American Eagle Outfitters Inc Q1 FY2023 Earnings Call

Greeting and welcome to the American Eagle Outfitters First Quarter 2023 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 the 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 www.aeo-inc.com in the Investor Relations section. Here, you can also find the first quarter investor presentation. And now I will turn the call over to Jay.

Good afternoon, thanks for joining us today. Entering 2023, we built our plans for the year cautiously, balancing continued optimism for our brands with the flexibility to navigate uncertainty in the macro environment. Exiting the first quarter, I am pleased to note that the strategy delivered for us. Our team successfully managed through the quarter and achieved results in line with plan. Consolidated revenue of $1.1 billion was up 2% versus last year and marked a new first quarter high for the company. Adjusted operating income of $44 million improved slightly versus last year. We continue to make progress strengthening the balance sheet and redeemed our outstanding convertible debt in the quarter with healthy liquidity. By brand, first quarter revenue declined 2% at American Eagle and increased 12% at Aerie. Despite a tough spending environment, both brands demonstrated a sequential improvement from fourth quarter trends. We made progress at American Eagle with profits up versus last year and top line trends moving in the right direction. We remain steadfast in our focus on healthy and profitable growth. Although still early, new expansions like AE77, our premium capsule, and 24/7, our entry into men's active wear, are seeing encouraging results. Aerie remained a fan favorite, delivering record revenue and profitability. Our active wear extension OFFLINE continues to carve out a unique identity in the marketplace with its high-quality assortment and vibrant spirit. Additionally, investments in new stores are increasing brand reach and awareness, providing a tremendous foundation for Aerie as it continues to scale in the coming years. We took action to restructure acquired platform operations to strengthen profitability. As I mentioned last quarter, across AEO, we have initiated a formal program to find further cost savings and discover more efficient ways of working. We have a powerful portfolio of brands with tremendous value still to be unlocked. In the near term, we are highly focused on managing through this macro environment. As Mike will review, we're maintaining strong disciplines and seeking opportunities to optimize profitability this year and in the future. With that, I'll turn the call over to Jen.

Thanks, Jay, and good afternoon, everyone. I'm proud of how our brands performed this quarter despite choppiness in the retail environment. We showed up well across stores and online with fresh styles and chased into high-demand items profitably. While promotions were up versus last year, we participated strategically, protecting our multiyear progress in building brand equity. Our first quarter average unit retail (AUR) was the second highest in history, down 3% versus last year's record results, yet up over 20% versus pre-pandemic levels across brands. Our customer KPIs were healthy. In the first quarter, we grew our total customer file and also expanded our loyalty customer base. In fact, our Real Rewards loyalty program was recognized by Newsweek as America's fourth best program in apparel this year. Moving on to the brand. Aerie had a strong quarter with double-digit revenue growth and positive comparable sales growth. We saw an incredible customer response to new styles in our core apparel collection across fleece, bottoms and tops. Seasonal tops and new bottoms silhouettes in particular were key drivers of new customer acquisitions. Demand for our active wear extension OFFLINE by Aerie also remained healthy with strength in tops, sports bras, active shorts and fashion items. Swim and intimates were soft this quarter, consistent with trends we've seen in recent periods as our customers focus on other categories. We are continuing to engage our customers with exciting content. In the first quarter, we grew our Find Your Own Wonder campaign supporting our Y2K collection, including partnerships with key influencers and publications like Who, What, Where. This month, Aerie launched the Real You summer campaign, celebrating our new summer collection, including our fan-favorite pool-to-party capsule. Turning to American Eagle. Revenue was down versus last year, yet profits were up as we continue to focus on healthy sales. We made progress across several major categories. For example, women's tops, I'm pleased to say, returned to growth. We also continue to see exciting comps in non-denim bottoms and denim trends improved throughout the quarter. Men's was a bit soft, where I believe we have the opportunity to lead with more newness. As noted last quarter, following several years of work to streamline the AE brand and improve profitability, we are honing our focus on growth. I'm pleased with the response we've received to AE77, our premium denim collection, and 24/7, the men's active wear line. We are testing and scaling thoughtfully as we position AE for profitable growth. We are continuing to think creatively about how we leverage marketing to drive momentum for AE. In the first quarter, our organic partnership with Alix Earle, one of TikTok's fastest-growing influencers, generated strong buzz. Videos promoting AE products have received 6 million views to date and increased sales velocity of promoted products. Additionally, we introduced an exclusive partnership with e.l.f. cosmetics, bringing together two powerhouses in the Gen Z world. The collaboration was first of its kind and sold out within minutes of hitting our website. Looking ahead, I am excited by new trends in casual wear. While the macro is clearly tough, we will lean into high-quality innovation and marketing to draw our customers. I'm incredibly grateful to the AE and Aerie teams for their hard work and solid execution this past quarter. Thank you. And now I'll turn the call over to Michael.

Thanks, Jen, and good afternoon, everyone. I am encouraged with the progress we are making across our operations, brands and channels. Given ongoing uncertainty in the macro, we've been very focused on making operational improvements across the business with an emphasis on finding efficiencies in labor, inventory and expenses. This is a multiyear journey, yet the early impacts we are seeing provide a compelling proof point of the work underway. In the first quarter, store revenue increased 5% as customers returned to in-person shopping and new Aerie stores continue to ramp up. I am pleased to note that store labor cost declined versus last year as we achieved efficiencies in our labor model, offsetting both wage inflation and payroll related to new stores. Our focus on the store fleet is to ensure that we are fueling the best stores in the best locations with the right inventory, the right staff and the latest new technology, all to deliver outstanding customer experiences while finding efficiencies and cost savings at the same time. We are taking steps to enhance our operational excellence across all these areas as we focus on maximizing ROI and store productivity. This includes the RFID and AI-based technology I discussed last quarter, which provides accurate inventory and location visibility within our stores. As we roll out this new capability, I believe the benefits to our business will be meaningful, yielding efficiencies and inventory productivity. On the digital side, revenue declined 4% as customers return to in-person shopping and demand continued to normalize from elevated builds during the pandemic. New leadership is bringing innovative ideas to drive improvements to online KPIs. Specifically, we're looking at greater use of analytics and testing to drive increased engagement, traffic and conversion. I remain excited about what we have in the pipeline for 2023. We've also seen positives in our supply chain. On the outbound side, Quiet Platform's innovative fulfillment model continues to drive incremental benefits to our brands. Digital delivery costs in the first quarter were down versus last year and leveraged as a percent of digital revenue. We reduced shipments per order and found efficiencies in fulfillment costs all while delivering orders to customers faster. Since the first quarter of 2019, digital delivery costs have leveraged nearly 100 basis points as a percentage of digital revenue. As Mike will review, we took action this quarter to restructure the third-party side of the platform, reduce expenses and focus on core services that drive value both for American Eagle and Quiet customers. We now have a leaner organization that will position us well for the future. We see opportunities to leverage Quiet fulfillment capabilities to unlock even greater efficiencies in our operating model. This includes optimizing inventory placement, buys and replenishment as we work upstream through our supply chain. As expected, 2023 is providing a much more stable supply chain environment with lead times and product costs normalizing back to pre-pandemic levels. This was incredibly beneficial to us in the first quarter. It enabled us to plan cautiously and successfully chase into strong items. With continued choppiness in the macro environment, we are approaching the balance of the year with a similar strategy. From where we sit today, we are leaving a sizable portion of inventory open as we focus on maintaining agility to read and react to demand signals in the market. As I said earlier, we are early in our journey to strengthen our operating model. We still see significant opportunities across both labor and ongoing inventory efficiencies, and we are also going to be keeping a sharp focus on expense reductions. Thanks. And with that, I'm going to turn the call over to Mike.

Thanks, Michael. Good afternoon, everyone. As expected, the environment remained choppy in the first quarter. Yet, I'm pleased with how we managed through monthly variability. We entered the year with a healthy inventory position, product cost favorability and renewed agility in our supply chain. This enabled us to operate with flexibility, strategically control promotions and deliver on our first quarter plan. Consolidated revenue of $1.1 billion marked a new first quarter record for the company, increasing 2% versus last year. Adjusted operating income of $44 million was up slightly, reflecting an operating margin of 4.1%. Compared to last year, gross profit dollars increased 6% to $413 million, with the gross margin rate up 140 basis points. Merchandise margins increased versus last year, led by a favorable transportation environment with a partial offset from higher markdowns. Markdowns remain below pre-pandemic levels as we maintain focus on healthy promotions and preserving the progress we made in rebuilding brand equity over the past several years. Within gross margin, we also leveraged compensation and delivery costs, partially offset by rent expense linked to new store openings. SG&A expense of $312 million was up 5% versus last year, driven by corporate compensation and advertising. Store compensation was down despite new store growth, driven by efficiencies in our labor model. We also saw a reduction in professional services, another area that has been a focus over the past several quarters. Depreciation increased primarily due to investments in new stores. In the first quarter, we took measures to restructure Quiet Platform and strengthen profitability. We reset expenses to align with the current pace of growth in the third-party business. This included downsizing the workforce and streamlining costs to focus on areas where we see the greatest long-term runway. In our first year of ownership, we've seen significant benefits to our brands from Quiet Platform's innovative delivery and fulfillment model. From here, as Michael mentioned, we're focused on the next layer of benefits, including rethinking how we buy, place and replenish inventory. As noted last quarter, we began a company-wide assessment of our entire cost structure as we prioritize unlocking greater profitability in our business and rebuilding long-term operating profit margins back into the double digits over time. This includes a full review of expenses across the P&L as well as processes such as clearance management as we continue to explore more efficient ways of working. I look forward to sharing more on this in the second half of the year. Adjusted EPS was $0.17 per share. This excluded $0.08 of charges primarily due to impairment and restructuring related to Quiet. Our diluted share count was 197 million, down from 220 million last year. Turning to our brands. We are pleased to see trends for both Aerie and American Eagle improved sequentially in the first quarter. Aerie revenue increased 12% with comparable sales up 2%. As Jen noted, new product assortments resonated well. Additionally, we saw a nice lift from new stores opened over the last two years as they ramped up along the maturity curve. Aerie's operating margin of 15.8% improved 240 basis points versus last year, driven by normalizing freight costs as well as rent and expense leverage. American Eagle revenue declined 2% and comps were down 4% versus last year. As Jen noted, we have rebuilt the foundation of the AE brand over the last several years, eliminating unproductive SKUs and closing down or relocating unprofitable stores. This allowed us to deliver better profitability year-on-year despite lower sales. With the bones of the brand in a healthier place, we're now focused on pursuing new ideas that can drive profitable sales moving forward. Consolidated ending inventory cost was down 8% compared to last year, with units down 9%. AE and Aerie inventory across the U.S. and Canada, in particular, ended the quarter down double digits versus last year as we continue to buy cautiously in the current environment. Looking ahead, we are maintaining inventory discipline and expect second quarter inventory to pace below revenue. In the first quarter, we successfully redeemed the remaining balance of the principal associated with our convertible note position. We ended the quarter with $118 million in cash and continue to have healthy access to additional liquidity through our revolver with total liquidity amounting to $659 million. Capital expenditures totaled $46 million as we continue to prioritize free cash flow generation. We're investing selectively and focusing on leveraging the infrastructure we have. We now expect full year CapEx to be in the range of $150 million to $175 million, down from our prior guidance of $150 million to $190 million at the start of the year. We continue to expect our consolidated store count in 2023 to be roughly flat to last year reflecting approximately 25 new Aerie store openings, offset by approximately 25 net closures for the AE brand. Moving on to our outlook. As the supply chain continues to normalize, we're seeing product cost favorability and increased agility in our operations. Yet the environment for discretionary spending remains volatile. Over the last several weeks, business has slowed from the first quarter. While it remains to be seen if this trend will continue, at this time, we are guiding to second quarter revenue down in the low single digits with operating income in the range of $25 million to $35 million. We expect the gross margin recovery from last year as we cycle pressure from end of season sell-offs and elevated freight costs. SG&A is expected to increase in the low to mid-single digits and depreciation expense is expected to be similar to the first quarter. For the year, we see revenues flat to down low single digits and operating income in the range of $250 million to $270 million. As discussed, we're highly focused on finding efficiencies and savings across the organization and we'll continue to provide updates on our progress. With that, I'll open it up for questions.

Our first question comes from Paul Lejuez with Citi.

Can you maybe talk about what has changed thus far in the second quarter and where you adjusted your expectations down for the back half as a result of that? And then Mike, talking a lot about cost savings and efficiencies, when are we going to see that hit? Curious if there's anything coming in the second half? Or any concrete examples of where you might be finding savings to date as you go through and do that work.

Yes. Thanks, Paul, it's Mike. I can talk about the trend of the business. Obviously, we talked about first quarter revenue up 2%, comps down 1.5%. Definitely choppy as we keep using that word to describe it. Felt good about how things were progressing through the spring break shift and Easter shifts, got to the end of April and now into May, and things have slowed down a bit. So again, May is just our smallest month of the quarter. We're four weeks in, and we're keeping an eye on when schools are letting out. It looks like it's going to be later this year, which could have an impact. So we're being cautious about what we've been seeing for the last few weeks. The majority of the quarters ahead of us still probably 75% plus of the volume, but the guide is cautious; it's just based on what we've been seeing for the last several weeks. Your second question on cost savings: we're four to five weeks into pretty aggressively laying out a roadmap for opportunities, some of which we haven't waited on. As Michael talked about, store labor was a good result in the first quarter, and we've been looking at that since last year. Services were also a good story in the first quarter. That work continues. We're pulling down our capital spend more to benefit depreciation in future quarters and really next year and beyond. And then as I mentioned in my prepared remarks, I mentioned clearance inventory. That's something else that is underway as we speak and could have some benefits for this year, maybe even in the second quarter, a little more than we've provided in our guide. That's something we're not locking down right now in terms of plans. It's really just about how we manage through clearance, our end of season sell-off process. It's basically part of the operating model like I've been talking about within our $4.7 billion cost base. We're changing that process as we speak. So some of those things we think could have more second-half benefit than what's in our guidance right now, but I'll be talking more about that on the second quarter call to lock down things more specifically and provide more specifics at that point.

Got it. And then was that slowdown at both brands? Or was there more one than the other thus far in May?

Both brands were affected a bit, reflecting in our guide, and that's why we think there could be some shift happening, and we want to keep an eye on that. Cautious for now — three and a half weeks into the quarter — it's definitely a bit in both brands.

Our next question is from Jay Sole with UBS.

I'm wondering if you can elaborate a little bit on the intimates business within Aerie. Maybe Jen can talk about what you're seeing there and what the plan is going forward?

Sure. We're really excited about this business actually because the ceiling is lowered in intimates. We held our ground on bras for sure. There's been some shifts in silhouettes. But we're doubling down. In fact, I have a huge offsite with the team where they're going to present tons of new innovation and ideas. The whole category has shifted—girls are wearing bra tops out—so there's less need for traditional bras and we're focusing on how she is wearing her intimates. We've certainly seen uplifts in sports bras. As Mike and team mentioned, OFFLINE is certainly an exciting category for us, and sports bras are really accelerating. If you haven't tried our sports bras, please do; they're very comfortable and supportive. We're not giving up on intimates. Next year is Aerie's anniversary—Aerie Real anniversary spring 2024—and we're revving up into that year with new exciting things happening in all of our categories.

Our next question comes from Matthew Boss with JPMorgan.

So Jen, you mentioned a focus on driving growth at the American Eagle brand. Could you just elaborate on key initiatives in place today, timing of those initiatives and any key categories in the assortment you see as an opportunity as we look ahead into back-to-school?

Sure, absolutely. We've been really rationalizing this brand, as Mike mentioned, too, closing some stores and exiting businesses that were not profitable. We've been focused on the bottom line and delivering margins in American Eagle. We've seen improvements in women's, particularly a significant shift with comp trends into Q1. We're leaning into that category. In men's, we did see some softness. I think we could be a little more aggressive in newer categories, and we've tested those categories in Q1. You'll see as we head into the back half of this year—since we launch back-to-school around June 30—that we have some new ideas we were able to react with for men. Jay mentioned 24/7; that active line is incredible. I just saw all the creative for it and some of the innovation there and the excitement around it. I think our customer will be very excited as we head into back-to-school. Also AE77 is a small test but these jeans are premium price points and we like what we're seeing early on. They could attract an older customer. We're excited about some new ideas and opportunity in these new categories to really go after them as we get more momentum. Aerie's back-to-school is incredible — it continues to get better. To remind you, Aerie since 2019 has grown 129%, which I believe outpaces competitors. The team is an engine and we have so much opportunity ahead, and we're going to keep looking for our golden nuggets and driving it. I will say the teams reacted to the business early and we saw nice momentum coming out of the quarter in April. Easter was a shift and momentum happened. I'm optimistic. We haven't hit Memorial Day yet. Our stores business performed nicely in Q1. So when these kids get out of school, I'm hoping they like what they see.

Great question. On the margin side, Q2 gross margin expansion will be healthy. If you remember last year, we had freight-related pressure; we expect recovery versus last year from freight and product costs, and that will flow through. Last year we did some actions to right-size inventory at the end of the quarter that we don't have to re-duplicate this year, so we should benefit from that anniversary. We do not have any intention or plans for higher markdowns for the year. Our inventory is in good shape, supply chains are back to normal, and we have flexibility to buy. Against our guidance, inventories are positioned appropriately and we can chase into trends as needed for the back half. We're not planning on higher markdowns at all.

Our next question is from Adrienne Yih with Barclays.

Jen, I was wondering on the AE brand, how much higher are initial retails at AE versus 2019 and the ability to — after we get through this kind of period — the ability to hold on to that pricing based on elevating the business and more innovation. And then for Mike, can you talk about traffic and/or transactions versus ticket/basket for each of the brands?

Both brands are significantly up versus 2019, and we're pleased with that. We're seeing favorable costing as well, so we'll have to balance pricing and what our out-the-door prices look like while ensuring we're competing on our terms. We've struck gold in some categories and we don't want to give up the progress we've made over the past three years. Denim is an example where we increased prices in specific categories. In American Eagle, the two new initiatives we launched in testing haven't encountered resistance to pricing, which we'll use as test points for scaling those businesses.

Adrienne, on traffic: traffic has been relatively healthy. As Jen said, AURs are still up nicely versus pre-pandemic levels and we aren't giving much of that AUR back — AUR is down only a little versus last year, not substantially. The average basket size is primarily driven by AUR, which is down a bit, roughly 2%. We have some work to do on conversion; we believe some of that may be tied to macro conditions, where some mid- to low-income consumers are coming through but not converting as heavily. We're keeping an eye on it and working to move the needle.

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

As you think about the upcoming back-to-school period with the cadence of business currently, any shifts that you're making, whether it's marketing, when you're bringing in goods and how you're planning promotional levels as we go through Q2 into the back half?

Everything has to be a full 360 approach when it comes to back-to-school. We do it best and I'm proud of the way the stores look. The store business has been healthy and we're focusing on stores. We have a new leader in the digital business, David Zhang, who brings experience and is already unlocking opportunities for online. For back-to-school, I just saw the product and we'll continue building on the assortment shifts from Q1 into Q2. We tested some aggressive ideas in bottoms in Q1 and we'll build on that. For Q3, we're seeing bright spots in denim that we can respond to. We've seen improvements in denim, particularly in women's, as we paced through the quarter and into May. So we feel ready. We do not plan on broad-based promotion — we will promote with intent. Mike mentioned some opportunity to improve how we clear goods in Q2, hopefully more profitably. We have good plans and will come out clean and be ready to fight.

On promotional levels, we don't have plans to be more promotional for back-to-school. We're clean going into the back half and last year we cleaned up inventory in the spring, which led to healthy promotional levels through the third quarter. We're planning similar levels of promotion this year.

And Dana, my phone went off earlier — so Dana, I know you and I'm sorry. Thank you very much.

Our next question is from Jonna Kim with TD Cowen.

Just curious about what you're seeing in the loyalty program, how the spending and retention trends have been like versus history? And what are some of the data advantages you can have by leveraging the loyalty program?

Jonna, we're pleased with the relaunch of the program from a few years ago. Response to the program, engagement and membership levels are continuing to increase. Our total customer file for the company is very healthy in both brands. In total, we're meeting new heights in total customer count and loyalty membership. It's a piece of the equation in terms of everyday communication to customers and driving traffic to stores and digital channels.

And Jonna, just a little more color: our total customer base is roughly flat, but our loyalty base has increased. These customers are our most valuable customers — they're spending more and transacting more frequently. That's an encouraging sign across both brands. We relaunched the program about 12 to 18 months ago and we're constantly refining it so our customers get more benefit, engage with our brands more, and we run it to efficiently grow the business.

Our next question comes from Alex Straton with Morgan Stanley.

In the sequential top line weakness you've observed, have you seen any variations by household income demographic? And then secondly, I know you're near peak AURs and I'm just wondering, do you think that's at all contributing to some of the challenges on the top line? How do you guys gauge price sensitivity?

Three and a half weeks into May, we're asking exactly these questions. We see a bit of a bifurcation in the market between brands appealing to higher income customers and those exposed to mid- to low-income consumers. We are susceptible to that mid- to low-end consumer shift, which is why we are cautious. Our inventory flexibility and normal supply chain timelines allow us to navigate these external impacts we can't control. We're monitoring customer metrics and the loyalty base; we're not seeing major impacts tied to AUR. We are actually down a couple of points from the peaks of 2021 and haven't grown AUR since those peaks. So while AUR is elevated versus pre-pandemic, it's not increasing now. We'll continue to assess and control what we can, like inventory and operating model adjustments.

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

First on a housekeeping item, Michael: is depreciation now looking to be up mid-teens for the year? Maybe you could help me on that. And then on the guidance cut on operating income for the year that includes a lower outlook for Q2 as well as for the back half—could you flush that out for me, please? And Jen, was there some change in category investment in May versus April? It sounds like April was a decent month. You said you had some acceleration in April maybe after a weak March, so I'd like to understand maybe how the assortment shift may be impacting the response rate right now at both brands.

Janet, for Q2 guidance, depreciation dollars are expected to be similar to the first quarter. With the new full year CapEx range of $150 million to $175 million, depreciation will be consistent quarter-to-quarter and will be roughly a 10% increase on the year based on that range. We've made a lot of investments in recent years—particularly in Aerie and OFFLINE growth—and we're going to grow into and optimize those investments. We're looking for depreciation to normalize and even come down over time. Regarding guidance, yes, the full year guidance contemplates what we just guided for Q2 and how we're viewing the rest of the year. We talked about flat to low single-digit down revenues for the year; the income guide is based on that revenue outlook today.

But is there greater pressure on gross margin or not as much recovery as you had originally expected?

We expect recovery from freight and related product costs and to see that flow through. We expect a net positive impact from lower markdowns for the year as planned. So yes, gross margin expansion should come from those things, but there will be less operating expense leverage on the revenue level we are guiding to.

Janet, on assortment: we've built on the assortment from April. We do need a few of our seasonal categories to turn on; we're hoping as Memorial Day passes we'll see that happen. In American Eagle we saw bright spots in bottoms, including denim, which we leaned into going into Q3. Women's tops returned to growth and were a big positive. Overall, assortments did not significantly change; in some cases, like women's tops, we could use more. We're cautiously optimistic and ready to react as these seasonal categories come in.

Our next question is from Chris Nardone with Bank of America.

Can you help quantify what is driving the low- to mid-single-digit increase in SG&A in the first half of the year compared to last year? And then if you can tie that into your expectations for full year SG&A growth embedded in your new EBIT guide? That would be great.

Chris, SG&A was up 5% for the first quarter. We provided Q2 guidance of a low- to mid-single-digit increase. For the year, you can expect roughly that same range, although we're actively working through opportunities to reduce costs. The increase year-over-year is mostly compensation-related—payroll taxes and benefits—plus the impact of a 53rd-week year, which adds about one point of growth. We're reviewing the entire $4.7 billion cost base and will provide more color and specifics on the second quarter call. Some things are already underway.

Got it. And then just one follow-up on gross margin. Are the opportunities around freight and cotton recapture just a fiscal '23 thing? Or do you expect some of the cost reversal will help you looking out into fiscal '24? I'm just trying to understand the cadence of when you expect to fully recuperate that $60 million to $80 million in incremental freight costs you guys have talked about in the past?

We'll get most of that back this year. There is some spillover into 2024 as goods that we sourced in 2022 are being sold in 2023 and goods we source this year will spill into 2024. The sourcing environment is very favorable right now: demand is weaker, commodities are stable, and transportation is available at pre-pandemic levels. So I expect we'll see recapture this year and benefit into early 2024.

And our final question is from Marni Shapiro with Retail Tracker.

Jen, a quick question on gross margin to make sure I understand the puts and takes because there's obviously the freight recovery and it sounds like the sourcing environment is better. Were you able to get those AUCs for the back half of this year? Or is that for next year? And then when you talked about promotional pressure, was that pressure coming on mostly the seasonal goods? So was that primarily in places like swimwear, for example, where you've had some issues? Or is that across the board? Because I'm wondering if denim is as promotional going forward or are knit tops and the things where you've seen improvement in women, do you have to be promotional in those areas too? Or are the promotions more specific?

Marni, I don't think we really had broad promotional pressure. Markdowns were up a little in the first quarter versus an unusually low prior-year quarter. The first quarter this year was more appropriate relative to history. We're not planning higher promotional activity in any quarter throughout the year. There's no inventory reason to overpromote to clear units. We're not in a position where we need to over-clear inventory.

Was the pressure in AUR just versus a very high AUR last year? Is that what it really is?

Yes. Last year's AUR in the first quarter was historically high, so comparisons are tougher.

We do expect both transportation and product cost benefits similar to, if not greater than, first quarter throughout the year.

Can I just follow up on seasonal products: are you seeing the same slowdown across the country? Are there any regions where the weather has kicked in earlier? Or is it across the board?

We're seeing better results in the South and the West, where seasonal categories often kick in earlier. Geography matters and we review regional results weekly. The guide is cautious and reflects weaker results in other areas of the country, but we're hopeful that weather and school timing will help drive seasonal sales as the quarter continues.

I'll take the rest offline.

I would like to turn the floor back over to Jay Schottenstein for closing comments.

In conclusion, we are staying focused on navigating the near term. Our brands are in good shape, and we know there is an opportunity to unlock growth and profit from here. We're seeing discipline on inventory and expenses and looking for additional efficiencies. Thank you for joining the call, and I look forward to updating you all on the progress next quarter. Thank you.

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