door count per se and square footage expansion.
Because in general, I would say a flattish door 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 doors, slight square footage expansion opportunity, but we're we have no factory store business that we come in Canada. And there's a similar penetration, call it, 10% to 15%, 15% to 20% opportunity in Canada.
We're under penetrated in our direct business in the Canadian market relative to the U. S. Off of our current platform, that's an opportunity. And Mary 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. And not surprisingly, our country cluster is not surprisingly, they're the same markets that everyone talks about. If you look at Asia, Greater China is attractive. We currently have that business license.
If there were being 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 license.
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 client 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 United States 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. And Europe is no longer Europe anymore.
So 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 see the balance of Europe and would probably look do that in some form of a partnership, but and the balance of our Middle Eastern, Northern Africa 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. So nothing there of significance either above or below. In terms of our international stores, honestly, haven't even set targets yet. It's somewhere down the road here in the future for the plan. So really haven't had an opportunity to think through that myself yet given my newness to the company.
But the one thing though that I feel very strongly about is the ROIC focus. So every store we take a decision on has to meet our ROIC objectives that we've articulated. And of course, we are looking for everything to be margin accretive, right? We want to be able to do better than us. And so the only way you can is to make sure your decisions are accretive to the business and not dilutive.
So that would be the goal. But haven't set specific targets yet on the slide.
Do you have I know you haven't given out 2013 guidance per se, but you have any early view on what square footage could be in 2013, what the growth could be in 2013? And also any reason why your long term sales and EBIT target for 2013 would be much different from what you've laid out versus your long term?
So in terms of our commitments, we obviously haven't provided guidance for 13, but our goal is to consistently deliver in that 7% to 9% revenue CAGR range, that 12% to 15% EBIT CAGR range and suggest ROIC in that kind of 14% to 17% range, Lindsay. So we although we want flexibility to be able to withstand some the pressures of a tougher year and to kind of push hard through years where everything is kind of breaking in our favor. To deliver those CAGRs, we have to deliver pretty consistent performance year on year. So 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 in the past, the way to look at this is on mainline, we're looking at rebalancing the fleet.
The A, B, A plus locations that I've mentioned are not easy to come by and it would drive the degree of patient. So we will want 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 landlord work partners are very clear on what we're looking for. And so 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 the level of under penetration that we have in that business is in our factory storage business. And so we see a pretty strong expansion opportunity in 2013. And 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.
You mentioned you're pleased with the quarter thus far and you've got a
lot of
strategies evolving. What where do you think you're getting the most traction thus far if we look at back to school? What where are you hitting the nail on the head and 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 and how do we sort of assess that? Have you sort of assess that? And do your plans incorporate kind of the level of promo you're seeing out there right now? I mean, 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. So I want Mary 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. But before I do that kind of strategically, what we feel good about is that we're delivering a competitive top line. And 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.
So we feel good about that. Why we feel that we're delivering a very balanced assortment across our Famouswear categories, core, 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 Q2, which enabled us to deliver increases in revenue, which were driven by traffic, Our stores team executing extremely well with converting that traffic, driving most metric all metrics up actually. ADS was up, UPTs were up.
We saw an increase in average unit retail, which was driven by mix. So we just have a broad based strike at the moment, but it's because of the balance of the assortment, we feel like we're competing per share in our Famouswear categories against our core competitors and competing per 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 and how we're going to market versus focusing overtly on price. And 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 1st part of the year. That said, we won't give up market share.
We are bought to compete and not give up market share. But 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 message that we've laid out as our goal. So we feel good, we feel balanced, and it's our intention to execute our playbook as we have in the 1st part of the year.
So 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. And that's to your point, right, very promotional last year. Q4 of last year, we drove an 11% comp, right? So I think when you look at kind of those 2 years combined, we feel comfortable with the guidance we provided. In terms of EPS, for Q3, we provided guidance of $0.37 to $0.38 a share, which is a year over year growth of 23% to 27%.
And then for the year, guidance of $1.33 or $1.36 So that's kind of that 37% to 40% growth. So I think the bottom line of that is that despite the promotional environment, our performance has remained strong as Robert indicated. So we still feel very comfortable with our guidance.
How should we think about it this year and also for next year and what's changing? Then on the people, so Roger retiring, Chief Talent and Culture Officer, have you had that before? What will they do? What do they what do you want them to do? And with Roger's replacement, anything different than what Roger is doing now?
How do you see that coming about?
Again, 3 of them. That's our trend. Exactly. So in talking about let me go to the people issues kind of first. The Roger is an incredible partner, and I give Roger a lot of credit for being the catalyst behind kind of 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 kind of 14, 15 months working on that transition. The key that we, 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 fitters. And to be able to have that balance enable our design team to be really focused on leadership, both in terms of our famous 4 categories as well as trend leadership in fashion. And 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 is 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 Offers 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.
But we feel really good there. There's always opportunities to fortify. And 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, there's 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 asset.
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 Offiters as the must stop place in their career building within the specialty retail environment. And so to bring in a partner to work with me, Mary and the balance of the executive team to kind of build that high performance innovative culture is essential to our long term success. And so 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. We hope to have that announcement in the not too distant future.
And ultimately, I'm feeling good about the capability transformation that we're driving. Sorry, in the first question that you asked, marketing spend, I'll let Mary take that one.
Yes. So overall, we've been tracking as a percent of revenue below 2%. So that will increase here as the year goes on. But I think long term, we didn't specifically break out our SG and A and say, hey, this is our plan for
call.
Okay. And then just a follow-up on the to do on that. I don't know yet what that
is long term, okay? Really?
It's going to be good. If we go to Slide 9 in the packet, because I feel like this can be very important for the Street over the next 3 to 5 years is,
can we get a little
more granular once again on this 7% to 9% revenue CAGR? So this year, the revenue growth will be like 9%, comps will be up 8%, 9%, right? So comps matching revenue. You're guiding us going forward a low single digit comp yet a sales CAGR of 7% to 9%, you have these other categories to grow that to fortify that growth.
So can we get just a
little bit more for
the piecemeal it, how
it would break down against that 7% to 9%?
So I think that let me give this a shot. So about 10% of that growth roughly would be coming from mainline. So if you just kind of look at the size of the bars, right, the size of the bars are there right to give you a kind of a rough feel for what's the contribution to that 7% to 9% growth. And then again that mainline growth again driven by productivity per square foot, which again looking at the mix of malls, etcetera, traffic conversion, etcetera, that we believe we can drive. The factory store growth is roughly 30 ish percent of that of CAGR.
That's based on a specific factory store rollout plan that Robert walked you through. The e comm growth is about roughly 25% of that growth. That's really getting us from that 14% of revenue, ecom up to about 20%. Mexico long term could be roughly 15% and then international roughly 20%. I mean, generally, that's how it how the CAGR breaks down.
Again, different by year, different by initiative, but high level over the terms of the strategic plan. That's generally how we would break down internationals later in the plan, back when stores are earlier in the plan. So it will be a little bit different by year. But that's kind of the general makeup. And 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 assortment is, which we continue 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 initiatives from Fortify and Growing North America being the 2 pillars that are going to be the ones we really talk about over the next 3 years. And the mix that Mary just talked to you through, is it going to play out exactly like that? Of course, yes. But what we feel we have got now is the ability to drive a competitive top line.
And it's we've built in modest assumptions on the comp. And then 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 Mary laid it out, of course not, but we feel that we can deliver consistently to the targets with this mix.
The introduction there. So the factory store opportunity, first, I think you said 35 to 40 new next year. It's just kind of straightforward, it's high margin, high productivity. So why do you think the prior management team has focused as much on the factory opportunity? And then 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?
Or do you assume some sort of cannibalization or something like that?
So in terms of our plans moving forward, look, I can't really comment on the decisions that were made in the past. I think Justin 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. And 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 50% to 20%. Most importantly, we know this customer. There are, for example, 2 types of customers that shopper stores in the factory channel. There is 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. So there's a value customer who shops the outlet channel as their primary channel of distribution that we want to be able to access. But there's also a fashion shopper that shops the packaged store channel, generally skews female and she's looking for treasures. So 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. And if we can execute our brand proposition in a premium way within the factory stores, it's just a legitimate incremental channel of distribution.
And 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 placing them, both relative to existing factory stores, but also where our regional mall penetration is. At the same time, 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 capital within our e commerce business as well. And 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.
And if you look at the math that Robert showed earlier in his presentation, plenty of opportunity. We are not located today either with the mainline or a factory to open up the door, which would say probably not a lot of cannibalization because we're not there today anyway.
So Go ahead. Mario, where you could lead with a licensee that could ultimately become a JV or a direct store? Is there a
Yes, great question. I'm glad you asked this. I forgot to mention upfront. 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 5, 7 10 year exit ramp to either joint venture or to direct ownership. We know our brands best.
There are 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. So we just want to be balanced about it. Mary 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.
So sales is a take to the partner
and then
they retail it? The economics for that partner?
On our current franchisees, so it's a license arrangement, so that just will grow.
So you're selling them the merchandise. Correct. And not just I think.
Yes. Correct. Yes, we are. Yes, we're selling the merchandise.
Maybe just to add on a little bit. So on the is there a hybrid model also perhaps where you kind of have a flagship type of market building the brand and let the licenses expand out? Is that a possibility? And then you mentioned flexibility a lot with regard to international. You mentioned the 6 month lead time with online before you enter the market.
Are there scenarios are you approaching this as a test for some of these markets where if a company if a country just doesn't meet par, you just say, we made our investment or kind of a minimal investment given the capital light and let's move on to a different market. I mean, is that going to be a little bit of a focus?
So 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, either direct, it's not sensor or it's devices. That said, if a bit of a hypermarket like 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. So it's a blended model. And we certainly will look at that.
I would say in key cities, our intent wherever we're entering directors or to joint venture would be to do exactly that. We would only leverage license or franchise partner capital if we're going beyond what we want to directly manage or control ourselves. And in terms of your question 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% to 70% consistent returns. And obviously, we'd like to do better than that.
And 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, we're putting into our expansion strategy. But if we do face that, we won't fund margin dilutive businesses.
Are you seeing any lift in malls where you may have seen a closing of an A and F store? And 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.
So we understand kind of 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 and that again in locations where we're hitting our hurdle rates and are highly profitable as well. So 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 pulling 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 that will follow that. And your second question, sorry, was just concerning everything.
Right. Clearly, our side by side locations are incredibly productive. I mentioned in the past that the top performing side by side locations and shop in shop locations have sales productivity in the range of the top 150 stores in the American Eagle Outfitters fleet, so call that high 700 to even mid to high 800 range. The average sales per square foot in the Ares 4 wall fleet is well below that, call it a quarter to a third of that. We have seen a dramatic improvement in the Ares 4 wall performance over the past several quarters that we talked about.
We do believe that although we still are pushing those stores to get beyond close to breakeven set 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 is worth 5 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 brand, all of that's 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 the business. Do
you want to add anything? No. No. No. No.
No. High end range. So I would say, look, the Aerie 4 wall sales versus 4th productivity is below our average fleet, which is in the kind of mid-four range. It's probably a third, I would say, is the way to look at it as 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.
And if we do, they hit our hurdle rates. And we've seen a number of stores kind of crossed over that line over the past several quarters. But the focus for us on Aerie moving forward, including our international expansion is in that 5 by 5 locations for the obvious
reasons.