American Eagle Outfitters Inc Q1 FY2024 Earnings Call

Greetings, and welcome to the American Eagle Outfitters First Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Judy Meehan. Thank you. 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; 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. Consistent with the retail calendar and the 53rd week last year, first quarter 2024 results and today's discussion are presented for the 13 weeks ending May 4, 2024, compared to 13 weeks ending April 29, 2023. Comparable sales metrics are presented for the 13 weeks ending May 4, 2024, compared to the 13 weeks ending May 6, 2023. Also, please note that during this call and in the accompanying press release, certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis. Reconciliation of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website. Here, you can also find the first quarter investor presentation. And now I will turn the call over to Jay.

Thanks, Judy, and good afternoon, everyone. I'm incredibly pleased with our first quarter results. We posted significant growth from last year and meaningfully exceeded our guidance. These results were a strong proof point that our strategic priorities are driving business momentum and solid profit flow-through. This past March, we were excited to share our new strategic plan, powering Profitable Growth, which charts a new path forward for the company and aims to deliver steady growth as we build towards an operating margin target of 10% by 2026. AEO is a proven brand builder with distinct and undeniable strength. We have exceptional brands in American Eagle and Aerie with a powerful customer connection and tremendous growth potential. Our best-in-class operations bring our talented design team’s creative vision to life at the highest level every day. Our shopping experiences across stores and digital are second to none, powered by decades of customer insights. Our new strategy magnifies these strengths to go after growth opportunities, and our focus on continuous operational improvements will set the business up to deliver consistent profitable growth in the years ahead. As a reminder, our priorities are defined by three key strategic pillars: first, amplify our brands; second, optimize our operations; and third, execute with financial discipline. Jen and Mike will provide more detail on how we deliver against these pillars, but I want to underscore just how pleased I am with the momentum out of the gate. The teams have wasted no time implementing our priorities. Let me touch on a few highlights. First quarter revenue of $1.1 billion reflected a new record for the company, driven by 7% comp growth. What's more notable is the strength we saw across brands and channels. American Eagle, Aerie, digital, and stores all experienced solid growth and healthy metrics. We saw meaningful increases across Aerie and OFFLINE's core categories, particularly in apparel, where expansion beyond Aerie's foundation intimates has seen strong success as we reviewed active wear under the OFFLINE banner and Aerie's soft dressing presents huge long-term growth opportunities. These are large categories with significant white space, and Aerie and OFFLINE bring a fresh take to the market that is body positive and fun. As we continue to build brand awareness and invest in our assortments, we're gaining momentum, and we have strong plans in place to continue to gain share. I also want to take a quick minute to celebrate the great progress we have made on the American Eagle brand. As we shared in March, there's a renewed focus on driving growth by leveraging AE's powerful platform and amazing legacy to extend our dominance in casual wear. This presents a sizable growth opportunity. And as Jen will cover, early initiatives are delivering excellent results. We are gaining momentum and growing market share in a number of our focus categories. Strength was broad-based across channels with growth of both digital and stores. Here, too, we saw our recent initiatives aimed at improving KPIs deliver results. For example, more strategic and targeted customer tactics online led to a double-digit increase in digital revenue. Our first quarter financial results reflected strong early results on our priorities. We saw significant leverage across our cost base, fueled by a number of initiatives we actioned as part of our strategic priorities. Our strong cash position allowed us to fuel investments in the business. Additionally, we returned approximately $60 million in cash to shareholders through a combination of dividends and share repurchases. Our balance sheet is healthy with $300 million in cash and no debt. With a solid start to the year, we are on pace to deliver our full year guidance for revenue and operating income. This is an exciting time for American Eagle Outfitters. We feel very confident in our future. We have the right focus, a clear strategy, and a highly talented team that will carry us through as we unlock greater value for our shareholders.

Thanks, Jay, and good afternoon, everyone. It's great to see nice momentum across the business as we implement the strategic initiatives we reviewed with you last quarter. The teams have truly taken the task of amplifying our iconic brands. We are making great headway and fueling significant opportunities across the assortment while elevating our store and digital experience. I'm incredibly pleased with how we delivered in the first quarter. We brought innovation to core collections as well as new adjacencies, driving growth across American Eagle and Aerie. We maintained inventory discipline and chased into winning ideas efficiently, fueling merchandise margin expansion. We also grew our customer file across brands, marrying strong products with exciting marketing activation and a winning shopping experience. Starting with American Eagle, I am particularly encouraged by the acceleration to 8% revenue growth fueled by a 7% increase in comps. Key drivers of growth included women's overall, especially in tops, which as I reviewed is a major priority for us. I'll also highlight strength in dresses, skirts, and jeans. In these areas, we are seeing a positive customer response as we look to capture the social casual dressing occasion and a wider age demographic. Both of these are key growth opportunities within our long-term plan. Men's saw strength in pants, knit tees, sweaters, and outerwear. I'd also like to add that we are seeing nice momentum in AE 24/7, our men's activewear collection. Across the AE brand, our ongoing focus on flow-through led to a 310 basis point improvement on the operating margin to 19%. Turning to other brand priorities. As you know, we are modernizing our stores and improving inventory allocation. We are seeing exciting results from actions taken so far. The new lived-in store design is a truly fresh and modern update with remodeled stores continuing to outperform the balance of the fleet across several KPIs. Additionally, as I discussed last quarter, our focus on expanding availability of top-selling styles across our fleet is delivering a nice comp lift. Now moving on to Aerie. We achieved yet another record revenue quarter with the brand revving up 4% to last year, fueled by a 6% increase in comps. Exexcluding swim, where trends have been challenging in the spring season, Aerie comps were up 11%, consistent with trends exiting last year. The operating margin increased 70 basis points to 16.5%. And as Jay noted, we saw incredible strength across our core soft dressing and activewear businesses. In intimates, we continue to see traction with new fabrications and styles, including our fan favorite SMOOTHEZ collection. Looking ahead, there remains significant untapped opportunity for Aerie and OFFLINE as we are confident in their growth trajectory. New Aerie and OFFLINE stores continue to come out of the gate positive to expectations. We are also testing a new Aerie store design in Tysons Corner that showcases our assortment in an exciting and unique way. We opened this location a few weeks ago, and early indications have been encouraging. As we made investments in our assortment and shopping experience, we also fueled customer engagement with exciting marketing activations. In the first quarter, we kicked off our celebration of the 10th anniversary of Aerie Real, showcasing our decade-long commitment to body positivity and women's empowerment that has forever transformed the retail industry. Throughout the quarter, we shared real-life testimonies from our customers on the life-changing impact Aerie has had on them through social and in-person events. This included the first event, an exciting multi-stop Gen REAL tour running through the country this year. American Eagle continues to be at the epicenter of popular culture. Promoting our spring denim collection and capitalizing on the Western trend, we leverage influencers and organic content to build excitement across social channels. As we approach back to school, we look forward to the relaunch of the brand platform celebrating AE's heritage of self-expression, individual style, acceptance and, of course, optimism. As we fuel growth, casual dressing remains a quintessential part of our customers' wardrobe, providing the natural tailwinds to our business. We are seeing exciting new trends emerge on the runway and on the street. Two of the most beloved brands in the industry, American Eagle and Aerie, are well positioned to continue to win. And before I turn the call over to Mike, I want to say a big thank you to the American Eagle and Aerie team for their hard work and perseverance. We've had a lot to be proud of this quarter, yet the work continues. We are breaking new ground every day and forging ahead. And with that, I'll turn the call over to Mike.

Thanks, Jen, and good afternoon, everyone. As Jay and Jen reviewed, we're off to a strong start for 2024. Our new strategy is delivering great results with healthy growth across brands coming hand-in-hand with meaningful profit and margin expansion. Our focus on optimizing our operations and executing with financial discipline contributed to strong gross margin expansion in the quarter, and we remain on track to begin leveraging SG&A in the second quarter as additional work streams come into effect. Expanding on a few highlights. Consolidated revenue of $1.1 billion was up 6% to last year, driven by a 7% increase in comparable sales growth. As discussed last quarter, the shift in the retail calendar contributed approximately $15 million to revenue, reflecting the capture of a higher volume spring week. Operating income was $78 million. This represents a 76% increase to last year's adjusted operating income of $44 million. The operating margin rose 270 basis points to 6.8% against an adjusted operating margin from last year. Gross profit dollars of $464 million increased 12%. Gross margin expanded 240 basis points to a rate of 40.6%. This was our second highest rate since 2008, which really speaks to the structural improvements we're making to our business. Strong inventory management and our shift to a more profitable clearance model initiated in the second quarter of last year contributed to gross margin expansion. Lower product and transportation costs also had a favorable impact on margin. As I reviewed over the past several quarters, our focus on reducing costs across the business continues to deliver results. Operating expenses within the gross margin leverage, including 90 basis points of leverage on certain costs driven by rent, delivery, and distribution. SG&A expense of $333 million was up 7% to last year and roughly in line with sales growth, consistent with our guidance. As noted in March, SG&A is a big focus for us. We have work streams that are continually addressing 85% of our expense base with focus areas being store and corporate compensation, professional fees and services, and optimizing marketing spend. We're making good progress across the board and remain on track to begin leveraging SG&A in the second quarter. Depreciation was down slightly year-over-year, leveraging 60 basis points. The first quarter tax rate benefited from discrete items. We expect the tax rate to be in the mid- to high 20s for the remainder of the year. Earnings per share for the first quarter was $0.34 per share, and this rose 98% to last year's adjusted earnings. Consolidated ending inventory at cost was up 9% year-over-year with units up 10%. This includes higher end-of-season merchandise due to our shift to a more profitable clearance strategy, which will anniversary next quarter. Inventory levels remain healthy and in line with demand trends across brands as we maintain buying discipline and continue to chase. We ended the quarter with a strong balance sheet, holding approximately $300 million in cash and over $900 million of total liquidity, including our revolver. CapEx totaled $36 million, and we continue to expect full year spend to be in the range of $200 million to $250 million. As we discussed, the strategic plan is driving great results. There's a new mindset across the organization with every team decision now incorporating an end-to-end assessment of its ability to power healthy top and bottom line growth. This is a permanent cultural shift across the business that is optimizing how we operate every day and allowing us to maintain strong financial discipline. Importantly, as we discussed in March, the work is ongoing. We have formalized this new mindset and rigor into an office of continuous improvement, identifying incremental efficiencies and driving accountability and results. Now on to our outlook. We are making steady progress across our strategic pillars. As Jay noted, we're on pace to achieve our full year operating income guidance of $445 million to $465 million. This reflects revenue growth in the range of 2% to 4%, including an approximately one point negative impact from one less selling week. As we control expenses, we continue to expect full year SG&A dollars to be flat at the low end of our revenue outlook. Additionally, D&A is still expected to be approximately $220 million, and our projections for weighted average share count remains in the high 190s. As I discussed last quarter, we expect total revenue and profit growth to be skewed to the first half of the year, reflecting either year-over-year comparison, the impact of the retail calendar shift, and one less selling week in the fourth quarter. As noted last quarter, this implies a low single-digit comp assumption in the back half of the year. Quarter-to-date, we feel really good about the pace of the business with strength continuing into the second quarter. We're guiding operating income in the range of $95 million to $100 million with revenue up in the high single digits. As a reminder, this includes a $55 million positive impact on the top line from the shift in the retail calendar as we pick up a week of back-to-school, which are some of our busiest weeks of the year. Before I open up for questions, I want to underscore our confidence in the direction of the business. With our strategy and priorities aligned towards delivering consistent, profitable growth, we have a solid plan in place that is already unlocking significant value across the company. The teams are focused on driving towards our long-term plans.

Our first question comes from Matthew Boss with JPMorgan.

Great. So Jen, could you elaborate maybe on current demand trends, what you've seen in May, maybe what you're seeing across your product assortments across brands into the back half of the year? Just your confidence in comping that comp as we move through the year. And then, Mike, just on the SG&A, maybe how things came in during the first quarter relative to plan and then drivers of the inflection to leverage that you cited in the second quarter and back half of the year?

Sure. Okay. Thanks, Matt. Thinking about American Eagle first. As I said back in March, we're really up to amplifying not only American Eagle but both brands. I think about, Mike, you just said it well, we really did deliver on the strategy. We continue to dominate in jeans, and I believe there will be tailwinds there. We're seeing early trends, particularly in women's, and the assortments look great for back-to-school and onward. Completing the outfit has been something so important on the American Eagle side. We were very single noted, and it was time to rebuild that lifestyle that the customer was demanding from us. Those results have been better than expected. So we're going to continue to expand in those adjacencies, Matt. And then thinking about our fleet, we have a new store design, lived-in, that is getting an incredible response from the customers. We're going to continue to deliver on that. As I think about the product and how we're set up for back-to-school, the tailwinds are there in denim. We're going to round out the assortment in men's with the early reads we’ve seen in the business, which are great categories. We just need to dominate more and distort more into these categories that did win in men's. Women's were on a great trajectory. So we're going to continue to drive the early trends and get back into those businesses. We leave open to buy so we can really course correct as we build out into the back half. Aerie, look, the comps outside of swim were powerful. We were right in line where we left in Q4. Those businesses continue, and I think you're going to see a nice change in pace in that business as we lead into the back-to-school season, soft dressing and some new categories. We love what we're seeing in some of these new offerings that our customer has not really seen from us, one being sleep. There are some really fun ideas around that category. We're going to continue to innovate on our core categories. Even in some of the slowdown in intimates, we held our position and our market share, and we have new surprises in that category. So lots in store for back-to-school not only just with the product offerings but also our marketing. We're going to repitch the American Eagle brand. I think you're going to be really excited about what you see. It's getting back to our roots, our heritage. The campaign looks phenomenal, and the same for Aerie. So lots in store.

Matt, on SG&A, Q1 result for SG&A was right in line with our guidance. Dollars were up 7%, exactly in line with our comp result of plus 7%. In the second quarter, we're looking at SG&A growth in mid-single digits on high single-digit revenue growth. That includes the impact of that $55 million shift of revenue into the quarter from the retail calendar shift, and the SG&A up mid-single includes some variable expense shifts with that revenue. Then the back half of the year, SG&A dollars are planned down. So from here, we are structured to leverage. I am really pleased and proud of the expense leverage we saw in the first quarter across the P&L, a lot of which was in gross margin and then depreciation from here. We're looking to, and I'm excited about the fact that SG&A is where we'll see a significant amount of leverage from the second quarter on.

Our next question comes from the line of Adrienne Yih with Barclays.

Great. My first question is about the full year. Does that relate to visibility or macro factors? Jen, can you provide the percentage of sales that swim contributes? It was obviously challenging to sell swim products in 50-degree weather, but does that have a calculated impact on the second quarter? Lastly, Mike, can you clarify the ending inventory? There seems to be some confusion about how much inventory is on your balance sheet compared to what is being liquidated with third parties. That would be helpful to understand too.

Sure. Thanks, Adrienne. I can discuss the reiteration of the full year guidance. We're pleased with our Q1 results as we mentioned. We exceeded expectations and guidance on both revenue and our operating income range of $65 million to $70 million. The reiteration for the year indicates that we are on track, slightly ahead of our plans for the first half. This is more of a cautious outlook for the latter half of the year as we compare it to the strong results from last year's back-to-school season. July and August will serve as indicators for what we should anticipate. It's always a benchmark for our expectations in the latter half of the year. So we’re focused on maintaining our strategic direction and executing our plans. As we progress through the second quarter and into the back-to-school period, we can adjust our expectations for the year. Regarding inventory, we're currently seeing a 9% increase in inventory, which aligns with sales and our brand demand. There are a few points worth mentioning; we would have experienced a mid-single-digit inventory without the effects of managing clearance and selling it ourselves profitably compared to our prior sell-off strategy. This will be reflected in the second quarter. Therefore, the ending inventory for the second quarter and the inventory for the latter half of the year will be a more accurate comparison. Currently, we are holding more inventory as we handle the clearance ourselves.

The impact of swim is, for Aerie specifically, high single-digit impact on the front half and then not material at all in the back half. As I mentioned, other core categories that we will then double down on as we get into Q3 and Q4, we're really excited about. We've seen nice wins there.

Our next question comes from the line of Dana Telsey with Telsey Advisory Group.

As you look at the channel sales of stores and digital, what's the difference between Aerie and American Eagle, what you saw traffic-wise or transaction-wise in unbundling the comp by channel? And any change to your new store openings for this year and how you're looking at it?

Yes, thanks, Dana. The sales performance for the Aerie brand in stores and online was quite similar, both showing mid-single digits growth, with Aerie's comparable sales up by 6%. Both digital and stores contributed to that 6% increase, though swimwear had a greater effect on digital sales. When excluding swimwear, Aerie's comparable sales rose by 11%, which influenced the digital performance more significantly than the stores. For American Eagle stores, sales were slightly positive, while digital experienced high teens growth. The overall 7% comparable sales for the Aerie brand stemmed from slightly positive store sales and strong digital growth in the high teens. Additionally, we plan to open 25 to 30 new Aerie offline stores, while anticipating around 20 to 25 closures for American Eagle. We are closely monitoring this situation and expect the number of closures to decrease as we focus on repositioning more locations, driven by the positive results from our store remodeling efforts.

Got it. Just one follow-up, Jen, on the category of denim. How did denim do? How is pricing? With some of the new styles, you mentioned tops being a key call-out. Sounds like it's helping the tops business, too. Is that driving margins also?

We've really regained our position in that category, particularly in women's where we're seeing success. We're gaining insights in men's as well, and you will notice more updates on that in Q3. We're maintaining flexibility in that area and are now more balanced than before, allowing us to focus on the right fashion while avoiding excessive assortment. As we move into Q3, expect to see new fits and insights. We've conducted several tests that will inform our assortment strategies. I’m optimistic about what I'm seeing and believe there are favorable conditions ahead. We're entering a strong cycle in a key category, which is our main focus. Women's trends are particularly promising, and we will continue to support these developments.

Our next question comes from the line of Paul Lejuez with Citi.

If I am seeing this right, Aerie comps were up 6%. I think total revenue is up 4%. Why the negative spread on the Aerie business? And then curious if you could talk about what you saw by month throughout the quarter by brand and if you saw any weather impact.

Paul, yes, the difference in the Aerie plus 6% comp versus plus 4% total revenue is fully an impact from sell-off revenue last year. Last year in the first quarter, we had not made the operational change around selling our own clearance profitably versus sell-off. So we did book sell-off revenue in the first quarter last year at a loss. So that differential this year impacted Aerie more last year in the first quarter, which is driving that differential this year. We'd expect that to normalize as we anniversary that in the second quarter, and you won't have that impact go forward. We still expect Aerie's spread to be about 1 point directions for the rest of the year. I think by month, yes, it's always a little rocky when you've got kind of the spring break and Easter calendar shifts. Definitely a couple of rocky weeks there in terms of weather, but that's always a March, April phenomenon. We're pleased with the total quarter results coming in above our expectations.

And in May 2Q to date, anything you can talk about by brand?

Yes, continued momentum, similar to what we've been seeing. Pretty commensurate with the first quarter trend. We’re very pleased with that coming into the second quarter. Our guidance is based on mid-single. So again, early in the quarter, 3.5 weeks in. So both the second quarter guide and the full year, we still have got a long way to go. Some big kind of summer and back-to-school weeks coming in the second quarter, and then obviously, our bigger time of year is back-to-school and holiday. Very pleased with the start of the year, a lot of business ahead of us.

Our next question comes from the line of Jonna Kim with TD Cowen.

Just curious on the promotion side, if you saw any more uptick this year versus last year and AUR that you've seen this quarter and what your expectations are for the remainder of the year. Also, it looks like you have a lot of exciting marketing initiatives. Any color around the spend, if you're looking to increase spend year-on-year and how are you allocating by channel?

On promotions, our gross margin result reflects the effectiveness of our strategies and plans. We achieved a gross margin expansion of 240 basis points, influenced by various factors. Product margin and initial IMUs were robust, aided by controlled freight and transportation costs alongside our sourcing strategies. Although we didn't book revenue from the structural change in clearance, it contributed positively to our gross margin this quarter by enabling profitable sales through clearance rather than selling excess inventory at a loss. We also leveraged expenses and gross margin by 90 basis points, which I am very pleased with in the first quarter. Promotions remain well managed, thanks to the structural changes we have implemented in our operations. For instance, we no longer offer BOGO on jeans, which had been a long-standing practice. Our loyalty program has also been revised to stop giving away free jeans or bras. Additionally, the adjustments in clearance have positively impacted markdowns and gross margin, and we view these changes as permanent with satisfactory results. Regarding our marketing spend, we are increasing our investment. We are not looking to cut costs in advertising and marketing expenses; instead, we aim to optimize spending in other areas while continuing to support marketing. We have become more adept at utilizing our marketing dollars effectively and measuring returns from that expenditure. Our focus is on media, particularly digital media and performance marketing, while also reinforcing our brand. We are experiencing strong results from our advertising spend in these areas and will persist in seeking opportunities where we can generate returns on our investment.

Next question comes from the line of Chris Nardone with Bank of America.

Mike, just a follow-up on SG&A. How should we think about the outlook for SG&A dollar growth for the full year, if you guys are approaching the upper end of your sales guidance? And then in the back half, I think you alluded to SG&A dollars down, can you walk through some of the specific drivers of where you're seeing savings versus last year?

Sure. I believe we are entering a phase where SG&A leverage will positively impact our operating rate. We are positioned to leverage from this point onward. We anticipate mid-single-digit growth in the second quarter, paired with high single-digit revenue expectations, which will create substantial leverage. In the third quarter, we expect a slight decline in dollars based on low single-digit assumptions for the latter half of the year in both quarters. SG&A expenditures are also expected to decrease, so we are aiming to leverage SG&A even with low single-digit comparisons. It's worth noting that due to the retail calendar shift, we expect total revenue to remain flat in Q3 and decrease slightly in Q4 based on this assumption. The promising aspect is our ability to leverage any increase in comparable sales from this point, understanding that revenue expectations remain cautious until we observe a few more months of performance. Yes, we plan to leverage SG&A significantly for the remainder of the year across the next three quarters. At the higher end of our revenue guidance, we anticipate a healthy contribution to our bottom line from expense leverage.

Got it. And then just a quick one on the back half comp expectations above low single digits. Is that uniform across both brands? Or are you expecting different trends between AE and Aerie in the back half?

We'd expect Aerie to be on the higher end. Again, the comp in Q1 was plus 11% when you back out the impact of swim. We're seeing that continue into the second quarter. Swim becomes less of a contribution to the brand as we pass through the second quarter. Like last year, we saw some pressure on Aerie's comp through the first half because of swim and went right back to double-digit comps in the back half. There’s no reason to expect we wouldn't see Aerie's comp exceed AE. The flip side of that is we're seeing momentum in the AE brand as well. I think reasoning why I guide in the back half is cautious, is it’s early in the year, but we've got momentum across the brands. The strategies we've got in place to grow the brands are working. To answer the question, on average, you think would be a little below Aerie based on that, but we've got momentum in both brands, which is exciting.

Our next question comes from the line of Marni Shapiro with Retail Tracker.

Jen, congratulations. The stores look really beautiful, and the tops are amazing. I wanted to discuss something you mentioned about expanding the age range for the Eagle customer. I wasn't certain if you meant for Eagle and Aerie or a combination of both. Are you noticing an increase in older shoppers or non-high school teen shoppers spending more time in stores? Or is this a reflection of what I've observed in some of your media posts, where the teens seem to appear older, and there’s a sense that they’re progressing from ages 12 to 18 all at once, skipping the in-between? Could you share your thoughts on this expansion of the age range?

Sure, Marni, welcome. I have a 17-year-old. Returning to our strategy, we are committed to our course and I'm pleased with what I observe. We will always prioritize our core customer and ensure that we have offerings to cater to them so they will choose to engage with us. Our focus now is on retaining those customers. Reflecting on our strategy, we aim to provide new and core occasions, social casual, men's active, and everyday casual. As we introduced these assortments, we've noticed customers are more inclined to stay with us, and that trend is evident. We're actually seeing a slight increase in the next age bracket. They are remaining loyal, which is a shift from the past where they would exit at a certain age. The more we concentrate on this and expand our offerings, the more likely they will continue with us, and this approach is proving effective. Expect to see additional offerings in future assortments and quarters.

Will the marketing stay very reflective of the younger shopper and just the product assortment will expand a little bit?

Product will expand. I think you're going to see a more balanced age demographic as we continue to provide these other options. Denim is timeless and remains our core business. With the introduction of new fits, we're attracting new customers because in the past we focused on just one fit, especially for women. Now that we've diversified our offerings, we're seeing an increase in customers who love our jeans for various reasons including price, value, quality, and innovation. I believe we may experience positive momentum in this category, which should be beneficial for the brand.

Our next question comes from the line of Janet Kloppenburg with JJK Research.

Congratulations on a great quarter. Jen, I know you work hard on every aspect of your business, but weather has hurt you in the swim area for a couple of years in a row now. I wonder about the time and focus you put into it and how you'll think about that category going forward. I also wanted to hear what you're thinking about the progress in the men's business and in the social occasion business. Mike, I think you said that SG&A would be up mid-single digits in the second quarter and down, I presume, on dollars in the back half. Maybe you could give us an idea of how much. That we should have leverage even in the fourth quarter with sales being modest, I think that's what you're guiding to.

Yes, it was a great call. We are certainly dedicating the appropriate time to that category. We have a new team in place, bringing fresh perspectives and ideas. I just reviewed their strategies for next year, and I like what I'm seeing. We will make adjustments as we move into 2025. I saw the product assortments, and we have new categories in Aerie that will be expanded both online and in stores. This will be a significant advantage for the brand next year, starting in Q3. Regarding men's clothing, we have achieved some impressive results. It has primarily been about focusing on the successes we identified early on. The 24/7 collection is performing well, along with select knit categories and outerwear that I mentioned earlier. It's now about investing in the new successes we are observing. You can see the trends in our marketing; we will be introducing more categories moving forward, and we will be increasing our focus there.

Let me just be specific on SG&A. Yes, again, dollars up mid-single digit in the second quarter on high single-digit revenue, both the revenue and SG&A dollars being impacted by the retail calendar shift with the $55 million benefit in the second quarter. Q3, we’d expect SG&A dollars to be down slightly. Yes, I think it's a cautious low single-digit comp. But again, with the retail calendar shift impact, there's a negative $45 million impact in Q3. So in that kind of comp expectation, total revenue would be relatively flat. So we'd be set to leverage.

And the only way that doesn't happen is if the sales numbers disappoint?

Correct. That's how we're structured on the low end of our revenue guide of 2%. We're structured to leverage significantly on every comp point above that expectation.

And just, Michael, some brands are seeing upticks in their transportation costs right now, their freight. What’s going on with you guys?

We are not seeing that. Again, first quarter gross margin results were a mix of benefits across the board from initial markup, including freight and transportation costs, well-controlled inventory and promotions, and leveraging our expenses and gross margin. Line of sight for the rest of the year is no headwinds from freight and transportation costs, and we're expecting initial markup benefit in future quarters.

And our next question comes from the line of Alex Straton with Morgan Stanley.

I've just got two for you here. First, just on SG&A. Can you elaborate qualitatively on what exactly is happening in the back half that enables you to pull back on the spend there? Just so we can understand the drivers. And then secondly, just on the Aerie intimates weakness that I believe you all highlighted. Can you just remind us how much of the business that comprises as well as provide any color on how that market is trending or what you're seeing in intimates? That would be super helpful.

Yes. The drivers of SG&A, we talked about for a year now as we kicked off our profit improvement initiative last year and started to see the expenses and gross margin benefits from work around rent, delivery, distribution, and supply chain costs coming through our gross margin the whole back half of last year. We talked about those being priorities with SG&A coming later. As we landed our plans for this year, the work across 85% of our expense base across the P&L in general with the line items in SG&A that we talked about being store labor, corporate compensation, related incentives, and optimizing our advertising dollars, reducing leveraging supplies and repairs. A lot of that work is taking hold; some of it in the first quarter, but a large majority of the benefits really starting here in the second quarter and for the rest of the year, including compensation and incentives being in that pool.

In Aerie, roughly, it's about a third of the business. We're not forgetting about these core competency businesses that we launched and we owned. The SMOOTHEZ category, you're going to see newness there. We're really excited about where we're taking the intimates business. What’s changed a little bit is the customer has pivoted. If you think about our OFFLINE business, which has done incredibly well this quarter, sports bras are amazing. Thinking about that category as well gives us the ability to leverage both businesses, Aerie and OFFLINE, on where the customer is going, and we certainly did that. The sports bras business has been amazing. In fact, we ranked fairly high in market share in that category and also in leggings. We gained over 2 points of market share in the leggings category in this quarter. So really excited about that business. Again, going back to our strategy, we want to win in intimates and in soft apparel. We're seeing that happen, particularly in apparel, growing off the OFFLINE business. We definitely want to be the new authority in activewear. I'm very excited about all these other areas that we are diving into and owning and winning at. Lots of expansion opportunity there. So really excited for more to come as we build out the rest of this year.

Great. Thanks, Jen. So that completes our call for this afternoon. Thanks, everyone, for your participation, and we appreciate your interest.

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