American Eagle Outfitters Inc (AEO) 2014 Q1 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Greetings and welcome to the American Eagle Outfitters first-quarter 2014 earnings conference call.

  • At this time, all participants are in a listen-only mode.

  • A question-and-answer session will follow the formal presentation.

  • (Operator Instructions)

  • As a reminder, this conference is being recorded.

  • It is now my pleasure to introduce your host, Ms. Judy Meehan, Vice President of Investor Relations.

  • Thank you.

  • You may begin.

  • - VP of IR

  • Good morning, everyone.

  • Joining me today are Jay Schottenstein, Interim Chief Executive Officer, Roger Markfield, Chief Creative Director, and Mary Boland, Chief Financial and Administrative Officer.

  • Also joining us for Q&A today are Simon Nankervis, EVP of Global Stores, and Michael Rempell, Chief Operating 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 current -- Company's current expectations or beliefs.

  • The results realized may differ materially based on risk factors included in our SEC filings.

  • Please refer to the tables attached the Press Release.

  • We also have posted a financial supplement on our website.

  • And now, I'll turn the call over to Jay for opening remarks.

  • - Interim CEO

  • Good morning, everyone, and thanks for joining us.

  • Earlier this morning, we reported first-quarter results.

  • As anticipated, this was a challenging quarter as we faced a number of headwinds.

  • Weakness in demand led to soft traffic and a 5% sales decline.

  • This, combined with elevated inventories, created downward pressure on our margins.

  • We achieved slight profitability in the period well below the prior year.

  • As we manage through the near-term, implementing our plan to improve profitability is a priority.

  • We made good progress during the quarter.

  • Our plan includes -- creating great merchandise and improved customer experience across our brands.

  • Continuing to build strong digital and omni-channel capabilities.

  • Rationalizing our brick-and-mortar store fleet, expense reductions, and distorting our International approach towards more licensed stores.

  • We have been moving quickly to get our plans in place.

  • So, now let me give you some of the details.

  • First, we are continuing to develop omni-channel capabilities to improve every touch point with our customers.

  • We recognize the vast shift in industry dynamics and the need for transformation to remain competitive and win in the future.

  • We have a number of projects aimed at optimizing our platforms to create a better shopping experience for online and mobile shoppers.

  • Throughout the year, we will launch upgrades to our online site to include improved product displays and better navigation.

  • Additionally, we will release a new mobile app later this summer with better functionality and speed.

  • We've seen great early results from our buy online ship from the store pilot program including incremental sales that would have otherwise been lost due to stock outs and more efficient use of inventories.

  • Currently in 50 stores -- we will ramp up to 100 by back-to-school.

  • Additionally our new fulfillment center opens in July providing leading supply chain functionality, much-needed capacity, and significantly faster customer delivery times.

  • Second, we are aiming to improve the profitability of our store fleet through closures, lease negotiations, and fleet repositioning.

  • As Mary will discuss, the combination of store closures and short-term leases give us greater flexibility to react to changing consumer shopping trends.

  • In addition, the field team is driving more productive use of store payroll and reducing non-customer facing activities while keeping our focus on delivering a great customer experience.

  • Third, we are simplifying our structure across all areas of the Business in eliminating redundancies and realigning our terms -- teams to be more effective.

  • As Mary will discuss, we are cutting expense across the organization specifically corporate overhead, professional services and travel, and we are utilizing a more robust, non-merchandise procurement process.

  • Our efforts are to ensure we are invested in the right areas for the future including omni-channel projects, vertical customer-facing activities, and global expansion.

  • This leads me to our most important area of focus, improving merchandise and overall brand experience.

  • We have a strong team in place with Roger at the lead.

  • I'm confident they will deliver improvements to merchandise with greater alignment and support for marketing.

  • Lastly, as part of our overall business assessment, we are [repacing] and adapting our near-term International growth plans.

  • We are gearing our International approach towards licensed stores where we see strong profitability and low investment requirements.

  • For example, we now have seven Partners and are operating in 13 countries.

  • We expect to announce new Partnerships by the end of the year.

  • Our International expansion plans underscore the importance of the omni-channel investments we are making today.

  • We see a tremendous global appetite for our brands, and as we expand into new markets, we see significant opportunity in our digital channels.

  • Before I turn it over to Roger, I want to provide you with a brief update on our search for a permanent CEO.

  • Succession planning is a priority, and the process is underway.

  • We are committed to finding a strong successor and will take the time necessary to find the right person to do so.

  • In the meantime, our focus is unwavering.

  • We have a very strong and talented team at all levels to facilitate our recovery plan and continue to execute on our goals.

  • With that, I'll turn the call over to Roger.

  • - Chief Creative Director

  • Thanks, Jay.

  • Good morning to all of you.

  • The first quarter reflected micro wind -- headwinds, unseasonable weather, and our own execution challenges.

  • Our product assortment isn't quite what it needs to be, and inventory was planned above trend pressuring our results.

  • However, we did see healthy demand for certain categories including our heritage bottom business, denim and pants.

  • We're also pleased with our fashion capsules, and how we have successfully adopting new styles into our mainline assortments.

  • We saw the weakest results in men's shorts, mid-tees, and women's bare looks.

  • Within Aerie, bras, undies, and swimwear performed well.

  • During the quarter, we needed to clear through excess inventory, and clearly, markdowns were not where we'd like them.

  • Yet, we were able to selectively reduce broad, all-box promotions.

  • For example, we did not anniversary promotions during holiday periods, and in some cases, we excluded core businesses from the events.

  • As we get inventories down in the second half, our goal is to continue to selectively reduce promotions.

  • Improved product and more relevant marketing events will also support a better overall pricing strategy.

  • The challenges we faced in the quarter underscore the importance of continuing to evolve as the retail industry changes.

  • We are aligned on the initiatives Jay outlined, including fleet rationalization and continuing to build our omni-channel capabilities.

  • At the same time, we are also working hard to manage the Business well this year against the backdrop of the current macro environment.

  • As we move forward, here is what the creative team is focused on.

  • First, we are building upon and maximizing our leading heritage bottoms businesses.

  • This is our core strength where we are driving innovation and delivering against exciting new emerging trends.

  • We are known for the architecture of our fit systems, and it's critical we maintain outstanding innovation, quality, and value.

  • Across the assortment, the teams are bringing greater focus, on-trend styles, and adding newness to our heritage categories.

  • Upcoming marketing will be aligned with product lines ensuring customers know what we stand for during any given season.

  • We're excited about our new marketing campaign in which we partnered with an agency on a creative, diverse, 360-degree customer outreach across social media, in-store, digital, magazines, online video, and TV.

  • Our next major area of focus -- we have streamlined and are simplifying our design and merchandising process.

  • We have removed layers and within the teams, we're creating a clear reporting structure and more direct accountability.

  • We are cutting unnecessary expense and more effectively using our speed-sourcing capability.

  • This year, we will reduce the number of design styles, and our goal is to drive higher adoption percentages and reduced sample costs.

  • I want to be clear.

  • This will set us up for a better process, less clutter, and more quality assortments.

  • We've had good success with our fast-track fashion capsules where we are getting product from design to in-store within 60 days.

  • This is an exciting feature within our women's assortment, and we'll appropriately balance our core heritage lines.

  • Third, we are reducing inventory levels for the back half.

  • Leveraging speed-sourcing capabilities and keeping more open to buy.

  • In addition as Jay mentioned, our omni-channel projects, especially buy online ship from store will enable us to have better utilization of inventory driving sales and reducing markdowns.

  • Aerie and AE are extremely well-positioned in the marketplace today.

  • With Aerie, we see enormous potential to go after an underdeveloped, youthful, intimates business.

  • During the quarter, we opened six new store designs, both shop-in shop and side-by-side locations.

  • We've included a few photos in our supplemental presentation.

  • It's an updated more modern look for Aerie with better product displays.

  • Though it's early, we are very encouraged by the performance of these stores as they look to be driving incremental sales both to AE and obviously Aerie.

  • This goes back to our heritage as Aerie was always built for the AE customer, and we continue to believe that is where it belongs.

  • Lastly, I want to mention how pleased we are with the customer response to our new global markets.

  • Over the past several weeks, we opened new stores in Mexico and licensed stores in Colombia and Japan to a tremendous response.

  • Before I turn the call over to Mary, I would like to underscore my confidence in the Team and our ability to drive much better performance.

  • Our Company is strong.

  • Our brands are extremely well-positioned, and AE will stay true to its heritage as the Democratic American lifestyle brand.

  • We expect to see the early results of our plan begin to gain traction later in the year and set us up for a strong performance in 2015.

  • With that, I'll turn the call over to Mary.

  • - CFO and Administrative Officer

  • Thanks, Roger.

  • As Jay mentioned, the first-quarter results were consistent with our expectations.

  • Our performance reflected a weak top line, increased markdowns, and expense deleverage.

  • Total revenue for the first quarter decreased 5% to $646 million compared to $679 million last year.

  • Our total revenue benefited from our non-comp factory and International stores as well as increased licensed revenue.

  • Consolidated comparable sales decreased 10% following a 5% decrease last year.

  • By brand, AE comps decreased 11%, and Aerie was down 4%.

  • Weakness in traffic and incremental markdowns resulted in lower transactions and transaction value.

  • Additional sales information can be found on page 5 of the presentation.

  • The consolidated gross margin fell 420 basis points to 34.9%.

  • The comp decline caused buying, occupancy, and warehousing costs to increase 220 basis points as a rate to revenue.

  • Higher markdowns also contributed, partially offset by favorability in merchandise and design costs.

  • SG&A expense of $185 million increased 2%, or $4.3 million, which included $2.3 million in severance.

  • First-quarter expense reductions of approximately $10 million, nearly offset incremental strategic investments related to new factory stores, International growth, and omni-channel initiatives.

  • We continue to work hard on expense reductions which we expect to ramp up as we progress throughout the year.

  • Depreciation and amortization increased $32 million -- to $32 million, driven by IT investments as well as new factory and International stores.

  • Operating income for the quarter was $8 million compared to $57 million last year, and EPS of $0.02 decreased 89% from adjusted EPS of $0.18 last year.

  • Turning to the balance sheet.

  • Starting with inventory, which can be found on page 6 of the presentation, we ended the quarter with inventory at cost per foot down 7% following a 6% decline last year.

  • The year-over-year decline reflects a change in the timing of inventory ownership.

  • As a reminder, late last year we began taking ownership at the receiving port rather than the port of departure which is consistent with general industry practices.

  • Without this change, inventory at cost per foot increased in the mid-single digits which is consistent with our previous expectations.

  • Similarly, without the ownership change, we expect second-quarter ending inventory at cost per foot to decline in the mid- single digits as we clear through excess units and plan the second half more conservatively.

  • To underscore Roger's point, back-half inventories are planned down to be more aligned with sales trends.

  • We ended the first quarter with $328 million in cash and investments.

  • Capital expenditures totaled $72 million for the quarter, and we continue to expect to spend approximately $230 million this year.

  • During the quarter, we opened 11 stores including 5 factory stores, 2 stores in Mexico, and 1 store in China.

  • Three new North American mainline stores opened in key markets.

  • We closed 20 stores consisting of 14 Aerie standalone locations.

  • Additionally, we added 11 International licensed stores including our first store in Colombia and ended the quarter with 77 stores across 13 countries.

  • Additional store information can be found on pages 9 through 11.

  • Now, regarding the outlook for the second quarter.

  • We expect first-quarter trends to continue.

  • Based on a high single-digit decline in comparable sales, we expect second-quarter EPS to be approximately break even.

  • Our guidance compares to earnings of $0.10 per diluted share last year, and it excludes potential impairment and restructuring charges.

  • Now, I'd like to review some of the key areas of focus as we execute on our recovery plan including store fleet rationalization and our efforts to reduce expense and identify efficiency gains across the Business.

  • As Jay mentioned, given the changing industry dynamics and increased pressure on our stores, we've gone through a thorough [full review] to determine where we can close stores and successfully migrate sales to other channels are nearby locations.

  • I'd like to emphasize that the majority of our store fleet is healthy and generated four-wall profitability on a trailing 12-month basis.

  • That being said, we have thoughtfully assessed our portfolio and in addition to the 20 stores we closed in the first quarter, we've identified an additional 150 stores to close in North America over the next three years including nearly 100 AE stores.

  • Assuming a continuing negative trend, the stores will not be delivering our expected returns.

  • For 2014, we are now planning to close 50 AE and 20 Aerie stores in North America upon lease expiration.

  • This will result in annualized after-tax savings of approximately $10 million to $15 million beginning in 2015.

  • We also have an additional 300 stores with leases expiring in the next three years which will be regularly evaluated for potential closures.

  • So, in total, we have flexibility on more than 400 stores, nearly 50% of our North American fleet.

  • We have also been working hard to negotiate rent reduction and lease flexibility, and we'll continue this work.

  • We are highly focused on our expense reduction program as well including corporate overhead, travel, and professional services.

  • We are also going after store expense to drive more productive use of store payroll, reducing non-customer-facing store activities and cost to achieve greater store profitability especially in light of the declining trend.

  • The actions we are taking to reduce our expense base are helping to fund the strategic investments and additional advertising necessary for our long-term success.

  • We have dramatically reduced SG&A dollars from our previous budget.

  • Our current view for the year has SG&A up in the low single digits yet we continue to work to identify more opportunities for savings.

  • Before we take your questions, I would like to reiterate that implementing our plan to improve profitability is our top priority.

  • We are intensely focused on delivering improve product and customer experience, bringing inventory in line with those trends, rationalizing our store fleet, reducing expense, and growing International licensed stores.

  • We look forward to keeping all of you updated on our progress in the coming quarters.

  • Thanks for listening, and now we'll take your questions.

  • Operator

  • (Operator Instructions)

  • Simeon Siegel, Nomura Securities.

  • - Analyst

  • Thanks, good morning.

  • Jay, can you talk about the shift in International strategy as it relates to the markets you currently own.

  • And then, for perspective, what percent of sales does licensing currently represent?

  • And, where do you think that can go?

  • And, just maybe a quick update on the factory strategy?

  • Can you remind us where the factory stores sit productivity-wise and on a four-wall basis?

  • Thanks.

  • - VP of IR

  • Simon is going to take this question.

  • - EVP of Global Stores

  • Hi, Simeon.

  • It is interesting.

  • We've done a lot of work on our International business, and we've identified a number of locations where we believe the brand will have great traction.

  • To date, we're in 13 countries.

  • By the end of this year, we will have 14 licensed countries, and we'll be in over 100 licensed stores.

  • I think as you look to the way that our owned and operated -- our breakup of owned and operated versus licensed business plays out over the next two to three years, what we've really done is be very focused on where is the best return on that investment for us especially given the focus that we now have on fortifying the North American business.

  • And, in particular, driving incremental productivity out of our US fleet.

  • I think what we will do is you will see us -- the strategy change and adapt as we move forward.

  • For example, career was a market that we have historically identified as a likely target for an owned and operated business.

  • And, as part of our restructuring of our strategy [we've now identified that's an appropriate market for us to target our licensed store base which is what we're in the process of working through at the moment.

  • So, as to the comment that Jay made earlier about our expansion of the license business over the balance of the year, we are looking for proactive opportunities.

  • We are currently pursuing a number of options for additional licensed markets.]

  • - VP of IR

  • Next question.

  • Operator

  • Tom Filandro, SIG.

  • - VP of IR

  • Hello, Tom?

  • Operator

  • Your line is live.

  • Please proceed with your question.

  • - VP of IR

  • Let's move on, Jess.

  • Operator

  • John Morris, BMO Capital Markets.

  • - Analyst

  • Good morning, everybody.

  • Maybe, Jay, or others in the room, a little bit more color on the omni-channel initiatives?

  • Which I think are impressive.

  • Besides the web upgrade, can you tell us a little bit more about what you're doing in the supply side?

  • For example, are you looking at fabric platforming, vendor-managed inventory and the like?

  • Especially the opportunities you have with the new fulfillment center?

  • Thanks.

  • - VP of IR

  • Michael Rempell is going to take that question, John.

  • - COO

  • Hello, John.

  • So, you asked about omni-channel initiatives and some of the supply chain capabilities that we're building, so I'll try to address both of those.

  • On the omni-channel side, the team alluded to earlier, we really think about omni-channel in two ways.

  • One is having a single view of our inventory across the Company and really leveraging that inventory to serve the customer however they want shop.

  • The other is a single view of our customers, knowing all their interactions with the Company and being able to make special, targeted relationship and offers to those customers.

  • We launched our ship from store capability.

  • We're very excited about the initial results of that pilot.

  • It has definitely demonstrated to us that there was previously unfulfilled demand in the market that we're now able to fill by leveraging inventory that was in our stores.

  • So, that's a huge win.

  • We plan to expand that this year and then roll out additional flexible fulfillment capabilities next year.

  • Single view of our customers is something that the team's worked hard on to make sure that we understand all our customers interactions whether they're in the stores, [whether they're online, whether they're on a mobile device, et cetera.

  • And, what we're going to be doing in the back half of the year is really leveraging their entire relationship with American Eagle to make sure we're giving them the right promotions, compelling product, and the right offers at the right time.

  • So, more to come on that but we think there's going to be a big return there.

  • - Analyst

  • I was is going to remind.

  • - COO

  • So that the omni-channel side on the supply chain time we mentioned we are launching our DC in Hegel to, it's a huge win for us is going to complement what we're doing with shift from store but today we're able to service about 60% of our customers with them to get day shipping that's going to take that percentage well up to over 90% of our customers.

  • It's going to allow us to seamlessly leverage our inventory across channels and ultimately reduce our dependency on having unique inventory for the web and for our stores.

  • and really be able to put the inventory Weber the customer wants it, whenever they wanted.

  • and lastly you touched on speed insourcing, John.

  • Roger mentioned we are leaving for more open than we ever have before and we feel very good about our ability to execute on that in the back half of the year.

  • We printed in a sale way] in Q1, but we've been heavily focused on making sure we have the right capabilities to platform fabrics and trends to make sure we have capacity ready, to call our triggers as tests prove out.

  • We're leveraging systems that we've put in over the last couple of years and supply chain capabilities to ship pre-packs either directly from factories to the stores or through the coasts directly to the stores which has cut a week to 10 days out of our supply chain, and we've also refined our processes to make quick decisions.

  • Taking weeks out of our typical process.

  • So, more to come, but we feel good about the wins we had in Q1 and our ability to build on those in the back half of the year.

  • - Analyst

  • Okay, great.

  • Thanks.

  • Operator

  • Betty Chen, Mizuho Securities.

  • - Analyst

  • Good morning, everyone.

  • I was wondering, Roger, if you can talk a little bit about some of the successes in the first quarter?

  • I think in particular, you mentioned some of the top and also the fast-track capsules?

  • Can you remind us what percent of the product can now benefit from fast track, and how that's changed into the second half?

  • Thanks.

  • - Chief Creative Director

  • The strength of our business continue to be in the heritage parts which you know are the bottoms business.

  • The denim business, the casual pants business are pretty strong for us, and we feel pretty good about that going forward.

  • On the fast-track business, we have two different variations taking place.

  • One is from point of design to in-store -- get ready, 45 days.

  • And, it's actually coming out of Italy, and we're doing this now on a monthly basis and the acceptance in our stores -- at this point, it's only in 75 stores -- has been quite good.

  • But, the big payoff is the styles that are doing -- are running at less than three weeks supply, we're starting to get involved through what Michael talked about, the whole process we have in speed-sourcing to then take that and expand the quantities and do that through India and through China.

  • That will become part of the heritage programs.

  • So, for each delivery, we will now start to input this fast fashion, and it will fit within, as you know, our lifestyle brand -- the D&A of American Eagle.

  • - VP of IR

  • Great.

  • Jesse, we will take the next question.

  • Operator

  • Jennifer Black, Jennifer Black and Associates.

  • - Analyst

  • Thank you.

  • The new merchandise looks so much improved.

  • In fact, I did a double take, and we can see your vision.

  • I wondered how long it will take you to create the same deal in your new stores in the old stores?

  • And, do you envision adding side-by-side Aeries to all your stores that have the space?

  • And then, how many stores are in the same format as the new store format in our area?

  • I am in Oregon.

  • And, what kind of costs do you incur [when you do these are models and what are the returns look like out of the box?

  • We noticed there was an clearance in the stores and we were also wondering how that impacted the new stores that you were opening.

  • Anything about traffic for the new stores versus really blown away when I saw the stores so thank you very much.

  • - VP of IR

  • Thank you.

  • You had a bunch of questions in there.

  • - Analyst

  • I'm sorry.

  • I'm so excited to see what you are doing.

  • - Chief Creative Director

  • The fast fashion where] as I said, we're in the beginning processes of it.

  • Right now, it is in 75 stores, and I'm trying to figure out in an intelligent way how many stores we can expand it to.

  • There's no question that the styles that pop up on less than three-weeks supply can work in the whole chain.

  • Keep in mind -- the amazing thing on the fast fashion, it's all one size fits most.

  • It's amazing.

  • Anyone who tries it on -- it fits them pretty well, and I won't get into [how we're able to achieve that but we're able to achieve it.

  • But obviously within expand it to] the stores we're doing it in sizes because while on the East Coast or West Coast, the customer may recognize it, across the rest of the country one size is a little bit difficult for them to gather.

  • On Aerie, this team we've put together in Aerie is quite exceptional, and I appreciate your comments on it.

  • And, it was always built to be within the store, and then when we decided we were going to add bras to it I didn't feel that bras were the right feeling for the American Eagle store.

  • The rest of it is the intimate things for the AE girl.

  • These new stores that we just designed, I think [Mary or Simon may have the numbers, it's quite amazing how successful but keep in mind it's just opened up.

  • But they're incredibly six us will and there's no reason in the right malls] that we can have side-by-sides adjacent to American Eagle because it works for American Eagle and it works for Aerie, and it makes our presence that much stronger.

  • - EVP of Global Stores

  • So, just to answer your question, Jennifer, relating to the Aerie stores themselves, it has been part of our strategy with Aerie over the last two years to close the underperforming and generally oversized freestanding store locations with either side-by-side or shop-in-shops locations.

  • And, as we discussed over the last six months, our new Aerie concept was always due to debut in Q1 of 2014.

  • It's great to hear your feedback on how much you are enjoying the shopping experience.

  • And look, to be honest, we've opened seven stores.

  • We've been very, very -- we've had great positive reaction from the market and from customers to the experience.

  • And, over the balance of this year, we look to double the size of that side-by-side fleet to 56 stores.

  • In relation to how big do we believe that can become, I think it's really an opportunity where, wherever we've had an Aerie freestanding store, we are currently looking to create an opportunity for that to become either a shop-in-shop or a side-by-side.

  • And, in a lot of circumstances, we've actually taken adjacent tendencies and grown the footprint of the Eagle store to accommodate the Aerie side-by-side.

  • Early indications, as Roger said, it has been four weeks now -- have been very positive.

  • We continue to expand on that strategy over the balance of this year.

  • - VP of IR

  • Great.

  • Jesse, next question, please.

  • Operator

  • Paul Lejuez, Wells Fargo.

  • - Analyst

  • Thanks.

  • Can you talk about comp performance by type of center in the first quarter, [ABC malls, street locations, outlet?

  • And then, also just wondered about the store closings that you mentioned, 150.

  • What type of malls will those be in?

  • Thanks.]

  • - CFO and Administrative Officer

  • I think -- hi, Paul, it's Mary.

  • In terms of comp performance, I would say comp performance was fairly consistent across all channels and across all types of stores.

  • In terms of store closings, we did a very thorough assessment of our fleet, and obviously, what we would call kind of the DEF malls are probably our least profitable stores.

  • So, obviously, those would rise to the top of the list, but it's more than just DEF malls, what you need to look at is how you can recapture those sales.

  • So, we're not just walking away from the sales.

  • So, is there in adjacent store?

  • Can we move that customer to our direct business, et cetera.

  • So, there is a bit of a mix across all store formats in terms of the closures, but I would say probably more focused on the D, E, and F malls.

  • - Analyst

  • And, factory outlet performed similar to the mall stores this quarter?

  • - EVP of Global Stores

  • What we've seen, Paul, is it's difficult with our factory business because we've grown the format so aggressively over the past 12 months.

  • The actual fleet number has growing substantially so we're not -- you're not looking apples-for-apples when you've got a mature mainline fleet and then a growing factory store fleet.

  • So, I think it's really too early to say whether it performed similarly or -- because it's really distorted through the number of new stores we've actually opened.

  • - VP of IR

  • Next question, Jesse.

  • Operator

  • Paul Alexander, Bank of America Merrill Lynch.

  • - Analyst

  • Hi, thank you.

  • Just sticking on the 150 stores that you're closing, what other kind of characteristics can you share with us about them?

  • And then, on the assumptions that you're making for the transfer of sales, are you assuming that a certain portion of that goes online?

  • Or, can you share a projection, maybe 20% or 30% of sales or something like that?

  • And then, on the assumption of the continuing negative trend that you mentioned that would result in these stores not meeting your hurdle rates, how far out are you projecting that trend in this plan?

  • For instance, if you began to achieve positive comps at some point next year, does that change how you're thinking about these stores?

  • Or, would you reconsider closing all of them?

  • - EVP of Global Stores

  • So, I'll take the first part, and then I'll give the [the second part to Mary.

  • I think in determining store closures, one of the things that we've been very careful and] cognizant of is not just looking at a number on a piece of paper and drawing a line in the sand.

  • I think what we've done is we've looked at the profitability of the store, we've looked at the impact on the store portfolio, demographic in the catchment area, other channels within the geography for sales and profit transferability.

  • The critical thing for us is any decision to close stores has to be done with consideration to the roles -- role our stores play as a primary view for a new customer acquisition.

  • The store fleet -- we still see the store fleet as a meaningful competitive advantage, and in a way, the brand acquires new customers and engages with its existing customers.

  • An example of one of the decisions that we made last year was when we closed the store in West Valley Mall.

  • It's sort of a 60- to 90-minute drive east of San Francisco, and the store hadn't been delivering on our minimum returns.

  • We have three other stores within a 30-minute radius of that store, two mainline stores and one factory store.

  • And, upon closing the location, what we've seen is continued engagement by a large proportion of our loyalty customers across the other three locations as well as our digital sales channel.

  • So, one of the critical elements for us is the transfer rates of customer spend and our ability to actually leverage that and maintain a percentage of the sales revenue as well as profitability.

  • - CFO and Administrative Officer

  • And, as we looked at the analysis and the assessment, the brick-and-mortar fleet historic for a good number of years has been in a negative trend position so we assume that going forward here for the next three to five years and kind of assess the fleet up against it.

  • But, to Simon 's point, there's a multitude of factors that you take into account upon deciding what store and when to close.

  • So, it was a very broad, broad assessment not just the comp trend.

  • So, as we said, we will continue to assess this as our business -- as we watch our business trends, but we think this is generally about the right place to be.

  • - VP of IR

  • Okay, great.

  • Jesse, next question?

  • Operator

  • David Berman, Berman Capital.

  • - Analyst

  • Hi, this is Steve Kernkraut for David.

  • The question that we have for you -- and I guess it's for Roger or for Jay.

  • Obviously, you're seeing and adapting your strategy for e-Commerce accelerating, but your closing 150 locations.

  • But, of the remaining 850 locations that you're going to have, are they going to be smaller-size stores, given that you're going to be focused on e-Commerce with your omni-channel strategy?

  • And, I guess also on the omni-channel side, if you could just give us an idea of what percent of your sales are e-Commerce now, and where do you see it three years from now?

  • And, I guess the last question is of the 150 stores you're closing, are any of them going to be these factory stores that you've spent so much time over the last couple of years and so much money investing in?

  • Or, is that going to be fixed, and they are really mall stores that are being located?

  • Appreciate it.

  • - EVP of Global Stores

  • I'm going to take the start of that, and I'll [flick] it back to Jay.

  • I think there's a big focus on a number.

  • At the end of the day, it's 150 stores over a three-year timeframe.

  • And, I think that there are a lot of events or circumstances that could happen over the next three years as we go through that.

  • I think one of the important things to note is that historically we have closed around 30 to 40 stores a year with the exception of last year.

  • One of the big differences is that in the development of our omni-channel approach to customer and the way that our customer is now looking to shop with us what we have done is we've made the decision not too aggressively pursue new mainline stores.

  • So, whilst it sounds like we're aggressively closing, we're actually not.

  • What we're doing is we're not aggressively opening additional brick-and-mortar locations which has historically been our trend.

  • A large part of what we have within our fleet is the flexibility to adapt the fleet size based on business trends and what's happening, and as we see this shift between the brick-and-mortar strategy and the digital strategy, we are seeing those lines becoming more and more blurred all the time.

  • And, I think we'll develop our strategy especially with the buy online and ship from store initiative now underway, we're seeing substantial opportunity throughout the fleet.

  • - Interim CEO

  • I think the key is -- we're trying to emphasize -- is the way our leases are structured, it gives us tremendous flexibility.

  • Like Mary pointed out, we have 50% of the fleet that comes due the next couple years, the leases.

  • That puts us in the driver's seat as far as working with landlords.

  • And, as Simon was saying and talking to Roger and Mary, we do have that flexibility which means that we see in certain stores that we may have targeted as a possibility for closing -- if the sales improve there, those stores may not close.

  • I'm glad that people like the way the merchandise is looking, but we feel our merchandise isn't currently up to the expectations that we expect it to be.

  • And, we won't see it up to our expectations until later on this year.

  • So, if our expectations are right, and we get the results we want, we may have a different number to report to everybody in the next several months.

  • - VP of IR

  • Great.

  • Next question, Jesse?

  • Operator

  • Susan Anderson, FBR Capital Markets.

  • - Analyst

  • Good morning.

  • [Thanks for taking my question.

  • I was wondering if you could talk about AUCs and your expectation for the back half?

  • It sounds like you are expecting them to be down.

  • And also on that front, on the pricing front, what are your thoughts around that?

  • and if you are lowering AUCs we be giving it back to the consumer?

  • Thanks.

  • - CFO and Administrative Officer

  • Yes.

  • Or the back half of the year we expect our AUC to the basically flat from last year.

  • and, I think as we kind of look forward into the back half of the year, when you look at the overall kind of financials and where we think our margin will ultimately play out, with having a better balance of inventory as Roger mentioned earlier, for the back half of the year, more aligned with our sales trend, I would expect to see an improvement in our markdown rate as we make our way through the balance of the year.

  • With having the two better aligned.

  • So I think we do have some opportunity here but it's really more around markdowns then average unit costs.

  • - Analyst

  • Got you.

  • And just one follow-up on the fast-track product.

  • How should I think about] the margin of that product versus your core product?

  • - Chief Creative Director

  • The beginning of the made in Italy project is lower.

  • The chase out of India is higher.

  • - VP of IR

  • Okay, Jesse?

  • Operator

  • Matthew McClintock, Barclays.

  • - Analyst

  • Hi.

  • Good morning, everyone.

  • Mary and Jay, I guess I was wondering if you could talk a little bit about the balance between reducing expenses but also making investments in the brand and experience itself?

  • When we think about the investments that need to be made to elevate the brand et cetera, how do you think about spreading those investments between traditional brick-and-mortar stores now that you're closing some stores?

  • But, still feeling the need to make those -- the remaining stores more and more relevant?

  • But, also making investments in e-Commerce?

  • How should we think about that mix?

  • Thanks.

  • - CFO and Administrative Officer

  • It is a good question, and that's really what we're trying to balance here at the end of the day.

  • So, as I mentioned in our first-quarter results, our SG& A was just up slightly.

  • But, we had an increase in our critical investment areas around omni, around our factory store growth, around our International growth that we believe they do drive a good return to the Company.

  • But, more importantly, are the right long-term investments to make here for the Company.

  • But having said that, our US brick-and-mortar business has been under pressure for quite some time.

  • And, we need to significantly reduce that cost structure as well as what I would call corporate overhead that kind of goes along with that.

  • So, we're trying to find that right balance here I'm making sure our cost reduction is focused on non- growth areas and non-customer facing areas.

  • We don't want to lose that either.

  • Which will give us the ability to invest in growth and to invest in a great store which we have very many, many great stores here in the portfolio so we need to keep them fresh as well as we move forward across the year.

  • So at the balance.

  • That thing we're finding that right balance, to best and the declining business to invest in growth.

  • - Analyst

  • Great.

  • Operator

  • Brian Tunick, JPMorgan.

  • - Analyst

  • Great.

  • Thanks, good morning.

  • I guess first four maybe Roger just looking back now I guess the past few quarters can you maybe parse out how you guys are thinking about the weakness out there?

  • How much is coming from not having a dominant new fashion trend may be in bottoms?

  • How much is your own execution and how much is the promotional pressures in the mall?

  • And on the balance sheet side we were just wondering what is your convert versus a minimum cash balance and your dividend payout ratio.

  • How you guys thinking about uses of cash as we move through the next couple of quarters and as you think about store closing, et cetera?

  • Thanks very much.

  • - Chief Creative Director

  • Brian, on your first question, obviously it's never one reason it's always a number of reasons but I think you need them.

  • I think our product execution presently in the last quarter, or two, as now where needed to be.

  • the teenager customer is suffering, the promotional game is bigger than ever and we're withdrawing from it on a very targeted way.

  • the traffic is down for all retailers in the malls so you have the combination.

  • The interesting thing is that American Eagle still is by far the dominant retailer in the team space.

  • Over five years actually you look at that comp trends over five years we're flat which is amazing.

  • We had a fabulous 2012 and we do over $425 a foot.

  • I think that and we have all the omni-channel variations taking place that you heard my partner Michael Rempell talk about.

  • That combination and owning the bottoms business I'm very optimistic about the future.

  • - CFO and Administrative Officer

  • And then regarding the balance sheet, we ended the first quarter with a little over $300 million of cash which is fine for us] as a Company that gives us the wherewithal as we look forward as well to continue with our dividend as it stands.

  • And, most importantly, continue with the investments that we need to make to grow the Company long-term.

  • You know, the store-closing piece -- we're closing these stores upon lease expirations so we're not accelerating closures that would have a cash call with the closure if you accelerated it.

  • So, I think we have that all modeled into our cash forecast for the year and don't see any significant movement related to the store closures.

  • Operator

  • (Operator Instructions)

  • Oliver Chen, Citigroup.

  • - Analyst

  • Hi, thank you.

  • [As we look to model are cash flow from operations this year is that working capital going to be a neutral kind of driver?

  • Are there any other things] we should think about in terms of getting that right?

  • And also, on the fast-ship mix, what percentage approximately is on faster ship now versus where you want to be longer term just so we can dimensionalize the impact there over time?

  • Thank you.

  • - CFO and Administrative Officer

  • Regarding the cash flow, nothing unusual as I look forward to this year in our cash flow in terms of sources and uses of our cash.

  • We've articulated our CapEx spend for the year.

  • Our operating cash is following -- pretty much following our business performance.

  • So nothing unusual.

  • - Chief Creative Director

  • And, on the fast fashion, as you recognize, we've been over-inventoried the way it was planned.

  • As that comes down in the second half, we'll be able to really get engaged in the speed-sourcing game.

  • It should probably grow to 20% or 30% of the Business along with our heritage brands, which are the core, and there is some tremendous innovation taking place in these heritage brands now.

  • Especially in new fabrications and new washes.

  • Especially on the bottoms business so that combination should be pretty strong for us.

  • Operator

  • Dorothy Lakner, Topeka Capital Markets.

  • - Analyst

  • Thanks, and good morning, everyone.

  • A question for -- just a follow-up for Roger.

  • Obviously, you want better product performance, and you're seeing some success with the fast-track fashion that you're doing and keeping the strength in heritage, which is kudos to you in a very tough environment.

  • How big -- how much bigger or how big is the -- where was open to buy?

  • [If you go back a year or so and where is it now how much bigger piece do think that can become and are you getting to the changes that you're making to the merchandising and design teams or is that still to come?

  • Thanks.

  • - Chief Creative Director

  • I think the alignment is there now.

  • I think it's a really is a pleasure everyday now we're all moving in the same direction I just -- from the point of concept to sign up of a particular big season those being the four big seasons of the year, it takes about three months to do it from concept within a lifestyle brand and then within that, Dorothy, on the chase], you're starting to put about 25% of the into that combination and that you do on a 45- to 60-day period.

  • That combination works very strongly for us, and that's how we're going to continue to do it.

  • The teams are aligned.

  • We just signed off on holiday.

  • I must tell you, I love what I saw.

  • We're getting great compliments within the organizations.

  • We have one boss -- it's the customer.

  • We will see when we deliver holiday, and spring concept is going along great.

  • - VP of IR

  • Jesse, we have time for one more question.

  • Operator

  • Thank you.

  • Kimberly Greenberger, Morgan Stanley.

  • - Analyst

  • Great, thank you.

  • I have just two quick clarifications.

  • My question is on SG&A.

  • In terms of the clarifications, you talked about planning second-half inventory to grow in line with sales.

  • Can we assume that's in line with the mid- ingle-digit decline you're expecting at the end of the second quarter?

  • Is that] -- ?

  • - CFO and Administrative Officer

  • Regarding inventory we are planning inventory down in the back half of the year.

  • and given the current trend that we're experiencing in terms of our count performance.

  • - Analyst

  • Mary, as that mid- single-digit or 10% decline?

  • I'm just not sure how to think about the second half decline?

  • - CFO and Administrative Officer

  • For Q2, we're looking down with the change in payment terms down kind of the mid-teens.

  • Half two will be down too high single to load team kind of range obviously depending on how the Business trend plays out but it's] going to be in that kind of double-digit range for the back half of the year.

  • - Analyst

  • Okay, super helpful.

  • My SG&A question is can we take the $10 million SG&A savings that you realized here in the first quarter and just sort of annualize that for the rest of the year?

  • Is there some bigger SG&A cost-cutting program you're working on?

  • Just with regard to the $10 million to $15 million of SG&A savings you are looking for from your 2014 store closures -- I think you said you'll start realizing that in 2015.

  • Is that net of lost gross profit dollars?

  • Or, is that a gross savings number?

  • And, then we need to net out the lost gross profit from the stores?

  • Thanks.

  • - CFO and Administrative Officer

  • The store -- the $10 million to $15 million profit impact in 2013 is net of everything, so it's basically the bottom line P&L impact of those store closures.

  • Regarding SG&A for the balance of the year, as I said, as we sit here today looking for SG&A to be up slightly throughout the year.

  • But, really our goal here is to drive cost reduction, which we have a lot of plans and works underway to do, to offset our growth in critical areas of the Business.

  • So, think about it as an offsetting way to make sure we net out to something closer to flat to up slightly for the year.

  • So, that's our objective.

  • The growth initiatives are important.

  • We can't pull back on those.

  • Factory stores are critical.

  • International growth is critical.

  • Our omni work, as Michael articulated earlier, is really important for the long-term growth of the Company.

  • Operator

  • Thank you.

  • Ladies and gentlemen, we have reached the end of our question-and-answer session, and this does conclude today's teleconference.

  • Thank you for your participation, and you may disconnect your lines at this time.