As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Judy Meehan, Vice President of Investor Relations.
Thank you, Ms. Meehan. You may begin.
Good morning, everyone. Joining me today are Jim O'Donnell, Chief Executive Officer Roger Markfield, Vice President and Executive Creative Director and Joan Hilson, Executive Vice President and Chief Financial Officer. 10 results are from continuing operations and are adjusted to exclude the impact of the ARS liquidation this year and the tax benefit and investment loss last year. Before we begin today's call, I need to remind everyone that during this conference call, members of management will make certain forward looking statements based upon information, which represent the company's current expectations or beliefs. The actual results may be materially different from these expectations or based on risk factors included in our quarterly and annual reports filed with the SEC.
And now I'll turn the call over to Jim.
Thanks, Judy. Good morning and thanks for joining us. I'll begin by recapping our performance for the Q4 and fiscal 2010 and then provide my perspective as we look towards 2011. Roger will provide an update from a merchandising point of view and then Joan will take you through the financials and our outlook. I'm pleased to report that we made progress even though it was not as significant as we would have hoped.
Let me share with you some color. In the Q4 fiscal 2010, we achieved an increase in our operating margin and generated EPS growth despite decline in sales. Our 4th quarter operating margin expanded to 14 0.6% from 13.3% last year. 4th quarter EPS increased 16% and our adjusted annual EPS grew 11%. For the year, operating income was 3.17 $1,000,000 and cash flow was once again quite strong.
We ended the year with cash and investments of $740,000,000 and after returning $400,000,000 to shareholders through 20.10 stock buybacks and dividend payments. The improvements we made reflect initiatives I discussed on our last conference call. Specifically, we took actions to strategically manage the business in what continue to be a very challenging retail environment. We have strengthened assortments appropriately, managed inventory levels and we realigned our talent. Our results also reflect our disciplined approach to expenses and that too contributed to the operating profit improvement for both the year and the Q4.
We continue to make progress implementing our corporate profit initiative, which are aimed at gaining efficiencies across our supply chain and production operations, as well as reducing overhead costs. These projects are expected to deliver $20,000,000 to $30,000,000 in savings over the next 2 years. Now as we look to fiscal 2011, we are building on this progress and positioning our brands for a long term profitable growth. Roger and I will provide some additional color here, highlighting the prospects for our AE brand, Aerie and our direct to consumer, especially in the international marketplace, as well as our outlook for 77 Kids. We expect to see major benefits from these efforts to occur in fiscal 2012.
The key priority in 2011 is to drive increased productivity at the American Eagle brand as we work to bridge the gap between current sales and historic levels. The AE brand remains among the strongest in today's marketplace with meaningful brand equity, great quality and affordable prices. We have real customer loyalty and an established and enduring American heritage. We continue to lead the market in both men's and women's denim. The enviable position we have earned for our brand is a platform for profitable growth here and internationally.
Clearly, continued improvements in merchandising will be critical to our success. We made progress in 2010. We're especially encouraged by the response we saw to the assortment in the Q3. Our team is focused on delivering Our team is focused on delivering more consistent performance. We know where we need to make changes and those efforts are well underway.
We see significant potential for growth through bolder investments in key businesses, building on our market, a leading position with core customers. One example is in accessories where we expanded assortments in handbags, footwear, jewelry, which complements our core offering. Within the Aerie brand, we continue to drive the same profitability and growth and have already witnessed consistent improvement in operating earnings including in the Q4. During 2010, we repositioned the assortment and we're making further refinements in 2011 to highlight and give greater prominence to the strength of our intimate apparel categories while building more complete lifestyle of our brands. We know what our Aerie customers want and we're committed to becoming her go to destination.
We have outstanding talent and our team is very excited about the direction of this business and the opportunities ahead. In 2011, we will open 10 additional Aerie locations bringing our year end total to 158 stores. AE direct to consumer has a solid foundation of $335,000,000 in annual sales. In the Q4, we achieved a sales increase of 4% and we improved profitability. As we look forward, we expect to expand this business more aggressively in 2011 and beyond.
We believe this channel is especially right for growth given the demographic of our core customers and the opportunity to drive sales from international consumers. We are moving forward to enhance the capabilities and the reach of our e commerce platform, which will include exclusive merchandise and specialty shops combined with an increased focus on international growth. Given the strength of the AE brand around the world, e commerce is a natural complement to the international expansion, which continues to proceed well. In addition to reaching customers around the world via the Internet, we are also building our physical presence in key markets. We currently have 4 franchise stores in the Middle East and our sales are exceeding expectations.
We plan to open 20 franchise AE stores this year in the Middle East, China, Russia and Hong Kong. Our international strategy will focus on utilizing partnerships to enter new markets, limiting our investment and our risk and the overall longer term capitalizing on the international potential of our direct business. 77 kids stores are off to an encouraging start. We continue incubate the brand as a potential driver of future growth. We currently operate 9 locations and we are encouraged by the ramp up in sales productivity.
The concept is differentiated in the marketplace and we've received very positive responses from our customers. Our plans call for an opening of additional 12 stores in 2011 and I will bring the total to 21 at year end. As we work to drive the top line across all of our businesses, we're also focused on delivering more to the bottom line. As I mentioned earlier, cost reduction measures have helped to partially offset the impact of lower sales and we will continue moving forward with our profit improvement initiative. That being said, there is no question we face headwinds with respect to higher product costs in the second half of the year.
We are actively managing our supply chain to help mitigate this cost pressure and we will also make selective adjustments in our pricing and promotional strategies as appropriate while maintaining our outstanding value position. Overall, we look forward to continuing our progress in 2011. We are making significant strides in absence of the external headwinds we are facing, we will be anticipating a healthy growth to the bottom line in 2011. We are confident that we're moving in the right direction as key strategic and merchandise initiatives gain traction and we're excited about the opportunities ahead. Opportunities ahead.
Before I turn it over to Roger, I want to briefly comment on an announcement that I have decided to retire that the company has initiated a succession planning process. As many of you know, I've been with the company for more than a decade and most of that time as CEO. And I've determined that this is the right time to move forward with the leadership transition. As I discussed this morning, we have a solid foundation in place with great brands, world class business and people. And I look forward to working closely with the Board to identify our next CEO and to assure a smooth and seamless handoff.
I will remain as CEO until my successor is in place through a normally transition process. In the meantime, I will continue working with our team on implementing our strategic plans and taking advantage of the many opportunities we see as we continue to position the company for long term profitable growth. Now, I'll turn it over to Roger. Good morning, everyone. While there
are certainly areas to improve on, I must say that I am extremely pleased how our strategic objectives are coming together. First, we have put tremendous talent in place over the past year. Across all brands, I now have critical talent and importantly, the leadership that can deliver not only great merchandise, but great brands. I'll the first to tell you repositioning an organization as we have takes time. Teams need time to gel together and work within the AE process.
I am very proud of the progress we have made and what we have accomplished to date. As we move forward, I am confident about how our design and merchandising teams are working now and they are focused on consistently delivering unique powerful assortments for our core customers. Secondly, as Jim mentioned, we have a preeminent brand in American Eagle, supported by tremendous equity and loyalty. We continue to gain ground in a number of brand defining categories. For example, AE Jeans as well as non denim bottoms are a real strength and produced positive results throughout 2010, including the Q4.
Additionally, we are extremely pleased with the customers' response to our expanded accessory business. However, in the Q4, we had some areas that were not up to our expectations. Women's tops, including sweaters, should have been stronger. On the men's side, frankly, we did not invest enough in key items and missed an opportunity to drive higher volumes. Additionally, we faced an environment in the 4th quarter, which was extremely promotional as peers worked through heavy inventory levels.
Our inventories were tightly controlled with provided support to our margin performance. Now as we move forward, we will focus our attention on 3 main priorities. 1st, we will continue to strengthen assortments, consistently providing on trend differentiated fashion. At the core of the AE is our enduring denim business and that will continue to be critical to our success. It is the foundation of our brand.
We are clearly the number one market share leader and continue to gain momentum. Going forward, we will build on this position, providing more newness, more often and being first to deliver new trends. You will see a 3 60 degree approach to denim. We will launch innovative new fits and washes supported by a powerful in store presence and strong marketing. As good as we've been in the denim category, we have not yet maximized our potential.
Secondly, we will be bolder about AE's unique value proposition. We will invest in key items in more depth in categories where we have the opportunity to drive volume, particularly in our sweet spot categories. I want to be clear, we are not lowering prices. Rather, we are investing in the price points that are the most compelling to our customers, which represent great value. In tops, you can expect to see bolder investments in fashion key items again with more emphasis on our power price points.
As a result, the assortments will be tighter and deeper with more impactful focused fashion statements. And 3rd, as Jim mentioned, we are expanding our accessory business in a meaningful way. We have been testing this idea, which has received a tremendous response from our customers represents an exciting opportunity. Regarding Erie, I absolutely love the direction we are heading. And as the floor sets continue to unfold this spring, we get closer to the complete expression of the lifestyle brand.
It's great intimates at the core, accompanied by apparel, accessories and personal care, which will become more robust as the year progresses. Each quarter in 2010, Erie's financial performance showed improvement and we expect that to continue. We've got the right talent in place and believe we have a unique and differentiated concept with tremendous potential ahead of us. In summary, our team is energized and focused. We made progress in each of the brands from a merchandising perspective and are applying our learnings from 2010 and the holiday season to help us fine tune our strategies and better on the specific areas of opportunities we see.
Let me now turn this over to Joan.
Thanks, Roger, and good morning, everyone. In the Q4, our initiatives to drive profitability led to an improvement in our operating margin and growth in bottom line results even with lower sales. Controlled promotional activity combined with reduced expenses drove stronger operating performance. Now looking at the details. Following a strong Q3, we saw the holiday season get off to a positive start.
Thanksgiving weekend posted a positive mid single digit comp driven by a powerful lease line promotion. However, we did not see the expected sales build, especially as we approached Christmas. Total 4th quarter sales of $916,000,000 were down 4% from the 4th quarter last year and comparable store sales declined 7%. By brand, AE decreased 7% and Aerie was down 6%. AE direct sales increased 4% in the quarter.
Looking at consolidated 4th quarter sales metrics, transactions declined in the mid single digits primarily due to traffic as conversion was relatively flat. The average transaction value increased slightly supported by an increase in units per transaction. The average unit retail price declined in the low single digits, primarily due to the expansion of lower ticket items within accessories. Now moving on to margin, the gross margin decreased 160 basis points to Now moving on to margin. The gross margin decreased 160 basis points to 39.4%.
The merchandise margin decreased 60 basis points compared to last year. Rent increased as the rate to sales due to new store openings and negative comps. Turning now to operating expense. SG and A dollars declined $34,000,000 or 15 percent to $194,000,000 leveraging 260 basis points. SG and A expense also included $5,000,000 of severance and related charges.
The decrease in SG and A resulted from a combination of lower incentive compensation and reductions stemming from our corporate profit initiatives. Building on the momentum established in the 3rd quarter, we achieved cost improvement in virtually all operating areas. For the year, SG and A decreased $12,000,000 to $713,000,000 leveraging 60 basis points. The 7 $13,000,000 also included $10,000,000 of severance and related charges. The 4th quarter operating margin increased 130 basis points to 14.6%.
EPS increased 16% to 0.4 $4 per share. Now turning to the balance sheet, 4th quarter ending inventory was down 8% and cost per foot declined 7%. This was against an 8% increase in the prior year. We were successful clearing through holiday merchandise and our ending inventory was on plan including clearance which was well below last year. Looking ahead, Q1 2011 average weekly inventory per foot is planned down in the high single digits against a mid single digit increase in the Q1 of last year.
Reflecting our reduced spending plan, 2010 CapEx totaled $84,000,000 compared to $127,000,000 in 2,009. In 2011, we currently see a CapEx range of $90,000,000 to $100,000,000 with a little over half relating to new and remodeled stores. We ended the 4th quarter with cash and investments of $740,000,000 During the quarter, we repurchased an additional 1,500,000 shares bringing the 2010 total to 15,500,000 shares purchased for 216 $1,000,000 Combined with cash dividends of $183,000,000 we returned a total of $400,000,000 to shareholders in 2010. In terms of our outlook, we have numerous opportunities and are optimistic about our long term growth plans. In plans.
In 2011, we are continuing to strengthen assortments, achieve expense efficiencies and challenge all concepts to deliver productive growth. However, in 2011, we also faced headwinds. As Jim discussed, rising product costs are a reality in the back half of the year. Our plan to mitigate cost inflation includes the following: a targeted reduction in markdowns supported by inventory management and allocation tools, selective price increases while maintaining our value proposition, and of course ongoing expense savings. As we look forward, we are taking a prudent approach to the year as we face uncertainty with the customer response to pricing initiatives.
Let me give some additional insights into our view for 2011. At this time, we expect our financial results to be similar to last year's adjusted EPS from continuing operations of $1.02 We are targeting comparable store sales growth in the low single digits. Our SG and A expense is planned to increase in the low single digits where we anticipate continued expense savings coupled with planned investments in advertising and new store growth. Depreciation is expected to increase in the low single digits for the year and the effective tax rate is currently expected at 38%. Now regarding the Q1, it's important to keep in mind that we are up against the highest quarterly comp performance last year at 5%.
Peak spring shopping periods are still to come. That said, we currently expect EPS in the range of $0.13 to $0.17 per share based on comparable store sales of negative 3% to flat. This compares to $0.17 per share last year. Embedded in this guidance, SG and A dollars are planned to decline in the low single digits and depreciation is expected to be about flat to last year. As I conclude our prepared remarks, I am pleased to note that our balance sheet remains exceptionally strong.
And with that foundation, we are able to take steps to enhance the overall efficiency and profitability of our organization, position our brands for long term growth and seek other opportunities to enhance shareholder value. Now I'll turn the
call back to Judy. Thanks, Joan. Now we'll move on to Q and A. So that more participants can ask a question, please limit yourself to one question. If we have time, we'll take follow-up.
Okay, Rob, we're ready for the first question.
Thank you. And our first question is from Dana Telsey of Telsey Advisory Group. Please state your question.
Good morning, everyone.
Good morning.
Can you talk a little bit about what on the gross margin side of the business, how you're thinking about pricing for 2011 with the merchandise margin down 60 basis points? How do you see that continuing throughout the year? And Jim, best of luck and we look forward to staying in touch with you.
Thank you.
Dana, on the pricing, obviously, we're a value priced organization and brand. And that is consistent with what we want to be. Because our brand is so strong, there are areas within the categories that we do believe that we can take prices up and still be as value priced as we are. We've tested some of those price points and where it deems that it's doable and it still offers the customers great value, we will do that. In the areas where we've tested and it's not possible, we will not do that.
Totality of our assortment will still be very price oriented for our customer base.
And Roger, where do you think you are in getting the women's business to be more productive?
I think right now, we're as you know, we're running you saw the inventory levels. We're running lean inventory levels. There's many great new players and we were very cautious in the Q1. The machine is getting much better at chasing and being nimble, which has always been part of our strategy. And this new organization is really, really ramping up.
So based on information that we responded to on fact, the Q2, we have big chases in place. And we believe that where these big chases are taking place that second quarter will show you stronger, bigger items that the customer wants from us.
Thank you.
Thank you. Our next question is from Michelle Tan of Goldman Sachs. Please state your question.
Great. Thanks. I was wondering if you guys could talk a little more about your guidance for the Q1. Your comp outlook implies some improvement versus Q4. I wonder if you could give us any sense of what you're seeing now that gives you comfort in that guidance?
And then on the gross margin side, it looks like you're guiding down despite the lean inventory. So I'm wondering if you could give us color on how you're thinking about IMU and markdowns in Q1? Thanks.
Michelle, I'll take that. It's Joan. The Q1 guidance, we've included our view of the quarter as flat to negative 3. It embeds what we're currently seeing in our business. And we'll talk more about that as we get to more color on that as we get to the Q1 earnings call.
In terms of our margin, we see that we can on our leaner inventories, we have the opportunity to produce lower markdowns. However, that is very much largely dependent on the top line. So it's a top line story that we're navigating our way through in the Q1 and to Roger's point, we believe that we've chased into some stronger key items for the Q2.
Okay. Rob, we're ready for the next question.
Thank you. Our next question is from Brian Tunic of JPMorgan Chase. Please state your question.
Brian, are you there?
Stand by. I'm bringing Brian through now.
Okay.
In the U. S, just wanted to understand a little more about the timing of those. And also, Joan, maybe a little more on the delta on the SG and A guidance. I think on the last conference call, you talked about flattish. So maybe just what's changed in the last couple of months on your view on SG and A?
Brian, we missed the first part of your question.
Yes. Sorry, I was asking about the store portfolio. I think on the last conference call or 2, you've talked about the potential for store closings in the U. S. Just want to see any update on thoughts there or timing of store closings?
Brian, it's Jim. Most of the store closings that are planned of any substantial number will be taken in 20122013 and they could be anywhere between 65 to 100. But it's all pending lease discussions with the landlords and so it's a very dynamic number that is very difficult to pin down and say specifically it's going to be this number or that. But we will have store closings at a greater rate than we have ever in
the past.
Okay. And Brian with respect to SG and A, in the Q4 SG and A was down $34,000,000 and included in that was some of the severance and severance related charges as well as some costs related to our corporate profit initiative. So on an apples to apples basis, excluding those costs, SG and A was down 7% year over year. As you look at it on an annual basis, which was where we guided to roughly flat without those costs, the incentive difference as well as the severance costs, it was basically flat.
Okay. I meant more of the guidance for 20
2011 as we work through our plans, the increase is largely related to advertising as well as new store growth. We have factored in offsetting some inflationary costs in SG and A with the corporate profit initiatives that carried over into 2011. And so we feel very pleased that we're able to offset those. Our advertising costs investment really supports the product assortment that Roger and team are getting behind for the full year. And the new store is really self explanatory.
It's related it's cost related to opening the stores.
Okay. Thanks very much. Congrats, Jim.
Thanks, Brian.
Our next question is coming from the line of Jeff Black of Citigroup. Please state your question.
Yes. Let me add my good luck, Jim, on your future endeavors. Hopefully that includes a lot of relaxing.
I'm actually studying to be a retail analyst.
That won't take much. Come on.
Can you talk
a little bit about Aerie? And did you hit the profit targets? Are we 4 well profitable? And how much progress do we think we can make? And give us a little color on where you think the assortments are relative to where they need to Thanks.
From a financial perspective, Jeff, Aerie was basically neutral as a brand in 2010. We essentially hit our targets for the brand. We stores that are showing promise and have achieved profitability. As we look forward into 2011, we are very optimistic about that brand and we expect the brand and the 4 walls to be profitable.
Okay. Thank you. Thank
you. Our next question is from Christine Chen of Needham and Company. Please go ahead with your question.
Thank you. Just to follow-up on that Aerie comment, I mean the apparel assortment looks very differentiated from the American Eagle assortment, but I was wondering in locations where you have the brands in the same store, I
mean have you seen any cannibalization or do you feel like it's a
different customer? No, actually, you
know, that we've assembled over the last 6 months is quite that we've assembled over the last 6 months is quite extraordinary. I mean, the talent in there and I just signed off on the Somerset, which you'll see, I think it's around April 14th. It just gets more beautiful. The lifestyle apparel parts of the business continue to be very strong. And we really are embarking on a strong undies and bra campaign as we move into the back to school season.
And we have all of the matchups now. The prints are by far the prettiest in them all and you just need to go in there and see it. So I welcome everyone to see the new set in April.
And then what about in the standalone locations? Since you've added the apparel, has that been a traffic driver? Are you getting different customers than the intimate apparel customer that you were attracting?
Yes. The answer to that is yes. We're actually attracting, I don't like using the term older, but we are attracting a customer that is north of 20 years of age as well as the core demographic. But I think that to Roger's point the styling of the product, the intimate apparel piece is the core, but the styling of the complementary product around the intimate apparel has been well received and it is very as you stated, very different than what we carry in the American Eagle store and by that is by plan. And we think that there's enough of a female consumer out there that no one's addressing this lifestyle.
And we think we've got the embryo now. It's up to us to continue to capitalize on it floor set by floor set, so time will tell.
Great. Thank you and good luck.
Thank you. Thank you. Our next question is from the line of Jennifer Black of Jennifer Black and Associates. Please go ahead with your question.
Good morning. And Jim, good luck to you.
Thanks, Jennifer.
I wanted to know how you feel your position for the changing denim trends. I see you have like 3 styles of flares. Are you in a position to chase if your consumer responds? And then I wondered if you could also comment on how you feel you're positioned in knits?
Well, obviously, we by far and I'm proud of it, not an Eagle game. We're the Denim destination, Jennifer. And we started that back in 'ninety 3 as part of our mission statement. And obviously, we're you said we have 3 styles. Obviously, the Bohemian trend is there.
We're ahead of it. We're in it. We're going after it appropriately where we want to make the investments. But it really is about the entire denim assortment. It's about each individual fit and each individual wash.
Every fit. And then after we have our answers, we make the goods. Our teams in denim, and I invite you to come to our design center. I know you're interested. Those denim teams we have are just modelers.
Great. And can you also comment on the knits? And then just going back for a second to the denim, does that mean that you can chase different styles of denim? I know that you've tested, but I want to make sure I understand you can chase whatever you need to chase. And then if you could comment on knits, that would be great.
Yes, of course. We platform denim, which means we have denim, different basis of fabric based on the styling and the wash we want to generate. We have that fabric platform with our resources. And we have lines that are ready to switch styling as necessary. So we're very proactive in how we make changes on denim.
And on the knit front, we I think we have a we've made some changes in the knit category as we always do in this business. And I think we now have an individual in knitwear with the team under him that's better than we've ever had.
Okay. So you feel you're well positioned in knits for spring and summer?
I do.
Okay. Thank you and good luck.
Thank you. Thank you. Our next question is from the line of Liz Dunn of FBR Capital Markets. Please state your question.
Hi, thank you. I was wondering if you could sort of address use of cash. I mean, clearly, you have you were pretty decently aggressive with the buyback and did a special dividend this year, but you still really have an abundance of cash on your balance sheet. So how are you thinking about that?
Liz, what I'd remind you of there is that and to your point that we did return $400,000,000 of cash to our shareholders, which is essentially cash from operating activities during 2010. Then I'd remind you that for 2011 and 'twelve, we have 14,500,000 shares authorized, which at a $15 share price is over $200,000,000 that we're looking at to return cash. Also
I'd like to note though on this Liz is that one of the things we haven't really stated is that we are updating our store portfolio this year.
We have over 115,
20 projects to remodel stores. This is a very big remodel year for us. And our remodeled stores have shown very positive performance once they've been completed. So that's another utilization of cash that we think is going to benefit the company and the shareholders in the long term.
Do you have a minimum amount of cash on the balance sheet that you like to keep just for sort of safety and security purposes?
That ranges Liz earlier in the year $300,000,000 to $400,000,000
Great. Thank you.
Thank you. Our next question is from the line of John Morris of BMO Capital Markets. Please state your question.
Thanks. Jim, congratulations and wish you all the
best as well.
Thanks, John. So Roger, can you expand a little bit for me on the top progress that you are making? I know you're saying that there are challenges there and that's obviously what you've got to fix. So first of all, tell me a little about or tell us a little bit about where you are seeing some progress and then dive a little bit deeper on where you see the opportunity. What is the fix in tops?
Well, obviously, it always comes down to hitting the right product and having the right product in the right quantity, John. And we in terms of the woven category of tops, we have a real strong design team and the wovens are really doing well. Our problem in wovens is we haven't invested enough inventory and that you'll see coming into the Q2. We know exactly what's selling and it's doing extremely well for us. The churn is faster than ever, but we and we will have that inventory in Q2.
On the knit front, we put a new fellow in charge of the knitwear. He was in our design studio. He had a different category. He just came back from a 2 week trip to Asia. And I personally think he's a star.
And what he's brought back is what I think is quite exceptional. And in this business, we'll see. But we have big reorders coming in, in the second quarter based on what we did sell in the Q1. And our inventories are very lean. As it relates to sweaters, I like the team we have.
We had some misses last holiday. And we're working very diligently. I like what we have for back to school. And we're working on holiday at this point in time. And while spring 2 is not a big sweater season, I think on April 17th, you'll see our summer set, which is our 1st summer set.
And that set is probably the best that I've seen in years.
And I think you talked about the accessories, expanding accessories.
That is Jim and I have taken this initiative on very aggressively. It's only in X number of stores. In those stores, the traffic is the traffic generates 13% more traffic in those stores. It's an exciting number. We're moving prudently, but Thank you.
Our next question
is from the
line of Janet
Kloppenburg of
Jacobs. Thank you. Our next question is from the line of Janet Kloppenburg of Jacobs, Gener and Kent. Please state your question.
It's JJK Research. Hi everybody. Congratulations to you, Jim. I'm really happy for you.
Thank you, Janice.
I wanted to ask Roger a couple of questions.
Only one. Hi,
Rod. The shift away I'm sensing a shift away from classics for the brand and I'd like you to talk a little bit about that. There's obviously more fashion on the women's side. I don't see as much of it on the men's side. I'm wondering if you could just talk to us a little bit about your positioning and what you'd like to achieve?
And if the customer understands that perhaps American Eagle is no longer as classic as they used to be? And I'm also wondering if you could talk about the men's business.
There's been weakness there recently. And I'm
wondering if you've seen that improve. Categories are giving you the challenges to prevent the comp from being positive? Thanks so
much. Let me see if I can address your some of your questions.
Okay.
First, the goods are turning faster this year than last year,
but we own considerably less units.
You see the inventory than last year. We we will be getting back into things we know about. And when I think when you go into the store on April 17 and you look at the set, you should call me and tell me what you think.
Okay.
I think it's a very strong set. And that talks to the whole element of, yes, we're a preppy store, but we're a preppy store with all of the fashion elements of the time. And I think when you see this set, you will not see any lacking as it relates to the fashion side of the business. On the men's side, we did it to ourselves. We ran the products.
We just didn't have enough to get to them. We had to pre of our men's product. We just didn't have enough to give to them. We are the preeminent number one brand in this space in menswear.
Our next question is from the line of Randy Konik of Jefferies and Company.
Please go
ahead with your question.
First question, Jim, you talked about I think 65 to 100 store closures 2012, 2013. Is that cumulative or is that per year? And
what do
you see as the right size for the American Eagle fleet of stores in the U. S? And then just lastly for Joan, does the EPS outlook for 2011, does that include share buyback? If so, how much? And then I guess on the comp guidance of the low single digit positive comp expectation, how are you thinking about the composition of AUR versus transactions as we progress through the year on that comp assumption?
Thanks.
The closing number is, Randy, is cumulative. I think that the portfolio for the American Eagle brand based on the demographics that we attract is I'd be very comfortable with somewhere around 900 stores in that range.
Randy, can you repeat your question for me please on the EPS outlook?
Randy has lots to keep question queue.
Okay. The AUR question that you had Randy related to 20 11, we expect AUR to increase over the course of the year basically due to mix and some of the selective price increasing, but largely due to mix and we'll see that throughout
the year. Thank you. Our next question is coming from Darcy Leichner of Harris and Company. Please go ahead with your question.
Thanks and good morning everyone. Congratulations to Jim, but no relaxing just yet. You're still there. Definitely not.
This team won't allow it unfortunately as much as I
would like to. Just a couple of questions on the remodels. Obviously, you're doing a lot of those and it does have an impact on performance. How many of those are going to be expansions? And then for Roger, I saw the expanded accessories assortment in Garden State.
It looks great. But just wondered if you could give us a little bit more clues as to how many stores it's in now and how many you'd expect to have it in by holiday? And then lastly, just another question, a little bit more color on knits. And you talked about wovens, you didn't have enough for the spring season. Is the knits category still dominant?
Will wovens carry the day? And when do you think you'll feel comfortable with where you are on the knit side?
Okay. On the remodels, Darcy, the majority of them are not expanded based on they're from an era where Roger and I mutually agreed that we would go to larger stores. So that when I came here 11 years ago, these are the stores that were in year 2 of a 10 year lease. And so they're pretty much right sized. So I'd say you have to use the eighty-twenty rule, 80% are not expanded, but they are updated and the other 20% have modest expansion based on that they're undersized and or they're in markets where we deem to be undersized and we want to take on a little bit of a larger footprint.
Great.
On the elements of categories, Dorothy, the
accessories that
you saw in Garden State, point in time. The response we see is quite extraordinary. It's going to move for summer into 40 stores and then into for holiday, we'll have it up and running in over 2 50 stores. As we move into next year, we're working Gemini strategically in terms of space and stores, how best to put it in so we can put it into the rest of the chain. Our bottoms business is pretty damn strong.
And I think go take a look at the set April 17 as it relates to knitwear.
Okay.
Thank you.
Thank you. Our next question is coming from the line of Sean Nunn of Piper Jaffray. Please state your question.
Hi. Thanks for taking my question. In terms of malls where you've seen some direct competitors exit at the end of last year, have you seen any improvement in your business ahead of the rest of your chain? And is there anything in particular you're doing to capture that traffic? And then secondly, the outlook and guidance that you provided for EPS, are you including any share repurchase in the Q1 or for the full year?
Thank you.
Yes. Where there has been some exiting of some competition that aligns to the American Eagle brand, we have seen continue if others fall out.
And thank you for repeating Randy's question, Sean. Yes.
It was
on my list as well.
It does not include share repurchase. It's on an average of roughly 198,000,000 shares for the year.
Okay. Thanks a lot. Best of luck.
Thank you.
Thank you. Our next question is from the line of Kimberly Greenberger of Morgan Stanley. Please go ahead with your question.
Great. Thank you. Good morning.
Good morning.
I'm wondering if you could help us understand the international opportunity. How do the economics flow through to American Eagle's P and L? Is it a mid to high single digit percentage of sales in those stores? Just any color you can offer there would be great. And then I'm hoping you can just update us on your progress with getting the Aerie stores to profitability.
Where are you there? And what are your goals here this year? And where are we on a sales per square foot basis? Thanks so much.
Well, the international right now is, as I stated, it's rather small. So it's not really a major contributor to the overall profitability. As we move forward and we expand our presence through both franchise operations as well as joint ventures, I would expect that if we would start to see an appreciable contribution in the year probably a bit in 2012, but definitely in 2013 and forward. We're right now we all of our these locations that I mentioned in the prepared statements
and the countries that
I mentioned are all countries that I mentioned are all franchise operations. And we are now looking at a number of countries where we're going to be going at probably with a joint venture, which has a little more risk built in, but it also has a higher ROI. And so the more of those we get into and if we're successful and I would hope we would be, international will be a tremendous contributor to profitability at American Eagle as well as expanding the brand presence throughout the world. And as Roger mentioned, also I think it will enhance our overall direct to consumer business and vice versa.
And then Kimberly, Aerie as a brand in 2010 was profitable. We've had some stores that showed a good improvement in profitability in 10. For 2011, we expect the store group group to be profitable and demonstrate 4 wall profitability, which then would obviously drive accretion for 2011. We think that the brand is making nice progress and improved year over year in 2010 and we expect to see the same improvement in 2011. And interesting to Roger's comments, the brand is has continued to evolve.
It's established itself as a lifestyle and found with the foundation of intimates. So there's a lot of promise there.
Thank you so much.
Thank you. Our next question is from the line of Laura Champine of Cowen and Company. Please state your question.
Good morning, guys and congratulations on your retirement, Jim.
Thank you, Laura.
My question, to the extent that you can comment now, how much do you think your AUR has to increase in the back half of the year to fully pass on your cost pressures? And if you can go back through your history, if there's been a period of similar cost inflation, can you talk about what you learned then about elasticity of demand and how that's influencing your unit plan for the back half of the year?
Laura, we see the AUR increasing in the back half of the year as I mentioned earlier. However, we do not expect that to offset the inflationary costs on its own in terms of the product costs. We are doing other things including selective price increases, which is reflected there, but other things within our inventory management, we're reducing markdowns, we're with our allocation tools. And as Roger mentioned, buying closer to need and buying the things that we know about, which enables us to chase and turn our inventory faster. The other thing, obviously, we're also doing and it's reflected in our guidance is our cost savings initiatives.
And we're relying on those three levers to enable us to deliver that flat outlook. And Roger, can you comment on earlier years?
Well, this is the I've been in this business as you all know a long, long time. And each year, every time there was going to be cost increases, I quite didn't believe it and it never really happened, I must tell you. This is the first time that the raw commodity goods, take
raw commodity goods, take cotton that was a year
and a half ago, dollars 0.60 a pound and now we're talking about over $2 a pound and think about the weight of a denim jean quite frankly. So the costs are going up. This is a great brand and we've tested raising prices in some instances $5 and in the right items, the customer responds as though there was no price increase. On other items, that's not the case. So we have
to be very careful where we can
do it, but there's no question that the costs are going up for everyone in the business. And I think relatively, we're pretty well positioned in terms of the volume of the country and the competition.
Okay, Rob. We'll take one more question.
Thank you. That question is coming from the line of Richard Jaffe of Stifel Nicolaus. Please go ahead with your question.
Thanks very much guys. And really just a follow-up on the price increases and units planned for inventory. Looking forward to fall obviously your inventory is
going to be bought with dollars.
How do you think inventory is going to be bought with dollars. How do you think that skewing or reducing the number of units and particularly with your conservative outlook for inventory and how that's going to play out in terms of average unit retail and the inventory and comp guidance?
Clearly, at this time, we're positioning Q3, Richard. So we would expect units to be down in the 3rd quarter.
And on a percentage basis?
We're still working through and we're basically through July August. So it would be premature to really give percentages at this time.
Okay. Thank you. Okay. That concludes our call today. Our first quarter announcement is scheduled for Wednesday, May 25.
Thanks for your participation.