Greetings, and welcome to the American Eagle Outfitters Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this call is being recorded. I would now like to turn the call over to Judy Meehan, Senior Vice President, Corporate Communications and Investor Relations. Thank you, Judy. You may begin.

Good morning, 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. 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, second quarter 2024 results and today's discussion are presented for the 13 weeks ending August 3, 2024, compared to 13 weeks ending July 29, 2023. Comparable sales metrics are presented for 13 weeks ending August 3, 2024 compared to the 13 weeks ending August 5, 2023. Additionally, you can find the second quarter investor presentation posted on our corporate website at www.aeo-inc.com in the Investor Relations section. And now I'll turn the call over to Jay.

Thanks Judy, and good morning, everyone. During the second quarter, we continued executing on our strategy plan, powering profitable growth, removing our iconic brands forward and strengthening our operating capabilities to continue driving shareholder value. Our second quarter results were strong proof, consolidating financial results showed improvement across the majority of our key performance metrics. We delivered our sixth consecutive quarter of record revenue, while also achieving meaningful operating income growth. Second quarter results built on our strong first quarter performance locking in a solid first half. We make consistent progress across our strategic priorities align with our multi-year plan. As a reminder, our three key pillars are first, amplify our brands. Second, optimize our operations and third, execute with financial discipline. Touching on the strategic and financial highlights for the quarter. To start, second quarter revenue of $1.3 billion was a new record for the company. We achieved 4% comp growth and a total revenue increase of 8% for the quarter. Notably, both brands and channels posted nice growth. We have two of the most beloved brands in retail, American Eagle and Aerie. Each with their own exciting roadmap for expansion. AE has defined American casual fashion for countless generations and I love seeing it come to life in new ways, as we leverage our powerful legacy and execute on our growth initiatives. AE comp grew 5% in the second quarter. We are gaining momentum and growing market share and a number of our focus categories. Our new lived-in store design has now been rolled out to approximately 30 locations, and we are seeing great results with remodeled stores outperforming the balance of the fleet. Aerie is a very special brand, anchored in positivity and women's empowerment, as we build brand awareness and expand into new categories, we are reaching new heights. In the second quarter, Aerie achieved another record revenue result with comp increasing 4% driven by strength in apparel and our offline active sub-brand. New Aerie and offline stores are performing very well, expanding our reach and bringing in new customers. Second, in line with our focus on delivering profitable growth, we also continue to realize efficiency across key focus areas. This drove significant leverage on our cost base as we implemented new operating principles across the business and delivered 55% growth in operating income year-over-year. Third, we exited the quarter with our balance sheet in excellent shape with $192 million in cash and no debt. During the second quarter, we leveraged healthy cash flow to fund long-term investments in our brands and operations. We also returned $120 million in cash to our shareholders through a combination of dividends and share repurchases. This brings year-to-date returns to $180 million consistent with our commitment to delivering value to our shareholders. Lastly, in the second quarter, we were very excited to welcome a new board member, Stephanie Pugliese. Stephanie brings a strong track record as a proven strategist with over three decades of brand building experience in the consumer sector, complementing our outstanding board, which has always brought strong expertise and invaluable advice to our organization. Now, as I look forward, I'm pleased with the positive customer response to new Fall collections. New product innovations, combined with our unique formula of outstanding quality and style offered at great value, as the cornerstone of our brand, position us perfectly for today's consumers. Across brands I'm optimistic that we will continue to deliver great experiences for our customers in the upcoming seasons. At the same time, we recognize the importance of inventory and expense discipline in this dynamic macro environment, and that will remain a core focus across the organization. In closing, the second quarter results lock in a solid first half for AEO and our powering profitable growth strategy. As Mike will review, we are on track to deliver operating profits of $455 million to $465 million at the high end of our previous outlook. Looking beyond this, I'm confident we have the right plan in place to further expand our brands and deliver sustainable profit growth over the long-term. Our focus on greater efficiencies is yielding results, and we will remain steadfast in making continued progress to drive shareholder value. Now over to Jen.

Thanks, Jay, and good morning, everyone. I'm really pleased with our second quarter performance. Our brand strategies are guiding us in delivering strong results. Across brands, we offered trend-right collections and exciting new marketing. We stayed disciplined on inventory and chased into fan favorites profitably, which contributed to higher merchandise margins, and we are actively engaging with our customers more than ever. Both AE and Aerie saw double-digit growth in their customer files, further demonstrating the widening appeal of our brands. Let me start today with American Eagle. As Jay noted, AE is a mainstay in casual fashion that has brought joy to generations of customers. An incredible journey we've been on over the past year is modernizing AE's legacy of optimism and individual style anchored in an exciting new growth agenda. In fact, this was the fourth consecutive quarter of revenue and profit growth for AE, with revenue rising 8% and comps up 5%. Operating profit also continues to rise, with every quarter we are making steady progress, amplifying American Eagle with exciting collections. I'm particularly pleased with the momentum in women's, which once again led growth for the quarter. We continue to drive tops, a category that has now seen six consecutive quarters of growth. As I reviewed in March, completing the outfit is a huge focus for us, and I love seeing new fashion check across knits, tees, and shirts. Skirts, dresses, and shorts were also very strong. We have seen a great response to new looks targeting social casual occasions and our widening age demographic, both of which are key growth opportunities. In men's, we were very pleased with improving trends in tops and strength in twill bottoms. Additionally, our Activewear collection 24/7 is gaining traction, offering a new active casual option defined by high quality, sharp design, and great value. We look forward to continuing to use our learnings to read and react to new trends. In the second quarter, we were also excited to reintroduce our marketing platform, Live Your Life. Built on AE's legacy of individuality and optimism, it's a powerful anthem that inspires every generation to live life to the fullest. Our Fall campaign features U.S. Open Champion Coco Gauff and star quarterback Trevor Lawrence. Just last week, we introduced a limited-edition product collaboration with Coco designed to highlight denim-forward styles. We look forward to building on our platform as we move ahead. Moving on to Aerie, we continue to see a terrific response to this amazing brand. Our soft dressing categories and the expansion into Activewear with offline has been simply incredible. The second quarter marked yet another record for Aerie with revenue up 9% to last year, fueled by a 4% increase in comps. As we continue to scale, profit flow-through is improving with margins that are expanding. Most major categories were positive. One callout continues to be the expected weakness in swim. Excluding swim, which is a seasonal spring category, Aerie comps were up 7%. As we shared in March, Soft Apparel and Activewear are two of Aerie’s hottest categories and where we see the most growth potential in the coming years. I love how we delivered here in the second quarter, with both categories comping in the double-digits. In Soft Apparel, strength was led by tees, tanks, and pants and shorts. As our customers reach for our tried-and-true cozy favorites. Offline continues to be outstanding; we came to market with a stellar assortment that captured key summer active looks, driving strength in sports bras, shorts, and active tops. As we transition to back to school, we are seeing a very positive customer response to newness in categories including sleepwear, as well as strongholds like fleece and leggings. We are also amping up our influencer strategy to expand the power and exposure of Aerie Real. In July, we launched Get Real with Me, featuring 30 prominent TikTokers sharing what makes them real, and the campaign has been a huge success to date. As we continue to build buzz around offline, we are unveiling new Activewear-focused marketing for the first time in this Fall, highlighting our breadth of fabrications with a tagline 'Move the way you want.' In summary, our brands are healthy, growing, and well positioned. Our new Fall collection is doing well, and I'm pleased with our performance so far in August. I'm excited about upcoming collections, which include fun collaborations and marketing events to delight our customers. We are making fantastic progress across our strategic initiatives. I remain incredibly confident that we are on the right path to unlock the tremendous potential we see across our brands. Thanks to the teams for delivering once again, and I look forward to the continued momentum. And with that, I'll turn the call over to Mike.

Thanks Jen, and good morning, everyone. Our strong second quarter results speak to the power of our brands and the work behind our powering profitable growth plan announced back in March. Foundational improvements to our cost structure are driving nice leverage across the P&L, leading to strong operating profit growth and margin expansion. Banning on a few highlights, consolidated revenue of $1.3 billion was up 8% to last year, driven by a 4% increase in comparable sales growth. As discussed last quarter, the shift in the retail calendar contributed approximately $55 million to revenue, reflecting the capture of a higher volume back-to-school selling week. Operating income was $101 million, increasing 55% to last year. This included a contribution of approximately $20 million related to the calendar shift. The operating margin rose 240 basis points to 7.8%. Gross profit of $499 million rose 10%. The gross margin expanded 90 basis points to a rate of 38.6%. Merchandise margins were healthy and up to last year, led by favorable product costs. Additionally, we maintained strict cost discipline, leveraging BOW costs by 40 basis points, driven by rent and digital delivery, along with lower costs per order. SG&A expense of $345 million was up 4% relative to last year, consistent with our guidance. SG&A as a rate to sales declined 90 basis points driven by leverage across compensation including incentives, store and corporate payroll, professional fees and services, and supplies and maintenance also leveraged. I'm pleased with the progress the teams are making across key focus areas. We're challenging how we work and driving efficiencies in how we operate every day and remain on track to leverage SG&A over the balance of the year. Depreciation was down year-over-year, leveraging 60 basis points. The second quarter tax rate was 25% in line with guidance; we continue to expect the tax rate to be in the mid to high 20s for the remainder of the year. Earnings per share for the second quarter were $0.39 per share, rising 56% compared to last year. Consolidated ending inventory cost was up 4% year-over-year. Inventory levels remain healthy across brands as we maintain buying discipline and continue to chase. As Jay noted, we generated healthy cash flow allowing us to fund investments in our business as well as return cash to shareholders. Second quarter CapEx totaled $61 million in the quarter and $97 million year-to-date. We continue to expect full-year spend to be in the range of $200 million to $250 million. In addition to paying out our quarterly dividend, we repurchased 4.5 million shares in the quarter amounting to $96 million. Bringing year-to-date share purchases to 6 million shares at $131 million. We ended the quarter with a strong balance sheet with approximately $192 million in cash and over $800 million of total liquidity, including our revolver. Second quarter results are a good demonstration of our ability to deliver strong results under our new strategy, fueling growth across our brands while driving efficiencies to improve profit flow-through. This operating discipline is now ingrained in our organization as we move our business forward, continuing to create shareholder value, which leads me to our outlook. For the third quarter, we expect operating income to be in the range of $120 million to $125 million. This reflects approximately $20 million of profit that shifted into the second quarter from the third quarter due to the retail calendar. We expect third quarter comparable sales to grow in the range of 3% to 4%, with revenue flat to up slightly reflecting $45 million of revenues shifting out due to the retail calendar as previously discussed. For the full year, we have updated our operating income outlook to $455 million to $465 million at the high end of our prior guidance. This reflects income growth of 21% to 24% relative to adjusted operating income of $375 million last year. We expect comparable sales growth of approximately 4%, with revenue up in the range of 2% to 3%, including the impact of one less selling week as previously discussed. We remain on track to leverage SG&A for the year with the bulk of the second half benefit coming in the fourth quarter due to the timing of incentive and other expenses as well as ongoing profit improvement initiatives. Third quarter SG&A is expected to be down slightly. D&A remains at $220 million, and our projections for weighted average share count remain in the high 190s. Before I open up for questions, I want to underscore the confidence that I have in the direction of our business. With the clarity of our new strategy, we're moving our brands and business forward in line with our long-term agenda. And with that, we'll open it up for questions.

Our first question is from Adrienne Yih with Barclays.

Great to see the progress. Jen, I was wondering, you mentioned that you were happy with the early reads on back-to-school, sort of quarter-to-date month-to-date. I was wondering if you could go a little bit deeper into that between kind of Aerie versus American Eagle and if you're seeing some of the silhouette shift impact thus far, and then following up, how do you think about the duration of back-to-school in terms of having a second wind after September after Labor Day? And then Mike, can you talk about the estimate down slightly? Is that a change from last quarter? If so, what has shifted there, because you are up against a pretty big up 16% last year for that same quarter.

Really pleased with second quarter results and really, we're delivering on this strategy. I am so pleased with our results and as we look ahead, I'm very excited about the acceleration into back-to-school. As we think about denim, it's our mainstay. Jeans are a rite of passage for American Eagle. We have an incredible denim business. We're number one for 15 to 25-year-olds and number one for women of all ages. We're really leaning into women's particularly. Denim is our mainstay, I'm going to reiterate, and we love the new trends that are emerging. We are not just a one fit brand anymore. Women's is so nimble these days, and we are leaning into all the new silhouettes; I feel really good about lower and looser silhouettes, and we're seeing really nice results there. As we think about the future, we're modifying our trends that we're seeing. We're making sure that we're leaning in as we go into the back half of Q3 and Q4, and we're ready to play. Going into Aerie, I mentioned a little softness in swim in Q2, but we are seeing really nice results as we head into August. There are still many weeks ahead of us, but very similar to what we saw outside of swim. In fact, we're seeing some nice growth in our categories, including soft dressing; really amazing results there. We launched Sleep, and I don't know if you saw it, but early on in July, and we are chasing that business. It's done fantastic for us. And also, of course, offline. Offline is our business right now. We are not seeing any slowness in the athletic category. In fact, we were high double-digits on last year's double-digit increase. We are going to continue to lean into that category.

So we had a great result here in the second quarter. We guided the mid-single-digit increase in SG&A. We came in on the low side of that guidance, just an indication of how our expense initiatives have taken hold, and we're continuing to strengthen that muscle even further. For the remainder of the year, we expect SG&A to be down slightly in the third quarter, and down in the fourth quarter, leveraging for the rest of the year. And that's really consistent with the previous guidance we've given. And then your question on just the elongation of the back-to-school season, we have seen that in recent years where, especially in the Northeast, I think as you get into Labor Day and into the early September period, we have seen demand stretch a little bit. We're assuming something similar that will happen this year.

Our next question is from Matthew Boss with JP Morgan.

Jen, maybe could you speak to the poor consumer relative to new customer acquisition? I think you talked about expanding the customer file at American Eagle by double-digits, actually across both brands. So maybe what are you seeing from your existing customers? What do you think is driving new customer acquisition and how best to think about where we stand today on assortments relative to where you see assort opportunities as the year progresses?

Look, we're really leaning into our marketing campaigns for sure. If I think about American Eagle, we're amplifying our strategic growth initiatives, and we have new categories in American Eagle. We have 24/7 and AE77. We're getting nice early reads on those businesses, and we're offering new categories that were not in existence in prior years. We're leaning into social casual. I think we're going to own this category. We're doing it better than our competition out there, and this is what we do best, right? Quality and value. I want to highlight quality for our brands. Our quality is like no other and we spend a lot of time leaning in and ensuring that we have the best quality out there at the best price. I missed your second question—can you please reiterate that?

Just on new customer acquisition and relative to opportunities within the assortment as the year progresses that you see.

Yes, and it's not just acquisition; it's also retention in both brands. We saw in past years that our customer disengaged, especially post-2021. Now just with these assortments in both brands, we're really able to keep that customer with us, and they're growing with us. Such an important key factor for us as we grow these businesses.

On gross margin, yes. I think with the revenue shift in the calendar, we're not expecting gross margin to expand as much as we have seen in the first half, really because of the leverage of the expenses and gross margin. Nothing tied to product margin. We still see favorability in our initial markup, and we're managing promotions and markdowns as we always have. So it's really just about the revenue shift, not leveraging those expenses. We're not looking for the margin improvement like we've seen in the first quarter and the second quarter.

Our next question is from Jay Sole with UBS.

Could you elaborate on the expectations for the promotional environment from other subsidiaries regarding promotional uptake? Are you anticipating a more competitive landscape, and has that changed from your outlook 90 days ago?

Yes, it's always competitive. Jay, I think it's a good question, but I think we've been managing things consistently for multiple years now. We manage markdowns intelligently. We compete when we need to during peak periods. We've refined how to manage the depth of our discounts and the length of our promotions to maintain a very disciplined approach to markdowns. We don't see that changing at all based on what we're seeing in the business right now. On gross margin in general, I think this year is a great equalizer due to these shifts creating some nuances we don't want to get into details around. On the year, we are seeing a total gross margin improvement based on what we've seen so far in the first half. The color I just gave Matt a minute ago indicates we are tracking toward our longer-term goal of 39% to 40% for gross margin, and we're seeing nice improvement on a full-year basis toward that goal. The value equation on promotions is also key. We know our price-quality equation is in a great spot in the industry. So even if there are deeper or more aggressive promotions from other retailers, we're managing intelligently, ensuring the price-value equation is our starting point.

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

As you think about the stores channel versus the digital channel, what are you seeing in each? You had mentioned in terms of the stores business, some of the new formats. How are you seeing traffic in stores versus digital? And then just expanding on the gross margin, the puts and takes in terms of the components and what you're seeing also with freight costs and also cotton costs as we move through the back half of the year.

For the second quarter, Dana, we saw strength across both brands and channels. So both stores and digital were positive in the quarter. We're seeing the same thing continue into the third quarter here with a nice start in the back-to-school peak season and strength in August. Both channels are positive still, with traffic being healthy in both stores and on the digital side. Gross margin puts and takes are similar. I think we're seeing flow-through of finished product margin benefits. There has been some freight disruption in the industry, but our teams have gotten ahead of that really by changing timelines and handover dates, so we've mitigated any issues there. It just comes down to quarterly revenue shifts, how we're leveraging the expenses and gross margin tracking nicely to a full-year improvement in our gross margin rate as planned.

Our next question is from Paul Lejuez with Citi.

Maybe give a little bit more specifics on what you're seeing quarter-to-date by brand, also just how you're thinking about the composition for each in terms of what comp assumptions you bake in the second half. Separately, we're seeing some SG&A improvements down in the back half. How should we be thinking about SG&A dollar growth for F'25?

In the second quarter, both brands showed positive trends. As Jen mentioned, Aerie's revenue increased by 7% excluding swim products. We have observed consistency in this trend as we entered August. AE is maintaining its momentum from the second quarter, and Aerie has also seen an increase similar to its performance without swim. It's encouraging to see this positive start at the beginning of the quarter, especially during the strong performance weeks of back-to-school in August. Regarding SG&A, we plan to leverage our expenses for the remainder of the year. Spending is expected to be relatively flat on the lower end of our guidance and may increase slightly on the upper end. For 2025, we are actively developing our plans. We are focused on managing every expense line item and have set specific targets for each. All our decisions are made with the goal of meeting our 2025 targets. Overall, we are aiming for a total revenue growth rate of 3% to 5% year-over-year, and SG&A expenses will be budgeted to grow at or below that rate. This is our current outlook for 2025.

Our next question is from Jonna Kim with TD Cowen.

Could you talk about the monthly cadence during the quarter, how each month performed? And also, just comment on consumer health, if you saw anything notable there? I'd love any color on how you're planning for the holiday as well.

For Q2, May and June were the stronger months. We did see July moderate a bit. I think that's been an industry topic. Traffic data and other indicators showed July slowing down. However, August has kind of re-accelerated right back to the pre-July trend. As for our guidance for the rest of this quarter coming off August, we're planning for the middle periods between peak selling periods and peak traffic periods between back-to-school and holiday. We're using the assumption that things might moderate again within our 3% to 4% comp guidance for the full quarter.

Our next question is from Janet Kloppenburg with JJK Research.

I have a question for everyone. Jay, we've been hearing from many CEOs regarding their views on the consumer outlook as we navigate these uncertain times, especially with the upcoming election. I'd like to know your thoughts on that. Jen, the stores look outstanding, and I’m curious about Aerie's potential to accelerate now that swim has less seasonal importance. Regarding the men's denim business at AE, the silhouettes look great to me, but it's not being highlighted. Michael, I'm interested in the factors affecting merchandise margins as we move forward, especially with AUC levels normalizing and some pressures on freight costs. Additionally, the inventory levels appear strong. Will they continue to improve?

First of all, we see a lot of opportunity out there. We have great brands in American Eagle. We have great sub-brands. As Jen has emphasized, we work very hard on giving great value to our customers. Not only are we proud of our quality, but we're also proud of our fits, our comfort, and what we've developed. In all the years I've been in this business, I probably see the greatest opportunity in the history of the company. Because number one, we've got American Eagle growing the right way. We have Aerie growing in the right way. We have a hot brand in the athletic area with OFFLINE, which is just getting started. We're only in a few states, and we see great opportunity. Even with Aerie, we're only in half the country, and we see great opportunity there to grow this business. We've developed great sub-brands in our 24/7, which has great potential to be a strong brand within OFFLINE. At the same time, we have our AE77, which is our better, more sophisticated line appealing to a mature customer. From our standpoint, today we're a $5 billion business, and we think in the next few years we could be a $10 billion business.

That's really exciting.

I'm going to emphasize this: we are committed to making the investment to become that business. We're putting together our plans now, what it's going to take and what we have to add. Because we're going for it. We see the opportunity. We're excited about our business. You can walk in the malls today, and I'll put my stores up against the best-looking stores in the malls, the best shopping experience. We believe we have the best experience between the online and in the stores; it's a seamless experience. The last couple of years, we've invested money in innovation. We're not going to play second fiddle to anybody. My goal is to have the best shopping experience, whether online or in the stores. Now I know everybody goes quarter-to-quarter; I can't run a business quarter-to-quarter. I'm looking for the future, and I'm committed to do whatever it takes to build this thing to where it deserves to be built. We've put together a world-class team. I cannot emphasize the quality of our designers and our merchants that we've brought together. I'm very pleased, and I'm very proud of what we have.

That's a hard one to top, Jay. Thanks. As I think of Aerie, the best thing is we've run 17 quarters of record revenue in Aerie. And on top of it, the profits are exceeding even the top line. So we're really focused on a profitable, healthy business. As we look forward, we get our early reads in July, and we react to the business for the back half. The new reads are looking very strong in some of our new businesses, including Sleep, as I mentioned. OFFLINE was outstanding in Q2. This is just about building on innovation there and owning that business. By the way, our legging business has a cornerstone and market share there. We're number four in sports bras, actually. Think about how young this business is in OFFLINE. So there's lots of opportunity to grow that business and compete with higher-end competitors. I'm very excited about that business. Men's denim, first of all, I'm going to work with my marketing team, and we're going to make sure that that signage looks amazing in stores because we deserve it. The business is starting to turn around, particularly on the top side. We have more work to do in denim, but we like the fits that are coming through. We have a lot of agility to impact the business. Other bottoms are checking in nicely as well. Just as a reminder, in men's, we tend to sell shorter into the Q3 side of the business. So more to come on that front, but we have a lot to read and react to, and we're here to deliver.

On the margin puts and takes, consistent with what we've been describing: we're managing markdowns intelligently. We'll compete when we need to. We have line of sight to our initial margins that are positive and up over last year for the rest of this year. We're looking to flow through that benefit. We have line of sight into early initial buys for the spring season and the first half of next year looks favorable as well. I know there's some freight disruption and conversations around freight. Right now, we're managing, and we're not seeing any impact or decline relative to last year. We have line of sight into improvements for the remainder of the year and into early next. You're right; inventory looks great, with a plus 4% at the end of the quarter, which is in good position between AE and Aerie and the categories driving the business. As we look at our inventory plans for the rest of this year, we feel the same about the remainder of this quarter and Q4.

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

Can you talk through the moving pieces of your updated sales guidance for the full year relative to how you were planning the business last quarter? It looks like you took down the high end of the range. You've also talked extensively about strong quarter-to-date trends. So I'm just trying to tie it all together. One quick follow-up on your store growth plans. Can you reconfirm what the plans are for net store openings for both Eagle and Aerie this year?

On full-year sales guidance, I think the thing to focus on is the approximate 4% comp for the year. Narrowing the range on the high end of our earnings guidance, $455 million to $465 million, is tied to that approximately 4% comp, as well as the expense efficiencies we're seeing come through the business. We feel good about narrowing to that high end. Regarding other revenue components, we just have some line of sight to tighten those components up. Store plans include 25 to 30 Aerie and OFFLINE still planned for this year, and around 20 to 25 AE closings, so we’re kind of net neutral on total stores. On the remodel front, we’re executing 70 to 80 remodels, and we’re seeing great results from those initial stores. We’ve opened over 30 by the end of the second quarter, and we’re consistently seeing a lift across those stores. That’s creating a lift for the brand, and we’re excited about it. We’ll be executing many more during the third quarter.

Our next question is from Marni Shapiro with Retail Tracker.

Congrats on the great quarter. I will echo Janet's comments; Jen, the stores look amazing. I just have a couple of questions for you, and Jay, one for you. Your fashion on the women's side of American Eagle is turning very quickly: dresses, some of your fashion tops. So I'm curious where you guys stand on chasing, or are you pulling forward deliveries? What does that look like from your standpoint? You referenced some of the extensions of product categories. I'll just use pants like trousers as an example. Is that helping you keep the consumer longer, or are you getting a new consumer in? Jay, I just want to follow up on the real estate conversation because you guys are having great success with these new store formats, and you are still a net store either opener or remodeler. I'm curious about your thoughts on the real estate environment right now. You've been doing this a long time. Do you feel like it's favorable right now, and are you able to get the deals you want?

Regarding chase, absolutely, this team is very nimble; I do like a fast turn because it bode well for our demand on the brand. We’re seeing great responses in women’s, and we are doubling down on fashion. It's where we're getting a ton of the growth, and not only are we able to pull in these new items and do it relatively fast, we're also creating capsules. So it's not just random chase. What we like to do is focus on the right ideas, pull them together, curate them, and deliver a new concept. I think you're starting to see it, whether it's Coco Gauff or a collaboration, but we are bringing in capsules bi-monthly that mean something to the business, and they're resonating with the customer. Regarding ideas like trousers, I think it's both; we're getting new customers certainly with some of these new categories, but then they are sticking around. Double-digit growth in both brands in our customer file and we’ve only just begun. Certainly, we have new tactics on the digital side; this is our bulletin board to the world, and we are only scratching the surface there. So a lot more to come.

Right now, we have a very healthy and comfortable fleet. Eighty percent of our stores are in Aerie sub-malls. Between the combination of Aerie and OFFLINE, we’re able to go to the mall developers and offer them some fresh products. Everybody wants freshness in the mall. I think there will be a lot of opportunities out there because we have a lot of exciting things. Our new store design is very fresh and sharp-looking. I think mall developers will all want one. Our standby stores are great stores, and we put American Eagle, Aerie, and OFFLINE together. We have exciting things to offer the developer, and now, with the potential of expanding certain categories within our stores and developing sub-brands, it keeps us relevant to developers and makes us one of the important players in the mall.

We have multiple formats available. So this new design is different; we have different options. We can go into certain centers with a $25, $30 a foot version and keep our lease terms flexible, which gives us advantages. Or in centers where we know we're going to be for a long time, we go in and do a full remodel; that could be around $100, $125 a foot, signing longer lease terms that are favorable. We have the option to do multiple versions at different costs: lighter touches versus full remodels.

Just to reiterate, the Aerie new store design, we have a side-by-side in Tysons. Great location, right when you come off the escalator. We love the results here. We’re definitely going to roll this out; it is outperforming the average, so really exciting new design.

Our next question is from Corey Tarlowe with Jefferies.

Mike, I just wanted to ask on SG&A. Within the framework that you've outlined, how best to think about the different buckets where you see the most opportunity? How do you stack rank those opportunities relative to one another?

We've been talking about this for a little over a year now: the focus on core line items across the P&L, not just in SG&A but expenses and gross margin as well. In SG&A specifically, I think we talked about 85% of our costs are in compensation lines, so store labor, corporate compensation, and related expenses, advertising, services purchase, maintenance. Those continue to be the key focus areas where we saw the leverage in the second quarter. We're managing those expenses tightly, and those are the key buckets that the teams are focusing on and managing to the targets we’ve set, not just this year but out to the next two years as well.

Okay. I think we have time for one more question in the queue.

Our final question comes from Alex Straton with Morgan Stanley.

Just a couple for me here. One, just a quick one on the full-year revenue guidance; I wanted to follow up on. It sounds like even though you're lowering that, it's not reflective of the worst AE or Aerie back-half outlook, is it just tightening up somewhere? Can you just elaborate a little bit on that? I just want to make sure I understood the third quarter to fourth quarter operating income cadence. It feels like a bit of a big step down and then a bigger improvement, so I just wanted to understand the drivers there.

On full-year revenue, yes; it has nothing to do with our core brand trajectory. We're talking about the strength we're seeing here in August across the business and what our 3% to 4% comp guide for the rest of this quarter considers in tightening from 2% to 3% from 2% to 4%. It's other revenue components where we just see a more accurate line of sight to narrow this down a bit. So you’ve got license revenue, other emerging brands, and other revenue components; it's all that. In terms of operating income for the remainder of the year, we’re guiding Q3 essentially flat revenue and similar income, so we hit about a 9.5% rate, a 9.6% operating rate for the third quarter last year. Essentially, we're looking at something similar this year, impacted by the revenue shift. Q4, revenue is sort of flat to slightly down; we are going to see, based on SG&A leverage and expense leverage, we're expecting operating rate improvement in the fourth quarter. The great equalizer is the entire year, and we're guiding toward approximately 4% comp in the $455 million to $465 million range on that 2% to 3% total revenue growth. We will see nice operating rate expansion as well, getting to somewhere around mid-8%, or call it 8.5%. That will be a 140 basis point improvement to last year as we continue working toward our ultimate goal of 10%. That's a nice improvement on top of last year's improvement.

Thank you. There are no further questions at this time. This does conclude today's conference call. You may disconnect your lines at this time. Thank you for your participation.