American Eagle Outfitters, Inc. (AEO) Q4 2024 Earnings Report, Transcript and Summary

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. [Operator Instructions] 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 aligning the organization's focus on 3 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 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 and 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 with our core demo. 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 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 drug 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 date 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 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 we've 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 on 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 for 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 opportunity 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. And 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 leaving [ open to buy ] 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% to 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 to 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. The rate of 37.3% reflected 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 the 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 for 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, it anticipates 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 onetime $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. [Operator Instructions] Thank you. 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 like what 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 go off to -- go off on for 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.

And Jay, on SG&A, good question. I think you look at 2024 is a proof point of what we've been talking about. We've got this muscle built now around expense controls, cross-functional teams working through our transformation office with the FP&A team with the kind of cost center owners across the organization on a constant basis. We were able to leverage SG&A for the year -- last year on the comp result and revenue up low single digits. And actually, the entire operating rate improvement last year of 120 basis points was all from expense leverage. So just the proof points of everything we've been doing the last two years now. And then even on this guide for 2025, Jen and team are going to work vigorously at the top line improvement. But even messaging at this point, the dollars on the year are down similar to the revenue assumption, kind of down low single digit. I'm not sure the last time we've been able to say that walking into a year like this. We were structured in a similar way going into the year where within our algorithm, SG&A was set to leverage. So the starting point for this work that we've kicked off immediately when we started seeing this trend has allowed us to at least capture that. But then the work continues. We've got more decisions coming at us here in the next few weeks that we can -- that we're going to make this -- really decide on a few other line items across the P&L. Big store expenses like rent, store labor, services, delivery, SLAs, decisions we can make across our distribution fulfillment capabilities there. All discretionary spend. So it's all in work at the moment, and I'm confident we're going to be able to knock that number down even further with kind of more updates to come from there. So we're structured to do this. So in the out years, yes, our target of 25% to 26% of the rate is still intact. We need revenue growth to do that. There's no doubt about that. We're confident we'll get back to that revenue growth. But we're structured to continue to manage expenses for 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. Early on, as you mentioned, there's obviously headwinds coming out of February, you heard. Coming off of a very strong Q4, we were really pleased with our results. We entered very agile with our inventory, thinking we were down one. So we're leaving ourselves open for chase. And the new learnings are -- we have to react to these learnings. There's certainly opportunities across all brands, right? We could have had more denim in AE, specifically. Aerie, we could have had more fleece. That's good news and bad news at the same time. But because of our inventory position and because of the way we're posturing ourselves, on the back half, we can chase our business, and we're ready to do so. So there's learnings in February, it was softer-than-expected. And we are ready to gear up, and the teams are moving very swiftly and getting into the businesses that are working and obviously flowing the businesses that are not. So early on, the weather was tough, you heard that, and we actually are more penetrated in some of the tougher climates. So that's the truth. But early on, the teams have reacted. We've responded. Inventories well positioned, and we're taking all of our lessons and moving 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. Within gross margin, we've got a currency headwind in the first half that comes through the margin line. A little bit of tariff impact. We said $5 million to $10 million. So small in the grand scheme of things, mitigated by the teams very well. Flexibility there is key. We've got that built depending on what actually happens with tariffs that we're all kind of waiting to confirm. But the currency headwind is an impact to IMU in product margin in the first quarter. And then on the down 5 or down mid-single digit, call it, revenue guide, our ability to leverage expenses and gross margin, like rent, for example, diminished. So some expense headwinds in gross margin in the first quarter as well. When you get through the first half of the year into the back half, IMU improvement is expected and projected at the moment, which is a good change from the first half of the year. We still believe markdowns can be well controlled at a sort of flat comp or flat revenue results. Expense mitigations are -- we've got some things flowing through the third and fourth quarter already, but there are some lines that we're managing through right now that we can see some additional benefits to. So we're expecting gross margin to be relatively in line to last year in the back half. So front half, headwinds, back half, relatively similar to last year.

Thank you.

Our next question is from Janet Kloppenburg with JJK Research.

Hi, everybody.

Hi Janet.

Jen, I can't sure you call out, and I might have missed it, so forgive me. Did you call out leggings as a position of strength at Aerie? I think you said activewear. And comment on swim would really help there, too. And getting back to American Eagle, if you could elaborate a little bit more on the women's -- on the slowdown in women's? Other than weather, like what categories and what the learnings are there, that would help me a lot? And Mike, we should be using flat gross margin in the back half? And can you give us sort of a range on the front half, please?

Sure. Leggings, we're very excited about the business. In fact, I'm here at a hotel in Miami and I met a customer checking in, and she literally said to me, do you work for Aerie, OFFL/NE? And I thought -- I guess you heard me speaking, and I said, yes, she's like, they're the best leggings in town. And that's certainly true. We grew market share this year. We grew to the #2 market share in our core demographic. I'm thrilled with that number.

And you're seeing that continue here?

Yes, we are actually. Activewear is a positive trend for us. We're very excited about that business. Women's, Janet, we -- look -- we’re coming up of a very strong trend. We're comping the comp. The business is growing. We're introducing new fashion and obviously introducing -- getting back to some of our core competency businesses, i.e., fashion tops and that social casual dressing. We're doing great there. We're addressing that girl head to toe. We're closing the gap on our tops to bottoms ratio, very excited about that. Women's continues to comp quarter-over-quarter. And actually, if you look at the two-year stack, actually women's has accelerated into Q4, including denim, which was a 5 comp. Going to swim, my favorite subject, my favorite subject. Planning it accordingly, some softness in some other categories that we were expecting to comp the swim business, but we did plan swim down. It's actually beating that plan as we speak. And we planned some other categories up. And we needed some receipts here, to be honest, to offset some of the early headwinds that we're facing just getting out of the gate in Aerie.

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

It's actually not -- it's -- as I mentioned in my remarks, intimates in general is a slowdown, but we actually gained market share in bras and in undies. And we oversold fleece early in Q4, and we needed receipts here to mitigate some of the planned -- some of the swim business that we've planned down. That's what we're chasing right now. Good news is we have a new set coming our way, starting on direct. Newness is hitting on Thursday and new goods coming next week for Aerie.

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, we're chasing that business. And 24/7 is tracking well. We're seeing a great response to the new active looks. And pants has 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, on gross margin. The first quarter with the guidance of the $20 million to $25 million upping on mid-single revenue decline. You're going to get to gross margin around 240 basis points down. The majority of that is expense delevered. So rent and other ramping and fixed costs in the gross margin that are still in work. But the deleverage there will be the biggest driver of that. We do have little bit of IMU headwind, like I said, from currency, Q1 is still the biggest currency lap, especially against the peso last year. Jen mentioned some chase and some things being adjusted through the assortment, receipts for chasing, so a little bit of freight as well. But the majority is going to be expense deleverage with a little bit of pressure on the merch margin from those couple of items as well. Second quarter, more -- definitely tighter, call about 150 basis points is what we're thinking based on projecting now. Expense deleverage is not as significant on some revenue improvement. And again, we start to lap the currency impact to the back half of the second quarter last year. So that gets negated through IMU. So those two components, better than the first quarter, resulting in about maybe 100 basis points difference to last year in the second quarter versus the first quarter.

Thank you, Mike.

Yes.

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 kind of that wider leg denim? And then if you can talk about the promotionality of both [Barry] (ph) and AE brand. Thank you.

Yes. When it comes to tariff, nobody knows what tariffs are going to put on, where, when or what. We don't know what's going to be the Vietnam, we don't know China. We don't know India. We don't know Bangladesh. So there's a shift in everywhere we're shifting to. And you have to remember that eight years ago, we went through this before, and everything settled down. So we just have to be calm and on course. We're not going to be jumping all over the place until we know exactly what the story is. Nobody knows what the story is yet. We went through this eight years ago, settled down. And if you remember, eight years ago, the first-half of business was a tough business, and it settled down, and then everything got very good for the next few years until the pandemic. So I wouldn't be rushing -- you go rush, where am I rushing to? I don't know where I'm rushing to.

Yes, and then the assumption. Very fair.

Yes. And then the -- yes 100%, Jay. I think flexibility is key. That's the key point there. The teams have that built. We've got redundancy built to move around if we need to. But at the moment, to Jay's point, where do you move, until we know. But the assumptions are right now and the reality around China penetration is we're below 20 now. We're in the high teens. Some of the mitigation is we plan to be in the single digits by the time we get to the back half of the year. So that's why the -- a little bit of tariff headwind in the front half, back half pretty low under these assumptions. Vietnam is similar to China at the moment, kind of high teens to 20%. The teams have already worked the same process around mitigation efforts with our manufacturing partners, vendors in Vietnam. So right now, the assumption is no pass through the consumer. We've actually -- between the mitigation efforts in China, reducing the penetration, then it's the partnerships we have with our vendors and sharing in the cost of what could happen at the moment. We feel good about that, and the teams have worked tirelessly for good six, nine months now getting ready for this to create that redundancy, creates flexibility across the network. We feel like we can make a lot of different moves, pending, to Jay's point, what actually does occur.

And then denim, particularly in women's, we had a strong year, mid-single-digit comps. Q4 to run that 5% comp was exceptional. However, we did go into Q1 very lean, and we needed to chase goods. What I love about what's happening in the business right now is the diversity of fits. It's not just about baggy, actually. We're seeing skinny emerge. And what makes this magic on this team and our positioning in the market is how we chase denim and how we go to market and also our fit. I mean our fits are the best in the industry. And extremely proud of what the team is able to deliver. However, we still have a lot of open to buy. We just did our denim testing, and the results came in. And again, it's a little bit more diversified than I think what other people are saying. We're seeing strength across varieties fits in women's, in particular, and we are seeing leaner fits coming back into men's. The other thing that's happening in men's is bottoms are definitely trending for us, so other bottoms, pants and shorts. And I mentioned earlier, shorts are just beginning for that business. So a lot of more business to be had in this quarter. And hopefully, we'll get that 70-degree weather. As I think about promotions for AE and Aerie, look, this is where we have to win, right? We have to manage our inventory. Good news is we're lean coming in with inventory. So the teams don't have a lot of pressure there, but we have to compete at the same time. I do think that we could definitely balance out our assortments a little bit more with some opening price points, so that we can compete in that value equation and -- but mixing that business, and we'll continue to work on that. That's what the team is working on as we speak. But again, because we're lean on inventory, we have open receipts, we can actually be nimble and manage this.

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, incentive, we talked in the past about many to Paul. And then, as we talked about the past, our incentive metric is aligned with everything we talked about for the three-year plan. So EBIT. On this guide, we'd assume very low to minimal incentive comp in 2025 off a [$375 million] (ph) number. We talked about in the past, relative average around $50 million. But that's -- again, the $375 million, we would assume very little incentive compensation in this guide.

OFFL/NE, OFFL/NE?

The size of OFFL/NE, we've -- look, we've done a lot of work, strategic work around the growth of the brands in the last several months. And we believe that penetration still low, customer awareness is very low. We've talked about Aerie in total of being only around 55%, OFFL/NE from an awareness perspective is next to nothing. Obviously, we've got a nice business across the categories within the sub-brands and Aerie, $1.7 billion. We always talk about OFFL/NE as a sub-brand being about a third of the business, around $600 million. So very small still. It's the fastest-growing thing in the company as we speak, set of categories, a lot of runway ahead of us. The TAM, total addressable market is around, I think, $30 billion, $40 billion. So small in the context of the company. A lot of opportunity for us in terms of product expansion, geographic expansion, building awareness. And as we've talked about in the opening remarks, we're not going to stop or slow down the investments there. The best use of our cash right now is the return we think we can get from the continued investment across the brands, nothing bigger than OFFL/NE at the moment.

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 like no other. So 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?

Paul, can you repeat that? You're coming through a little muffled.

Inventory purchases and back half, any adjustments that you've made?

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 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 had growth for the fourth quarter, Dana, we had comp improvement across brands and channels, so both in digital and stores, digital ahead of stores within the plus 3 comp results. First quarter right now, digital is stronger than stores. Our traffic is still relative to mall traffic outpacing, even though traffic is down significantly in the mall. Traffic to digital is definitely healthier than in stores. And right now, on this mid-single-digit guide, digital's on the more positive side of that, with stores being down more than mid-single. On remodels for the year, we talked about -- we did 56 in 2024, seen nice results from those stores. We know we want to continue on this program to knock down the average age of the American Eagle fleet from 12 years to seven years. We are planning to -- still on our capital plans to do more this year, closer probably 90 to 100, in that range, within the $300 million capital spend guide. And then for openings for Aerie and OFFL/NE, around 35, which includes the mix of side -- stand-alones and side by sides. So continuing to make those investments for future growth in this year. Marketing spend. So within the earlier question around expense management really coming into the year, we were really successful in keeping expenses down across SG&A other than advertising, really to fund additional marketing expense. We've talked about getting a lot better in terms of investments there, measuring those investments, continuing to invest in marketing for growth. We've got very specific acquisition and retention targets for our customer base. We don't want to slow that down either. So advertising in this guide is still similar to what we've planned the rest of our expense dollars in SG&A down to fund that investment. We have the opportunity to flex that still through evaluating some elements of that spend. But it is still -- it's the 1 line that's in an SG&A guide that is basically flat rate to last year. Advertising would deleverage within that on the year.

Got it. And then just one follow-up on the warmer markets doing better. How much better is 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 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 that 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 looks 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 like 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. We -- 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 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?

Okay. My big picture thoughts are very simple. They have the fear of the unknown. Not just tariffs, not just inflation. You see the government cutting people off. They don't know how that's going to affect them. They see programs being cut. They don't know how that's going to affect them. They just don't know how it's going to affect it. And when people don't know what they don't know, they get very conservative. I think the vast majority of merchants is not going to be affected 1 way or the other. But right now, until there's so much news on the TV, it makes everyone a little nervous. And that's what I think we're going through. I also remember eight years ago, when we went through this before, similar issues, things were up and down, the first six months were tough and then things got back to normal. And then the country was -- everything was going very well until the pandemic. So I don't know what to get excited about right now or not get excited about. I just think you have to get things settled in first before we figure out what to do exactly.

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 are -- 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 never been bigger over 24 million at the moment. And again, very specific retention or acquisition and the 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 1 to 2.

Thank you.

Thank you for the dress comment.

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. Actually, we've been holding our own in traffic against some of the data we've been seeing. And actually, the basket size is holding its own right now. And it's a focus of ours because in this environment, we have to make sure that when she comes in or he comes in, that we're fulfilling their needs. So big focus on basket size. And like I said, we're a little uptick there on those numbers with traffic being some weeks, slightly down to slightly negative and some weeks, beating them all. It's very -- right now it's a little erratic up coming out of the gate in February. So I think what the teams have been doing is -- what our teams have been doing is making sure that our customers are satisfied when they come in. And actually, our basket size is actually slightly up right now. So it's a focus of ours as we build out this year. And obviously, managing the promotions. And we're finding new ways to dress her and to dress him, the new occasions, dressing occasions. And obviously, with the growth in OFFL/NE and some of the -- we're very excited about that business that we think that's an add-on business for all the brands. As you know, we share a website, and we're definitely talking to her across brands. Aerie, OFFL/NE and obviously, AE women's. So lots of opportunity there. Mike just talked about the loyalty program, and there's definitely opportunity to invite all of our customers at 24 million into all of 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 of 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 our international license revenues and the profit? And I guess, what's the right way to think about them going forward?

Yes. I think for -- it's in the guide to mean the brands are similar to what we saw in '24, the current trends and trajectory with a little bit on the negative side of the average, Aerie on the positive side. So for down mid-single, you could assume Aerie was better than that, AE, down a little more than that. Similar, I mean if you think about 2024, we had a 4 comp, Aerie with a plus 5, AE was plus 3. So I think we're looking at similar things at the moment, with more to come once we see how trends continue, a lot to be -- a lot to absorb in current performance and see how things trend 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 in undies. Slightly, not huge. But this will be a year of us competing and getting the market share that we deserve.

On the license business, I mean, the -- over the last several years, we've been pretty consistent with -- around the mid-30s revenue from those businesses, some of our biggest partners in the Middle East with [Alshay] (ph) and Box. Obviously, a lot of disruption over the last couple of years, but their businesses are stabilizing to come back a bit. But you can assume something similar. We're assessing some things around kind of future international growth. The majority of our international revenues, as you know, is from Canada and Mexico. So 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.

Yes. So nothing to think about in terms of anything significantly different from the license piece of that with -- what we have talked about in the last several years is the great growth, to Jay's point, coming out of Mexico. We have a lot of room there. It's been a nice impact to the AE brand over the last several years. We've kind of only getting started there in OFFL/NE. So it's very small penetration to the total for those two brands in Mexico with plans to grow those brands in the market still.

I think there were some -- I was just saying I think there's some Hong Kong that were converted. So just is there not the change or an approach to looking more to licensing internationally? Or was that a one-off?

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.

Thanks so much. And maybe for Jen. Just -- you mentioned a number of top line initiatives that should build throughout the year and enable that post first quarter sales improvement. You mentioned a number of things. So I just want to understand how you think about that, maybe in terms of buckets or which are the top ones? And then just a quick follow-up on the tariff response. I think you said you're moving China sourcing exposure pretty materially into the back half. I'm just curious where are you going? Or where are you shifting that? Thanks a lot.

Sure. First and foremost, coming out of Q4, we had strong results. And going into Q1, we had some inventory opportunities and some good news and some bad news, right, going into the quarter. We definitely had some inventory outages, but it allows us to be nimble. We are chasing denim after -- in women's in particular after a strong fourth quarter comp. And then there has been some product misses that we are acknowledging. And most of it is due to inventory. So again, we needed some inventory here in some key categories, in Aerie, in particular. And we're seeing just some wins in some businesses that we could have had more of. So for instance, in Aerie, soft dressing, sleepwear has been -- actually across all categories, sleep and lounge has been really doing well, chasing that. Graphics has been great. So of course, we have early reads. And this is what we do day in and day out. So the early reads, we're reacting to. We're ensuring that our inventory is nimble. We're ensuring that we're open on the back half, which is obviously -- it's our Super Bowl as we enter into Q3 when we're such a denim-driven business, and denim drives behavior for all of our brands, which is important to note. Denim drives traffic to our site, and then we cross-pollinate throughout our brands. So that's really important to know, and we're setting ourselves up for the back half of the winning in denim. And I feel like the teams are doing a great job. And then, of course, we're monitoring our promotional cadence, balancing AURs at opening price points, very important right now. And of course, just reading the business day in and day -- but mostly staying connected to our customer. We send a lot of data analytics around our customer, where she is and what she wants and the fluidity of that is really important in today's business, right? One week, she's in stores or he's in stores, in the next week they're online shopping. And we have to open up the gates and ensure we are addressing where that customer is and obviously delivering to that customer. And that's a high intent for the balance of this year.

Great. And then just on that China sourcing question?

Can you repeat the question?

I think in the prior tariff question, maybe Mike can answer that. You guys are moving China production from like a high-teens percentage of the business to single-digits or something. So I'm just wondering where that's going?

Yes, we built -- that's the plan for now. But again, flexibility is key. So to Jay's point earlier, depending on what actually happens, we can decide if we ultimately do that or not, and we have redundancy to move as needed. But if needed, if things that are being projected or said about China actually do occur, we have the plans right now to go from high-teens to single-digits. We source across 15 countries. The teams have built redundancy across those countries. We will flex as needed.

Thank you.

Thank you.

Thank you. That concludes our question-and-answer session. This is the end of today's conference. We thank you for your participation. You may disconnect your lines at this time.