American Eagle Outfitters Inc (AEO) Q4 2022 Earnings Call Transcript

Greetings, and welcome to the American Eagle Outfitters Fourth Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Judy Meehan. Thank you, Ms. 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 AE 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. 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. 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 in the Investor Relations section. Here, you can also find the fourth quarter investor presentation. And now I will turn the call over to Jay.

Good afternoon. Thanks for joining us today. 2022 was a dynamic year with numerous external questions. As we lapped outstanding results in 2021, we faced a difficult macro environment with rising inflation, higher interest rates, continued supply chain disruption, and a highly promotional retail environment. I am proud of how our teams executed throughout the year. Early on, we took swift and aggressive actions to reduce inventory levels, cut expenses, and capital spending. This contributed to a significant recovery in profitability and free cash flow during the second half of the year. We also posted our second highest revenue periods on record in both the fourth quarter at $1.5 billion and the year at $5 billion. Our fourth quarter results exceeded expectations and adjusted operating income of $96 million was above last year. We strengthened our financial position and exchanged nearly all of our outstanding convertible debt to end the year with a healthier balance sheet and improved liquidity. Moving to the American Eagle brand. I'm incredibly proud of the work the AE team has done over the last several years to improve profitability, rationalize unproductive SKUs, and close low margin stores. As a proof point, fourth quarter adjusted operating profit for AE was up 36% compared to 2019. Jen has made great strides to refresh the brand by energizing assortments to capitalize on trends while delivering better profitability. AE is a strong and healthy brand. I'm encouraged by how customers are embracing new styles and I look forward to our continued progress. Aerie has demonstrated exciting multiyear growth with fourth quarter revenue and adjusted operating income up over 70% from 2019. The rapid success of OFFLINE, our extension into active wear, underscores the strength of Aerie's powerful brand platform. We have significant potential as we reach more and more customers, and I cannot be more excited about the future. Our international business performed well in 2022. We will continue to fuel sales and profits, pursuing a multiyear strategy to optimize key company-owned markets and expand our license business. In 2022, I was pleased to publish our first ESG report, highlighting over 2 decades of actions we have undertaken to build a better world. As noted in the report, we have made tremendous progress across our water goals and continue to reduce emissions. ESG responsibility is embedded in our brands and company culture and deeply intertwined with our corporate strategy. As we grow our brands and markets, we will stay disciplined and focus on profitability. Inventory management remains a key focus, and we will use the strength and agility of our supply chain to chase demand. Additionally, we have launched a formal program to further reduce expenses, gain efficiencies, and prioritize high ROI in projects. Given the highly volatile environment we've been operating in over the past several years, now is the time that we set our business. Last year, we made good progress yet opportunities remain as we strive to break out of the mid-single-digit operating margin range. On Quiet Platform, we continue to see interest from prospective customers and remain optimistic about the long-term opportunity. Yet the demand has been pressured this past year. As Michael will review, we are adjusting our go-forward plans to strengthen profitability. Although the macro environment remains uncertain, we entered 2023 better positioned. I see no shortage of opportunities for this company. We will harness the power of our brands and an industry-leading operating model to drive growth and find efficiencies in processes and capabilities. I'm confident, with focus and discipline, we have strengthened our bottom line. We are committed to returning cash to our shareholders and are very pleased to reinstate our quarterly dividend. With that, I'll turn the call over to Jen.

Thanks, Jay, and good afternoon, everyone. Over the past few years, the dynamic macro has battle tested us in many ways and 2022 was another roller coaster of a year. In this environment, American Eagle and Aerie displayed resilience, maintaining their status as fan favorites within our core demographic. In a year where customers pulled back on discretionary spending, we grew our loyalty customer file, further strengthening our relationships. Even in a highly competitive promotional environment, fourth quarter results exceeded our expectations. With inventory back at healthy levels, we brought exciting new innovation to our customers in stores and controlled markdowns, achieving our second highest fourth quarter AUR. This was down 7% from last year's record high, yet up over 20% across brands compared to 2019, highlighting our focus on controlling promotions and building brand equity. Aerie reached a milestone at $1.5 billion in revenue in 2022 as new stores continued to expand awareness. Since 2019, revenue has nearly doubled with operating profit up close to 150%. I am pleased with this accomplishment, especially given the unprecedented macro volatility. For the fourth quarter, Aerie continued to see good growth, yet came in below our expectations. Core apparel showed up well, and we achieved our best sweater season in the brand's history while also continuing positive growth in fleece. Our active wear extension, OFFLINE by Aerie, remained a standout performer, led by our leggings franchise. Leggings continue to be a powerful driver of new customer acquisitions, and we are seeing nice momentum across fashion and performance styles. Intimates were a bit softer than expected. And as we look forward to 2023, our plans include launching more units in Intimates to build greater awareness and engagement. As we continue to scale Aerie, we are leveraging creative marketing touchpoints to drive excitement. In the fourth quarter, our Aerie holiday marketing campaign centered on gifting was a strong success. Additionally this spring, we launched a new Find Your Wonder campaign with a throwback to Y2K fashion, including real life and digital experiences. Turning to American Eagle, demand in the fourth quarter exceeded our expectations. As we evolve our assortment with engaging fashion trends, we are seeing a nice reception to new silhouettes such as wide legs and cargo, and renewed excitement in fleece and knit tops. I look forward to capitalizing on new fashion trends as we move through the year. Over the past several years, we have been intently focused on improving the health of the AE brand, tightening our assortment, pulling back on the value-driven promotions, and selectively closing unproductive stores. These changes are driving better margins. As we maintain our focus on profitability, we are also actively exploring opportunities to drive growth. On that note, in January, we launched AE 24/7, a new men's sub-brand focused on the fast-growing active wear category. The early reception to our limited initial assortment has been very encouraging, and we look forward to scaling the collection later this year. Last month, we also relaunched AE 77 as a premium sustainable capsule within the AE brand. Introduced with limited denim choices for now, the assortment spans both men's and women's and will be available predominantly online with a bricks-and-mortar presence in select stores. The reception has been very encouraging, and I look forward to building on the early success. I'm pleased to note that AE's customer file grew in the fourth quarter as we retained and reactivated more customers. On the marketing front, we collaborated with the cast of The Summer I Turned Pretty, a Gen Z favorite show, launching a limited edition collection that fully sold out. Buzz around AE is continuing into spring. Last month, our newest denim silhouette, Dreamy Drape, went viral after an organic post by Alex Earle, one of TikTok's fastest-growing influencers. We have also launched an exclusive spring collaboration with the Outer Banks crew, which is off to a good start, drawing in new customers with great reception across social media. In fact, a recent post by one of the stars on the show became our #1 Instagram post of all time. Entering 2023, while the macro remains uncertain, emerging trends in casual wear continue to provide new avenues to drive growth across our brands. Innovation is our strength. We will lean into newness and continue to deliver excitement and high-quality on-trend styles to our customers. Thank you. As always, to the AE and Aerie teams for their tremendous effort this past year. With every season, we are making progress, and I remain very excited about what's to come. Thank you. And now I'll turn the call over to Michael.

Thanks, Jen, and good afternoon, everyone. As Jay noted, the past few years have been extremely volatile for the retail industry, highlighted by a shift in consumer spending and operational challenges. Navigating through this period has not been easy, yet I'm very proud of how we've responded with both agility and speed. We've added significantly to our capabilities and increased our use of new technologies, which are driving benefits to our operations and the customer experience. As we continue to manage through a dynamic landscape, we will lean into these capabilities as we strive for productivity improvements and even stronger profitability. Fourth quarter channel performance largely reflected the ongoing macro volatility. It's notable that customers are returning to in-person shopping. Store revenue was flat to last year and up 5% from 2019. Since taking responsibility for stores last fall, I've had the opportunity to visit numerous locations and spend considerable time with our incredible store leadership. We have a powerful fleet and truly a world-class field team. And I've been very impressed with just how well we service the customer and leverage tools and technologies to drive store productivity. For example, this quarter, I am pleased to note that we were tied for the #1 Specialty Retailer for customer satisfaction in the ACSI Customer Satisfaction Survey, and actually had the largest year-to-year improvement of any company surveyed. Our new point-of-sale system is providing a better shopping experience and reducing average checkout times by 50%. We expect this to drive improvement in sales per selling hour as we focus on further efficiency gains. I'm also very excited to share that we will start rolling out an innovative RFID and AI-based technology capability across our stores later this year. Our pilot test this holiday proved highly successful, providing visibility into inventory availability and placement at over 99% accuracy. I'm very enthused about the sales opportunities, inventory productivity improvements, and labor efficiencies we can unlock moving forward. As I indicated last quarter, we are also focused on updating and modernizing our most productive stores and relocating certain stores to ensure we are in the best location. Last month, we consolidated our store footprint in Manhattan. We moved Aerie from Spring Street to the second floor of our AE SoHo Broadway location and introduced our full OFFLINE collection to this market. We will also be testing a handful of off-mall locations, which are smaller, lower-cost stores in emerging neighborhood outlets. And mid-summer, we are testing a new American Eagle store design, introducing a fresh and modern take on both the aesthetics and functionality of these stores. As we introduce these changes, we are dissecting all facets of the store channel to optimize how we operate. As we sharpen our focus on store productivity and profitability, this is revealing further opportunities, particularly within our labor model. As a result of the channel shift and unnatural builds from COVID, digital revenue was down 9% compared to 2021, yet revenue was up 19% compared to 2019. Digital is a healthy channel, representing 36% of total brand revenue, and it continues to be highly profitable. This quarter, I'm happy to say we are hiring new talent to the team, welcoming David Zhang as our new Chief Digital Officer. David brings vast experience in building successful digital commerce, and we're looking forward to his contributions. Now turning to the supply chain. After three years of unprecedented volatility and inflation on the inbound side, we are entering 2023 in a much more stable supply chain environment. Lead times are essentially back to pre-pandemic levels, and product costs have normalized. As we manage through an uncertain macro, we are using this to our advantage, planning cautiously and chasing into demand. Buying for the spring season is down compared to last year, and a significant portion of our fall still remains open. On the outbound side, our investment in client platforms continues to provide much-needed capacity, flexibility, and speed for our brands, combined with cost savings. Digital delivery costs in the fourth quarter were down compared to last year. We are making progress in reducing fulfillment costs and the number of shipments per order, which resulted in a lower delivery cost per order. As Jay noted, although Quiet's third-party revenue has grown significantly compared to last year, acquiring new customers has been slower than anticipated due to a tougher macro. For 2023, we are focused on reducing expenses to better align with growth trends. We will streamline investments in the platform and look to leverage Quiet's capabilities to continue to drive benefits both for our brands and for all of Quiet's third-party customers. Thanks. And now I'm going to turn the call over to Mike.

Thanks, Michael. Good afternoon, everyone. As Jay mentioned, in response to changes in the environment, we took early and aggressive actions to reset our plans. We reduced inventory, expenses, and capital expenditures, which enabled us to deliver a meaningful improvement in profit and cash flow in the second half of the year. Margins rebounded, and we generated adjusted operating income of $213 million in the second half compared to $56 million in the first half. We also returned to a positive free cash flow position and further strengthened our balance sheet. Full year consolidated revenue of $5 billion was second only to last year's record results, and adjusted operating income was $269 million. Fourth quarter results exceeded our expectations, reflecting improved demand and stronger margins. Consolidated revenue of $1.5 billion declined 1% from last year's record results and included 1 point of growth from Quiet Platforms. Brand revenue was down 3%, coming in ahead of our outlook for a mid-single-digit decline. This includes our second highest holiday sales result in the history of the company, with positive momentum continuing into January. Compared to pre-pandemic fourth quarter 2019, consolidated revenue was up 14%. Adjusted operating income of $96 million reflected a 6.4% margin and was up 30 basis points from last year and 60 basis points from 2019. Quiet Platforms produced a $13 million loss, excluding a $4 million impairment and restructuring charge. Demand was lower than anticipated. As Michael reviewed, with macro challenges continuing into this year, we've adjusted plans to reflect a more measured pace of growth for Quiet Platforms and reset expenses aimed at improving profitability this year. The gross margin rate of 33.9% in the fourth quarter was ahead of our expected range of 32% to 33% due to stronger demand and lower markdowns versus planned as we leverage our healthy inventory position to control promotions. Compared to last year, gross profit dollars increased 4% to $507 million, with a gross margin rate up 150 basis points. Merchandise margins were higher, reflecting lower product and freight costs with a partial offset from higher markdowns. Lower compensation and delivery costs also had a positive impact on margins, offset by higher distribution and warehousing costs and higher rent. Quiet Platforms had an 80 basis point impact as that business continues to scale. Despite a highly promotional operating environment, markdown levels were significantly healthier relative to 2019, reflecting our multiyear focus on improving brand equity and driving profitable growth. SG&A dollars were approximately flat compared to last year in the fourth quarter, reflecting our ongoing focus on controlling expenses. As Jay noted, we're currently undertaking a company-wide assessment to look for additional savings and efficiencies across our entire cost structure, strengthening our culture to focus on innovation and investment discipline. I'll report on progress over the course of the year. Adjusted EPS was $0.37 per share. Our diluted share count was 197 million, down from 203 million last year. Shifting to the brands, Aerie revenue increased 8%, driven by new stores. Comparable sales declined 2%, following a 17% increase last year. The adjusted operating margin of 12.2% reflected a significant recovery from the fourth quarter of last year. Aerie remains a strong multiyear growth and profit story. As we move past tough comparisons and new stores ramp up along the maturity curve, we anticipate comps returning to positive territory this year. American Eagle revenue declined 8%, and comps were down 9%, following an 11% increase last year. Demand was ahead of our expectations and reflected a sequential improvement from the third quarter. I'm particularly pleased to see a significant improvement in the health of the brand since 2019. While revenue was down 7% compared to the fourth quarter of 2019, adjusted operating profit was up 36% over the same period and brand operating margin expanded 510 basis points to 16%. Consolidated inventory cost was up 6% compared to last year, with units up 4%. Inventory reflects current spring product and earlier-than-expected delivery as the supply chain continues to normalize. AE and Aerie inventory across the U.S. and Canada is down compared to last year, with the consolidated increase driven by expansion in Mexico, where we're experiencing growth well into the double digits. We ended the quarter with $170 million in cash and total liquidity of $862 million. Capital expenditures totaled $61 million in the quarter and $260 million for the full year, which is down significantly from our plan at the start of the year. As we focus on strengthening free cash flow and capitalize on the investments we made over the past several years, we're reducing annual CapEx to the $150 million to $190 million range in 2023. We plan to open approximately 25 new Aerie stores next year with net closures at AE of approximately 25 stores. As I reflect on the fourth quarter performance, despite operating in a highly dynamic environment, I'm pleased by the multiyear improvement and the health of our business. We continue to see opportunity to drive growth and profit improvement over the long term. Moving on to our outlook. As we enter 2023, as the team has discussed, our brands are strong and inventory is healthy. The global supply chain environment continues to normalize, providing improved costs and greater agility. And we have a company-wide focus on expense reduction and operating leverage. That said, visibility into the macro and overall consumer spending behavior is still limited. As a result, we're taking a cautious view. Regarding the current quarter, while we've seen good trends in February with a favorable response to new merchandise, the environment remains choppy. Additionally, it's early in the quarter with our most important week still ahead. At this point, our outlook for the first quarter is for revenue to be in the range of flat to up low single digits and for operating income to be approximately flat to last year. For the year, our outlook reflects annual revenue growth in the range of flat to up low single digits and operating income in the range of $270 million to $310 million. With that, I'll open it up for questions.

And our first question is from Jay Sole with UBS.

Maybe just a two-part question. One, just first on Aerie. It sounds like there's a lot of exciting things happening just in terms of fashion. I think in the slide deck that you talked about still you see it as a $2 billion brand. You just talked about the long-term opportunity you continue to see with Aerie? And then maybe, Mike, just on the guidance that you gave for first quarter. It sounds like February has started strong. You're looking for flat to low single-digit growth?

Sure. As Mike mentioned, as we begin to tackle these new store openings, we are definitely experiencing some comparable growth in these locations. When we enter a new market, it's essential for us to establish the digital aspect of our business, and we have already observed some promising results as we start Q2. From a comparable perspective, our quarters have been increasingly strong. This demonstrates that there is potential for upside as we navigate these new store openings and allow these businesses to develop. We are quite enthusiastic about that. Regarding the product side, we couldn't be more thrilled. We have numerous new categories, one of which is OFFLINE, which is performing exceptionally well. Q4 showed remarkable results compared to last year, and we have successfully launched our crossover flare product. It’s unique to us and performs exceptionally well. Regarding Aerie, I want to note that our customer awareness has surged by 25% year-over-year in Q4, which is significant. This indicates that our store openings are starting to resonate, and we are successfully introducing the brand to new customers. We are currently in expansion mode with about 500 stores and plan to open around 20 more this year. These new locations should enhance our brand awareness. From a product perspective, we are actively engaged. We are excited about OFFLINE, which is driving growth for us, along with new businesses like fleece, where we believe we are achieving a competitive advantage. Looking ahead, we aim to focus more on intimates as a category where we can innovate. Our SMOOTHEZ launch this year was fantastic, and some of those designs have really gained traction. We plan to reinvent that business. We will continue to innovate; next year marks the 10-year anniversary of Aerie Real, and we have exciting developments ahead as our creative team remains committed to pushing forward.

Great. Sorry, I think I got cut off at my second question. But for Mike, regarding revenue for Q1, February seems to be good. You mentioned it has been choppy, and you're expecting flat to low single-digit growth. Can you share whether your current trends for the quarter are above or below that? Additionally, how do you feel about gross margin in Q1 compared to last year?

To clarify the revenue outlook for our Q1 guidance: At the end of December and during our ICR, we indicated that brand revenue was down 3%. However, we noted an improvement in January, which persisted throughout the month, resulting in a 2% decline in brand revenue for the fourth quarter. This positive trend has continued into February. The combined performance in January and February has shown some consistency, boosting our confidence in the flat to low single-digit revenue outlook. Regarding gross margin, we anticipate it will be similar to last year, and could indicate some improvement along with the flat to low single-digit revenue projection. We are still facing some freight challenges from the previous year, including air freight issues in Q4, and we expect these to persist into the first quarter. Thus, we are factoring in a slight improvement in gross margin as we aim for results comparable to last year's income guidance.

Our next question is from Matthew Boss with JPMorgan.

Jen, maybe could you elaborate on early spring selling trends that you're seeing across categories? Maybe if we touched on both the American Eagle brand and also Aerie?

Sure. As I mentioned on my last answer, it's nice to see comps in both brands. We're getting better quarter-over-quarter starting in Q3. So I'm excited about that. Look, it's early on, it's February, but I have to say that there's a lot of encouragement from the teams. AE, I'd like to reflect on American Eagle for a minute. First of all, we've really assembled a world-class team here. I'm very proud of the work they've done. And we've been up to really rightsizing that business. And during these tough times, it allowed us to do so while also protecting our bottom line, as you can see. But we've been up to building a profitable base, a healthy customer base. I think that's the most important thing I can articulate right now in the American Eagle side. We had a lot of customers in the past that only came to our brand once, and they were promotional customers. We're up to getting the best customers in our brands. So starting with American Eagle, I think we're really here. I think we've right sided the business, and now we're looking for growth opportunities. So early on, Matt, we launched 24/7, and another new line, 77. But let me take a step back to say that women's, we're starting to see a nice turn here. I think we're getting into the right balance of the assortments, and I just really want to highlight that it is about the balance. Denim had been a little softer, but we saw the trends happening out there in other bottoms. And I think the teams did a nice job adjusting and really going after, and we're starting to see some nice results there as well as just outfitting. Now we're seeing great tops come to life. Our tops business has turned around in women's, which is so exciting to see. And then in men's, just going back to we're learning. Men's, that customer is a little slower to take off. But I like some of the early reads in our new 24/7 athletic business, as well as 77 is a little bit of a surprise, it's premium denim. We really worked on it. We wanted to perfect that line. We believed in a higher-priced business. We own denim as a company and why not service a new customer? And early reads have been spectacular. So we have two new potential growth vehicles for the company as well as it's just nice to see women's, that business round out, Matt. And all that I can say is because of our test and scale and our logistics platform and our ability to get goods here, we're pretty pleased on how we can chase these goods and get back into business on the American Eagle side. And then Aerie, look, it's a little early to read swim, but we've seen some nice momentum starting in February, but coming out of the end of February, some really nice results there. I can't even talk enough about the apparel side. And what we're up to is really going after intimates for the future.

Great. And then maybe, Mike, as we break down your full year operating margin guidance, could you just help bucket the embedded assumptions if we're thinking markdown rate versus IMU recapture maybe relative to just potential offsets to consider on the expense front?

Sure, Matt. I think we're definitely assuming freight cost recapture. So we saw it in Q4. We'll start to see it here in Q1. So our guide for the year includes the assumption that we know that product costs are improving. Speed and agility in the supply chain is here now. We're back to chase mode. We're leaving significant open to buy, so that should allow us to ensure inventory levels are appropriate for the full year. So both freight cost recapture and then not repeating that charge we took in Q2 associated with cleaning up the first half inventory. The offset then would be some expense growth, some level of incentive assumption that we did not incur out in 2022 and then just some typical annual wage costs that we're looking to offset, as well as some other just annual expense growth categories. That's what's embedded in our assumptions.

And our next question is from Paul Lejuez with Citibank.

I'm curious if you could talk about the performance of Aerie new stores from this most recent year, and compare that to previous years is what you're seeing in terms of the new store ramp? And then also curious if you could size for us the size of the OFFLINE business within Aerie? And just what are you counting on that business to do in terms of growth for '23 versus the rest of that Aerie business?

Yes, I can start with the performance of the new Aerie stores. We are very pleased with how the new stores have performed from the beginning. They are meeting our pro forma expectations, which align with our usual guidance of a 2- to 3-year payback on these investments. We have observed this right from the start. In the latter half of the year, and what we are continuing to notice this spring, is a return to stores, which is positively impacting the performance of the new locations. Store traffic is generally healthy. Business through stores currently slightly exceeds digital sales. Although digital traffic is facing some challenges, the stores are performing well. This is beneficial for Aerie's overall performance. Regarding the offline part of the business, Jen, would you like to address that aspect of the question?

I apologize, I may have missed that. I was disconnected for a moment. Regarding the offline results, are we encouraged by the early outcomes? Absolutely.

No. Just the size and contribution.

The size and contribution, Jen, the size of the OFFLINE business contributing to Aerie.

It feels reminiscent of Aerie's early days. We are experiencing rapid growth and gaining insights into our business. We have various store formats that allow us to learn and adapt effectively. Our new stores are encouraging, yet we still have some business operating in select Aerie locations. Whether or not there's an offline store in the mall, we continue to learn within Aerie stores. This indicates that as we expand offline, we are exploring and testing new ventures within the Aerie brand, particularly because I frequently receive inquiries from customers wondering why Aerie does not expand into certain categories or offer more in the intimates sector. I am excited about the new business potential we can scale. Looking at our performance, it appears to be on par or even faster than Aerie’s impressive quarter-over-quarter growth that we saw before the pandemic. Even during the pandemic years, we performed well. Currently, this segment represents about 30% of Aerie's business, and there's more to come as we continuously test new categories. Our OFFLINE operations are not just about lifestyle; we are earning customers' trust in our performance-related offerings, which opens up further opportunities.

And Paul, this is Michael Rempell. I just want to stress what Jen said earlier, which is we've seen sequential comp improvement in Aerie stores each quarter from the second quarter and even here at the start of Q1. And what that really does is it supports our hypothesis that we opened over 130 Aerie stores in the last two years. Those stores, as they mature, they're going to start comping. They're going to start a multiyear trajectory of comp, which is what all our data and all our history tells us, and they're going to bring new customers into the brand and grow not just the store comp but also the digital comp. So early signs, if you look at the last few quarters and you look at these stores as we're anniversarying them, are very positive that what these stores are doing for the business is going to mirror history, which is going to give us multiyears of growth. And we got into these stores, obviously, during COVID, at a very advantageous time to get long-term deals done for that brand. So it's very encouraging what we're seeing right now in the Aerie business.

And our next question is from Adrienne Yih with Barclays.

Great. It’s been a strong ending to the quarter, everyone. Jen, I’d like to start with you. There has been some discussion around consumers being cautious with their spending and showing price sensitivity, yet it doesn't seem to be affecting your customers. In fact, you're reducing promotions. I assume the strength comes from the product itself, but what strategies are you implementing to foster engagement and build loyalty? Additionally, how do the average unit retail prices compare to 2019, and what portion of that is due to promotions versus the initial retail price? By the way, the stores look fantastic.

Our average unit retail prices have seen changes over the year or quarter, and Mike can provide more details. We are focusing heavily on our loyalty customers, and our loyalty file is increasing. It's important to maintain the health of this file since these customers are our best repeat buyers, and we aim to attract more of them. This intense focus on our loyalty program will yield more developments, and we've gathered some great insights to strengthen it further. In terms of Aerie, we have consistently worked to evolve and bring fresh ideas to the brand, and our customer base is expanding rapidly. Currently, we have more than 10 million customers, which is four times our original base. Our efforts are geared towards enhancing brand awareness, penetrating new markets, and fostering a community around our brand through grassroots initiatives. We have ambassadors and our store associates play a crucial role in connecting with our customers, leading to an exceptional store and customer experience that gives us a competitive advantage. Regarding American Eagle, we are in the process of revitalizing the brand and unlocking new opportunities. We launched AE 24/7 in January and have interesting metrics showing that Gen-Z is increasingly engaging with the AE brand. We collaborated with "Outer Banks," which is currently the top teen show, and the product sold out. Our strategy involves more collaborations to attract this demographic and keep them engaged with the brand. We recently had a pair of jeans go viral on TikTok, thanks to popular influencer Alex Earle, and this buzz has been incredible. The key is to introduce authentic products that resonate organically with our customers, which is at the core of what we represent. Aerie embodies realness, while AE emphasizes authenticity. We have plenty of positive developments ahead, including collaborations for back-to-school, and we're excited to leverage our new foundation in AE to propel our growth.

And Adrienne, just to answer the second part of your question on AUR, AUR is still up over 20% from 2019. And you talked about that being a combination of controlled promotions, more targeted promotions versus full box offers, some structural changes in our loyalty program in terms of giving away free jeans historically that we eliminated during the pandemic, which we don't plan on going back to. I think targeted increases in ticket where we have not seen price resistance and where we can see the customers willing to pay for it. And that's the continued strategy. We build up that brand equity through the pandemic, and our plans are set to not give that back.

And our next question is from Alex Straton with Morgan Stanley.

Great. I know last year, you guys had mentioned this path to kind of $6 billion in sales and a low teens EBIT margin. And obviously, that's very different from where you guys are landing this year, just given what's happened in the last year or so. So just taking a step back, are those numbers still in play at all? Or how should we think about those targets and the revenue and margin trajectory longer term?

Thanks, Alex. I think at some point, we'll come back out and talk about longer-term targets. We're obviously very focused on just navigating the current environment and our guide for '23 includes that. I think we've got the firepower in the company across our brands to get to $6 billion over time. Again, we can discuss later, and we'll provide maybe more color on when we think that's possible. And then double-digit operating margin is still our goal. The guidance we just provided for this year is kind of keeping us in that mid-single-digit range, call it, 6%, maybe 6% to 7%. But as Jay noted in our prepared remarks and in our press release, we're embarking on a project here this year to really unlock across our entire cost structure. The opportunity for us to leverage that continued revenue growth in a different way than we've been able to in the last few years or in our history. So more to come on that project. It's geared towards exactly that, structural changes to our operating model that will allow us to leverage revenue in a different way and pass us towards that 10% or double-digit goal.

Our next question is from Marni Shapiro with Retail Tracker.

Congratulations on a fantastic end to the year. Jen, I really support that jean whenever I wear it.

Marni, it's the best. We just got a new delivery in.

We see good momentum heading in the right direction. As we mentioned, last month was a positive month. Although we are unsure about the future, we remain very optimistic. It was quite interesting; this past week, we hosted our international partners. I received a call from one of our major partners who has been visiting for about 10 years, and they mentioned that this is the best they have seen the line book. We are very optimistic about this. As Jen mentioned, we developed a new AE 77, which is gaining good traction. We believe that this 24/7 initiative is going to be significant.

So it's mostly product based, which is really where you guys shine anyway?

Yes. We're focusing on both product and private offerings. Additionally, as Michael Rempell and Mike Mathias mentioned, we are reevaluating our real estate strategy. Our approach involves analyzing each market individually to identify the best locations. Our goal is to ensure that we have stores in the top locations within those markets.

Makes a lot of sense. And then, Jen, if I could just ask one quick follow-up to the AE jean situation. You've had some very big hits in the store that I've seen. And I'm curious, has the market opened up enough that you can chase back into that product? I'm not calling out the product in the public forum for a reason. But do you have that ability to now chase what I'm seeing selling out very quickly?

Yes, we've made significant changes to our testing process at American Eagle, allowing us to be more agile and adaptable, not just in silhouettes but also in washes. My experience here has taught me that design isn’t solely about one aspect of jeans; both the wash and fit play critical roles. I believe we can excel in this area due to our innovative testing and market approach. There’s increased agility in our strategies, and we’re witnessing positive trends in denim at American Eagle. We're also complementing this with new ideas that we anticipated in our forecasts. It's essential to note that jeans remain a constant in the market. I recall Roger Markfield's observation about the enduring appeal of jeans and t-shirts in America; they evolve but never disappear. This team has excelled in curating the spring collection, effectively incorporating emerging trends in bottoms. Additionally, we have new tops and other promising items that we plan to explore further. We're optimistic about what we've seen recently and appreciate our ability to adapt. Exciting developments are on the horizon, and I look forward to sharing this enthusiasm with you at the end of Q1.

Also Jen, you have other businesses, too, that we're very excited about. We have our Todd Snyder business, which is growing very strongly. And we're very excited about that.

Our next question is from Jonna Kim with TD Cowen.

Just curious about the Quiet Logistics platform and how you're thinking about long term. You mentioned that the revenue growth and profitability, you're revisiting that for '23. What's sort of your assumption there? And how do you still think about the long-term trajectory? And in terms of the Aerie comp growth, how should we think about the cadence as we start to lap the impact of the new stores?

You're referring to Quiet, which is a significant acquisition for us. We require the capacity to fulfill orders for our brand, and Quiet has provided us with both efficiency and speed. Ultimately, we believe that succeeding in logistics is essential for winning in specialty retail and competing effectively. We remain dedicated to this goal and aim to improve our bottom line. Michael Rempell can elaborate on this further.

Yes. Thanks, Jay. I mean you really can't separate the two issues. So one is Quiet provides tremendous support for our brands and our business. It gave us capacity, like Jay mentioned, faster delivery times. And of course, we've consistently reduced our delivery cost per order to customers over the last couple of years, which is pretty unique in retail. But like I said, the third-party business just hasn't ramped to our expectations. It saw great growth. It grew almost 40% but that was below what we expected and it did at a margin that was below what we expected. So while we're not giving up on the business at all, we still think it's going to be a very valuable business someday. We are resetting our plans. And we're going to pull expenses out of that business. We're going to eliminate unprofitable service lines in that business. And we're very committed to reducing the loss on a full-year basis. So from a year-on-year basis, it's going to go from something that was a headwind in 2022 to something that provides benefit in '23. And again, over time, we still believe this is going to be a successful and profitable business for us. Was there a second part to the question?

Yes, just on the Aerie comps. Yes.

Yes. Considering the minus 2% for the fourth quarter, we've discussed the factors influencing this, including the 150 stores we added over the last few years and the 60 we added this past year. More specifically, the anniversary comp gap for Q4 resulted in a 10-point gap, with total revenue up 8 and comp down 2. This gap is expected to narrow further in Q1 as we mark the anniversary of last year's Q1 openings. Given similar total growth rates, we anticipate Aerie comps to become positive as early as this first quarter and certainly positive for the year. Michael previously explained how this growth will affect the overall business. From a GAAP perspective, to provide specific metrics, we expect the total growth compared to the comp gap to close and show positive results in 2023.

Our next question is from Janet Joseph Kloppenburg with JJK Research.

It's nice to see the improvement going on. I'll be quick. I wanted to ask Jen what her overview is on the intimates category. There seems to be softness across the industry, Jen. So maybe you could tell me what's going on there. And also on basic leggings, black leggings, I'm planning to see a lot more promotions in the industry. And I'm wondering our customers gravitating more to fasten leggings. And just lastly for Mike, given your guidance for flattish revenues this year of up low single, I think, should we expect inventory to track in line with that?

Intimates have been somewhat unpredictable. We're maintaining our market share, but it's been fluctuating. With the launch of SMOOTHEZ, we are discovering new insights that could lead to fresh ideas, which is essential for us. The team is ready for new challenges and innovations in intimates, and I will be discussing this more in the future. The situation is quite intriguing, resembling a tale of two cities. On one hand, there's a resurgence in certain areas of the business, but on the other, it feels like there's hardly anything happening. Our focus should be on what aligns with Aerie right now and what suits our business. Over the past year, we've gained valuable insights, and I believe we'll begin to gain traction with some of these new ideas and effectively focus on our strengths, such as our pioneering position in the bralette market. Regarding black leggings, there is indeed an abundance in the market, but we are noticing a shift towards more fashionable options, not just in black leggings but across other areas in the OFFLINE business. I want to acknowledge Abby and the team for exploring innovative ideas in that sector, and we are optimistic about the initial feedback. Furthermore, we have upcoming launches starting in Q3, with a particularly exciting launch in Q4 that will distinguish us from competitors. We will continue to leverage the established value of both brands by enhancing quality and average unit retail, and customers' willingness to pay reflects the trust they have in us. This is our focus as we develop our legging business.

And on inventory, by the time we get to end of the first quarter, as we talked about, total inventory is projected to be down as we sit today. And actually at the end of the fourth quarter, AE and Aerie U.S. and Canada inventory was down high single digits. We're expecting that to actually, by the time we get to the end of Q2, to be down even further, which really it should be, right? We were against the elevated inventories last spring that we had to clean up. You'd expect us to be down pretty significantly on this guide of flat to low single-digit revenue increase. Then when you get to the back half of the year, knowing all the actions we took last year to right that inventory for the back half, which drove the positive results we saw in Q3 and Q4 in general, it'd be really just philosophically back to inventory growth being below sales growth expectations similar to below. And that's what we're planning as of now.

Okay. We are running up on time now. So I'll turn it back over to Jay for some closing remarks.

Entering 2023, we are in better position. Our brands and operations are healthy. Given macro uncertainties, our outlook is cautious, we will stay disciplined on expenses and inventory. If demand is stronger, we will strive to deliver better results. Thank you for joining the call, and I look forward to updating you on our progress next quarter. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.