Dorian LPG Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
September 6, 2023

There are 14 speakers on the call.

Operator

Welcome to the AEO Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Judy Meehan?

Operator

Thank you, Ms. Meehan. You may begin.

Speaker 1

Good afternoon, everyone. Joining me today for our prepared remarks Sergey Shottenstein, Executive Chairman and Chief Executive Officer Jen Foyle, President and Executive Creative Director for AE and Aerie Michael Rimpel, Chief Operating Officer and Mike Mathias, Chief Financial Officer. Before we begin today's call, I need to remind you that we will make certain forward looking statements. These statements are based upon information that represents the company's current expectations or beliefs. Results actually realized may differ materially based on risk Factors included in our SEC filings.

Speaker 1

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. Additionally, you can find the 2nd quarter investor presentation posted on our corporate website at www.ae0 inc.com in the Investor Relations section. And now, I will turn the call over to Jay.

Speaker 2

Good afternoon. Thanks for joining us today. I am pleased to report 2nd quarter revenue and operating profit that exceeded our expectations, reflecting stronger demand and improved profit flow through. Business picked up in June across brands and channels, With strength sustaining into July as our early back to school collections rolled out, the teams executed well during the period. We made quick product adjustments, chasing demand profitably, while also maintaining healthy inventories and controlling promotions.

Speaker 2

Record revenue of $1,200,000,000 was up slightly to last year, while operating income $65,000,000 increased significantly to last year. We generated strong cash flow, Ending the quarter with a healthy balance sheet and cash of $175,000,000 up to $77,000,000 to last year. As previously discussed, we have spent this past several months reviewing our cost structure to find areas where we can be more efficient As we continue to grow, we have identified opportunities to improve profitability over the next 12 to 24 months. We began to take action on these items in the Q2 and are starting to see results, which Mike will review. Now onto a few highlights of the quarter.

Speaker 2

American Eagle continues its leadership in casual wear And that's evident in recent performance where demand has been strong, particularly during peak shopping periods. We are seeing encouraging results across genders as new products are introduced. Extensions like AE77, Our premium capsule and 20 fourseven, our entry into men's activewear are injecting new energy and expanding our reach. As the teams will discuss, we are excited about the launch of the new store design to update and modernize the shopping experience. The online channel is also being enhanced with new features, which is driving better overall metrics.

Speaker 2

Aerie achieved yet another record revenue quarter with strong profit. As Jen will review, We saw incredible demand across our core apparel collections and our activewear extension continues to be on fire. You're also seeing renewed momentum in intimates where we've introduced new collections. I see a very bright future for the Aerie and Off Line brands where we are just beginning to see the real potential. I'd also like to comment on our Todd Snyder brand, where we have been seeing strong growth.

Speaker 2

Over the past year, We have selectively expanded into high fashion metros, bringing Todd's modern creations and upscale experience to new customers. We expect to reach over $100,000,000 in revenue this year. I cannot be more excited for what's ahead. Entering the Q3, it's been encouraging to see sustained strength across our entire brand portfolio. As we continue to fuel this momentum with strong merchandise and innovative marketing, we will stay focused on delivering efficiencies Across the business and improve profit flow through.

Speaker 2

Before I turn the call over to Jane, I want to touch on the leadership transition Announced last month. As noted, Michael Rimpel, our Chief Operating Officer, has made the decision to leave the company at the end of the fiscal year. Well, I'm personally sad to see him go. I want to thank Michael for his incredible leadership and partnership over the last 23 years. Michael has been a tremendous asset to the company, investing in technology and infrastructure to create our world class operations.

Speaker 2

We leave AEO with a strong foundation to build on from here, including excellent teams to help support a successful transition. With that, I'll turn the call over to Jeff.

Speaker 3

Thanks, Jay, and good afternoon, everyone. I am pleased with how the Q2 shaped up, including a significant improvement in operating profit across brands. As Jay noted, June was an inflection point. Business improved as we brought in new fashion, and July was our best month with both AE and Aerie comping positively. We were able to chase into high demand items at a strong margin.

Speaker 3

With inventory at appropriate levels, promotions and end of season clearance We're down dramatically to last year. Our 2nd quarter AUR was the 2nd highest in history. Customer KPIs remain solid with growth in our total customer file as well as our loyalty customer base. Aerie continues to expand its reach led by new store growth. With the exception of swimwear and intimates, comps are very solid across categories, with most major businesses up in the double digits.

Speaker 3

As we move past peak swim season, Comp strengthens further as we introduce new merchandise turning positive in July and accelerated into the 3rd quarter. Receptions in new styles in our core apparel collection has been incredible, especially in fleece, bottoms and tops. Our activewear extension offline by Aerie also had a standout quarter across tops, sports bras, active shorts I am also pleased to note that our Intimates business turned positive with the arrival of updated collections. As discussed on previous calls, we have been focused on leading with greater innovation and offering more match backs. Our newly launched smoothie style and extended bodysuit collection have been a tremendous success.

Speaker 3

Coupled with refresh marketing, I am pleased to see the intimates attract new customers and drive higher sales. Building brand awareness and amplifying our products through unique marketing is a priority. Through our hidden gems campaign, We are bringing to life a more mature point of view within intimate CYS fall. We are emphasizing high quality, beautiful designs while maintaining the playful Spirits that makes Aerie distinctive. This is a 3 60 degree campaign, including partnerships with the dating app Bumble, Celebrity influencers, active social campaigns and live events.

Speaker 3

Now turning to American Eagle. Revenue was down to last year, yet with a significant improvement in profitability. Here too, we were pleased to see trends improve sequentially Throughout the quarter with AE exiting July with positive comps, which has sustained into the 3rd quarter as well. Women's tops had another quarter of growth with continued improvement in comp trends across denim and non denim bottoms as well. Men's also saw improvement in bottoms driven by pants.

Speaker 3

Over the past several quarters, with brand margins restored to healthier levels, We are now focusing on growth. As Jay noticed, we are pleased with the expansion of newer collections like AE77 and 20 fourseven and will continue to build on our learnings. I'm also very excited about the launch of our new AE store design With modern aesthetics that celebrate our strong heritage in denim and casual wear, we've seen strong results so far and look forward to updating additional locations. On the marketing front, AE collaborated with the Summer I Turned Pretty, a Gen Z favorite With a live shopping experience on Amazon, the campaign in collections were a strong success, and we continue to chase items. Looking ahead, I am really excited by the trends I am seeing in casual wear.

Speaker 3

Emerging new trends provide exciting opportunities to fuel growth, and I believe we will be well positioned for upcoming seasons. As we said, the business has shown material improvement this summer. Across brands, recent trends have been stronger with greater consistency and performance. We are continuing to build on the areas with high demand, while keeping a sharp eye on the consumer environment and planning appropriately. Before I turn the call over to Michael, Thank you.

Speaker 3

And now, I'll turn the call over to Michael.

Speaker 4

Thanks, Jen, and good afternoon, everyone. I am very pleased with how the teams are We are leveraging flexibility in our supply chain to chase high demand items. Across channels, we're making improvements and seeing a real difference in key performance metrics, which I believe will enhance the customer experience and Support sales growth. For the quarter, store revenue increased 4% as customers continued to return to in person shopping. It's encouraging to see demand improve over the course of the quarter as our new floor sets hit stores.

Speaker 4

I'm also very pleased with the progress we're making on our store payroll Which is creating efficiencies and allowing us to leverage expense. Upgrading our fleet and store operations remains a top priority. Our new store design was introduced in 3 locations: Oak Brook in Chicago, Palisades in New York and Polaris in Columbus. In Oak Brook, we coupled the remodel with a relocation to a better area of the mall. And while it's early days, the combination of these actions has driven a nice lift This is a great example of the 360 degree approach we are taking to improve store productivity, while also ensuring our brands are showcased in the best way possible.

Speaker 4

We also rolled out a new AI based technology to optimize Size Profiling and Inventory Replenishment. Early results are showing quicker and more accurate placement with improved in stock levels. This is allowing us to better service demand with lower inventory across the network. Turning to digital. Revenue declined 7% in the quarter as demand continued to normalize from elevated builds during the pandemic.

Speaker 4

Yet here too, we are very pleased to see the business accelerate month to month and turn positive in August. New leadership has brought a fresh set of eyes to how we can continue to elevate our online shopping experience. We have put new processes in place to Test, learn and scale ideas with greater precision and speed. This new rhythm and the culture of experimentation is creating an exciting avenues are leading to higher conversion rates. We are just scratching the surface and I see plenty of opportunity for more improvement as we build on our learnings.

Speaker 4

We are also taking action to create a more seamless customer experience across channels as we further integrate our store and digital operations. This quarter, we enhanced our buy online, pickup in store offering, providing increased visibility to customers and optimizing order fulfillment. The initial read has been very positive. We've doubled our pickup penetration, which is generating savings on shipping costs and creating additional sales. Altogether, this is allowing us to better leverage our store fleet and our associates to provide a great cross channel customer experience.

Speaker 4

Our network of distribution centers and in market nodes continues to drive efficiencies in our fulfillment model. 2nd quarter delivery costs We're down year over year and leveraged as a percent of digital revenue. In fact, we achieved multiyear lows in both our cost per shipment and the number of shipments required to fulfill an order, all while delivering product faster to our customers. On the inbound side, we continue to see a favorable environment. We expect product costs and freight to continue to be a tailwind in the second half of twenty twenty three.

Speaker 4

Additionally, we are leveraging shorter lead times to stay nimble and chase. Before I turn the call over to Mike, I want to thank Jay for his kind words on my decision to leave the company. It's hard to move on from a place that has been my second home for the last 23 years, especially one where I have made so many lifelong friendships. The only thing that makes it easier is knowing that I am leaving the company in very capable hands. It has truly been a privilege to work with such a high caliber and talented team over the years.

Speaker 4

Thank you for your support, your hard work and your comradery. We will work closely together to ensure a smooth transition in the coming months. AAO has a bright future ahead. I know there's no better team to take this company to the next level. And with that, I'm going to turn this call over to Mike.

Speaker 5

Thanks, Michael. Good afternoon, everyone. We are pleased with our 2nd quarter results, which reflected early progress on our journey to improve long term profitability. Despite a slow start, we saw a real inflection point with the arrival of new merchandise over the summer. We remain nimble, manage markdowns effectively and leverage our ability to chase into demand profitably.

Speaker 5

With the initiation of our profit improvement program, We also saw some early benefits, which I'll touch on shortly. Overall, we managed the quarter well and were able to nicely exceed our outlook provided back in May. Consolidated revenue of $1,200,000,000 was up slightly to the Q2 of last year. It's important to note that we cycled Approximately $22,000,000 in revenue from last year's excess end of season sell offs, which impacted 2nd quarter revenue growth across brands and channels. Operating income came in at $65,000,000 for the quarter, reflecting a strong recovery year over year and a 5.4% operating margin.

Speaker 5

Compared to last year, gross profit dollars increased $83,000,000 or 22 percent to $453,000,000 with the gross margin rate up 6.80 basis points to 37.7 percent. The majority of the improvement was driven by better merchandise margins. Inventory discipline drove lower markdowns as we maintain our focus on healthy promotions. Additionally, we lapped $25,000,000 of freight headwinds and $30,000,000 of incremental markdowns related to end of season sale off last year. As I will discuss shortly, we made a structural change to our end of season clearance process this quarter, which we expect to positively impact gross margin over the next year.

Speaker 5

As Michael noted, lower delivery and distribution expenses also provided tailwinds to gross margin this quarter as we drove efficiencies across our outbound network. SG and A expense of $332,000,000 was up 8% to last year. We continue to drive efficiencies in our store labor model, Providing a partial offset to incentive accruals compared to 0 last year, higher costs from store growth and other corporate expense. Depreciation was up year over year and in line with guidance provided last quarter. EPS was $0.25 per share and our diluted share count was 196 Turning to our brands.

Speaker 5

Following the lull in May, we were pleased to see trends for both Aerie and American Eagle improve sequentially through the quarter. Aerie revenue increased 2% in the Q2. Comparable sales were flat and Aerie's operating margin of 15.1% expanded approximately 12 points to last year driven by improved markup and lower markdowns. American Eagle revenue declined 1% with comps down 2%. AE's operating margin of 16.8% expanded nearly 3 points to last year.

Speaker 5

Consolidated ending inventory was down 7% compared to last year with units down 11%. Inventory levels remain healthy and controlled across geographies As we continue to maintain buying discipline and chase demand. We generated strong cash flow and ended the quarter with $175,000,000 in cash. We continue to have healthy access to additional liquidity through our revolver with current liquidity over $800,000,000 Capital expenditures totaled $46,000,000 and we continue to expect full year CapEx to be in the range of $150,000,000 to 175,000,000 Our plan for our consolidated store count in 2023 remains roughly flat to last year, reflecting approximately 25 new Aerie store openings, offset by approximately 25 net closures for the AE brand. Before I move on to our outlook, I'd like to provide an update on the positive progress being made on our profit improvement initiative.

Speaker 5

We have highly motivated cross functional teams making structural changes to our operating model to capture permanent efficiencies. As I've discussed on previous calls, we're working across all areas of the P and L. With roughly 70% of our costs spread across product, markdowns, rent, warehousing and inbound and outbound delivery, our initial actions are positively impacting our gross margin. Michael pointed out the benefits we're seeing in distribution and warehousing. In addition to this, in the Q2, we optimized our clearance strategy, It's a structural change to optimize our loyalty program with a focus on driving more profitable sales.

Speaker 5

We're also working on longer term benefits in SG and A across all areas. We will keep you updated on what this could contribute to long term profitability as we solidify those work streams. Moving on to our outlook. Quarter to date product acceptance and overall demand has been very encouraging. Trends through the back to school shopping period have been strong with AE positive An area delivering a double digit comp quarter to date.

Speaker 5

Yet with significant business still ahead, we're maintaining a cautious view. For the year, we're raising our outlook to reflect better than expected business performance in the Q2 in addition to improved demand and continued profit recovery in the back half of the year. We expect total revenue to be up low single digits and operating income in the range of $325,000,000 to $350,000,000 We expect gross margin expansion reflecting improved freight and product costs, lower markdowns and approximately $25,000,000 in savings Tied to early profit improvement initiatives. Based on improvements in trend and profitability, we are accruing a baseline of incentives this year. As a result, we expect full year SG and A to be up in the low double digits with the second half up in the mid teens.

Speaker 5

We expect the 53rd week to contribute a point to full year top line growth. We expect 3rd quarter total revenue to be up in the low single digits operating income in the range of $115,000,000 to $125,000,000 With that, I'll open it up for questions.

Operator

Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate that your line is in the question For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. So that we may address Questions from as many participants as possible. We ask that you limit yourself to one question.

Operator

And if you have additional questions, you may re queue And time permitting, those questions will be addressed. One moment please while we poll for questions. Our first question comes from the line of Jay Sole with UBS, please proceed with your question.

Speaker 6

Great. Thank you so much. My question is about the intimates business. Jay mentioned that there's some new momentum in intimates. Jen, I think you mentioned that Intimates turned positive with the updated collections.

Speaker 6

And you said, I think, Mike said, Ares up double digits 3rd quarter so far. Can you just maybe help us understand like how much momentum you're seeing in Inventor? Maybe elaborate on those comments, give us an idea of where you see that business going? Can you sustain that momentum? And is that how big of a contributor is that to the improvement in the Aerie comp that you've seen so far in Q3 versus Q2?

Speaker 3

Sure. What I like about the intimates business is, I mean, when we just think about our brand awareness, Jay, Aerie still the intimates business is roughly an $80,000,000,000 industry out there. And Aerie still Has only like 50% brand awareness. So we're still getting this brand out there and becoming famous for intimate. So There's a lot of runway here, Jay.

Speaker 3

Look, it was down there was a downtrending cycle in intimates, and I think the teams did an incredible job mitigating any risk there. But as we looked ahead and I mentioned on prior calls, Jay, That we were really up to really innovating in that category and showing up with what she wants now. And I think the teams did an excellent job relaunching smoothies And tying it in with an amazing campaign, we just it was incredible, Jay. We were down in the meatpacking district. We took over the district.

Speaker 3

We had girls bringing in their bras and trying on our bras and it was just the momentum I saw there. So what I can tell you is, Our Head Designer, that's her expertise. We're double downing there. And, Ares maintained market share, in fact, gained some share in some Specific categories tucked in the intimates business. So, we're going to keep at this, Jay.

Speaker 3

And as I mentioned, we saw excitement in other categories too, Apparel, fleece, offline is not slowing down, Jay. The new store design for offline and the new stores, We're seeing nice momentum in malls where we coexist, Aerie and offline. That's really exciting. And as we anniversary these new store openings in both brands,

Operator

Thank you. Our next question comes from the line of Adrienne Yih with Barclays. Please proceed with your question.

Speaker 7

Great. Thank you very much. Congratulations. And Michael, thanks for all the hard work you've done over the years. So really appreciate that.

Speaker 7

Good luck.

Speaker 4

Thank you.

Speaker 7

You're very welcome. So, Jen, I want to stick on the theme that things seem to be rebounding. It does seem like the teen space generally seems to be having a little bit of a moment, sort of a recapture moment, maybe a recovery moment. What are the driving forces that you're seeing in sort of back to school? I know you kind of own the bottom space.

Speaker 7

So if you can talk a little bit about kind of long standing trends. And then Mike, on the SG and A dollar growth, just wondering, it would seem that, you're more incentive, I guess, on the EBIT side of things versus The top line, because it looks like you're flowing through a lot more on the EBIT. So just a little bit of color on kind of the incentive comp going up so much. I think prior guidance was Low to mid single digit and now it's low double. So some color there.

Speaker 7

Thanks so much.

Speaker 3

Yes, sure. Look, I think we've been at this for 3 years now rebuilding American Eagle. Michael mentioned we have new store designs, we have new concepts. And quite frankly, out of the gate in Q1, we've been chasing women's. Women's has gotten better quarter over quarter.

Speaker 3

As we landed this Back to school assortment, it really came together between the marketing and the assortment. We really leaned in there and it's paying off. I really like what I'm seeing. I don't know if you got a chance also to see that marketing campaign, The Summer I Turned Pretty. It was incredible.

Speaker 3

It was a great success story. And I think it was a great launch pad as we headed into back to school. Getting into the back to school season, as you know, we do dominate in bottoms. The teams did a great job Maneuvering the fits not only between denim, but also non denim bottoms, we really doubled down there. And We're definitely in position to continue to see that business grow.

Speaker 3

And as you know, when this comes back, AE is the winner in bottoms. The fit, The quality, the price value equation, I'm really excited to see this come to fruition. And early on, we've been still seeing wear now trends. So we're not even into as you know, it's 90 degrees out there as we really get into the back half, looking forward to seeing our leg shape and all the Adjustments we made to the categories in both men's and women's come to life. The trends that we saw early on, we've gone back at double downed on.

Speaker 3

So looking forward to really capitalizing on this on the back half. And just wanted to mention women's tops, that came out of the gate Really swinging, beating expectations. We've been up to chasing there too. Excited what I'm seeing there Just from owning the key items and then chasing the fashion trends that are working. The team's at it every morning.

Speaker 3

I have my conversations. What are we doing now? Love what I'm seeing. I just got through looking at holiday and the adjustments are made. We bring in our first holiday delivery early in October, end of September, and we'll be able to still react then.

Speaker 3

So wide legs, Of course, are still trending for us as I'm sure you've heard from other retailers and we're ready to battle.

Speaker 7

The new style is great.

Speaker 3

Thank you. Thank you.

Operator

Thank you. Our next question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Speaker 8

Thanks and congrats on the quarter and the nice improvement. So, maybe 2 part question. Jen, Maybe relative to a year ago, could you speak to changes in customer behavior that you're seeing across categories? And just how you feel about your ability to chase Trends this year in the back half given inventories in the supply chain relative to a year ago. And then Mike, Could you just elaborate on specific areas that you've identified so far supporting the $25,000,000 of savings for this year?

Speaker 8

And then maybe how best to think about the potential magnitude of savings into next year?

Speaker 3

I would definitely say, Jay, that we're in a fashion cycle. And it's We've been chasing, like I said, in women's, they're definitely moving a little faster. But we're always going to take the position though that we are in this That's what we're up to. So looking at this from a 5 year perspective, a 10 year perspective, how do we do this year over year? I think we proved so doing that in Aerie, right?

Speaker 3

The many consecutive quarters of high double digit growth, Getting through COVID and some of the changes in the past couple of years, certainly that's changed the customer behavior in both brands. But we've been up to just looking at this, as you can see with our results, right, the profits and our net earnings are certainly From all the hard labor and the work we've been up to, and I think now we're really up to growth in both brands. I think We've repositioned American Eagle. As I mentioned, we have new store designs. We have marketing tactics that we're really leaning into.

Speaker 3

We're showing up differently with our marketing. I think better and bigger and better and we're winning there. And I think the same for Aerie. And I think just Really looking at both brands and making sure we have disciplines as what each brand stands for and the DNA behind each brand And making sure that we can get that incremental activity from our customer is what we've been up to. And I think we're starting to see the early Benefits from all the work the team has been doing.

Speaker 3

So, that's really it, Jay. I really we have a lot of weeks in front of us to pull out this

Operator

Thank you. Our next question comes from the line of Paul Lejuez with Citi. Please proceed with your question.

Speaker 9

Hey, thanks guys. Curious if You can talk about the profit improvement plan. And as you go through and do all that work, are you finding opportunities on the SG Cut SG and A, are you also discovering places where you maybe have underinvested, which makes it tough for savings to flow through to The bottom line? And I guess just big picture, when you're through all the profit improvements and accruing incentive comp at an appropriate rate, What do you consider the right base level of expense dollars for this business? Thanks.

Speaker 4

Mike, are you having phone trouble?

Speaker 10

Yes.

Speaker 4

Paul, Mike is having some difficulty with his line now. We'll maybe move on to the next question then come back.

Speaker 9

Sure.

Operator

Our next question comes from the line of Janna Kim with TD Cowen. Please proceed with your question.

Speaker 11

Thanks for taking my question. You're seeing nice growth in terms of digital penetration. Can you just remind us in terms of where the margins are on the digital versus stores and Where that can go over time? Thank you so much.

Speaker 4

Sure. This is Michael. I'll take that. The way we look at it, our digital margins are pretty comparable to our store margins. What I would tell you is we've been able to start to see that nudge even higher As we've been focused on some of the delivery initiatives recently.

Speaker 4

So as I mentioned in the prepared remarks, We've been able to drive down and reduce the cost of delivery, both in absolute dollars, in Cost per shipment, in number of shipments per order, while delivering to the customers faster. And that is starting to drive incremental leverage in the direct channel. So we're certainly Excited to see that and we think there's more work and more opportunity in front of us. One of the big levers That I talked about in the remarks was the fact that in many parts of retail, in grocery and hard goods, People have been able to leverage their stores as pickup points in a pretty robust way to make a difference in their business. It's Historically been a very small part of our business, but with some changes that the team made, focusing on inventory availability and some of the system changes, We were able to double that in the quarter and we see a good runway to continue to grow that.

Speaker 4

That provides a ton of leverage for us because it actually Eliminates delivery as a cost and allows us to upsell customers as they come in the store. We're currently seeing about a 10% attachment rate to those digital sales and we think we can get that number even higher. So, yes. So historically, margins for e commerce and stores are pretty comparable. We've been able to drive the e commerce margins up In recent quarters and we see opportunity as we go forward to raise those even higher.

Speaker 3

Got it. Thank you.

Speaker 4

Thank

Operator

you. Thank you. Our next question comes from the line of Cory Carlo with Jefferies. Please proceed with your question.

Speaker 9

Great. Thanks so much for taking my question. I was wondering if you could talk a little bit about the New store design that you have and it sounds like it's early days, but it does also seem like you're witnessing some pretty promising results from that. So could you maybe talk a little bit about what you're doing differently in this new store design?

Speaker 3

Sure. First and foremost, we've Michael mentioned that we're in 3 malls as he stated, Polaris, Palisades and Oak Brook in Illinois. So, they're all semi different formats, but It's very focused on more of a modern design, approachable design. The opening, just the entrance alone is very inviting. I was really pleased to see when I went to Palisades to see all three brands in the mall.

Speaker 3

I mean, just our store designs really Are like incredibly inviting. They're bright. We definitely needed a new concept for American Eagle. It was time. We've been working Fast and furiously on this design and we're calling it lived in.

Speaker 3

And I really like what I'm seeing. The results are definitely At this stage, it's only been a few weeks now, but well above average. And we really feel excited about it. So We're in the middle of some of these new strategy sessions with some of the new learnings between not only between the store design, but AE77, AE 20 fourseven, which is our men's Active concept early reads there are very encouraging, to the point where we're launching some of the product that was tested in fewer stores to all stores. We're up to a lot over here.

Speaker 3

Also just to add on, SoHo, our store there now has all brands consolidated into it, Including AE77, and we just did our first pass at a remodel there. It will be in full swing headed into November, but just I love what I'm seeing early on. The teams, we only set forth on this initiative about 2 months ago. This shows you how swiftly our teams work, And they've already put together entire concept around the store. It looks beautiful.

Speaker 3

I'm going to go revisit it after this call. I invite everyone to go see it. We're calling it the gateway. It has all of our house of brands and it's the entrance into Soho. So I think it's just really an exciting concept and there's more to come here.

Speaker 3

So like I said, I'm encouraged by the early reads. In some cases, Michael mentioned, we reduced square footage, but went into the 50 yard line and we're seeing better sales in smaller square footage. So, that's always a good recipe. So, more to come. And again, we're going to start to incorporate This new design into our strategies going forward.

Speaker 9

That's great. Thanks. And then I was just wondering if you could talk a little bit about what you're seeing in denim?

Speaker 3

Yes. Denim is our Denim is everything we do. It's amazing what this AE team accomplishes. Just when I look at competition, our price points, our quality, Our washes, our ability to chase and ebb and flow, a very complex business, as you know, size, intensity, ownership, But still allowing us to be fluid in our assortments because fashion is definitely changing in that category. We're seeing fashion mixes go higher than we've ever seen, and we're creating testing strategies so that we can Ebb and flow faster than we've ever had.

Speaker 3

I just got through all the testing for spring for next year and We're really able to impact receipts, definitely wider silhouettes, as I mentioned earlier, in both men's and women's. Men's is seeing an inflection point in fashion, and we're pretty excited about the future. Great. Thank you so much. So, and I think we're ready to compete.

Speaker 3

And it's not just denim bottoms. It's denim as a holistic category, really exciting things We're starting to show up. If you go on to our homepage right now, you'll see, and we're going to continue to drive this business home.

Speaker 5

Hi, it's Mike. And hopefully, everybody can hear me now. Let me sorry for those technical difficulties. Let me double back and answer, I think Adrian, Matt and Karl had questions on SG and A and just where we are on our profit initiatives. So if you go back to our Q1 guidance, at that point, and well, first, Adrian, yes, we are incented on EBIT, not revenue.

Speaker 5

And if you go back to our Q1 guidance, we were not assuming an incentive accrual in the year at that point. With the 30% increase in our guidance range now, we are. We've crossed that And based on that timing, it will be it's back half weighted, which is the guide you're getting with mid teen SG and A growth for the back half. So on an annual basis then, we're talking about low double digit SG and A, call it 10%, 11% for being projected. And with that though, we our initiatives initially our initiatives on the profit side are very much focused on Gross margin and immediacy.

Speaker 5

We've seen some benefit in Q2. Our guidance includes some significant benefit in the back half. But we do have work streams across really every area of the P and L. So work continues. If you think about the OpEx that's up in gross margin, we actually saw a reduction to those operating expenses in the 2nd quarter.

Speaker 5

So even with SG and A up high single in the Q1, our OpEx was only up mid single. And if you would have normalized for the baseline of incentives, We're not talking about our total OpEx for the Q2 was actually down to last year. For the back half of the on an annual basis then, we're talking about double Low double digit SG and A growth. Those operating expenses and gross margin that span design and merchandising compensation, Rent, delivery, distribution costs, those expenses are projected to be relatively flat for the year. So with SG and A in the low double digit range, OpEx is only up about, call it, high single.

Speaker 5

And if I would normalize year to year on that baseline of incentives, our total OpEx would be up mid single. From there, like I said, we've got Across every area of the P and L, we believe there's more annual benefit coming through those gross margin expenses. We've got work Streams as we're calling them against 80% of our SG and A spend right now across really all the big buckets that make up those dollars. We've got a lot of positive momentum happening there, but the SG and A piece takes a little longer to get at. We've got contractual obligations.

Speaker 5

We've got RFPs out. We're bidding expense categories. We're looking at consolidating vendors for things, across services, across maintenance. We've got our design and labor model changes that we're testing into that we look want to implement things into 2024. So there's a lot of work, work happening across our teams right now.

Speaker 5

We have more updates in November and the end of the year on the progress on the SG and A front, but we're really pleased with And all the OpEx progress we've made down through gross margin at this point, that's coming through our results. If you kind of look at the gross margin guidance that we're implying for the year, Other than 2021, it would be the highest back to like 2012 or even 2008, 2009 periods. So we're seeing a lot of benefits come through there With more to come through SG and A, we'll provide more updates on coming calls.

Operator

Thank you. Our next question comes from the line of Janet Joseph Klauberberg with JJK Research Associates. Please proceed with your question.

Speaker 10

Hi, everybody. Congratulations on the progress. Mike, you just gave out a lot of different numbers on SG and A, Excluding incentive comp and all of that. I guess what I'd like to understand is The SG and A outlook for the second half is different than we all expected and versus your prior guidance. So what I'd like to understand is as we look into fiscal 2024, should we expect that on a total basis, there's Opportunity for meaningful SG and A reduction or is the incentive comp Going to continue to push the SG and A levels higher or other factors like Aerie's Store rollout.

Speaker 10

I'd like you to flush that out a little bit for us. And Jen, I think your guidance assumes that Comps decelerate from current trends. Perhaps you could talk about what's driving that maybe clearance levels would be lower year over year or other factors that are influencing the Q3 outlook versus current trends. Thank you so much.

Speaker 5

Hi, Janet. Let me just simplify. I know I said a lot earlier, but so with SG and A guidance being up low double digits For the year, let's just focus on this year to your point. About 40% of the dollar growth is related to incentives, Again, no accrual last year. The expectations for next year would be no, that we're really kind of Looking at a baseline accrual this year and that we would look to probably anniversary something similar next year.

Speaker 5

So there wouldn't be any additional pressure on 24 based on what we know today. And from here then, we are looking at progress and outline and have a roadmap in place where we believe we can provide some significant leverage next year knowing that we wouldn't have that headwind or that sort of apples to oranges compare for incentives. And again, 80% of our SG and A is kind of under a microscope right now with a lot of work happening cross functionally between our finance teams, Supply chain, IT, merchandising and planning, we've got a lot of great momentum happening across our entire expense base. We're seeing some benefits in our new guidance this year, But we expect even more on an annual basis, so between next year and even into 2025. So more to come, but we would expect OpEx leverage off of all this Work and leveraging even incentives, at this point next year.

Speaker 10

Thank you, Mike.

Speaker 3

And Janet, yes, in Aerie, I'll start with Aerie. I mentioned that we're really encouraged, actually in both brands, just by the early reads, for back to Well, Aerie was really just our ability to double down coming off of swim. With all the work we've done around intimates and Just our fleece and offline categories, Janet, it's incredible what we're seeing. So, and like I said, the halo effect of going up against These non comp stores and going comp and just our customer acquisition is healthy. Our total file is Definitely, we've seen incredible acquisition.

Speaker 3

Again, in both brands, AE's really has seen some incredible growth in customer acquisition. So They like what they're seeing. So that's encouraging. Basically, it's intimates. And what Ares stands for, honestly, it's firing on all cylinders right now.

Speaker 3

So I can't say it's one business over the other. Some are definitely stronger than others. We saw wear now categories still trending as we headed into August and we own them. So we were there for the customer. And then AE, early on in Q1, we saw nice reads in tops And we are able to chase and we continue to chase women's consecutively sorry, got better consecutively Quarter over quarter and then as we launch back to school again, the stars were aligned there.

Speaker 3

We were able to remix a little bit more into women's versus men's And really reposition men's focused on back on the holiday for men's and really gearing up women's for back to school and it's starting to pay off. So I like the early trends. We still have several weeks ahead of us. So we're going to proceed Fast, but honestly with a lot of intelligence, profit minded, we don't want to give up everything we've earned over the past Few years of working towards these incredible margins that we're delivering, and so, we're ready to go. I hope it continues.

Speaker 3

We like what we're seeing now.

Speaker 10

But does your guidance assume that it will continue? Or is there some moderation?

Speaker 3

Mike can answer that for you.

Speaker 10

Okay. Thank you, John. Thank you. Hi,

Speaker 5

Mike. Revenue guidance,

Speaker 10

Janet? Yes. Doesn't it I'm not sure if it embeds the current trend. And I get why you might not want to do that, but I'm just wondering if you could talk us through it.

Speaker 5

No, I thought you're exactly right. It's a little more cautious than the we got about 50%, about half the quarter in from a revenue perspective, 7.5 weeks to go. And it does have a little more of a

Operator

Thank you. Our next question comes from the line of Chris Nardone with Bank of America. Please proceed with your question.

Speaker 12

Thanks guys. Good afternoon. I have a couple of questions on the gross margin. Can you confirm if there is any more freight recapture left in your guidance this year? Can you also help quantify the benefit you expect to receive from lower cotton costs?

Speaker 12

Then as a follow-up, I think you identified $5,000,000 of identified savings so far. Is that only isolating the changes you made to the end of season markdown process? Or is there more embedded in that $25,000,000 number? Thank you.

Speaker 5

Hey, Chris. Yes. No, I think we pretty much anniversaried the majority of the freight Headwinds that we had through the first half of last year and your answer on cotton, we are we do see line of sight not only Continued IMU benefit this year, but we've already have plans laid out for majority of first half of next year, and we continue to see Markup gains in our future plans, including, I think, just the benefit of from cotton or any other commodity pricing. So our teams are doing a great job there. We see Kind of tailwinds on product costs into the beginning of 2024 at this point.

Speaker 5

The $25,000,000 just maybe add a little more color there, That's really a net number. We're actually seeing with the incentive accrual, there's actually more benefit we're getting through not just the Kind of clearance end of season sell off process, but other operating expenses, Michael hit on a bunch of them, delivery, warehousing costs, Some headway in store payroll and a lot more to come. But so there is more benefit embedded in the guidance And really that the impact of incentives is offsetting that a little bit.

Speaker 12

Got it. Thank you.

Operator

Our next question comes from the line of Alex Stratton with Morgan Stanley. Please proceed with your question.

Speaker 13

Great. Thanks so much for taking the question. Really 2 from me. 1 just on the gross margin in the quarter. Did you guys quantify how much of the outperformance you would attribute to the cost savings initiative?

Speaker 13

And then I just wanted to make sure I Good. Were there just 1 or 2 of the things you had identified that flowed through this quarter and then there's still more to come there in the back half? Just trying to understand all the moving pieces there because it sounds like a lot of different initiatives. And then just secondly, on the full year guide, I wanted to just dig into the components of the raise and how you're kind of thinking about Aerie versus AE growth in the back half. Thanks so much.

Speaker 5

Yes. So the gross margin in the second quarter, we had benefits both from the acceleration across a bunch of different fronts. The acceleration In the business, really it started in June through July, like we've described. The change to our debt clearance sell off of the end of season goods had a benefit in the Q2. It will have an annual benefit beyond what we We're able to book in the Q2 or capture in the Q2.

Speaker 5

And obviously, we did recapture the freight headwinds from as well as the impact of selling off extraordinary amount of units are not higher than historical amount of units last year in the second quarter. In the full year guide then, we do have continued growth really the gross margin benefits that we're rolling through this forecast Continued benefits through the delivery savings we're seeing with a Wider network, including the capabilities we have for Quiet, warehousing costs alongside that, so compensation as well as other PCE related costs and benefits through just gross margin in general from Continued benefits to markups and controlling markdowns with very healthy inventory levels. So the guide really reflects A low single digit revenue trend. Aerie is still at this accelerated pace. I think it's probably a low double digit trend.

Speaker 5

AE, flat to positive, with the gross margin benefits that we've been able to see through the second quarter continuing through the back half of this year.

Operator

Thanks a lot. Thank you. Our next question comes from the line of Marni Shapiro with Retail Tracker. Please proceed with your question.

Speaker 11

Hey, everybody. Congratulations on all the improvements. The stores look great. Jen, I just want to dig in on 2 quick things. The fashion in stores, particularly on the women's side, seems to be moving at A very quick pace, like a few days on hand, it seems.

Speaker 11

It's turning very quickly. So I'm curious if you could just talk a little bit About the balance of the fashion and your ability to how quickly you will be able to chase back in? And do you feel well set for holiday in that balance? And then just on the expense line, I'm assuming the Ziegler sisters and everything that you guys are doing Capture attention. I'm assuming all of that is embedded in the marketing costs and the forward guidance on SG and A.

Speaker 11

Is that correct?

Speaker 3

I can answer that. That is correct. Yes. And just As I think about, just the pace of the I mean, the turns, right? It's just amazing how women's is turning, And it should turn fast.

Speaker 3

We're up to getting at tops and tops turn a lot faster than bottoms. And there's been some channel shifts. The new direct the direct business and this team, what they're able to we're really seeing a dramatic improvement on that channel. And we're up to making sure that we can maximize that channel and moving our best stores fast and getting back into goods. The team has been at it every day, Marni.

Speaker 3

I mean, every day we have new learnings. There's another day that goes by that we're not chasing. We definitely be As I mentioned early on, at the end of June, we were starting getting in new receipts. And so we've been chasing that. We exceeded plan.

Speaker 3

And now we're up to getting back on what we think is our new plan and making sure that we can deliver this number.

Speaker 5

Do you

Speaker 11

feel the fashion is balanced so for holiday Was that less of a I did. Okay, fantastic. I'll take the rest later.

Speaker 3

I feel good about that. And in men's too, Marni. We had to reset in men's. And I just saw the holiday delivery and it feels way more balanced. We have outerwear, we have categories that we hadn't been in business in.

Speaker 3

So we're pretty excited about the offerings that are coming.

Speaker 11

That's exciting. Thanks so much guys.

Speaker 3

Thank you. Thank you.

Operator

Thank you. There are no further questions at this time. And I would like to turn the floor back over to Mr. Jay Schottenstein for closing comments.

Speaker 2

Thank you. Our brands are strong and we remain focused on unlocking additional growth and profit moving forward.

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Earnings Conference Call
Dorian LPG Q2 2024
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