American Eagle Outfitters Inc Q4 FY2024 Earnings Call

Greetings, and welcome to the American Eagle Outfitters Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Judy Meehan. Please go ahead.

Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer; Jen Foyle, President, Executive Creative Director for American Eagle and Aerie; and Mike Mathias, Chief Financial Officer. Before I begin today's call, I need to remind you that we will make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. Results actually realized may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Also, please note that during this call and in the accompanying press release, certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at www.aeo-inc.com in the Investor Relations section. Here, you can also find the fourth quarter and fiscal year investor presentation. And now I'll turn the call over to Jay.

Thanks, Judy, and good afternoon, everyone. 2024 was a solid year for AEO. We launched our new Powering Profitable Growth strategy and aligned the organization's focus on three key priorities: amplify our brands, optimize our operations, and execute with financial discipline. And we achieved excellent results. Record revenue of $5.3 billion was fueled by a 4% comparable sales growth, reflecting positive momentum across brands and channels. Adjusted operating profit of $445 million marked one of our strongest years in history, and we drove significant operating margin expansion. This included strong fourth quarter results, which came in slightly ahead of the outlook provided in January. Comparable sales grew 3%, building on an 8% increase in the fourth quarter of 2023. Aerie comp sales rose 6%, and American Eagle was up 1%. Additionally, fourth quarter operating income of $142 million was the highest we've delivered in over a decade, with good operating margin expansion. Full-year cash flow from operations was over $470 million, and we returned over $280 million to our shareholders in the form of buybacks and dividends. Reflecting on year one of our plan, we had some clear wins, yet meaningful opportunities remain, and we are fine-tuning our strategy moving forward. Touching on a few highlights. Within our Amplify pillar, both American Eagle and Aerie continued to resonate strongly with customers this year, delivering positive comp growth and expanding their customer accounts. American Eagle maintained its number one ranking in denim with our core customer base and achieved its sixth consecutive quarter of positive comp growth. Women's was a standout, reflecting strong traction with new dressing occasions. Men's saw sequential improvement. And as Jen will share, we remain focused on reinvigorating growth. Turning to Aerie, we crossed $1.7 billion in revenue in 2024. Soft apparel and our activewear collection, OFFL/NE, were the big highlights, more than offsetting softness in intimates and swim. I am pleased to note that in leggings, we are now the number two ranked specialty brand within our core demographic. As Jen will review shortly, we have targeted strategies across Aerie and OFFL/NE to continue strong growth through greater brand awareness and expanding our collections. Moving on to the Optimize pillar, in 2024, we placed a heightened emphasis on improving our operating capabilities. As Mike will review, we made strategic investments in our store fleet and digital platform to support growth across channels. And we continue to build speed and agility in our supply chain while ensuring we are delivering the best products and value to our customers. Lastly, on to our third pillar, execute with financial discipline. We maintained sharp control over expenses and drove efficiencies across the business, yielding improved profit flow-through. In short, we executed on our strategic initiatives, demonstrating the power of our iconic brands, and made structural improvements to fuel long-term success. Now, as we shared in our press release this morning, 2025 has started off softer than anticipated. First quarter sales have been impacted by a less robust consumer environment and cold weather. For the year, ongoing consumer uncertainty and changes in the operating landscape, including tariffs and strength in the U.S. dollar, are also creating factors for us to navigate. Against this backdrop, we currently expect full-year revenue and operating income to be down relative to last year. Jen and team are focused on driving improvements to strengthen top-line growth. Additionally, as Mike will review, we are taking proactive action to drive additional expense savings. With the benefit of both top-line and cost initiatives building throughout the year, I am confident that we can improve business performance as the year progresses. Lastly, as we review our capital allocation plan moving forward, we are increasing our share repurchase authorization. Factoring the high level of confidence we have in our long-term growth prospects, we will continue to be opportunistic with our share repurchase program, building on the nearly $200 million in buybacks completed in 2024. Before I turn the call over to Jen, I want to underscore the strength of our brands, operation, and talent. We have been through challenging times before and have always emerged stronger. I know our team's determination, focus, and creativity will continue to drive us forward. With that, I'll pass it to Jen.

Thanks, Jay, and good afternoon, everyone. As noted, we made great progress in amplifying our brands in 2024, delivering a 4% increase in comparable sales. This builds on a 3% full-year comp in 2023. I will start today by reviewing our key wins and learnings. Let me start with American Eagle, our flagship brand that has dressed generations since 1977. After a multiyear focus on rebuilding profitability, last year, we turned our focus to growth, with encouraging results. Comparable sales increased 3%, accelerating from 1% the prior year. Additionally, our customer count rose to 18.6 million, reflecting an all-time high driven by growth across genders. Women's was a true highlight, where we achieved high-single-digit comps. Our market-leading denim business continued to grow in the mid-single digits as we introduced new fashion, washes, and silhouettes. Skirts and dresses delivered a record year, fueled by our expansion into social casual occasions. And the tops category doubled, as we offered more fashion styles in line with our focus on completing the outfit and improving our tops to bottoms ratio. In men's, we made progress. Our customer count increased, validating the ongoing strength of our customer base. Expansion into adjacencies like activewear with 24/7 are tracking well. Pants wrote another year of positive comps, fueled by social casual introductions, and we are pleased to see men's tops return to growth in the fourth quarter. Now looking ahead, we continue to see incredible growth opportunities across genders. In women's, this includes introducing more diversity in our assortments across bottoms, dresses, and tops to provide more dressing options. On the men's side, we are integrating more active looks and performance fabrics where we have seen a positive reception to date. Additionally, we are enhancing our price/value equation for basics by delivering greater optionality at opening price points. Turning to Aerie, 2024 was another strong year. Revenue hit a new record, fueled by a 5% comparable sales increase. And we grew our customer count to 11.8 million. This is an all-time high as we expanded our reach and brand awareness with stores and marketing initiatives. Two clear wins in the year were our soft apparel and activewear businesses, both of which saw double-digit growth. In soft apparel, we continued to win in cozy fleece, sweaters, and new fashion items. Additionally, our extension into sleepwear was a huge success. In activewear, OFFL/NE by Aerie saw strength in leggings, sports bras, fleece, and shorts. Our powerful platform, combined with our winning price, quality, and value equation, continues to differentiate us in the market. And as Jay noted, we are number two in the leggings category. Intimates and swim were down last year, driven by ongoing challenges across the industry. Yet I'm happy to note that we grew our share in intimates across core bras and undies, fueled by innovation, with our SMOOTHEZ collection and new novelty fabrications like lace. The long-term runway for Aerie is significant. OFFL/NE is our biggest growth opportunity across the company. We are continuing to broaden brand awareness, build equity in famous franchises like Real Me, and add more performance styles. In apparel, we are leaning into innovation through seasonal drops. We are also excited to build on our success in sleep by transforming it into a year-round franchise. In intimates, we see opportunities to reenergize our basics offerings with new base layers and styles focused on everything from life to lounge. And at the same time, we will also invest to elevate franchise collections like SMOOTHEZ, where we are building a strong following. In addition to product enhancements across brands, we will continue to invest in marketing. We will leverage learnings from optimization work streams in 2024 to speak to our customer base more effectively. We are highly focused on growing where our customers are across social media in a bigger way, with a focus on favorite and emerging platforms. We also have an exciting new AE men's campaign planned for the second half of the year. Now entering 2025, it's important to note that we are cycling a strong spring season from last year when we saw nicely positive results across brands. This spring, we have been facing headwinds. Colder weather has clearly been a factor, as well as some uncertainty with the consumer. As I will discuss, we also had some out-of-stocks in big categories, as well as product opportunities, which we have been working hard to correct. Quarter-to-date, while we have continued to see positive traffic into AE and Aerie across channels, demand has been softer than anticipated. From a category standpoint, bare looks such as shorts and tees have been soft, while cold weather items like sweaters have outperformed. Fashion items are checking with positive trends in categories like dresses at AE and soft apparel and activewear at Aerie. Of note, we have seen warmer markets perform better overall. We have also been chasing high-demand denim styles to manage outages in some of our best-selling items. We are working hard to address the current business trends and thoroughly reviewing assortment opportunities for upcoming seasons. In light of ongoing consumer uncertainty, we are also remaining flexible concerning purchases for the back half of the year while ensuring we are in stock in the right items. And before I turn the call over to Mike, I want to thank the teams for a successful 2024 and maintaining such strong focus through the near-term bumps in the road. Overall, we remain very excited about the long-term opportunity to grow our incredible portfolio of brands. We are acting on what we can control, staying disciplined, and maximizing flexibility to drive performance. And with that, I will turn the call over to Mike.

Thanks, Jen, and good afternoon, everyone. I'm pleased with how we delivered the first year of our Powering Profitable Growth plan. While we experienced some choppiness in demand and unforeseen currency headwinds, we navigated with agility. We drove efficiencies across the business to deliver significant profit and margin expansion. As Jay noted, full-year adjusted operating income of $445 million reflected a 19% increase to last year, hitting the high end of our long-term algorithm. Our adjusted operating margin expanded by 120 basis points to 8.3%. We closed the year on a positive note with strong fourth quarter results. Expanding on a few highlights, fourth quarter consolidated revenue of $1.6 billion was down 4% from last year, reflecting an $85 million adverse impact from the retail calendar as previously discussed. Comparable sales increased 3%. Operating income was $142 million, up slightly from last year, including an approximately $20 million adverse impact from the retail calendar and approximately $10 million of adverse impact from the strengthening of the U.S. dollar. Adjusted operating margin expanded 50 basis points to 8.9%. Gross profit dollars were $599 million, with a rate of 37.3% reflecting higher freight and product costs, which were offset by lower markdowns. BOW costs were roughly neutral as we successfully offset deleverage associated with the retail calendar shift with efficiencies across several expense areas, including delivery and compensation. These efforts also had a positive impact on the SG&A line, which decreased 6% and leveraged 40 basis points as a rate of sales. The improvement was driven by lower compensation, including incentive costs, partially offset by higher advertising, where we made choiceful investments to support long-term growth. Depreciation was down year-over-year, leveraging 10 basis points. The fourth quarter tax rate was 29.4%, and earnings per share was $0.54. Consolidated ending inventory cost was down 1% year-over-year as we maintained strong inventory control in a choppy demand environment. As Jay noted, our healthy cash position allowed us to fuel investments in our business, as well as return cash to shareholders. Fourth quarter CapEx totaled $65 million. Full-year CapEx investments were $223 million. This included a rollout of our new store design to 56 stores, where results have been positive, and 22 new Aerie and OFFL/NE locations. We returned approximately $24 million to shareholders through the fourth quarter cash dividend and completed $3.5 million in share repurchases amounting to $60 million. For the year, we repurchased a total of 9.5 million shares. As Jay noted, we have upsized our share repurchase authorization, demonstrating strong confidence in our brands and long-term growth plan. We ended the year with a strong balance sheet, with approximately $359 million in cash and investments, and over $920 million of total liquidity, including our revolver. Our 2024 financial results were strong proof points of our agility and expense discipline, and this work continues. As noted, 2025 has started off softer than anticipated. In light of this, Jen walked you through the actions she's taking on the top line. Additionally, we're taking proactive actions to pull back on expense plans for the year, with a thorough assessment of all costs and capital spend. We're also actively working to further diversify our supply chain to mitigate tariff impacts. Our current outlook reflects first quarter revenue decline in the mid-single digits, with operating income in the range of $20 million to $25 million. This includes an approximately $10 million negative impact from the strengthening of the U.S. dollar. For the year, our outlook reflects revenue down in the low-single digits, with operating income in the range of $360 million to $375 million. This includes an approximately $20 million adverse impact from the strengthening of the U.S. dollar and approximately $5 million to $10 million adverse impact from U.S. tariffs on China, net of early mitigation strategies. We anticipate a mid-single-digit revenue decline in the first half, recovering to flat to slightly up in the back half, driven by improved merchandising, easier comparisons, and a normalization of year-over-year currency headwinds. Additionally, we anticipate profit declines in the first half, with second-half operating profit flat to last year's levels on improved top line trends, lower currency headwinds, and its cost savings and tariff mitigation activities built through the year. For the first quarter and the year, the gross margin is expected to be down due to higher markdown activity, tariffs, and BOW cost deleverage on the comp decline. SG&A dollars are expected to be flat to last year in the first quarter and down for the full year. This reflects higher marketing investments to drive top line, with declines in all other line items driven by expense initiatives. The full-year tax rate is expected to be approximately 25%. Our weighted average share count is projected to be in the low 190s before accounting for repurchase activity beyond offsetting internal grants. This year, we expect capital expenditures of approximately $300 million. This includes a one-time $40 million cost of relocating to a new Manhattan office, providing more favorable lease terms. We're also investing to enhance our digital platform to support our growing e-commerce business to further strengthen the customer experience. And this year, we're investing in automation in our DC to create greater cost efficiencies. I'll end by saying across AEO, the teams are highly focused on improving performance. We're managing the business with discipline, taking action with urgency as we navigate through the current environment. And with that, we'll open up for questions.

Thank you. We'll now be conducting a question-and-answer session. Our first question is from Jay Sole with UBS.

Great. Thank you so much. I have a two-part question. Jen, the first part is for you. You talked about how some stores in warmer areas have done better than stores that have been affected by the cold. If you could just maybe give us an idea of the difference in comp has been? And then secondly, for Mike, if you think about beyond fiscal '25, can you just talk about your ability to control SG&A? Because the SG&A control has been really solid, just like the company had said over the past year. But can you talk about your ability to control SG&A going forward? So in other words, releverage those costs and get back to the margin targets? Or get to the margin targets that you've had, assuming that sales sort of bounce back as the consumer environment normalizes again and returns to normal? Thank you.

Thanks for the question. And certainly, yes, we do penetrate a little higher in the softer markets. Definitely in the normal weather climates, we did see some better comps, but certainly not enough to justify this quarter. So still a lot to come. We're only a third of the way into this quarter, lots of volume to be had, and we're ready to compete.

Jay, regarding SG&A, that's a great question. Looking ahead to 2024 will serve as a testament to our prior discussions. We've established a solid framework for managing expenses, with cross-functional teams collaborating through our transformation office alongside the FP&A team and the cost center leaders throughout the organization. Over the past year, we effectively managed SG&A, resulting in revenue growth in the low single digits. In fact, the entire 120 basis points improvement in our operating rate last year was driven by expense management, highlighting the progress we've made over the last two years. For 2025, Jen and her team will be focusing diligently on improving the top line. However, it’s worth noting that the projected expenditures for the year are expected to decrease in line with our revenue expectations, which are also down in the low single digits. It's rare for us to come into a year stating this. We were organized similarly last year, where SG&A was anticipated to provide leverage. The proactive measures we implemented as soon as we noticed this trend have enabled us to capture that advantage. However, we still have ongoing work. We have additional decisions to make in the coming weeks that will impact several line items on the P&L, including significant costs such as rent, store labor, services, delivery, and SLAs within our fulfillment network. All of these are discretionary expenses. We are actively addressing these aspects, and I'm confident that we will further reduce that figure, with more updates to follow. Our structure supports this objective, and our target of 25% to 26% of the rate remains in place for the future. Achieving this will require revenue growth, and we are assured that we will return to that growth trajectory, while also managing expenses for further leverage.

Got it. Thank you so much.

Our next question is from Matthew Boss with JPMorgan.

Great. Thanks. It's Amanda Douglas on for Matt. So Jen, could you elaborate on early spring selling trends that you're seeing across the American Eagle brands relative to Aerie and how that's reflected in your 1Q revenue outlook?

Sure. As you noted, there are some challenges following February. After a very strong Q4, we were pleased with our results. We approached our inventory with agility, thinking we had reduced it. This allows us to be flexible in responding to changes. We recognize that there are opportunities across all brands. For example, we could have offered more denim in American Eagle and more fleece in Aerie. This presents both positive and negative aspects. However, thanks to our inventory strategy and positioning, we can pursue business opportunities in the second half of the year. February's performance was softer than anticipated, but we are prepared to ramp up our efforts, with teams actively engaging in successful segments and pulling back from less effective ones. Initially, we faced some weather challenges, especially in tougher climates, but the teams have adjusted accordingly. Our inventories are well-managed, and we are applying our insights as we move forward.

Great. And as a follow-up for Mike, on the gross margin outlook, could you help break apart the embedded assumptions for markdowns versus product costs in the first quarter? And just how you see each of those progressing over the balance of the year?

Yes. In the first half, we are experiencing a currency headwind affecting our gross margin, along with a minor impact from tariffs estimated between $5 million to $10 million. This is manageable, and our team is addressing it effectively. We've built in some flexibility depending on future tariff developments. However, the currency headwind does affect our initial markup in product margin during the first quarter. With our revenue guidance reflecting a decline of around 5% or mid-single digits, our ability to manage expenses and gross margin, such as rent, has decreased. We are also facing some expense challenges in gross margin for the first quarter. As we move into the second half of the year, we anticipate improvements in our initial markup, which would be a positive change from the first half. We still believe we can maintain markdowns while achieving flat revenue results. We have some expense mitigation strategies already in place for the third and fourth quarters, but there are additional opportunities currently being managed. Therefore, we expect our gross margin in the latter half of the year to be relatively consistent with last year's figures. The first half presents challenges, while the second half should be more stable.

Thank you.

Our next question is from Janet Kloppenburg with JJK Research.

Hi, everybody.

Hi Janet.

Jen, did you mention leggings as a strong category for Aerie? I believe you referred to activewear. It would also be helpful to hear your comments on swim. Additionally, can you provide more detail regarding the slowdown in women's at American Eagle? Aside from weather, what specific categories are affected, and what insights can you share? Mike, should we expect flat gross margin in the second half? Can you also provide a range for the first half?

Sure. We are very enthusiastic about our leggings business. I am currently at a hotel in Miami, and I encountered a customer at check-in who recognized me and asked if I work for Aerie. She mentioned that our leggings are the best in town, which I believe is true. This year, we increased our market share and reached the number two position in our core demographic, which I am very pleased about.

And you're seeing that continue here?

Yes, we are indeed seeing positive trends in activewear, and we are very excited about that business. For women's wear, we are coming up from a strong position. The business is growing, and we are introducing new fashion while returning to some of our core strengths, such as fashion tops and social casual dressing. We're doing very well in those areas. We are addressing our women's range comprehensively, and we are improving the ratio of tops to bottoms, which is a strong point for us. Women's wear continues to show quarter-over-quarter growth. When looking at the two-year comparison, women's wear has actually accelerated into Q4, including denim, which saw a 5 percent increase. Regarding swimwear, which is a topic I particularly enjoy, we planned for some softness in other categories but expected growth in swim. Surprisingly, swim is exceeding our expectations. While we anticipated some categories to perform well, we have encountered early challenges at Aerie that we need to address with additional inventory.

Okay. But Aerie, then, where are the slowdowns from where you had been, Jen?

It's actually not a slowdown overall. As I mentioned earlier, while intimates in general are experiencing a slowdown, we have gained market share in bras and underwear. We oversold fleece early in Q4, and we need receipts here to help balance some of the planned downturn in the swim business. That's our current focus. The good news is we have a new set coming, starting on direct. New items will be available on Thursday, with additional products for Aerie arriving next week.

So except for men's, it sounds like everything is pretty correctable in the near term?

Definitely. I mean, definitely. And I love our inventory position. I love that we're open. And men's definitely have some green shoots, some new launches, some new product categories, some new fashion. We're seeing great returns in the graphics business, and we're chasing that business. And 24/7 is tracking well. We're seeing a great response to the new active looks. And pants have been strong for us. And I do believe as we cycle into the warm requirements, our shorts business is really set up for success.

Great. Thank you, Jen, and good luck to you. Mike?

Yes, Janet, regarding gross margin. In the first quarter, we are updating our guidance to a revenue decline range of $20 million to $25 million. This will lead to a gross margin decrease of approximately 240 basis points, primarily due to expense deleverage associated with rent and fixed costs still in progress. The main factor contributing to this decrease will be the expense deleverage. There is some pressure on the initial markup due to currency fluctuations, particularly significant in Q1 when compared to last year's peso rates. Jen mentioned some adjustments related to assortment and receipts, and there’s a slight impact from freight as well. However, the main issue remains the expense deleverage along with some pressure on the merchandise margin from these factors. For the second quarter, we anticipate a tighter situation, estimating about a 150 basis point impact, but with less expense deleverage due to some anticipated revenue improvement. In addition, we will begin to compare against last year's currency impact during the second half of the second quarter, which offsets some of the initial markup challenges. As a result, we expect a difference of about 100 basis points compared to last year between the second quarter and the first quarter.

Thank you, Mike.

Our next question is from Adrienne Yih with Barclays.

Good afternoon. So my question is going to go back to the tariff piece of it. Your assumptions for the tariff, you have the 20% exposure to China. I think that was for FY '24, but I know you're working that down. Where are you currently? Where do you expect that to be at the end of the year? And then just kind of proactively thinking, what is your exposure to Vietnam? Does your guidance actually just assume you're taking the margin hit with no pass-through and no kind of manufacturing negotiations, et cetera? And then again, where are we in the denim cycle of things? And obviously, you comped up 5%. Is there another iteration or another kind of progression of that wider leg denim? And then if you can talk about the promotionality of both Aerie and AE brand. Thank you.

Yes. When it comes to tariffs, there is uncertainty about what tariffs will be imposed, when, and where. We are unsure about the situation in Vietnam, China, India, and Bangladesh, leading to changes in our operations. It’s important to remember that eight years ago, we faced a similar situation and it eventually stabilized. We need to remain steady and focused. We aren't going to make any hasty decisions until we have clarity on the situation, as no one really knows the details at this time. Eight years ago, the first half of the year was challenging, but things returned to normal afterward, and everything was going well until the pandemic hit. So, I wouldn't be in a rush; I’m not sure where I would rush to.

Yes, and then the assumption. Very fair.

Yes, I completely agree, Jay. Flexibility is essential, and that's a crucial aspect to consider. Our teams have developed strategies for redundancy, allowing us to adapt as needed. However, as Jay mentioned, we need to be cautious until we have more clarity. Currently, our penetration in China is below 20%, sitting in the high teens, and we plan to reduce that to single digits by the second half of the year. This explains why we anticipate some tariff challenges in the first half, but expect them to be minimal later on, based on our current assumptions. Vietnam's situation is similar, with penetration also in the high teens to 20%. Our teams have been proactive with our manufacturing partners in Vietnam to mitigate any potential impacts. At this point, we don't expect any costs to be passed on to consumers. Through our efforts in China to reduce penetration and strong partnerships with our vendors, we feel confident about managing costs. Our teams have been working diligently for six to nine months to create redundancy and flexibility within our operations, positioning us to respond effectively, depending on how situations unfold.

Denim, especially in women's, had a robust year with mid-single-digit comparable sales. Achieving a 5% comp in Q4 was exceptional. However, we entered Q1 with low inventory and needed to acquire more products. What excites me about the current business situation is the variety of fits we're offering. It's not just about baggy styles anymore; we're also seeing the return of skinny fits. The strength of our team and our market position stems from how we pursue denim and market our fits. I believe our fits are unmatched in the industry, and I'm extremely proud of what our team has accomplished. Nonetheless, we still have a substantial amount of open-to-buy inventory. We've recently conducted denim testing, and the results showed a broader range than what others are reporting. We're witnessing positive trends across various fits in women's denim, and leaner fits are regaining popularity in men's collections. Additionally, menswear bottoms, including pants and shorts, are trending well. I've mentioned before that the shorts season is just beginning, indicating plenty of potential business in this quarter, especially if we see 70-degree weather. When it comes to promotions for AE and Aerie, we need to excel in managing our inventory. The good news is that we have a lean inventory now, alleviating some pressure from the teams, but we also need to remain competitive. I believe we can enhance our assortments by incorporating more entry-level price points to compete effectively in terms of value. Our team is actively working on this. Because we're lean on inventory and have open receipts, we have the flexibility to adapt and manage the situation effectively.

Great. Thank you very much. Best of luck.

Thank you.

Our next question is from Paul Lejuez with Citi.

Hey, thanks, guys. Just a couple of quick ones. What's built in for incentive comp in F '25? Can you just remind us what F '24 was versus '23, the impact of the margin on incentive comp? And then OFFL/NE, can you talk about the size of that business in dollars and what you expect for growth this year? And then just curious if you canceled any inventory purchases for the back half?

Yes, we have previously discussed our incentive metrics, which align with our three-year plan. For 2025, we expect very low to minimal incentive compensation based on a $375 million figure. Historically, the average has been around $50 million, but again, given the $375 million, we anticipate very little incentive compensation for this period.

OFFL/NE, OFFL/NE?

The size of OFFL/NE has seen significant strategic work around brand growth in recent months. We believe customer penetration and awareness are still quite low. For instance, Aerie has only about 55% total awareness, while OFFL/NE is nearly unknown. Although we have a solid business across our sub-brands with Aerie generating $1.7 billion, OFFL/NE accounts for about a third of that, roughly $600 million, which is quite small. However, it is currently the fastest-growing segment within the company, and we see a lot of potential ahead. The total addressable market is estimated to be around $30 billion to $40 billion, which highlights the opportunity we have for product and geographic expansion as well as increasing brand awareness. As mentioned earlier, we plan to continue our investments in this area, as we believe the best use of our cash lies in enhancing our returns through ongoing support for our brands, with a particular focus on OFFL/NE.

And think about the positioning, right? We're number two leggings business and actually number three or four in the bra and the sports bra segment. And we've only just begun. We haven't even marketed to this business. So lots to come here. The product is very well received, and the innovation is unlike any other. So we're really proud of this business, and it continues to outpace the other businesses in our company.

Got it. And then any place you've adjusted inventory purchases for the back half?

Yes. Yes. We have a lot of open to buy for Q3 still. Q4 is in work and development as we speak. So we have a lot of flexibility on the back half. We're looking at trends and projections that we've laid out here for this guide, and Jen and team working through adjustments to forward plans, and we have a lot of flexibility to do that still.

Thanks, good luck.

Thank you.

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

Hi, good afternoon, everyone. Can you talk a little bit about the performance of digital and stores in the fourth quarter and how it's looking in the first quarter to date and how you're planning to go forward? It is following up on remodels. I know that there was expected to be an acceleration in store remodels in '25. Is that still on track? Or what are you looking at for openings and remodels and how you're thinking about marketing spend this year? Thank you.

Yes, we experienced growth in the fourth quarter, with improvements in comparable sales across both our brands and channels, where digital outperformed stores in the plus-three comparable results. Currently, in the first quarter, digital is showing stronger performance than stores. Our traffic continues to exceed mall traffic, despite a significant decline in mall visitors. Online traffic is healthier compared to store traffic. Regarding our mid-single-digit guidance, digital is on the more favorable side while stores are down more than mid-single. This year, we completed 56 remodels in 2024, which have yielded positive results. We aim to reduce the average age of the American Eagle fleet from 12 years to seven years. We are planning to increase our capital spending this year, likely closer to 90 to 100 remodels within the $300 million capital spending guideline. For Aerie and OFFL/NE, we are looking at around 35 openings, including a mix of standalone stores and side-by-sides, to support future growth. In terms of marketing spend, we have successfully managed to keep expenses down across SG&A, with the exception of advertising, to fund additional marketing efforts. We have improved our investment strategies, focusing on specific acquisition and retention targets for our customer base. We intend to maintain our advertising levels similar to last year while evaluating opportunities to flex our spending. However, marketing remains the one area in SG&A that is projected to stay flat year-over-year, while advertising costs may increase throughout the year.

Got it. And then just one follow-up on the warmer markets doing better. How much better do the warmer markets do? And then, what are you seeing in terms of category performance that may be different in the warmer markets that is making you excited?

Yes. We're seeing just obviously, the seasonal businesses check better in the warmer market. We slightly penetrate higher, as I mentioned, in the cooler climates, Midwest and Northeast, slightly about 10 basis points. It's still too early. We have a lot of checks and balances on this quarter with the shift of spring break and Easter being out so late. It's very early to read, but the product that's checking, that's what we're responding to, right? And of course, digital, you see a little bit of a different demand in the digital channel, less seasonal. So we're in the market. When I think about how we're reacting to this business, the teams, like I said, you definitely see some warmer trends happening in the warmer climate shorts and tees. But it's too early to tell. And what we're doing is posturing our inventory, as I mentioned earlier, so that we can be nimble. And the teams are chasing what is working early out. So a little early to tell here, but the team is reacting and responding.

Thank you.

Our next question is from Marni Shapiro with The Retail Tracker.

Hey, guys. Thank you. And Jen, the dresses in the fashion at Eagle really look absolutely fantastic. Just a couple of quick housekeeping questions. And Jay, I have a question for you. But did you guys talk about the penetration of your loyalty program to your business? And you talked about store openings and closings and remodels. Did you provide a square footage number for the full year? Are those remodels the same sizes, bigger, smaller? So what's the full-year square footage? And then I have a big picture question for you, Jay. I'm curious, you've been through a lot of cycles, obviously, before. I'm curious what you think about the consumer out there. Do you think that they're slowing down? Is it really the weather? Do you think that they also bought a lot over the holiday and they're taking a breather? Do you think the news does actually have an impact on them? I've read some articles; I'm sure you've seen the same ones that the consumer today actually knows or trying to figure out what the tariff is, where two months ago they didn't even ask the question. So I'm curious what your big picture thoughts are on the consumer?

My overall perspective is straightforward. There is a fear of the unknown, stemming not only from tariffs and inflation, but also from government actions that leave people uncertain about their impact. With programs being cut, people are unsure how this might affect them, leading to a conservative mindset. I believe the majority of merchants will remain unaffected overall, but the current influx of news is making everyone a bit anxious. It reminds me of eight years ago when we faced similar challenges; the first half of that year was difficult but then things returned to normal, and the country was thriving until the pandemic struck. Right now, I am unsure about what to be excited about or not; it seems necessary to establish some stability first before deciding on a course of action.

Yes. Thank you.

On your loyalty penetration question, Marni, 75%. That's grown over recent years. We know that we get customers into that loyalty program. We get them shopping across brands, American Eagle, Aerie, and OFFL/NE. They're the most profitable customers. They have the highest lifetime value. So we have very specific strategies on growing that loyalty penetration in cross-brand shoppers. That's why our customer follows have never been bigger at over 24 million at the moment. And again, we have very specific retention or acquisition and retention strategies against that. Square footage with the Aerie, OFFL/NE openings of around 35, AE still being net closure. Maybe 15 to 20 in our plans, but that's under evaluation at the moment as well. You have square footage netting out at around a plus one to two.

Thank you.

Our next question is from Rick Patel with Raymond James.

Thank you. Good afternoon. Can you talk about the opportunity around basket size? You're making progress on tops, and it sounds like you're leaning more into entry price point products as well. So just curious if you see basket size as being a bigger contributor to the business this year?

Yes, we've been maintaining our traffic levels according to the data we've observed. Currently, our basket size is steady, which is important because we need to ensure we're meeting customer needs when they visit. We're putting a strong emphasis on basket size. Recently, we've noticed a small increase in those numbers, even though traffic has been somewhat inconsistent—sometimes slightly down, sometimes exceeding expectations. The start of February has been a bit erratic. Our teams are focused on ensuring customer satisfaction during their visits, and we're seeing a slight increase in basket size right now. Managing promotions is also a priority, and we're exploring new ways to dress our customers for various occasions. We're excited about the growth in our OFFL/NE segment, which we believe complements all our brands. We share a website and are connecting with our customers across Aerie, OFFL/NE, and AE women's brands, presenting numerous opportunities. As Mike mentioned earlier regarding the loyalty program, we have the chance to engage all 24 million of our customers across our brands.

Can you also help us with the outlook for marketing? It sounds like you're going to continue investing here. I think you touched on the new campaign in the back half. So curious if there's anything else to call out in terms of timing that could be a swing factor for margins? And if you don't see a good ROI on this marketing, do you see it as an opportunity to pull back and protect your margins?

Yes. Right now, we're playing up in the first half. So first quarter, second quarter plans in place. Some of that is strategic based on a lot of learnings around some new analytics tools of sort of effectiveness of the timing of spend to get benefits into back-to-school and holiday. Dollars in the back half were relatively flat. We increased investments last year in the back half. So it's a flex line item for us as we get into the back half of the year still, still working through nailing down specific plans there with Jen and the creative teams. So up in the first half, funded with SG&A dollars being flat, all other expense lines and funding advertising in the first half flat in the back half for the moment with some plans to get nailed down still.

Thanks very much.

Thank you.

Our next question is from Simeon Siegel with BMO Capital Markets.

Thanks. Afternoon, everyone. First off, sorry if I missed it, did you say how the different brands are looking in your guided revenue declines for the year? And then, Jen, when thinking about the market share versus the market growth dynamics within intimates you're referring to, any thoughts to what or when revitalizes the intimates' broader market growth? And then lastly, a bit peripheral, but it looks like you showed an uptick in the international licensed store count. At this point, how large are international licensed revenues and the profit? And I guess, what's the right way to think about them going forward?

Yes, I think the guidance indicates that the brands are performing similarly to what we observed in 2024, with current trends showing a slight decline on average for one brand and a positive outlook for Aerie. So for a mid-single-digit decline, you could assume Aerie is performing better than that, while AE is down a bit more. If we consider 2024, we had a 4% comparable sales growth; Aerie showed a 5% increase, and AE was up 3%. We are currently seeing similar patterns, but we will have more insights as we continue to monitor trends. There's a lot to take in regarding current performance and how things evolve from here.

Yes. Regarding market share, obviously, in this environment right now, it is a market share play. And I'm pleased to say that we certainly stack against our core competency businesses. Denim, we're holding our rank. As I think about OFFL/NE, we've grown in the legging market share. And then in a declining market in Aerie, intimates has been declining, we've certainly held our own, and we've grown in bras and undies. Slightly, not huge. But this will be a year of us competing and getting the market share that we deserve.

In the license business, we've maintained consistent revenue in the mid-30s range from those operations over the past several years, with significant partnerships in the Middle East, particularly with Alshay and Box. Despite some disruptions in recent years, their businesses are beginning to stabilize. You can expect a similar performance moving forward. We are evaluating potential opportunities for future international growth, with the majority of our international revenue coming from Canada and Mexico, accounting for over 10% of our total revenue.

And it's good there right now. It's amazing.

Yes, it's sort of amazing, to Jay's point. It would have been going on in the Middle East that has bounced back, but pretty consistent to that.

Warm weather, that's a good sign.

I was mentioning that some conversions in Hong Kong took place. Is there a planned change or a strategy for increasing our focus on international licensing, or was that just an isolated instance?

Yes. We shifted that business from an owned model to a license model in the back half. That was, I think, a strategic move for profitability purposes and just to have a partner in the market. Our owned markets that are really at this point are Canada and Mexico now. So growth in the future in other markets would be more through partnerships in one way or the other is our strategic thinking, yes.

Sounds great. All right, thanks, guys. Best of luck for the year.

Thank you. We have time for one more question.

Thank you. Our last question is from Alex Straton with Morgan Stanley.

Thank you very much. Jen, you mentioned several top line initiatives that should build throughout the year and help improve sales after the first quarter. Can you clarify how you view those initiatives, possibly by grouping them or highlighting the most important ones? Additionally, regarding the tariff response, I believe you indicated that you are significantly reducing your reliance on China sourcing in the second half of the year. I'm curious about your new sourcing locations or your plans for that shift. Thank you.

Sure. Coming out of Q4, we had strong results. As we entered Q1, we encountered some opportunities related to inventory, which included both good and bad news. We experienced some inventory outages, which made us agile. We're particularly focused on women's denim following a strong fourth quarter comparison. We recognize that some of our product misses were primarily due to inventory issues, especially in key categories like Aerie. We've noted successes in segments that could have performed better with more inventory. For instance, Aerie's soft dressing and sleepwear have been doing well across all categories, especially sleep and lounge. Our graphics line has also shown strong performance. We continuously monitor early indicators and react accordingly. It's crucial that our inventory remains flexible, especially as we prepare for the second half of the year, which is pivotal for us, particularly in denim. Denim not only drives sales for our brand but also attracts traffic to our site, facilitating cross-selling among our other brands. It's essential for our strategy that we are prepared for a strong performance in denim for the latter part of the year, and I think our teams are executing well. We are also keeping track of our promotional strategy and managing pricing effectively, particularly at entry levels, which is vital at this time. Staying in tune with our customers is a priority. We analyze a lot of data about our customers' preferences and behaviors, which are essential in today's market. One week they might shop in-store, and the next, they may prefer online shopping. We need to ensure our approach is adaptable to meet our customers' needs effectively, as this will be crucial for our success for the remainder of the year.

Great. And then just on that China sourcing question?

Yes, that's our current plan. However, we need to remain flexible. As Jay mentioned earlier, depending on actual developments, we can decide whether to proceed with that plan, and we have redundancy in place to adjust as necessary. If the predicted developments regarding China materialize, we are prepared to transition from high teens to single digits. We source from 15 countries, and our teams have established redundancy in those locations. We will adapt as needed.

Thank you.

Thank you.

This concludes our Q&A session. Thank you for your participation. You may disconnect your lines at this time.