Greetings, and welcome to the American Eagle Outfitters Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms.
Judy Meehan. Thank you, ma'am. Please go ahead.
Good morning, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer Jen Foyle, President, Executive and Creative Director for AE and Aerie Michael Rimpel, Chief Operating Officer and Mike Mathias, Chief Financial Officer. Before we begin today's call, I need to remind you that we will make certain forward looking statements. These statements are based upon information that represents The results actually realized may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward looking statements whether as a result of new information, future events or otherwise except as required by law.
Also, please note that during this call and in the accompanying press release, certain financial metrics are presented on both a GAAP and non GAAP adjusted basis. Reconciliation of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website ataeoinc.com in the Investor Relations section. Here you can also find the 2nd quarter investor presentation. As a note, our Q2 fiscal 2021 results are primarily compared to Q2 fiscal 2020 with comparisons to Q2 fiscal 2019 included where applicable. And now, I'll turn the call over to Jay.
Thank you, Judy, and good morning, everyone. I'm very proud to announce a record second quarter Fueled by strong customer demand for our products and brands. Financial results exceeded our expectations. Revenue increased 35% over last year. On a comparable basis, revenue increased 19% to 2019.
Sales of $1,200,000,000 and profits of $168,000,000 were the highest in our history. With our renewed focus entering this year, we are running the business better than ever across the board. As I said in January, we have the best talent in the industry and these results are clear evidence of that. So I'd like to start by thanking the entire AEO family for this significant accomplishment. Your passion, talent and commitment are taking our brand and company to new heights.
As I also said at our January Investor Meeting, we are on offense, emerging from 2020 with strength and focus. Our real power, real growth plan is our guiding light. I'm very pleased that we are making swift progress on our pillars, putting us ahead of Schedule on our financial targets. Today, the team will take you through the details of our performance, but I'd like to start with a few highlights. Aerie just continues to deliver exceptional multiyear growth.
As a brand is scaling, we are seeing significant profits flow through. This quarter was one more proof point of the excitement behind this brand. I couldn't be more optimistic about the potential ahead As we make our way to the next $1,000,000,000 in revenue. American Eagle is simply proving to be a powerful brand we always knew it was. Its dominant market position, combined with a fresh focus on inventory management, have resulted in the best margins and profits in years.
Under Jen's leadership, we energized product and marketing are yielding results and the timing couldn't be better. As the number one jeans brand, We are well positioned to capitalize on strong demand fueled by emerging trends. Across channels, stores and digitals are firing on all cylinders and driving meaningful profitability. Our multiyear investment to improve our customer shopping experience and enhance our supply chain are delivering strong returns. We're gaining new customers and the relaunch of our loyalty program has been a success.
Across operations, we are creating efficiencies, Increasing our speed and agility. The supply chain delivered great results even in the face of headwinds. While we made great progress, we are just hitting our stride. I see so much opportunity for us to generate incremental value moving forward. Our focus on ROI is also evident in the Q2.
We drove incredible margin recovery And cash flow. Our balance sheet is healthy and we're operating from a position of financial strength. I'm pleased that in June, we raised our quarterly cash dividend By 31%, reflecting our confidence in the strength and sustainability of future cash flow. Everything we do at AEO is done with purpose. We run our day to day business in keeping with our values to build a better world.
To that end, we are making great progress on creating more sustainable products. This year, we have more than doubled the number of our most sustainable real good styles across all merchandise categories, wider energy reduction and responsible sourcing remains top priorities. I'm extremely pleased by recent recognition from statantisemitism.org for a dedication to combat racism By creating inclusive and diverse corporate culture. This is something we strive for every day through innovative associate programs Designed to build a collaborative environment. This spring, we helped raise over $1,700,000 for important causes, including Bring Change to Mind And it gets better.
2 organizations are making the impact to uplift use and support mental health. I am really proud of all the work we are doing to strengthen belonging within our company and our communities. AEO's top talent is the keystone of our great company. Last month, AEO was named to Fast Companies Best Places to Work for Innovators, a distinction that recognizes our deep commitment to encouraging innovation across the organization. As the pandemic continues, our top priority is to keep our people safe.
Our leading health and safety measures remain in place across all facilities. We have consistent communication support and education for our associates and strongly encourage vaccinations. Before I turn it to Jen, I want to reiterate how pleased I am with our performance year to date and how excited I am for what's to come. We continue to execute well across all areas of the company. Although the current operating environment is presenting challenges from the ongoing pandemic The supply chain disruption, there's a lot within our control.
I'm very pleased with current business trends. We continue to see strong demand for our brands. The macro backdrop is favorable, consumers are spending and new fashion trends are a positive. We are focused on leveraging the agility we gained last year and the strength of our capabilities delivered to our customers and post a strong second half. With all this in mind, I am confident in our ability to achieve operating income of $600,000,000 this year.
With that, I'll turn the call over to Chad.
Thank you, Jay, and good morning. Wow, what a great quarter. Aerie and AE are 2 of the biggest brands in the market and are delivering truly exceptional results. We are making incredible Towards the goals we laid out in January, in fact, well ahead of my expectations. We are attracting new customers and they are spending more than ever, and I'm happy to see those trends carry into the Q3.
Let me start with Aerie. Our leading brand platform combined with product That continues to delight and excite our customers is delivering strong, consistent performance. Revenue in the 2nd quarter rose 34% On top of 32% growth last year, I'm proud to say this marked our 27th consecutive quarter of double digit growth. Sales metrics were very healthy. Strong demand led to significantly higher full price sales and we strategically removed promotions.
We are also mixing into higher ticket with higher margin items. I'm pleased to report broad based strength across all product categories, which were all up in the double digits. Core intimates, braless and apparel and swimwear saw strong demand. We continue to gain meaningful market share in swimwear as Aerie is becoming a true destination in the category. In May, we launched our Love the Swim You're In TikTok campaign highlighting all the ways to rock your Aerie swim.
The content was extremely well received, driving incremental visits and strong conversion. Aerie Signature bralettes and leggings are showing incredible growth. I'm also very pleased by the success of our offline Activewear brand, which continues to gain traction. Year to date, Ares customer file has expanded over 20%. Existing customers are transacting more frequently and spending more.
On the marketing front, we continue to focus on giving our customers their own platform in new and innovative ways. We just launched our Real Voices campaign, amplifying
the love
of our brand and product through our customers' own stories. The campaign has already generated a ton of buzz, generating close to 1,000,000,000 impressions in the 1st week, Bringing the AerieReal movement to more people than ever before. Market Expansion is progressing with 16 new stores across the U. S. And Mexico and our first store in Hong Kong.
As Mike will review, we look forward to further growth As we better penetrate existing markets and expand into new ones. The profit unlock from Ares growth has been explosive. I am so proud of what this team has accomplished. Momentum has continued into the fall season as customers embrace our amazing brand And cozy comfy collection. I'm highly encouraged by our results and excited for our upcoming season.
We remain focused on driving consistent double digit growth and improving profit flow through. Now, onto American Eagle. I'm absolutely thrilled with the progress we are making. 2nd quarter results clearly demonstrate the growth and value creation we are looking to unlock. Sales rose 35% compared to 2020 and demand was positive versus 2019.
Brand and product updates along with a laser focus on inventory optimization and promotional discipline drove strong AUR growth and significant merchandise margin expansion. Operating profit more than tripled and was up over 30% to 2019. We are running the business with a clear agenda to true up brand profitability, excite our customers and seek further growth. While results to date have been tremendous, we are still early on this journey. AE's position as the denim destination could not be stronger.
Our jeans collections continue to deliver great results across genders. We believe the current trends and shifts in silhouette Will be a tremendous win for the AE business. In the quarter, our women's business reached new highs led by ongoing strength in bottoms Across both fashion and comfort silhouettes, growth in
the men's business was also strong.
Our focus Great outfitting with updated fits and fabrics are certainly resonating. Together, new imagery and messaging, AE remains The number one jean brand within our demographic and the number one women's brand across all ages. It is clear that our customers are choosing 80's new back to school campaign featuring some of the biggest cultural influencers of the moment, including Jay Stokes and Madison Bailey of Netflix's number one show Outer Banks and TikTok creator Madison Ray has already become the most organically viewed video in the history of our brand. We also launched our 1st digital clothing line on Bitmoji, which has I am excited about our fall and holiday collection. Our team has Had a lot of fun bringing this AE iconic heritage to life and I think our Customers are really going to love what we're doing.
Earlier this year, we welcomed Liz Brunemer, AE's new head of design, she has hit the ground running. The team is energized and I know we are better positioned than ever to Bringing into action and driving such strong progress in such a short period of time. There is a renewed excitement around AE And I think we are at the very beginning of a great new chapter. Thanks also to the Aerie team for being rock stars quarter in, quarter out. We have a great slate of talent between these two teams and I look forward to sharing the results of their amazing work with you in the quarters to come.
We demonstrate the power of our brands and Thanks to our outstanding team of associates and global partners, We were able to successfully navigate through a highly disrupted environment that we're running our business better than ever. Investments we've made to Our operations, technologies and overall capabilities are yielding material efficiencies And contributed to our record profit performance. Importantly, I believe these benefits are This spring, it was great to see customers return to stores selling across brands. We saw strength across formats at both our factory outlets and mainline stores Our stores team did a terrific job welcoming our customers back And fueling record high conversion. Digital demand also remains very strong, increasing 9% Following the 48% increase last year, this channel continues to expand to new heights in both revenue and Profitability as we leverage our multiyear investments.
Consolidated second quarter digital revenues are approximately $150,000,000 Longer term, we continue to believe that continually looking for new technologies to drive better engagement and connect customer shopping experiences across our channels. As consumers reestablish their shopping rhythm post pandemic, our business model is going to remain flexible in meeting them wherever and However, they choose to shop. For example, our mobile sales more than doubled in the quarter as we continue to enhance the customer experience. We're thrilled to see very strong customer data, especially as we head into our key back to school season. We have added over 1,500,000 new Customers across brands since this time last year and over 2,000,000 since 2019.
The relaunch of our loyalty program last summer has been extremely Customers in the loyalty program are spending more, they're staying longer and the average customer spend is up in the double digits. This speaks to the quality of our engagement, our product, our marketing and the technology enhancements we've made. And we still see opportunity for continual improvement, and we're planning to experiment with new and interesting ways To better engage with our customers and to build the loyalty program going forward. As I discussed back in January, transforming our Supply chain is a major priority and the past 6 months have truly underscored the importance of strong partnerships as well as leading capabilities. We are continuing to prioritize investments in these areas.
During the Q2, our product arrived without major delays And we were able to chase into high demand items. From a logistics standpoint, our hub and spoke model with regional inventory positioning And regional fulfillment is working. It's part of what's fueling efficiencies, allowing us to drive substantially greater sales and margin on far less inventory. We are delivering product to customers faster and despite industry wide cost increases, Our delivery expense is leveraged as a percent of sales. Needless to say, I believe our supply chain platform truly is a competitive advantage.
The investments we've made to date are paying off. As global supply chains continue to be disrupted, this is creating opportunities for us to become even faster, more agile and more efficient. On that note, I'm excited to share that in the quarter, we acquired Airtara, an innovative logistics provider. With this acquisition, we are also excited to welcome an experienced leadership team with deep expertise in logistics And a shared passion for rethinking the status quo. We will run Air Terra independently as it supports AEO's business as well as provide services to other retailers.
On the product side, we feel good about our ability to maintain strong margins. Investments in our brands and products over the past several years are supporting our ability to successfully compete in higher ticket products. In conjunction with strong inventory management, we have confidence in our ability to sustain high margins And offset inflationary closures are leading to longer delivery times and higher transportation costs. As Jay touched on, we're very focused on the things that are within our control. We're working closely with our partners and we're moving production wherever possible to minimize disruption.
Of course, we also will leverage the significant structural improvements we've made over the past several years, and we believe We're going to be well positioned during the second half of the year. In closing, I'm very pleased with our performance year to date. Our results are outstanding and our teams are executing really well in all sorts of setting us up With that, I'm going to turn the call over to Mike.
Thanks, Michael. Good morning, everyone. I'm pleased to report another record quarter, bringing our year to date financial results to an all time high. Our brands continue to demonstrate incredible momentum, driving substantial profit to the bottom line. As we navigate through macro shifts related to COVID, our Seth has been fueled by the initiatives outlined in our Real Power, Real Growth plan back in January.
Strong focus on our brands and product innovation, Inventory and gross margin optimization and real estate and supply chain initiatives are 2nd quarter revenue of $1,200,000,000 Operating income of $168,000,000 and adjusted EPS of $0.60 marked 2nd quarter records for the company. The operating margin of 14.1 percent was our highest in 13 years. We also saw nice growth across the business compared to the pre pandemic 2019 period. Consolidated 2nd quarter net revenue increased 35% versus Q2 2020 and on a comparable basis increased 19% to 2019. The reported revenue increase of 15% included a $40,000,000 benefit revenue in 2019 from a change in our Japan license agreement.
Across brands, sales metrics were favorable. Our Average unit retail was up over 20% led by overall strong demand, higher full price sales and fewer promotions. This fueled a double digit increase in our average transaction value. As customers returned to stores, we saw a material increase in traffic trends, Which drove a 73% increase in store revenue versus This is last year. Even with the meaningful shift, digital demand increased 9%, curdling last year's very strong online demand growth of 48%.
Note that Q2 reported digital revenue declined 5% as we lapped elevated sales due to a timing shift in shipments from the Q1 into the Q2 last year. Our digital platform combined with our strong store footprint is a competitive advantage and the investments we've made continue to pay off. As Michael pointed out, logistics are a key differentiator and give us the ability to more effectively manage our business while generating meaningful efficiencies. From a brand standpoint, Aerie's multiyear growth trajectory remains strong with revenue rising 34% from Q2 2020 And almost 80% from Q2 2019. Ares operating profit rose 132% compared to Q2 2020 And operating margin expanded to 21%.
As I've consistently highlighted, Aerie is now at an inflection point in its growth story with Strong sales performance translating into numbers around it. 2nd quarter operating profit of $71,000,000 more than doubled the $30,000,000 we realized in 2020, Q2 of 2019. Moving to the American Eagle Brand performance, healthy demand, low promotions and inventory optimization drove another strong result across both revenue and profitability. From 2020 and on a comparable basis an increase of 5% from 20.19 Including the 2019 benefit from the change in our Japan license agreement. AE's operating profit jumped 234% from Q2 2020, With margins building to 23.5%, we have a significant margin opportunity for I'm proud of the transformation we have driven and how we are managing the business today.
We have redefined what success means for the AE brand Clear direction and focus on consistent profit and cash generation. This is driving improved sales trends as tighter inventory control And greater emphasis on the best selling SKUs. Work here continues and we see additional opportunities. Total consolidated AEO gross profit dollars were up 89% compared to the Q2 of 2020 and gross margin came in at a very healthy 42.1%. Inventory optimization and refreshed product assortments are supporting promotional discipline and higher full price selling.
This is driving healthy merchandise margin expansion. Rent leveraged significantly as a result of negotiated savings, store closures and benefits from impairments. As Michael discussed earlier, delivery also leveraged reflecting efficiencies enabled by our distribution and fulfillment nodes. As a result of strong sales, we saw SG and A leverage 70 basis points versus Q2 2020. The dollar increase of $70,000,000 was due primarily to the reopening of our We also saw increased advertising as well as incentive costs due to strong profit growth.
Record operating income of 168,000,000 reflected a 14.1 percent operating margin, our highest second quarter rate since 2008. Adjusted EPS was $0.60 Our diluted share count was 209,000,000 and included 36,000,000 shares of unrealized dilution associated with our convertible notes. Ending inventory was up 20% compared to a 21% decline last year. American Eagle inventory was up 10% and Aerie was up 16% compared to Q2 2020 as we positioned inventory below current demand levels As part of our ongoing efforts to optimize inventory value. As Michael mentioned, we feel confident in our ability to navigate ongoing supply chain challenges I am very pleased with our liquidity and the health of our balance sheet.
We ended the quarter with $824,000,000 in cash and short term investments. This compares to $899,000,000 in Q2 of 2020, which included $200,000,000 from our revolving credit facility that we subsequently repaid in the Q3 of 20 Capital expenditures totaled $49,000,000 in the quarter $86,000,000 year to date. For 2021, we now expect capital expenditures to be at the low end of our previously communicated $250,000,000 to $275,000,000 guidance range, Reflecting cost savings on our planned projects. With regards to our real estate strategy, as I mentioned last quarter, with 450 leases either come to term We're warranting action in some way this year. We have significant flexibility to manage our store fleet to support our revenue and profit agenda.
We are making steady progress towards our long term goal of rightsizing A. E. Store footprint. For Aerie, we are focused on markets with the greatest opportunity And are on track with our store opening schedule. Focused investments in our international business are also helping us gain traction in key markets where we see compelling long term growth Mexico is a good example of this, where our omni channel selling strategy is driving healthy growth and profitability in the market.
All in all, I couldn't be more pleased with our performance year to date. As we look ahead into the back half of the year, supply chain disruption is Creating some challenges and uncertainties. We're putting our customers first and prioritizing product availability. While there will be incremental transportation costs, we believe we can offset a significant portion. Demand for our brands is healthy, our inventory optimization is enabling promotional discipline, And our supply chain transformation is creating cost efficiencies.
Based on our record first half results and the current strength in the business, We feel confident in our ability to achieve operating profit of $600,000,000 this fiscal year. This is well ahead of our financial targets that we presented back in January. We continue to execute on our real power, real growth value creation plan with speed and confidence. Our results year to date are a clear proof point that we are focused on the right initiatives, positioning us well to drive continued strong financial results and Returns to shareholders. With that, I'll open it up for questions.
Thank you. The floor is now open for questions. In the interest of time, we do ask that you please limit yourself to one question and one follow-up. Our first question is coming from Oliver Chen of Cowen. Please go ahead.
Hi, thank you.
Good morning. Revenue growth was really solid, but it was below Somewhat elevated street expectations. What are your thoughts on inventory availability across both brands and Were there pockets where you may not have had enough? And how are you thinking about the ability to chase between back to school and holiday Depending on trends. Another follow-up on Air Terra.
It sounds very innovative. Would love your rationale for Purchasing that in terms of timing and how it may impact your financial algorithm longer term? Thank you.
Thanks, Oliver. It's Mike. I'll take the first part of that. I like your description of maybe somewhat elevated revenue, and I think there's a couple of reasons for that. One, I know everyone is basing things on 2019, but there's a couple of points there of back to school shift of the July business and tax Free events shifting out of July into August, so I think that's us and others, I think felt that in July.
Our business definitely accelerated into May June and in the back half of July I think you can attribute it to a back to school shift. From an inventory perspective, we are really happy with where we're positioned right now in the 3rd quarter. Pleased with what we saw in August with inventory being positioned well, and we think we're in a good position for the rest of the quarter and the rest of the year. And I'll probably turn that
So look, clearly, there's a lot of challenges in supply chain. There's port slowdowns. We have some factories that are closed. Transportation is less predictable. Our team has done a tremendous job.
I mean, supply chain transformation has been a huge focus for us. And we're very focused on controlling everything that we can and there's a lot that's within our control. So we're moving freight faster than ever. We've added carriers. We've secured our capacity.
We've moved production out of closed factories wherever possible. And we've diversified the ports we're coming into. And domestically, we've sped up our supply chain by almost a week and a half versus how it was previously and versus how a lot of our competition is. Our goods are coming in. They're going directly to markets and out to stores or to customers.
Our supply chain speed is better than ever. As far as Chase, We really booked a lot of holiday product early based on the insights that we had From spring, summer and the test that we did for holiday, and we feel good about the assortment that's coming in. So There is volatility, but we're managing through it. We expect that we're going to get all the freight that we want. We're going to Have enough product to have a robust holiday season and we're still chasing product.
So we chased product as late as last week and we expect
that we're going to get it for holiday. So
there is variability, but we're managing And we feel like we're set up for a great season. As far as Airtara, we're extremely excited to acquire Airtara and to welcome their terrific management team into the AE family. Akera, if you think about it, it's really a relatively small purchase That has huge potential for us. It's a company that's focused on middle mile and it's really focused on bringing economies of scale and the benefits of Speed and costing and diversity to shippers of all sizes. And previously, these benefits were only available to the largest shippers, to the Amazon's or Target or Walmart.
And we looked at it as a company we wanted to use for the American Eagle Business. And as we looked further, we thought it was a great acquisition opportunity. So it completely fits with our strategy of leveraging scale and innovation to Help us manage cost and improve service, and, they've shipped their first few packages for other customers and for us. And quite honestly, we're blown away by the amount of interest we've had in this business. So they have a tremendous pipeline of brands and retailers, large small that all want to use Air Terra.
The more people that get on, it helps to build the Air Terra business As well as support the American Eagle business providing economies of scale and transportation benefits for us. And we think this is a big idea, something that we're going to be talking about in the coming weeks quarters, and we expect that it's going to be Incremental to the profitability of the company.
Thank you very much. Best regards.
Sure. Thanks.
Thank you. Our next question is coming from Paul Lejuez of Citi. Please go ahead.
Hi, this is Kelly Crego on for Paul. Thanks for taking our question. Thanks for The clarity on the shift with back to school, just curious if you could provide a little bit more detail on what you're seeing quarter to date from back to And then just secondly on the $600,000,000 in operating income this year, it's very impressive, but it does And by step down in EBIT margin expansion in the back half of the year versus the first half. So just curious if that's coming from play or Are you assuming a more promotional environment? Any color there would be helpful.
Thanks.
Hi, Kelly. It's Jen. And just let me know if everyone can hear me. Greetings from London, the UK. I'm over here.
So I hope everyone can hear me well. Look, we're really pleased with the results. Certainly, if you look into the back to School season. It's a Kayla, 2 stories. Last year, AE really delivered their new goods for September, and Aerie had a new delivery Starting with the launch of offline in July.
Now keep in mind all the shifts that are happening. Aerie, for instance, has more of a North East and Eastern Coast penetration. So they were impacted more by some of these shifts into August and certainly the later Labor Day. AE was really able to ride the storm. And from what I see in both brands, I see strength.
Look, American Eagle, We dominate in denim. I've never seen a better assortment and certainly I haven't seen a better team executing to a strategy that I think is top notch. Our denim looks Phenomenal. I just got out of a testing meeting last week, looking forward into the future. This is a team that doesn't stop and we look ahead.
We dominate in denim. We've certainly executed to the new trends and these are all tailwinds for us. We're currently driving new Fashion silhouettes in both men's and women's. And look, they're checking and we're going to get more aggressive there as we look ahead. I just saw the holiday review for Some of the new shoots in American Eagle and Aerie, it's very optimistic.
It's addressing what these customers want. And just moving on to Aerie, look, do I need to reiterate 27 exec semi consecutive quarters of double digit comps? I mean, Do the math, it's almost 7 years. I don't see a lot of retailers delivering comps like that. I mean, this team is firing on all And certainly, we were prepared for the back to school shift.
We have 2 deliveries this year versus 1 last year Because we knew that it was going to happen later and we wanted to delight our customers even more as we face the headwinds into September, Lots of newness coming in to help us get through that month. It's a big month. AE too has a great strong delivery, but I think this strategy was really Smart for the Aerie team and how we approached it and the goods are checking. If I reflect back into Q2, all of our key categories gained market share in Aerie. The offline business continues to thrive in a very competitive environment out there.
I think we stand out. Offline is A very unique approach to athletic apparel, is the innovation there and certainly the store experience is winning And all categories in the area are really checking for us as we speak, especially on the bralette and leggings side of the business. And Look, we still have to get through Q3. We're always going to remain humble and hungry. We were aggressive to getting goods here for holiday And more to come.
We have a few more months here to get through the balance of the year. But look, I like that $600,000,000 number. It's far ahead of our what we told The Street. And here we are to deliver it. So that's what we're going to do.
Yes. Kelly, just to expand on the $600,000,000 totally freight related, nothing to do with the slowdown in demand, nothing to do with anything else we're executing in terms of Gross margin expansion and operating rate expansion, likely would have been higher if not for the freight and transportation costs that we're Embedding into the back half of the year here. Look, we're being aggressive. We're going to incur these costs to make sure that our customer doesn't feel any difference during holiday to their We believe it's definitely short term and will be coming out in January with our longer with what we think will be a significant increase to our longer term profit targets.
Thank you. Our next question is coming from Jay Sole of UBS. Please go ahead.
Great. Thank you so much. Maybe Jen, can you just talk a little bit about Aerie and some of the different New category opportunities, you mentioned offline, but just can you give us a little elaborate a little bit more about where you're seeing the growth, whether it's obviously the core of Underwear or just beyond? Thank you.
Yes, sure. Like I mentioned
Can you hear me now? Sorry, I had a little technical difficulty. Hi, Jay. Yeah, for sure. As I mentioned, all categories in Q2, we saw We saw gains in every category.
In fact, all categories delivering on double digit comps and growth. So I'm really pleased with those results. Certainly, bralettes are a key category for us. And the good news is they're not only wearing them in, they're wearing them out now. We're definitely addressing that trend as we look forward.
We've continued to pull back on our promotional cadence in undies, and we're seeing strong results there. Fleece and Sweats, especially when you look at a matching set, that's still trending for us. So we're going to continue to address that trend. And look, leggings are our core in the offline business. And keep in mind, we still sell that product Within Aerie, as we grow offline, we will start to sort of separate the results.
But right now, Offline leggings are sold underneath the area umbrella and they're definitely our number one category or up there, after intimates. So we could not be more thrilled with that business and we're going to continue to dominate there and innovate there. We have some really great ideas for the future and This team continues to strategize around the offline business and how again we can differentiate because that will be key To really be top of mind for our customers in the future. So, the trends are looking solid. And, again, you know, For business, I have to continually drive comp 7 years, almost double digit Year after year, we have to ride with the change, right?
So, I know everyone's very curious about an outside trend that's happening and people going out again. Look, we've managed to ride those storms as well in Aerie, where we dominate on some of our other categories. Swim for sure It's a go to destination for Aerie, and I've seen the assortments for spring and summer. They are strong, and, you know, that's a go to. That's almost like What are girls wearing out in the spring summer season?
So again, we're going to continue to navigate And drive what's working in our business for the future and remain nimble.
Got it. Thank you so much.
Thank you. Our next question is coming from Marni Shapiro of Retail Tracker. Please go ahead.
Hey, guys. Congrats on the, it sounds like Great Denim start to back to school. Jerry, could we talk a little bit about denim? You guys are now, I guess depending on the category, the number 1 or number 2 denim player. I guess, how do you think about growing that business further from where it is with this Erika, you're working with 3rd parties.
Would you consider wholesale or white label of your denim business to support a 3rd party? Would you Consider a premium line or premium brand under the AEO Inc. Banner. I'm just curious what your thought is because You're clearly a very powerful player in denim. So strategy wise, how do you take that to the next level beyond just American Eagle?
As we always said, and the statistics show it, we are the number one brand between the 15 to 25 year old. We are the number one brand for ladies denim in the country. If you look at our lineup, you'll see that we keep introducing new and new washes, new and new finishes And new and new higher price point goods too and better quality. It's a little premature, but we'll have Probably announcement in a few weeks about a new denim brand. Because you asked the question, we are working on the new denim concept that will be introduced in the next 3 weeks.
That's very exciting. It seems like the right thing given the denim platform.
That's right. But this is something that we've been working on For the last 12 months, we're about to open our first test stores in the next 30 days.
Great. Congratulations. Looking forward to seeing that.
Yes. And the good news about our denim is We have plenty of denim to sell. We don't see any problems for the fall for getting all the denim. All the factories produced our denim are running. We're getting shipments on a regular basis.
We have plenty of air capacity. One thing we've done In the last 2 years, the internal model of this company has been logistics, logistics, logistics. We've invested in our logistics system as Mike was talking about. We have other investments that have been made that are also being made As we're talking, we think we put together a world class, not a good class. You know, Michael didn't go into people's backgrounds.
We think we have some of the best logistics people in the United States, period. And what we have accomplished, what's the most amazing thing Is our cost of getting the goods to our stores in the last several months Has been less than it was a year ago, 2 years ago. I don't know another retailer that can make that statement that their cost of getting the goods to their stores It's less than it was before. With all the current costs today and all the cost increase, the day we're bringing for less cost is an amazing accomplishment And our logistics team is world class and have done that. So we're very proud of that.
We've done things that other retailers haven't done because we know the future This business is going to be not just the marketing and the merchandising and running great stores, it's going to be how you operate The whole flow. And if you don't do it efficiently, you'll get beat. The pandemic is just speeding up everything. A lot of these things that we put in were in work before the pandemic started, they speeded it up. And at the end of the day, If you don't win in the handling of your merchandise and your costs are defeated by everybody and we realize that we have to be able Control as much as we can and we have to be the best of it.
And one thing I'm very proud of is that we put together great teams, whether it be marketing, There will be our merchandise team, there will be our design team, there will be store operations and definitely our logistics team. We're very proud of it. Another thing we're very proud of is we're able to attract great talent to the company. Fast Company just Just rated us one of the 25 Best Companies I Think Work For Life Innovation. So we're able to attract great people.
So between our human resource area An old company, we have great strides being made everywhere and really a great culture And great morale. Everybody in this company is focused and one thing we've done is we've been Following our strategic plan, we don't get off track and we stay focused, focused, focused. And I'm very proud of that.
That's fantastic. And maybe just to follow-up on that conversation about your logistics with the Adterra acquisition. Does that allow you guys to Step up your buy online, pick up in store and that element of the business so you could even further integrate your online business with your in stores business. Is that part of the strategy here and to make that more efficient?
Yes, it is. This past year, you talked about our notes. A couple of years ago, they came with the concept to show me what they thought the future should look like and all of a sudden the pandemic started and within 4 weeks we had 5 or more reestablished. It's an amazing job we did a year ago. This will give us the ability In many markets, they will get same day delivery to the stores, same day delivery to the customers, being able to respond right away.
We're testing technology that we're working out right
now that in our stores, That we're working out right now that in our stores, we can follow every item. If something's missing, We'll know immediately and be able to fill it the same day. So it's always being 100% in stock level.
Your next question is coming from Matthew Boss of JPMorgan. Please go ahead.
Great, thanks. So maybe on gross margin, so both first and second quarter, more than 500 basis points above 2019. Is there anything structurally preventing Similar performance in the Q3. And Mike, do you view this as a baseline for gross margin for which to build on as we think about this year? Were there any areas of give back for us to consider as we think about gross margin beyond this year?
Thanks, Matt. I'll answer the second part first. Yes, I think you're describing it accurately. This is a new baseline to start from. So I think if you go back to our target for 10% operating margin, we talked about gross margin being in the high 30s, right?
And I think we're Exceeding those expectations. So I think, yes, as we talk about our targets again in January and probably what our new operating rate target will Which will definitely be higher than 10%, probably more like the mid to low to mid Teams operating rate, I think the new gross margin baseline is this 40% now on an annual basis. So yes, we've exceeded that the 1st couple of quarters. We don't see any structural reasons why this is a 1 quarter or 2 quarter and done phenomenon. It's going to be something that is the new baseline going forward.
Great. And then maybe just a follow-up on the top line. As we think about Back to school timing and the shifts that you mentioned, just to be clear and relative maybe to the second quarter, which And then maybe just any color on the Q3, meaning sales growth maybe relative to mid teens growth that you saw in 2nd quarter. Any way to help on August Q3?
Yes. I mean, I'll hit the first half of the year again. So I think we were up 17% In Q1 2019, if you normalize for that Tsumakin payment, if you're comparing to 2019, for the Q2, we're actually up 19%. So we actually did pick up a few points from Q1 to Q2. The bigger point I'll make though is that if you go back in history and Yes, the revenue our revenue number in 2019 was a record for the company.
But I think at that point, we weren't happy with the profit we were generating from that Revenue and that all goes back to unhealthy inventory levels, too many skews, too many choices. We bought revenue. So we are as much as we're looking at the same compared to 2019 you are, we're not focused on that because I think we are creating a new revenue baseline as well. And we are focused fully on profit generation, cash flow generation on the revenue we're seeing. We're focused on flowing through these phenomenal area growth That will be a continuation that will be baked into our targets we come back out within January.
So I guess to answer the August question, it's a little bit apples to oranges. We're very happy with what we saw in August. It's on path to what we're expecting. It's built into our guidance. And like I said earlier, the guidance would have been Without this incremental freight and transportation costs.
So we're focused on profit, we're focused on operating rate. Revenue is obviously part of that, but These maniacal compares to history that probably doesn't matter as much anymore is something we're not focused on as much.
Thank you. Our next question is coming from Dana Telsey of Telsey Advisory Group. Please go ahead.
Good morning, everyone. Jay, you mentioned logistics and the strength of logistics. Do you see other acquisitions Coming into the fold going forward, that will continue to enhance your logistics abilities and potentially even drive the operating margin higher. And then just lastly, as you think about the holiday season with the extension of back to school, how do you see the timing and planning for the cadence of holiday this year? Thank you.
Okay. To your first question, yes. About the acquisitions, yes.
And what kind of framework would you want there? What other qualities would be beneficial?
It's we are working on something. I can't go into details, But there'll be an announcement probably in the next couple of months.
Got it.
I mean, Dana, we're looking for everything we're doing is focused on Providing scale and speed and cost benefit and customer service benefit for the American Eagle Business. But clearly, there's a lot of opportunity with what's happening in supply chain today. There's a lot of disruption. But with that disruption creates a lot of opportunity. And like Jay was saying, it used to be that just if you had great brands and you had great products, you won.
In today's world, that's not the case. There's a bifurcation happening in retail where it's not just great brands, it's not just great But you need incredibly efficient, agile, fast operations. So Air Terra fits that mold. It's going to service the American Eagle business well. It's going to service other retailers well.
It's going to be a very successful Profitable company on its own and we are looking for other opportunities of companies that fit that mold.
Got it. And then the cadence of holiday, how you're thinking about it?
I can answer that if you want. Look, I think we keep on leaning on logistics here because I think it's mission critical on getting the goods where the customer Demand is in today's world, we're looking at countries thinking about shutting down again. We could go into a lock Again, those, God forbid. So again, the demand could change versus direct or in stores and That's what we're prepared to address, as a team. Where our customer's at, we're going to provide, the product for them.
Certainly with a little bit of a leadership back to school, I think we're going to feel a little bit of that, you know, as we move along month to month. And then, I would say though, I do think gifting could happen early again with all this in mind, similar to last year. So I think the team is ready to address
Yes, Jan. I'll also add something to Dana. We believe that this will be an earlier Christmas shopping and holiday shopping. What we believe is that from our standpoint, we'll have plenty of merchandise. We'll have a lot of great new merchandise to choose from, but we believe that there are going to be problems out there for other retailers.
We see there could be shortages of goods out there for all, not just for apparel, but you go out today, Anything you want to buy cars, you have a shortage of cars right now. You want to buy furniture, There's shortage of furniture out there. So anything you want to buy out there, there's shortages. You want to go build a house, it takes longer to build a house It costs you a lot more money. So for those people, those retailers who are able to get the merchandise on a timely basis, It's going to be a big opportunity and we feel we're in great position.
We're going to have great selection in our store And it's going to be exciting place to shop. It's going to be a great online experience. We're introducing to be the 1st introduced in the United It's live retailing on our app. It's being introduced right now. So we're very optimistic and we feel In a position as far as inventory is going to be, that it's going to be it's going to differentiate us from everybody and it's going to be a big opportunity and we're going to get more money For our goods because it's going to sell or that could be a promotional, which is good.
I think that you could Sell merchandise and get paid for your effort and give good value to the customer and give them great product. It's a win for everybody. And we'll have goods and that's the key. Having the right merchandise and having goods, we will have goods. When Michael was talking about logistics, we already have reserved airfreight That we've bought up.
So if there is excess air freight, we'll be selling it.
Thank you. Our next question is coming from Adrienne Yih of Barclays. Please go ahead.
Yes. Good morning. My question is, this is such a different company today versus 2 years ago, and I know you've gone through all the reasons why. But as we look at that sort of the early look toward the low to mid teen, I mean, we haven't seen those types of margins for pre-two 1000 and 8. And I'm just wondering, the last two quarters, you've come in sort of in line with the Street expectations.
And I'm wondering if the Street from our It needs to appreciate on a 2 year basis, 14% over 'nineteen, that's 7% for each year. How should we think about the Algorithm of top line growth, should it be mid to high single digits with low double digit EPS, growth, leverage growth to the bottom line. Because it really sounds like you are driving this business for quality sales at higher and higher profits. And then Mike, my second follow-up question Can you quantify in basis points the freight impact to 2Q? What's embedded for the second half?
And how much have you been able to offset that with AIR increases?
Thanks, Adrienne. I think you just told the story for me a bit. But yes, I think this is a different company, a different focus. We're not chasing revenue targets. We're very focused on I guess, what I could say is, if you think about The two brands we're looking at area to 30% plus CAGR continuously, AE is a modest growth.
We So a plus 5% increase to 2019 in the 2nd quarter, again, nonrelenting for that one time payment.
But Mike, You saw tremendous growth in margin dollars at the American Eagle side.
That's where I'm headed. So I think when I talk about 20 Baseline and the fact we drove a lot of unhealthy sales, it was the AE brand, it wasn't Ares. So we are we've changed the business model. We're operating differently. Inventory is healthy, Top line though, so to be honest with you, they hit a 5% over 2019 for the AE brand, but that is a new record again because 2019 was a record.
I'm actually ecstatic about the fact that we're driving similar to higher revenue with this income flow through that we're seeing. I mean, it's an amazing baseline that we're creating here. So for the go forward, I think we're looking at probably modest top line growth in AE, 30% plus CAGR and Aerie continuing and focus is to flow through on both The revenue from both brands. So when you think about operating margin go forward, I think we'll be coming out in January talking about And this is just round numbers, 40% gross margin, low to mid-twenty SG and A, 3 to 4 points of D and A and a new target that's in the low to mid teens for operating rate. And maybe exceeding that as we continue to optimize how we're flowing through, especially Ares revenue growth.
And we have some other growth We'll probably be telling too. We hit on Mexico a bit in our prepared remarks, and we think there's some other international opportunity that we can flow through at a very healthy rate as On the freight costs, Adrian, that's a moving target every day. We think we have in our guidance accounted for Everything we know to date, it could get better. So we're going to see how that comes to fruition. But As we've all been saying, our intent is we're going to be aggressive on getting our product here And making sure the customer does not feel any difference from us in holiday, and I think that can be a competitive advantage.
We all do. But it's a bit of a moving target, so it's hard for me to I'll give you the exact basis points. I'll just say it's embedded in our $600,000,000 for now and again could get better.
Great. Thank you very much and best of luck, sir.
Thank you.
Thank you. At this time, I would like to turn the floor back over to Mr. Schottenstein for closing comments.
Okay. Thank you. First of all, I want to say I'm very proud of the great team We've been able to assemble, whether it's in the marketing, whether it's in the merchandising, design, store operations, logistics side, We have world class players that we're able to track and still attract that type of caliber. So we're very excited about that. As we said earlier, we worked hard to make better product, get better selection to the customers And we can see it in the improvement of the performance, whether it be American Eagle and as Jen emphasized, 27 straight double digit comp Quarter increases for Aerie.
I don't know another retailer, if you go back in 7.5 years, almost 8 years, you could say Every quarter, a double digit comp growth and still going double digit comp growth. So and Have a new exciting brand like offline like the NRDU Snap 2 and to have that potential to grow like you're in. We're very excited about that. We're Very excited about the other brands that we'll talk later about whether it be Todd Snyder, whether it be Unsubscribe, whether it be the new denim concept, We see a lot of opportunities for us. And then the other thing is, we had our Investor Last January, we gave a 3 year strategy and little bit we realized when we gave that 3 year profit strategy That in the same year, we'd always be breaking the 3 year strategy.
It put this in the 3 years ahead We'll have another Investor Day probably next January where we'll reset the goal for the next 3 years We're very optimistic. And as we said, we're very well positioned for back to school. We like the way month of August started. We like the way September is starting. We're very excited for the second half of the year.
And we think that the systems that we have in place And what we have going on for us will differentiate us from everybody else. At the end of the day, we have to be different than everybody else. We have products that customer loves. We have great brands with great loyalty. We didn't talk about it.
We really will drive this back, but our strategy in marketing and the re launch of our loyalty program, we have the largest Enrollment of loyalty members that this company has ever seen in the last few months. So we're very optimistic about the second half. So we want to thank everyone for their support. And I guess tell you, this team is laser focused. And like Jen says, we're humble And we just know we got to keep driving and driving and keep the innovation, technologies And be able to put it all together and we push ourselves.
It's a great team we have. So thank you for all your support.
Ladies and gentlemen, thank you for your interest in American Eagle Outfitters. You may disconnect your lines at this time and enjoy the rest of your day.