Greetings. Welcome to the American Eagle Outfitters First Quarter 2021 Earnings Conference Call. Please note that this conference is being recorded. I will now hand it over to your host, Judy Meehan. You may begin.

Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer; Jen Foyle, President, Executive Creative Director for American Eagle and Aerie; Michael Rempell, 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 company's current expectations or beliefs. 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. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at aeo-inc.com, in the Investor Relations section. Here, you can also find the first quarter investor presentation. As a note, due to the significant impact COVID-19 had on fiscal 2020 financial results, our first quarter fiscal 2021 results are compared to the first quarter of fiscal 2019, which we believe is a more meaningful comparison. And now, I will turn the call over to Jay.

Good afternoon, and thanks for joining us today. I'm extremely pleased with the pace of our business and the outstanding financial performance in the first quarter. Even as we compare to the prepandemic 2019, our results are truly remarkable and validate the strength of our value creation plan. We exceeded expectations in essentially all areas of the business, giving us a strong start to the year. We hit record first quarter revenue of over $1 billion, and the highest first quarter operating income in our history of $133 million, which was up 170% from 2019. Importantly, we saw strength across both the American Eagle and Aerie brands. We ran an extremely healthy business with margins hitting the highest levels in many years. The actions we took in 2020, including our strategic growth pillars, combined with a favorable external environment, are having a very meaningful impact on our business. Starting with our first pillar, accelerating Aerie to $2 billion. This quarter provided even more evidence that Aerie is the most exciting brand in retail today. Our nearly 90% revenue growth, operating earnings rose well over 700%. Aerie is truly hitting its stride. We have increased digital penetration, expanded geographically and pushed new and explosive categories like OFFLINE, legging and additional apparel items. As Jen will review, we continue to gain new customers at a fast clip for spending more on our brand. At this pace, we expect to hit our $2 billion target faster than expected, fueling significant earnings growth. Second, reigniting AE. As I said back in January, American Eagle is a strong and highly profitable brand with significant opportunity for both growth and profit improvement. The first quarter demonstrated that potential. We are seeing a favorable response to our product and new marketing. While the June category continues to dominate, across the brand, we've hit high margin rates with promotions well contained. I'm very proud of the great progress under Jen's leadership. I know we are only at the beginning of realizing American Eagle's full potential. Next, customer-facing priorities delivered in the first quarter, fueled by our leading omni capabilities. Digital growth was terrific as momentum continued. We also saw an improvement in our store business as consumers are starting to get out more. Our loyalty relaunch is a home run and producing a stronger customer experience, positive margin contribution and higher ROI. The supply chain delivered great results even in the face of logistic headwinds. Deliveries were on time, and we were able to successfully chase into top-performing items. The multiyear investment we've made in these areas continue to pay off. Our fifth pillar, to strengthen ROI discipline, is clearly evident in our results. First quarter growth in our profitability is a testament to incredible collaboration across teams. We are not taking our eye off the ball and remain focused on ensuring strong financial management as a top priority. And lastly, ESG initiatives. I'll highlight our environmental goals where we continue to make great progress. We are reducing widely, utilizing more sustainable raw materials and reducing energy to ultimately achieve carbon neutrality in our own facilities by 2030. We know sustainability is important to our customer. It's important to us too. Pointing on our commitment to social responsibility and IND, this month, we awarded our first 15 rural trained scholarships for social justice. We are excited to support educational pursuits of our amazing associates who are actively driving antiracism, equality and social responsibility. Before I turn to Jen, clearly, 2021 is off to a great start. I'm so proud of the excellent execution across all areas of the company. The past several months truly validates my belief that we have more opportunity than at any time in the past. We have two of the best brands in the industry with significant momentum, and we have the right teams and leadership in place to achieve our goals. The macro environment is favorable with pent-up demand and new trends that play to our strength. At this pace, we expect to achieve our 2023 goal of $550 million in operating income way ahead of schedule.

Thanks, Jay, and good afternoon. I hope everyone is doing well. To say the least, we've had an incredible start to the year across both Aerie and American Eagle. There is clearly strong demand and momentum for our brands. Our strategies to expand into new categories, strengthening product and marketing and fuel our brand platform are having a meaningful impact on our business. It's truly gratifying to see strong sales, customer growth, and a very high level of profit flow-through. Let me begin with Aerie. I am thrilled by the incredible excitement and energy for Aerie and our merchandise collection. We continue to set records across the brand. Building on the momentum throughout last year, the first quarter accelerated. Sales rose an incredible 89% from 2019. The consistency we are experiencing is truly amazing. This was the 26th consecutive quarter of double-digit growth. As aerie.com becomes a go-to destination for our customers, the online business more than doubled, posting a growth of 158%. Store revenue increased 36%, with about one-third from new store openings. Aerie's active customer file expanded approximately 40% as we entered new markets, and we increased engagement on social channels, including TikTok, where we saw tremendous response. With new customers attracted to our brands and demand for our merchandise accelerating, brand equity scores show growing awareness. Sales metrics were strong across the board, and notably, our AURs were up 50%. High demand is driving greater pricing power. A significant reduction in promotions contributed to an over 700% increase in operating profit and a 23.5% operating margin. Across categories, we saw broad-based strength with all areas rising in the double digits. Intimates was terrific as was swimwear, where product innovation and newness are fueling demand. Aerie's signature legging business is exceptional and continues to expand with the success of our new OFFLINE by Aerie activewear brand. Related categories such as fleece, tanks and sports bras are also tracking very well. Geographic expansion is a major priority and opportunity for Aerie. We opened 6 new stores in the quarter, including a new OFFLINE by Aerie store, bringing our running total of OFFLINE openings to 5 stores. We are very pleased with the early results, as Mike will review. We plan to continue our market expansion strategy. Shifting gears now to American Eagle. As I said at our Investor Day in January, AE has a wonderful heritage defined by individuality, purpose, and heart. Michael has been the harness, AE's iconic image and updated it for today's youth. Harmonizing the old with the new, we want to leverage our dominance in jeans and focus on more outfitting. We are also optimizing our inventory for better margins. I'm so excited with the progress we've made in such a short period of time. We've achieved the best margin in many years, and customer demand is strengthening across all categories. This quarter, we saw a 39% increase in operating profit with operating margins rising to 20.8%. Our focus on inventory optimization and profit improvement drove merchandise margin expansion. We made better decisions around promotional activity and drove greater full-price selling. We are also pleased with the improvement in sales led by a 20% increase in the digital business. Customer engagement was up 2% with new digital acquisitions up 17%. Demand across our jeans and bottoms business remains very strong. We continue to solidify our position as the #1 brand within our demo and the #1 women's brand across all ages. With the new denim cycle underway, we are innovating and investing to maintain our leadership position and to offer the absolute best to our customers. As silhouettes transition, I'm excited for what's in the pipeline. In the first quarter, I'm pleased to report that we had our best quarter ever in fleece and graphics. We plan to lean into this momentum in the back half of the year. As bottoms evolve, we have the opportunity to delight our customers with new styles across tops and greater outfitting. Just 6 months into rewriting our strategy, the success we've seen reinforces my excitement for our longer-term opportunity. The team is energized, and I can't wait to share what's in store for AE in the coming quarters. Lastly, I can't say enough about the great work our team continues to deliver. The dedication and drive of the Aerie team is simply amazing. They strive for greatness quarter after quarter. It's been terrific to work with the AE team as well over the past several months. We have extraordinary talent, and I look forward to driving our vision together. Thanks, and now I'll turn the call over to Michael.

Thanks, Jen, and good afternoon, everyone. I'm really proud of how quickly and enthusiastically our teams embraced our Real Power, Real Growth value creation plan. The results out of the gate in 2021 are tremendous, and they affirm that we are positioning our operations in the right way to fuel our next chapter of growth. At the heart of our operating strategy is a truly customer-centric focus. The investments we've made in our systems, our data analytics, omni-channel and supply chain are yielding results. I firmly believe that the strength of these capabilities and our ongoing investments are a unique competitive advantage. Today, I'm going to talk about 3 important areas of our business: our selling channels, our customer focus, and our supply chain transformation. Let me start with digital, which continues to post remarkable results. Our revenue rose 57% from 2019, producing incremental revenue of $150 million in the first quarter. Online traffic and transactions increased well into the double digits. We achieved strong AURs and significantly higher margins, further fueling an already highly profitable channel. Digital penetration increased to 40% of total revenue, up from 30% in 2019. As customers continue to embrace online shopping, we are delivering an ever-improving experience. For example, we recently introduced a new TAB structure to provide greater ease of shopping across brands while enabling more immersive brand experiences. We also introduced more personalization and enhanced curbside and in-store pickup features, which yielded great results. We improved our mobile experience and redesigned our app, resulting in a 70% increase in revenue from Total Mobile. Stores improved in the first quarter despite continued COVID-related traffic pressure. Fleet optimization work is underway and we are pleased with the initial transfer rates from recent store closures, which are running well ahead of our 40% goal. Proactive customer engagement has been a driving factor in retaining customers, transitioning them to nearby stores or online. Our customer base is extremely healthy and growing, nearly 1 million new customers have been added since 2019. The average spend per customer is up in the double digits with a greater number of customers shopping across those brands. This speaks to the quality of our engagement, our product, our marketing and technology enhancements. The relaunch of our loyalty program last summer has been highly successful, not only in attracting new customers, but fueling more frequent engagement, more purchases and an improvement to margin. Across the board, our operational teams delivered exceptional results this quarter. As I've discussed before, we are highly focused on supply chain transformation aimed at improving inventory productivity, delivering efficiency and better and faster customer experience. This work is yielding results. For example, we reduced SKU counts across assortments to focus on the most productive styles, which resulted in faster turns and a meaningful increase in product margins in the first quarter. Our regional fulfillment nodes are resulting in better placed inventory, creating efficiencies and enabling faster service to both stores and to customers. In the first quarter, we leveraged e-commerce delivery expense, had fewer shipments per order and delivered to customers 1.5 days faster than in the first quarter of 2019. Our supply chain team anticipated and successfully managed through shipping delays with very minimal disruption to our business. We also successfully executed chase strategy to replenish high-demand items and supported the outperformance of Aerie OFFLINE, swimwear and a variety of fashion choices. This really speaks to the strength of our team, our capabilities and our vendor partnerships. Now as I look ahead, we are staying in front of ongoing supply chain challenges, and we have continued to see favorability in our product costs for the remainder of the year. In light of our strengthened operations, focused on driving higher margins, inventory optimization as well as our well-positioned and growing brands, I'm very confident that we're positioning AEO for continued success. And with that, I'm going to pass the call over to Mike.

Thanks, Michael. Good afternoon, everyone. I'll start by saying we are obviously extremely pleased with the first quarter, during which we hit a number of all-time highs and milestones. Results were well ahead of our expectations across the board. Our strategies are clearly working, and we're making great progress on our Real Power. Real Growth plan. This performance reflects a few major factors. Our brands are strong and our merchandise is in demand, fueling very healthy sales and KPIs. Our inventory optimization initiatives are working, resulting in lower promotions and significant growth in our merchandise margin. Both of our selling channels are delivering positive results. And our investments in our supply chain capabilities are effectively supporting our growth. These factors, plus a favorable environment led to record first quarter performance, revenue of over $1 billion and operating income of $133 million marked all-time highs for the company. Demand for Aerie continues at a rapid pace, driving significantly higher sales, margins and profitability. American Eagle saw slight top line growth and experienced one of the brand's highest merchandise margin rates on record with more runway ahead. As Judy mentioned, I will review first quarter 2021 against the same period in 2019. Consolidated first quarter net revenue increased 17%. Across brands and channels, sales metrics were exceptionally strong, with our average unit retail up over 20%, fueling a healthy transaction value. Conversion rates across channels were also favorable. Digital revenue rose 57% with Aerie, up 158% and AE, up 20%. The strong growth reflects the benefits of our multiyear investments to capitalize on the customer migration to digital and omnichannel e-commerce. Online sales for the quarter represented approximately 40% of our total mix, increasing significantly from 30% in the first quarter of 2019. Store revenue was flat, a nice improvement from the fourth quarter. Additionally, U.S. stores posted positive revenue in the quarter, with our stores in Canada affected more by lower traffic and store closures related to COVID-19. At a brand level, AE revenue increased slightly to $728 million. Strong demand, lower promotions along with inventory optimization initiatives led to a record merchandise margin. AE's operating profit jumped 39% to $151 million, and the operating margin expanded 570 basis points to 20.8%. These results are a clear proof point of the margin opportunity for AE, which we reviewed back in January. While the quarter showed great progress, the work continues. Jen reviewed the progress on the product side, and we still have opportunities to maximize inventory productivity. Aerie had another standout quarter with growth accelerating. Revenue increased 89% to $297 million. Operating income hit $70 million, rising over 700%. The operating margin expanded to 23.5% from 5.3% in 2019. As I've highlighted quite a few times now, Aerie is at an inflection point in its growth trajectory. We'll continue to realize significant flow-through of incremental sales to the bottom line. Total consolidated AEO gross profit dollars were up $111 million or 34% compared to the first quarter of 2019, and gross margin expanded 550 basis points to 42.2%. Merchandise margin expanded significantly, reflecting continued promotional discipline and benefits from our inventory optimization initiatives. Our product assortments were well received, which enabled higher full-price selling. Rent dollars were lower and levered significantly as a result of negotiated savings, store closures and benefits from impairments. Offsetting this, we saw higher delivery, distribution, and warehousing costs as well as higher incentive compensation. SG&A leveraged 40 basis points as a rate of sales. The dollar increase of $34 million from first quarter 2019 was due to compensation in line with our performance-based incentive program, an increase in corporate salaries and higher variable selling expenses, partly offset by lower travel expenses. Operating income of $133 million increased 170% compared to $49 million and adjusted operating income in the first quarter of 2019. The operating margin at 12.9% expanded 730 basis points, marking a 14-year high for the company. Corporate unallocated expense increased 29% to $88 million, primarily due to incentive compensation. As a result of historically higher profit delivered this quarter, incentive accruals are higher than normal and up against the minimal accrual in 2019. Adjusted EPS was $0.48 per share in the quarter, marking a record first quarter outcome for us. Our diluted share count was 207 million and included 34 million shares of unrealized dilution associated with our convertible notes. Ending inventory was up 2% compared to the end of the first quarter of fiscal 2019. American Eagle inventory was down 15% due to continued inventory optimization initiatives and a significantly reduced clearance level. Aerie's inventory increased approximately 50% versus 2019, supporting the strong sales growth, new stores and product expansion, including OFFLINE by Aerie. Across brands, inventory is well positioned and below current demand levels. As Michael said, we're comfortable with our ability to receive good into our supply chain and have successfully tapped into strong items. I'm very pleased with our liquidity and the health of our balance sheet. We ended the quarter with $792 million in cash and short-term investments. Even excluding proceeds from the convertible bond issuance, our liquid cash balance is up $36 million versus 2019. Capital expenditures totaled $37 million in the quarter. For 2021, we continue to expect capital expenditures at $250 million to $275 million, in line with the average annual target we shared at our investor meeting. We expect to be back half loaded given the timing of Aerie and OFFLINE new store openings. Regarding our store fleet, we are pleased with the transfer rates of recently closed locations and continue to expect incremental closures this year. We've had productive negotiations with landlords who have continued to secure lower rents and build flexibility into the portfolio. The vast majority of our 2020 renewals were short term, resulting in almost 450 leases coming to term in 2021. This year, we plan to open approximately 60 Aerie stores and over 30 OFFLINE by Aerie stores, which will be a mix of stand-alone and Aerie side-by-side locations. Now as we look ahead, we are encouraged by our continued trend early in the second quarter. Both brands continue on a healthy pace. There's still uncertainty ahead. But as we reflect on our 2023 targets provided back in January of $5.5 billion in revenue and $550 million in operating profit, we believe we are on pace to achieve the profit goals this year. Obviously, well ahead of expectations. We're excited about this prospect and what it could imply for our future profitability as we continue to implement and execute on our long-term growth strategies. As a reminder, our reported second quarter 2019 results included a $40 million benefit to revenue and $38 million benefit to operating profit from the termination of our licensing partnership with a third-party operator in Japan. We're extremely pleased with the speed and success with which we are putting our Real Power. Real Growth plan into action. As I said back in January, I believe we're headed to the most exciting period in our history. Our brands are stronger than ever, our business model is sound and our first quarter results bear testament to the quality of our strategy and strength of our execution.

Our first question comes from Matthew Boss with JPMorgan.

Congratulations on the momentum. To start, Jay, could you help us understand the extent of the business momentum and acceleration you're experiencing in the second quarter compared to the 17% growth in the first quarter? Also, I'd like to get your perspective on how sustainable you believe this demand recovery is for the overall apparel market. Additionally, do you have any thoughts on the potential for a denim-led fashion cycle as we look ahead?

Okay. I think, first of all, everything is still rolling as strong as it did in the first quarter. So, so far, the month of May, we're very pleased. Look, I'm really optimistic. I think our best days are ahead of us. I see great potential. I see great potential in American Eagle by itself. Aerie's on fire. Our goal was by 2023, it would be a $2 billion Aerie company, and I think we'll be there within the next 12 months. It's very strong. OFFLINE is starting out great. We think OFFLINE has the potential to be like another Aerie. So we're very optimistic. Thank god everything is going the right way. It's not just one area of the business. It's not just merchandise that drives the business. You need to have strong logistics with it, you have to have strong sourcing. And in every area, it's strong right now. We're adding more customers. Our loyalty program is getting bigger. And we're very excited. I mean this is probably the greatest time in this company's history.

Wow. And then just maybe a follow-up. On the accelerated operating margin target commentary, to be clear, and as we think about being ahead of the schedule. I'm just kind of making sure, as you talk about being ahead of schedule, you're also not citing the target as a ceiling. So maybe what do you see as pie in the sky or any structural impediment as we look back? 2012 was 14% operating margin. Just kind of maybe any thoughts on where could you see operating margins for this company over time?

Thanks, Matt, it's Mike. We recently provided guidance indicating that we expect to reach $550 million by the end of 2023, which we announced just four months ago. We are very excited about this and what it could entail for our planning discussions at the end of the year regarding new targets for 2023. In this guidance, we’re not focusing on the revenue goal of $5.5 billion for a reason. While it's not entirely impossible, significant progress needs to happen in the latter half of the year to achieve that figure. Essentially, we anticipate being a double-digit growth company this year, and there's a good chance we may approach 13% growth, similar to our performance in the first quarter. Generally, our operating margins are slightly higher in the first and third quarters, while the second and fourth quarters typically involve end-of-season inventory write-downs. Nonetheless, it's feasible for us to achieve double-digit margins each quarter this year. Therefore, we are stating that our double-digit target for 2023 aligns with the $550 million goal. Additionally, regarding our Aerie flow-through, back in January, we projected a 20% flow-through target for 2023, which some considered conservative. We recently achieved over 40% flow-through in the first quarter. While this level may not be consistent each quarter, it's an outcome we could potentially expect in future periods. This flow-through significantly impacts our operating margin, and to address your question directly, I'm uncertain how high is high. These are discussions we will have later in the year as we revisit our targets. However, we are confident in reaching double digits this year, and I believe 10% will ultimately be viewed as too low. We will evaluate what double-digit growth looks like and discuss this further later on.

Our next question is from Jay Sole with UBS. I expect to see this every quarter. However, the flow-through of Aerie and its effect on our operating margin has me uncertain about how high is high. We'll address these matters later in the year and revisit our targets. We're aiming for double digits this year, and I anticipate that 10% will be too low. We'll determine what double-digit means and discuss that later.

I guess if you could just elaborate a little bit and take us through some of the categories at Aerie maybe through the intimate apparel and then some of the other swim and more seasonal stuff. Tell us how those did, that would be super helpful.

Yes, Jay. I'm reviewing this impressive spreadsheet with the numbers, and I'm proud to say that every category in Aerie achieved high double-digit comps, if not triple-digit comps. We are experiencing remarkable acceleration in this brand. We've gained $150 million recently, reflecting this strong momentum and everything looks positive. I appreciate seeing this progress. The team is working diligently, and I'm serious when I say that we are pushing harder, faster, and smarter to stay focused and look ahead. I want to touch on swim specifically. It's surprising how well we're doing, and I believe we will be even better prepared for spring break next year as vaccinations increase. We sold swim products as if it were our best year ever, with the highest margins recorded. In fact, our margins across all categories are the best they've ever been, consistently outpacing sales and inventory, and swim has been outstanding. The team really excelled here, and I'm pleased to share that 60% of that line is sustainable, so we will continue to grow that business in an environmentally friendly manner. It's truly impressive what I'm witnessing. And let's not overlook the OFFLINE business. We have only a handful of stores, but the momentum is strong, and we're seeing triple-digit growth here as well. There is still much work to do since it's a developing brand, and we recognize the opportunities ahead.

Got it. If I could just ask one more. Mike, you gave us a lot of great color on the year in terms of getting to your goals ahead of schedule. Is there any color you can give us on second quarter gross margin, SG&A, just to round out the guidance a little bit more to give people a feel for kind of what you're seeing in the near term?

Sure. I think we should start with SG&A. The growth in SG&A will likely be similar to what we experienced in the first quarter, which was around the mid-teens percentage. Factors such as sales trajectory, variable expenses, and incentive compensation will probably play a role again. Therefore, we can expect a similar SG&A growth in the second quarter. Regarding gross margin, while we achieved over 42% in the first quarter and could see improvement compared to 2019, this may indicate a gross margin of around 39% or slightly higher. The second quarter coincides with our end-of-season spring inventory write-down period, so we will need to monitor how things progress in the upcoming weeks. July remains a critical month for us, but we anticipate similar gross margin improvement. However, we do not expect to reach the 42% mark again, leaning more towards the high 30s. The flow-through to operating margin will be influenced by SG&A leverage and notable gross margin improvement. As for operating margins, we are still aiming for double-digit growth.

Our next question comes from Adrienne Yih with Barclays.

I have to add my congratulations. Jen, the stores, both concepts are great. So Jen, I actually wanted to talk to you about this off talked about now silhouette shifts going from little, to little over big. We're seeing a lot of it. We knew that was happening, right, in '17, '18, '19. But it seems like it's really coming into the mass adoption phase. How strong are you seeing that trend emerge now? And what percent of the denim offering is currently in kind of wire leg and non-skinny bottoms?

I am incredibly excited about the denim opportunity. Back in September, we noticed a shift towards wider, looser denims and more fashion-forward styles. My timing was critical because we quickly transitioned to these silhouettes. We've observed these styles in both men's and women's lines, although men's active slim is performing well too, the major shift is in women's. Our team has an impressive strategy for testing and scaling within the denim category, and our ability to adapt to this trend has been unparalleled. The denim trends exceeded our expectations in the first quarter, and we plan to continue driving this business moving forward. We've completely changed our mix, and we feel very positive about it. All indicators suggest that back-to-school will be strong, with certain advantages emerging from new incentives for customer spending. We're looking forward to that season. As for our mix, I can't disclose specifics, but I can say it's performing better than we've seen in years, and we're enthusiastic about it. There's also a significant opportunity in outfitting as we're testing new combinations that pair well with denim. We're ensuring that everything fits well together so customers look their best. This work is currently in progress, and I believe it will only improve. I'm currently in the office with a highly motivated American Eagle team, and after reviewing our spring men's and women's assortments, I can confidently say we have exciting products ahead. It's our responsibility to keep learning, stay humble, and seize the right opportunities.

Excellent. Mike, could you clarify what time period the 15% decline in inventory refers to? It seems you're quite confident about supply for the latter half of the year. You've navigated the supply chain disruptions effectively in the first half. What gives you the assurance that you will have the visibility and access to all the inventory you require from a case perspective if business improves?

Yes, thank you. I can provide the details on the inventory at the end of the quarter, and Michael can address the second part. Inventory for the American Eagle brand was down 15% at the end of the quarter, while Aerie saw a 50% increase, resulting in an overall increase of 6%. This comparison is against 2019, as there aren't many relevant comparisons for 2020. So, American Eagle is down 15% compared to 2019 with flat revenue results, while Aerie's inventory is up 50% against 2019, with revenue up 89%. And Mike?

Our team is responding very quickly and aggressively on the inbound side. We have collaborated with our factories and diversified our carriers. Although our inbound transit times are longer, they have been fairly predictable. We notice a smooth flow of products coming in for the summer and back-to-school seasons. Given our current operation, booking strategies, and the agility of our team, we do not foresee delays as an issue. In fact, the ports have mostly cleared up, and the flow of goods is better than it has been all year.

Our next question is from Dana Telsey with LC Advisory Group.

Congratulations on the nice progress. One of the things that you had been talking about is SKU rationalization. Where are you in the SKU rationalization? And where do you see that developing? I think you had once mentioned that around 95% of revenues at AE comes from 40% of SKUs. How do you see that transitioning this year and the progress there? And then any further update on the logistical improvements with the supply chain? And are you getting the inventory that you need when ordering for this upcoming back-to-school and holiday?

Thank you for the question, Dana. It's Michael, and I’ll address that. First, regarding SKU rationalization, our team has effectively reduced the number of customer choices in our business by about 25% in the first half of the year. While we streamlined these choices, we also increased our investment in the remaining options by 25%. This means we eliminated less productive options with lower markups and margins, focusing on the items that our team is most passionate about and where we have optimized costs and inventory levels. This strategy has significantly contributed to our strong results, and we see even greater opportunities in the second half of the year. Connecting this to your logistics question, our confidence stems from the new logistics capabilities we've established. In 2020, we initiated a supply chain transformation, creating new distribution nodes and implementing updated systems while bringing in new talent and placing inventory closer to customers. This allowed us to reduce supply levels in stores by three weeks while maintaining stock availability and increasing flexibility. Our inventory became more efficient, allowing us to replenish stores and ship to customers more quickly, typically two days faster. We also cut delivery costs by sourcing e-commerce shipments from local markets and using regional carriers, which allowed us to minimize the number of shipments for each customer order. Overall, the inventory reduction and supply chain adjustments we made are structural, leveraging capabilities from last year that we have expanded in the first quarter and plan to build upon throughout the year.

Our next question is with Janine Stichter with Jefferies.

Congratulations. I'd like to ask specifically about the American Eagle brand. I think in the outlook that you've given, you're talking about Eagle revenues being flat with 2019. But now we're starting to see the brand grow again. So just curious how you think about maybe the upside potential for the Eagle brand. And then I would also have a little bit more color on the quarter-to-date trend. I think you said that business has accelerated. So just kind of curious if you could opine on what might be driving that. It would seem that May results would be kind of the cleanest performance we can get without any sort of impact from stimulus. So just some thoughts on what you think is driving that acceleration.

We developed a robust plan during our Investor Day and with American Eagle, and I believe we are exceeding our expectations. The focus is on growing the bottom line for American Eagle and expanding the Aerie brand. However, that does not mean we will stop trying to grow AE. I'm pleased with the progress we've made. We have a talented team in place, with some new additions, including a new head of design, and we will continue to innovate and offer the best products in the market. I can share that as I observe the upcoming spring '22 collections, the team has surpassed my expectations. Moving forward, our approach will be careful with our inventory, applying the valuable lessons we've learned during and after the pandemic as we enter 2022. We plan to be strategic about growing categories where we see potential while maintaining the excellent margins we've established. Looking ahead, we've seen improvements in areas like shorts and are enhancing our marketing efforts. Our recent Outer Banks campaign with American Eagle has significantly boosted brand awareness and social presence. I'm happy with our retention rates and customer spending, which is very strong. Our average unit retail prices are increasing, and we must continue delivering high-quality products while keeping a forward-thinking perspective. Overall, I’m excited about the direction we’re heading.

Janine, I want to add that Matt inquired about targets, and I mentioned total company performance in Aerie. As Jen noted, AE's target also needs to be updated. This is something we will revisit later this year.

Our next question comes from Oliver Chen with Cowen and Company.

You made a lot of great progress in supply chain optimization. Just would love your view on key catalysts there going forward. And then at the AE brand, would love to hear about the men's product and what innovations ahead and where you would say it is relative to where you want to be at tops and bottoms.

All right. Thanks, Oliver. As far as supply chain optimization, like I said, I really believe, although we have a great start and we're delivering results, we're really just scratching the surface on what the potential is. So making our inventory more productive, improving service to our customers and reducing the cost of doing business is something that, Jay, myself, our Head of Supply Chain, we're extremely focused on. And we think there's a lot more opportunity to expand the distribution presence, improve the systems we have. And we're looking at some other pretty interesting capabilities that I can't talk about now but perhaps on the next call, that we think are going to add both scale and ultimately, cost savings to what we're delivering in supply chain. So there's a lot more opportunity. I expect that we're going to see continued improvement throughout the year.

Oliver, as I mentioned, we continue to exceed our previous best in jeans, which is incredible. We've experienced remarkable success in both men's and women's jeans, and I'm very proud of that momentum. Our focus is on ensuring that we get the outfits right. Fleece had an outstanding quarter, and graphic tees are experiencing a resurgence, which we are emphasizing for future deliveries. We are innovating in that space. We are evolving that business into a more dynamic model. RTs have been performing exceptionally well, and we are concentrating on introducing new qualities for the future. The main point is that we still have room for growth, and we are committed to delivering on that. We will manage our inventory effectively to ensure that our sales outpace our stock levels. This strategy is key to our continued success with the strong business model we have created. There is more to come, and I believe you will be very excited about our back-to-school offerings, and I hope our customers will love them as much as we do.

And Oliver, just to come back to that supply chain question one more time. One thing I wanted to mention that we haven't talked much about, but I do think it's a huge strategic lever for our business is we're looking at returns and the opportunities around returns as actually a big strategic opportunity for the company. So obviously, with digital sales increasing, many retailers are dealing with increased returns. Our challenge is how can we make that a great experience for the customer, how could we refund money quickly, how can we get that inventory returned quickly and back into the spot where we're most likely to sell it? Our team onboarded a new partner to help us meet some of these challenges. We implemented some new technologies in the quarter. And we're seeing both digital returns as a percent of sales go down as well as we're getting that inventory back into a position where we can sell it much faster than ever in our history. And I think as the business grows, that's going to be an increasingly big opportunity for us.

Very helpful. Jen, just a last question. Body positivity and authenticity, you've been a real leader there. What do you think is next to stay innovative? And what do your customers want as you continue to evolve the strong sense of community across the banners?

Yes. I think in both brands, we have opportunity to continue to drive that side of our platforms, AE with individuality and Aerie being AerieReal. I mean when we think of the term real, there's endless opportunities. And Oliver, we're really trying to stay ahead of the curve there because as you can see, competition is following close behind. And look, we were there first. So we owe it to our customers to continue to excite her in new ways from a marketing perspective. This last real campaign that we launched, Oliver, it was incredible. 8 billion impressions from our customers, from our community coming into our Aerie business, and no surprise that our customer acquisition was up 40%. So that's how we have to stay ahead of our competition, right? We need to get new customers into our brand in Aerie. Retain customers in American Eagle is a huge strategy for us. As we get these new customers into Aerie, that's how we're accelerating this top line. And as Jay mentioned, we're going to hit this $2 billion. If nothing else fails out there, and we can continue to deliver with what we're doing earlier than said. I think it's because we are attracting new customers, we're going into new markets. We're turning around with our platform, the platform that we own in Aerie and the platform that we're certainly proud about. But we certainly have new ideas in store, Oliver. I can't share, but we're pretty excited about what we're about to see here.

And Jen, if I can add one thing. It was only 3 months ago we had a celebration in January, celebrating our $1 billion mark in Aerie. And here, we're talking about the next 12 months to be celebrating the $2 billion mark, a major accomplishment.

The new brand we launched during the pandemic has exceeded expectations. It highlights the dedication of this team to our platform and a business model that is truly unique. There is so much more to come. I'm beginning to see the passion and heritage returning to American Eagle, along with a strong commitment to delivering newness, uniqueness, and quality. Focusing on the quality of our sales and products is where we will find success, Oliver.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Jay Schottenstein for closing remarks.

Okay. Thank you, operator. I'd like to reiterate, we are really thrilled with the momentum we are seeing across our business. As Mike said, we're on track to achieve our $550 million operating profit goal for the total company this year ahead of expectations. Coming off a record first quarter, demand for our brands remains very healthy with business accelerating quarter-to-date in the second quarter. Our Real Power, Real Growth value creation plan to improve profitability at AE on few areas expansion is driving results, and we know we have the right strategy. And as you can hear, the passion and the people in place to win. Thank you for your support and your investment in AEO. I hope everyone stays healthy, and look forward to updating you on the strength of our business next quarter. Thank you.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. Have a great day.