American Eagle Outfitters Inc
NYSE:AEO
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American Eagle Outfitters Inc
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Greetings and welcome to the American Eagle Outfitters, Inc., Fourth Quarter 2018 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.
I'd now like to turn the conference over to your host, Judy Meehan, Vice President of Investor Relations for American Eagle Outfitters. Please go ahead.
Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Chief Executive Officer; Chad Kessler, AE, Global Brand President; Jen Foyle, Aerie, Global Brand President; and Bob Madore, our Chief Financial Officer.
Before we begin today's call, I need to remind you that we will make certain forward-looking statements. These statements are based upon information that represents the Company's current expectations or beliefs. The results actually realized may differ materially based on risk factors included in our SEC filings. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise except as required by law.
Consistent with the retail calendar in the 53rd week last year, the fourth quarter's financial report and discussion today reflect the quarter ended February 2, 2019, compared to the quarter ended February 3, 2018. Fourth quarter and year-to-date comparable sales are shifted to reflect the 13 and 52-week period ended February 2, 2019 against the comparable 13 and 52-week period ended February 3, 2018.
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 the Company's new external website at www.aeo-inc.com in the Investor Relations section. Here, you can also find the fourth quarter investor presentation.
And now, I would like to turn the call over to Jay.
Hi Judy, thank you. Good afternoon and thank you for joining us. I am pleased to announce that we ended 2018 with a strong momentum delivering another quarter and a year of record sales. We have now achieved our 16th consecutive quarter of positive comp growth. I am proud to report this level of consistency which is a real standout in the industry.
It's a testament to the talent and commitment of our teams and strength of our brands. For the year, we have reached a milestone of $4 billion in revenue representing 8% comparable sales growth on top of a 4% increase last year and adjusted earnings per share rose 28% to $1.48. Business strength in 2018 was broad-based as we again achieve growth across markets, brands and channels.
American Eagle's fourth quarter comp sales rose 3% marking the seventh consecutive quarter of comp increases. Aerie delivered another impressive comp increase at 23% the brand's 17th consecutive quarter of double-digit comp growth. In a highly competitive holiday season, we achieved record volumes on lower promotional activities.
Our fourth quarter EPS of $0.43 exceeded our guidance of $0.40 to $0.42. Cash flow was strong, and we ended the year with a very healthy balance sheet. Cash investments totaled $425 million a year and after we returned $242 million to shareholders through share buybacks and dividends. In addition, we invested approximately $190 million in capital.
But 2018 was a year of great progress for a company. We know the significant opportunity is still ahead. As we looked forward our focus is squarely on our strategic priorities and fuelling growth and gaining market share. We remain highly focused on elevating the customer experience and raising the bar on product innovation. We surpassed $1 billion in jeans sales in 2018. You see much more growth in jeans and bottoms as well as complimentary businesses such as graphics, shoes and accessories.
We're also focused on testing new categories our customers care about. This weekend we are opening a new sneaker shop within our New York SOHO store. The shop is a partnership with Urban Necessity a leading retailer of exclusive premium sneakers with a huge customer following. We look forward to seeing the results of this initiative.
Aerie is a major growth vehicle for us for the foreseeable future. We have filled a void in the market and emerged as a powerful voice for real women. The team is focused on gaining market share by continuing to offer compelling quality products that make our customers feel good. Aerie's growth has been terrific and profits have improved. We see tremendous opportunity ahead. Our sites are squarely set on the first $1 billion as we continue to enter new markets and grow our customer base.
As we maximize our customers own businesses across North America and expand Aerie's footprint, we are also prioritizing global expansion. In 2018 we continue to grow our worldwide presence and ended the year with 231 license stores across 24 countries. A few weeks ago, we signed a license agreement to launch our brands in Europe, our partner bring strong expertise and a proven track record in launching brands in Europe.
There we have the most exciting brands in the specialty retail market. Our purpose is to show the world that there's real power in the optimism of youth. As we conclude 2018 and look towards 2019, we're not only focused on driving profitable revenue growth, but we'll do it selling the right way. We'll continue to give a voice to our customers and represent the values that are important to them such as inclusivity, fairness, transparency and authenticity.
We have built a strong community for our customers and our associates that we can all be proud of. I'd like to take this opportunity to congratulate and thank the team for their outstanding execution in 2018 and their unwavering determination as we look to the future.
Now I'd like to turn over to Chad.
Thanks, Jay. Good afternoon, everyone. 2018 was a strong year for American Eagle. We continued to deliver on our strategic pillar of fuelling more growth for our brand. We saw greater consistency with all quarters achieving improved margins and comparable sales growth across channels. Fourth quarter was no exception. Comp sales grew 3% building an increase of 5% last year. Both women's and men's posted positive comp growth driven by strength in jeans and bottoms.
Sales growth reflected increases in both stores and digital. It's great to see stores once again post a positive comp which marks the fifth consecutive quarter of increases. Investments in store payroll led to greater customer engagement and a better overall experience. Combined with effective marketing these improvements drove store traffic which outperform the mall. We delivered strong merchandise collections which emphasized gifting in key categories.
Although there's always room for some improvement, I'm proud of how we performed this holiday season. Sales metrics were healthy with increases in the conversion rate, transaction growth, averaging a retail and average transaction value. We also saw consistency across geographic regions. In a highly competitive environment this holiday, we controlled promotions and reduced mark down's in the quarter.
AE jeans were strong across genders with the fourth quarter marking the 22nd consecutive quarter of best ever results. Our jeans business has strengthened dramatically over the past few years fuelled by unique fit, fabric, innovation and value that our customers love. In 2018, AE jeans surpassed $1 billion in annual sales gaining nearly 200 basis points of market share. Across all age demographics, we are now the number one women's jeans brand and the number two overall. Those are powerful stats and we continue to see and the number two overall. Those are powerful stats and we continue to see a ton of opportunity for further growth in this important loyalty category.
Leveraging our incredible success in bottoms, we remain focused on growth across the balance of apparel. We're capitalizing on new fashion trends in using our speed sourcing capability to offer the best selection season after season. I am pleased with the performance of our loyalty program which is bringing in new customers, increasing retention and fuelling more frequent buying.
They are always testing ways to introduce the customers, new customers to our brand and expand share of wallet. With our customer at the center we look for opportunities that are important to them. As Jay mentioned we're excited to open Urban Necessity bigger shop in our SOHO store. Like jean's sneakers are essential to sub expression and we look forward to seeing the results of this pilot.
We also recently launched a test of American Eagle Style Drop a rental service in partnership with Castle [ph]. The pilot is aimed at expanding brand awareness, getting new customers into AE jeans and highlighting outfits within our seasonal collections.
Our AE X ME brand platform continues to be a driving force for an authentic relationship with our customers. This spring 10 real customers photographed, styled, incredibly directed our campaign. It was truly first of its kind and strongly resonated with our customer base and strengthens in brand perception. Look for more to come. As I said, I'm excited about the opportunities for future growth. Congratulations to the entire team for another quarter and another year of exceptional and consistent performance.
Now, I'd like to turn it over to Jen.
Thanks Chad and good afternoon everyone. I am once again thrilled with another quarter of record performance for the Aerie brand; we posted fourth quarter comparable sales growth of 23% on top of a 34% comp last year. That's a two-year stack of 57%. This was also our seventeenth quarter of double-digit sales growth. It's truly gratifying to see consistency in the Aerie's growth as we continue to gain market share.
It's also important to note that on our fourth quarter annual growth was achieved on less promotional activity resulting in higher margin flow through. We continue to see healthy gains across our sales metrics posting growth in traffic conversion transactions AUR and the average transaction value. The quality of our sales metrics is a clear indicator that we're expanding our brand reach and attracting new customers to the Aerie community.
New loyalty numbers rose in the mid-teens consistently throughout the year and retention rates are up over 20%. Our fourth quarter category performance was broad-based with particular strength in newness in apparel and accessories. We also maintained a very positive momentum in core intimates, bras in undies. Overall, we are pleased by the positive response to our gift giving collection. We continue to broaden product offering, adding categories styles and expanded sizes that are important to our customers. Doors performance was again impressive as we posted strong results in both our standalone and side-by-side formats.
We continue to see great success in newer markets. The data analytics point demeaning demand across the country for Aerie will be under primary East Coast exposure. We are super excited to be accelerating our store growth to 60 to 75 openings this year. We will focus on the markets in Texas and California and add into filling existing markets and -- existing markets.
All of the new stores will incorporate unused design highlighting unique features such as a self-evolve fitting rooms like no other, the new design stores are performing extremely well. They're outpacing our average store comps and we are seeing online penetration in new design markets at 40% to 50% this is a tremendous opportunity for us to expand the reach of our area brand. Our marketing platform AerieReal continues to gain momentum.
Aerie is a game changer by staying at the forefront of body positivity and women's empowerment. Our new cast of role models are even more inspirational they embrace the Aerie lifestyle and were chosen for their influential voices, unique stories and commitment to increase the power and empowering our community. And speaking of women's empowerment, this spring we are excited to add a cool collaboration with the new captain Marvel movie. Congratulations to the entire Aerie team for a record 2018.
Let's stay humble and hungry and focused on the significant opportunity ahead. Thanks. And now I hand it over to Bob.
Thanks Jen, and good afternoon, everyone. As I recap our performance, it's important to note the impact of operating one last week in 2018 in keeping with the retail calendar. This adversely affected both sales team in keeping with the retail calendar. This adversely affected both sales and operating profit for the year and the fourth quarter. Throughout 2018, American Eagle and Aerie demonstrated strong brand performance. Total revenue reached record highs for fourth quarter and the year with broad-based strength across regions and channels.
Investments in our store experience are people in marketing have contributed to greater consistency and improved results across the business. In the fourth quarter, we delivered strong qualities sales metrics in reduced markdowns in what was a promotional holiday season. Please keep in mind that my comments will focus on the adjusted financials which exclude certain items as detailed in the press release and tables on pages 6 through 9 of the investor presentation.
Now looking at the fourth quarter; total revenue for the 13 weeks increased 1% to $1.24 compared to 1.2 3000000000 for the 14-week period last year. Total revenue grew by $15 million despite operating with one less week which approximated $60 million in lost revenue. Comparable sales for the 13 weeks increased 6 percent following an 8 percent in the prior year. The quarter marked our sixteenth consecutive quarter of positive comp growth.
Additional sales information can be found on page 11 of the investor presentation. By brand fourth quarter American Eagle comps were up 3% building on a 5% increase last year and Aerie comps increased 23% following the 34% increase in the prior year. Our stores business continued to demonstrate momentum posting a mid-single digit comp increase with positive results across both brands.
The investments that we've made in our stores including talent and payroll have delivered positive sales trends throughout the year. Digital was also strong posting a positive high single digit increase in the quarter its highest volume quarter ever. Digital penetration rose to 31% of revenue in the fourth quarter and 28% for the full year.
Overall, quality sale metrics were healthy particularly in stores supporting our investments in field talent and wages. On a consolidated basis, traffic and transactions increased with store traffic positive in the quarter outperforming the mall for both brands. Investments in store payroll and a positive response to our merchandise collections also drove an improved conversion rate. Controlled promotions led to a slight increase in the average unit retail price and transaction value.
Gross profit dollars increased to $431 million up 1% from $425 million last year. Gross margin rate was flat at 34.6% of revenue. Lower markdowns were offset by higher delivery costs due to increased transaction counts in increased incentive expense.
SG&A expense of $288 million increased 9% from $264 million last year. As a rate of revenue SG&A rose 160 basis points to a rate of 23.1% to sales. Investments in our brands and field talent customer facing store payroll, higher wages, advertising, and incentives drove the majority of the increase. As well as we've noted these investments have strengthened our plans and the quality of sales.
Depreciation and amortization decreased 5% to $41 million improving 30 basis points to 3.3% as a rate to revenue. Operating income of $101 million compared to $118 million last year and as a rate to revenue declined to 8.2% from 9.6% last year. One less week in the fourth quarter adversely affected operating income by approximately $18 million. The effective tax rate decreased to 26.5% compared to 34.2% last year primarily due to the impact of US tax reform.
Fourth quarter earnings per share of $0.43 exceeded our guidance of $0.40 to $0.42 in comparison to adjusted EPS of $0.44 last year which excluded $0.08 of tax benefits related to US tax reform. Now a few comments and highlights regarding our annual results. Total revenue for the 52 weeks increased $240 million or 6% to a record $4 billion compared to $3.8 billion for the 53-week period last year. One less week in the year resulted in loss week period last year. One last week resulted in lost revenue of approximately $40 million.
Consolidated comparable sales for the year accelerated to 8% building on a 4% increase last year. Comps were fuelled by strong brand performance throughout the year. AE brand increased 5% and Aerie comps were up 29%. AE comps were consistently positive during 2018 and Aerie continues to grow at a fast pace with this year marking four straight quarters of double-digit growth. Gross profit dollars increased $115 million to $1.5 billion rising 70 basis points 36.9% as a rate to revenue.
An improved markdown rate and rent leverage were partially offset by increased delivery expense due to strong digital business and higher compensation. SG&A of $981 million rose 11% and 110 basis points to 24.3% as a rate to revenue. Throughout the year we may delivered investments in our brands, the customer experience in our people which drove the dollar growth.
For the year operating income was $339 million increased 4% from $325 million as a rate to revenue operating income decreased 8.4% from 8.6%. This excludes restructuring and related charges of $2 million and $22 million respectively. Operating income was adversely affected by approximately $12 million due to operating one less week in the fiscal year. Annual adjusted EPS of a $1.48 increased 28% from adjusted EPS of $1.16 last year. For additional information please refer to pages 7 and 8 of the investor presentation.
Now turning to the balance sheet, total ending inventories at cost increased 7% to $424 million inventory ended the year in line with our expectations and consistent with our demand. We ended the year with $425 million in cash and investments up $12 million from last year. As a result of our strong free cash flow during 2018, we returned a total $242 million to shareholders. We paid dividends of $97 million reflecting a 10% dividend increase in the first quarter of 2018 and we repurchased 7.3 million shares for $144 million.
Consistent with our guidance capital expenditures totaled $180 million for the year. In 2019, we expect CapEx to be in the range of $200 million to $215 million. The increase in capital spending is driven primarily by increased Aerie store openings. 2018 store activity can be found on pages 15 through 17 of the investor presentation. Total gross square footage increased 1% for the year due to additional square footage for Aerie store openings. We open 12 new Aerie's standalone stores and closed six old format stores and we also opened 29 new Aerie side-by-side locations.
For the AE brand, we opened 16 total locations and closed 15. Our real estate priorities in 2019 are to accelerate the growth of Aerie with approximately 60 to 75 store openings to reposition and remodel 80 stores and to continue expanding globally through our franchise partnerships.
Now regarding our outlook in the first quarter of 2019, we expect earnings per share of $0.19 to $0.21 based on comp sales in the positive low single-digits. In closing, we remain focused on driving better earnings flow through while fuelling growth in our brands the future is bright as we look to the opportunities ahead.
Our goal is to deliver consistent bottom-line results while creating sustained shareholder value. And now, we'll open it up to questions.
Thank you. [Operator Instructions] Our first question comes from a line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Good afternoon everyone and congratulations on a successful fourth quarter. As you think about the leverage opportunities in 2019 Bob what do you see this year that will be different that last year, whether it's occupancy whether its comp and wages and then this next first quarter and how you are thinking about the comp guidance. What are you seeing different in the first quarter than what you saw in the fourth?Thank you.
Yes, so Dana thank you for the question. So, two things I think that are really going to drive leverage in 2019 and really the primary one is leveraging SG&A as we noted throughout the year we've made significant investments and advertising stores payroll wages in addition to that we've done a number of restructuring activities in the retail field organization where we really upgraded talent.
All investments that particularly highlighted by Q4 is quality of sale metrics in the stores. We've seen significant improvement across AER, ADS conversion just the comp performance in of itself in addition to driving comp gross margin dollars increases. So we really feel in addition to really drive an increase sales per dollar metric to. So all of those are pointing to great returns from those investments. Looking forward to 2019 most of those investments are behind us and reflected in the base with the exception of Q1.
We really started investing heavily in store payroll wages all the things I mentioned in Q2 through Q4. So, Q1 will see continued incremental investment in those categories in addition to just some slight increase in advertising year over year and some timing difference of the differences of when advertising materializes in Q1 and then flows out the rest of the year.
So, looking to Q1 of this year, we're really not expecting leverage or improved operating margin in light of those investments but as we move through Q2 through Q4 you should expect to see operating margin leverage improvement and it's really primarily driven by SG&A leverage. The one other thing speaking about investments or things that are different but reflected in the base in 2018, we had a very strong year this year which drove a higher incentive compensation pay out than it did the prior year.
That's now baked into the base also and is reset. So we won't have that as a head-wind as we look forward to. So those are really the drivers Dana.
Our next question comes from the line of Oliver Chen with Cowen & Company. Please proceed with your question.
The positive traffic was impressive as we look at the model traffic over the next year and quarter what are your thoughts on traffic and merchandise margins particularly as some of the commentary on February has been more cautious from other retailers?
And lastly just on denim, your denim leadership has been outstanding just your thoughts on what's next for continuing innovation and newness and making sure that you use the technology in active in the right for what the customer is looking for with the latest trends? Thanks.
So, in 2019 just thinking about traffic both brands AE brand and significantly Aerie brand have performed much better versus the mall, we expect that trend to continue you know AE has kind of leverage traffic by two full basis points at least on average, if not more throughout the course of the year and Aerie's traffic performance has significantly outpaced the mall. So, we expect both of those trends to continue throughout 2019.
Lastly related to traffic, our digital traffic has been performing mid-teens performance and we expect that traffic trend to continue in fiscal 19.
And as for jeans, we are obviously focused every day on making sure that we are the most innovative jeans in the – possible for our customers. This year is going to be huge year for jeans in American Eagle. I don't want to share what we have planned because back to school is still several months away, but I am really excited for 2019 and store for jeans and AE. We're going to continue bringing innovations and fabric wash and cooperating the innovations and fabric wash and value and quality that we do.
But I think we have some really exciting things coming for the customer.
Our next question is from Adrienne Yih from Wolfe Research. Please go ahead.
Good afternoon. Let me add my congratulations. Bob, I was wondering if you could help us with some of the four-wall metrics for the Aerie concept. And then, Chad, if you can talk about sort of the evolution of the fashion shift? We've heard it's very teen specific. It seems like it's definitely gaining traction in the back half of the year and the outlook for spring. And then, Jen, congrats again. I wanted to know what you've done differently to suddenly get march margin sort of accretion or expansion after kind of in the mid-year being I think somewhat impacted by some of the actions that Victoria's Secret was struggling through? Thank you very much and congrats everybody.
Yes. Thank you for the question Adrienne. We don't disclose four-wall metrics on a by-brand or concept basis. But what I will say is with Aerie's phenomenal growth, as demonstrated by the 32 comp on top of 19, and I think it's the highest comp that they've experienced, that business is on fire. We've said that for awhile.I think we're demonstrating the profitability of that store through the acceleration of store openings, 60 to 70 next year for sure. And Aerie has been continuing to be a positive profit contributor to the Company and is continuing to grow their operating margin by leveraging their overhead expenses on real strong topline growth.
So in terms of fashion trends, I think we're definitely benefiting from new silhouettes in the marketplace and customers are really responding to the assortment both in men's and in women's. And I think we're seeing silhouette changes in bottoms and impacting tops as well as accessories. And I think it's really – we're seeing really positive response to it. I don't want to talk about how we see that evolving through the rest of the Q4 and into the spring, but I will say I'm very excited for what's coming and happy to see the customer response.
And Adrienne, I think Bob articulated it well regarding the march margin in Aerie. However, the most important thing I can ever say about Aerie is, we continue to evolve what real means to our customer. And I think competition is following us and what we keep on doing in Aerie is looking forward and ahead and how we're going to surprise and delight our customer with a powerful campaign in a strong – we represent everybody and we believe in women and I think we got to do some really surprising things coming your way when we hit spring. So we're really excited about the future.
Our next question is from Simeon Siegel from Nomura Instinet. Please go ahead.
Hi, this is Julie Kim on for Simeon. Thank you for taking our question. Can you give color on comp progression through the quarter and separately any detail on different trends between your full-price stores, outlet and e-com?
Yes. The comp performance in the quarter was pretty steady and pretty consistent in the high single-digits. I will say it strengthened a little bit towards the end, but talking to maybe a comp point or so. So we're very happy with the consistent comp performance demonstrated through the entire third quarter.
And if you had any color on the different trends between your full-price stores or outlet in your e-com channel?
All performing very strong. E-com as we pointed out was up double-digits and stores had a six comp pretty consistent across the board.
Our next question is from Janet Kloppenburg from JJK Research. Please go ahead.
Thank you and good afternoon. Bob, just a couple of quick questions. It looks like the two-year stack on SG&A is accelerating. It's going to be higher in the fourth quarter then it's been all year and maybe you could talk a little bit about that? And also, I think I missed your fourth quarter gross margin guidance, do you expect markdown trends to continue to moderate?
And just quickly for Chad and Jen. Chad, the variation in leg openings that we're seeing in bottoms, how well does that transfer to denim, which is, accounts for the majority of your bottoms assortment? And Jen, congratulations on that great comp. Just wondering what impact the higher penetration of apparel at Aerie may have on the overall product margins? Thanks.
Thanks Janet, for the questions. On the first one, SG&A; you have to go back -- if you want to -- look there's a lot of noise as I pointed out with the 53-week shift into Q2 out of Q3, we've been very clear that we are operating this business for the long-term. We're making very purposeful investments in advertising, store's payroll, capital to support our omnichannel initiatives.And when you look at year-to-date SG&A, we've only deleveraged 80 basis points. And when you look at year-to-date operating income, it's actually up 14% and has improved 40 basis points year-over-year. So the 53 week really creates a ton of noise between Q2, Q3 and Q4 as a matter of fact. It's approximately $60 million of sales and represents $0.07 of EPS.
So when you're stripping out revenue of that capacity, that volume, you can see a little bit of deleverage. Our level of investment in Q4 is expected to be the same level of increase that we saw in Q3. Less deleverage than we experienced in Q3, but same dollar amount and really a good chunk of that increase is really comp related, large, large chunk related just to incentives, and a lesser amount related to continued store payroll investment and we're increasing our investment in advertising by $10 million in the fourth quarter.
So a number of conscious investments that we believe and we know are actually fueling the business and driving some really strong quality of metrics. As it relates to gross margin in Q4, I actually didn't give guidance on that, but I'm happy too. You should expect to see a gross margin either flat or slightly improved from last year's.
Janet, I think we are -- as I said to Adrienne, we are excited about what we're seeing in the silhouette chest, and we're seeing silhouette chest actually both in men's and women's bottoms. The wider leg openings have been more prevalent in softer woven categories. But we are not just to jeans destination. We are a total bottoms destination. So we've been taking lots of advantage of that throughout the year. I think going forward into spring without sharing too much I think that we have opportunities to leverage that across all of our fabrications. I think it's really exciting; one of the things I love about working with youth market is that the customer is always excited to try something new and when there's a new silhouette, new fashion, it's a great opportunity for her to update her wardrobe and I think we're taking advantage of that and I think we're going to continue to do that for all the quarters to come.
And Janet, I think Bob said it well as far as profitability in Aerie and it's not just apparel that's overall helping the product margins. Really, if you look at Q3 all businesses were highly successful and led to great flow through in Aerie. So we're pretty pleased with all the categories that we're running right now. And what I love about Aerie is, we are a lifestyle brand.So we can throttle different businesses when they're trending and we're not just solely dependent on intimates, although obviously that's what we stand for in Aerie. So again, as we scale this business, Janet, we're going to see really nice flow through as we hit $1 billion, which we're excited for that $1 billion mark.
Our next question is from Tiffany Kanaga from Deutsche Bank. Please go ahead.
Hi, thanks for taking our questions. I know you touched on it, but would you specifically recap how merchandise margin came in for the quarter and given the slight AUR expansion in the quarter after a long stretch of larger increases? Can you help walk us through how you're working to drive further progress ahead, especially by category?
Yes, sure. So as we pointed out, total gross margin came in at 80 basis points better, our march margin have improved even greater than that through markdowns being significantly lower than they were in the third quarter of last year, but march margin was up over 100 basis points.
I think AUR expansion as we continue to grow AE businesses, as we continue to grow the bottoms business gives us a lot of opportunity in AUR expansion as the jeans and overall bottoms carry a higher ticket price. We're also seeing expansion, I think it's the brand gains even more emotional connection and we have better value and better fashion and pullback markdowns. We're seeing higher sell-through and better sell-through in categories like sweaters and wovens, which also carry a higher ticket.
All right. Thanks so much.
Thanks. I was just going to say in Aerie that we're seeing nice increases in AUR. Again, having just the ability to throttle different trending businesses, including apparel, which has been really doing great for us and that does obviously, we're in a higher AUR. So we are seeing nice improvements in Aerie and will continue to grow the AUR.
Thanks, Jen. I appreciate it.
Thank you.
Our next question is from Marni Shapiro from The Retail Tracker. Please go ahead.
Hey guys, congrats on an outstanding quarter. And if I forget, best of luck for holiday. Jay, I actually want to pick on you for a moment and ask you a big picture question. You've been in retail a while you've seen a lot of ups and downs even at American Eagle?Could you talk about, how you feel about the brand health right now in particular and in terms of cycles and how you vision it long-term because it feels to me almost as if this American Eagle is like the new and improved Gap [ph] or Levi's and you are exporting the American dream out to the world.
So can you just talk a little bit big picture how you feel about the brand health and where you see it? I don't mean to like raise the flag here and everything, but it's an important brand name and so I'm just curious you big picture feels like?
Yes. We work very hard on the brand. We work very hard to take the merchandising very seriously. We put together a great merchant team, a super merchant team. We're very proud of our bottoms business.Like I said earlier, we are going to be the denim destination. It's our goal to be the number one denim brand in the United States. We made a big investment in our team. We invest in our technologies for our denim. We invest in the finishes the fit, the stretch, and we have to be the leader. We can't be a follower. We have to be the leader in that category and we have to be the authority for that category.At the same time, we are committed to make our stores more exciting. We are opening a flagship store next week in Las Vegas on the [indiscernible], which will be a major tourist attraction. We're looking for some other flagships that we feel that we could add different experiences.
We're working on certain technologies within the store and make an exciting experience for the customers that we'll be able to introduce hopefully in the next six to eight months, because we want not just to sell a pair of jeans or a top, we want to sell a whole experience.We believe there will be other categories in the future to expand on in our accessories area, whether it be beauty area, we see tremendous opportunity. Just like we said earlier, with the tax savings we got, we wanted to reinvest. We want to reinvest by giving better service in our stores. I think we're very proud, when you walk in the malls and you look at the shape of the condition of the stores and you look at how the merchandise display.
I think we're number one looking store in the malls today. The malls that I walk in, our merchandise is set up right. We are proud on ourselves on the service level. We're one of the few retailers that didn't cut back on service. We've improved our [indiscernible] and we're making that investment in our service.Besides paying more money for the wages, we're also putting more people who want to get that service level. Because at the end of the day, the customer, they expects everything. They expect a great online experience as well as in-store experience, too, and it doesn't happen by itself.
So we believe we have the good looking stores. We have to be able to offer a certain excitement to the customer. We have to offer more services to customers. We have to build in our stores. We are a true omnichannel. We had the ability to shift from the store level, shift from the warehouse level.They will have to do reservations for the customer and we're adding more and more services at the store level, too. And to be able to go four quarters and get comp store increases in today's world at the store level, I don't know many retailers that have done that before.So it doesn't happen by itself. We're investing more money in our technology. We're doing a lot more research. We're working with a lot of different companies to see what the latest stuff out there is and we know this is a -- it's a non-stop.
You can't sit on your pant as well, so we challenge ourselves as well as being able to offer beautiful looking garments at a great price. And one thing we pride ourselves is we make affordable fashion for everybody that we believe that we could offer better denim that fits lots of people and make people proud to wear.
All right. Thank you for the nerve out there in a good way. Best of luck for the holiday season.
Thank you.
Our next question is from Rebecca Duval from BlueFin Research Partners. Please go ahead.
Hi, good afternoon. Thanks for taking my question and congratulations.
Thank you.
Jen, I think at one point 65% of your online business came from where you had a store location and now that you've kind of been expanding store base pretty rapidly and you have pretty aggressive plans for next year. Is that still the same statistic or do you have any kind of insight on that?And then for Chad, you talked about men's making progress, but it seems like the bottoms business is really strong. I was still seeing some slow or issues or opportunities, I guess would be a better way to put it, in men tops or accessories? Thank you.
Yes, that is accurate. And as we enter new markets, it's certainly coming to life, so we're really excited. That's why we're moving fast and furiously into next year with the 60 or 70 stores.
Yes, in men's, I'm happy with the overall men's business. The bottoms business is certainly very strong, continues to be strong. The tops business is recovering, and what's nice to see is that we're getting more of a full-price business in tops. We're seeing margin recovery outpaced the topline sales recovery, but that leaves plenty of room for additional opportunity in men. We had a couple of years of men's tops declining and we have a lot of opportunity to get that business back. I think as the brand gains more of an emotional connection and more brand strength, I think it's a big opportunity to get our customer even more excited about the top.
So we continue to -- I'm happy with that business, but we continue to see a lot of opportunity to grow men's tops and accessories.
Our next question is from Oliver Chen from Cowen & Company. Please go ahead.
Hi, thank you. Our question is about the omnichannel tools ahead. What do you see as big opportunities in terms of making sure the experience is seamless and that your mobile experiences where you want it to be and would love any thoughts on AEO connected on how that program is going?Chad, I would love your thoughts also on breadth versus depth of denim and how you're feeling about how that assortment is evolving in terms of how you're inventorying it as well as what the customer is wanting there?
And then Jen, I would just love your thoughts on any surprises from the very successful bra launch in terms of learnings there? Thank you very much.
Sure Oliver, thanks. We're excited about all the omni tools what we're doing for digital investments going forward. One thing we do not yet have is Buy Online, Pick Up in Stores. We have reserve in store, but we will be adding Buy Online, Pick Up in Store, which I think from other retailers would be a good opportunity for us. But we continue to invest in the platform; we're actually replatforming the site this next year, which will make it more easy for us to run the site globally and to make more updates.We're also looking using our data tools to offer more personalization and segmentation across the site and in our communications with the customer, which we've just started to do and we're seeing a positive return there and think that there's a ton of opportunities to speak more -- in a more targeted way to our customer.So I think there's a lot we can do. I think our mobile experience so far has been pretty great. We're driving the majority of our digital revenue from both the combined mobile site and the app and then we continue to see the customer shift more there. We are thinking even further into the future about new experiences on the website and how to make the customer experience seamless as you say, but how to make the customer experience seamless across all the channels.
The customer as you know, isn't really, I think focused on whether they're shopping online or shopping in-stores. I think they're really focused on the brand and on the product and they want us as a brand to know them and anticipate their needs wherever they come to us. And so that is really our goal with the customer data we have and the site and the store experiences that we're building. So I think you'll see that rollout over the next few years, but starting with the site being replatform this spring.In terms of denim breadth, part of our leadership in jeans is that we offer a jean for everybody. We have a jean for everyone. We've expanded sizing in stores and on the website, we'd love to continue to do that. We have, I think the broadest range of silhouettes, and we see all of those. We see productivity across all of those.So it does require an inventory investment to run such a size intensive business, but we continue to see a positive return and great productivity across the breadth of the assortment that we have and look to make sure that we can satisfy our customer with whatever he or she is looking for.
And the bra launch was amazing. Just as a reminder, we redesigned every bra frame in Aerie, which was a group effort. The whole team really rallied around that. So that's a big undertaking. But we knew we wanted to do something big. Anyone can launch a bra and we really wanted to do something that was going to be a little bit more remarkable to our customer.And we reached out to our customer base and they were the cast of this launch and it was so well received just because it was really understandable and authentic. And I think that that's really the most important part of the campaign and everything we do really is authentic. And I think it has to come from inside the four walls for it to permeate out of the building and into the customer's heart.
So it was an amazing campaign, but I will tell you we left some money on the table, which I love. We added -- extended sizes, smaller and larger and we saw them sell out. So there's really good news there, which means that we still have opportunity in bras to really grow that business and ultimately grow market share.
Our next question is from Jay Sole from UBS. Please go ahead.
Bob, the question is the mix continues to shift to online? How does that impact margins in the quarter and how does your store margin compared to online margin at this point? And then maybe one other question is, as you add store payroll and store hours, how was that leverageable next year? Do you have to add more payroll and more hours next year to continue to grow the comp at a strong rate? Thanks.
Yes. Our margins are actually very comparable between our digital business and our stores businesses. I know that's not the case in a lot of other circumstances, but it very much is ours. As it relates to store payroll and being able to leverage that -- as I said, it will be in the base every incremental dollar sale doesn't necessarily drive incremental payroll. Our payroll model is actually tied more to traffic. So I don't anticipate there to be a significant incremental investment required to drive, decent comps next year at all.
Got it. And then, if you talk about the -- it sounds like compensation for the quarter? Is that sort of a one-time thing or is that something that's amortized across all the quarters and the performance of the company gets better than that just increases for every quarter? Thanks.
Yes, it ramped up starting Q2 into Q3 and Q4. And a lot of it was upgrades of talent in the field. Some of it was wage pressure related to increases in minimum wage or us increasing our wage bands to not only be competitive, but actually one of the leaders out in the industry. And that's the main areas where we're actually seeing comp pressure and we may feel a little of it next year, but I think the bulk of it, we're experiencing now and it's behind us.
Our next question comes from the line of Laura Champine with Loop Capital. Please proceed with your question.
Thanks for taking my question, it's basically a follow-on. How many stores can you add to your current base presumably for Aerie without needing to expand your distribution facilities into new buildings?
You know, I think we've got a couple of year out in front of us before we hit capacity and the distribution network that we have an actually the teams have already been working on this for a while. They are way out ahead of this. So, I think we are regardless of store counts within Aerie, I think just as a total business right because we're not just picking more in retail, but we support it pretty significantly growing digital business, capacity issues or something we are on top of already maximizing the facilities we have in addition to looking at expanding our footprint.
Okay. That completes our call today. Thank you everybody for your participation. Have a good day.