American Eagle Outfitters Inc (AEO) 2014 Q4 法說會逐字稿

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  • Operator

  • Greetings, and welcome to the American Eagle Outfitters fourth quarter 2014 earnings conference call.

  • (Operator Instructions)

  • As a reminder, this conference is being recorded.

  • It's now my pleasure to introduce your host, Judy Meehan, Vice President of Investor Relations for American Eagle Outfitters.

  • Thank you, please begin.

  • Judy Meehan - VP of IR

  • Good morning, everyone.

  • Joining me today for our prepared remarks are Jay Schottenstein, interim Chief Executive Officer; Roger Markfield, Creative Director; and Mary Boland, Chief Financial and Administrative Officer.

  • Also joining us for Q&A today are Simon Nankervis, EVP of Global Commercial Business; Michael Rempell, Chief Operating Officer; Jen Foyle, Global Brand President of Aerie; and Chad Kessler, Global Brand President of the AE Brand.

  • 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.

  • Our comments today will focus on results from continuing operations and include non-GAAP adjustments.

  • Please refer to the tables attached to the press release.

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

  • Now I will turn the call over to Jay.

  • Jay Schottenstein - Interim CEO

  • Okay.

  • Thank you, Judy, and good morning.

  • What a difference a year makes.

  • As I said on this conference call one year ago, we had significant opportunities across many areas of the organization.

  • This included higher quality merchandise that was more complementary to our lifestyle brand, and more innovative and fun customer experience, and greater team alignment.

  • I am pleased to report that we made good progress over the past 14 months.

  • The work that began at the outset of 2014 is beginning to deliver results, and fueled a stronger second half of the year with momentum continuing as we enter 2015.

  • Now looking back at 2014, the year in aggregate was challenging.

  • Total sales declined 1% and EPS of $0.63 was down 15%, yet it was two different -- two very different halves.

  • Our initiatives led to a recovery in the second half of the year, following a weak start.

  • As we expected, the first half was extremely difficult with financial performance below our targets and historical norms.

  • Merchandise assortments were not where they needed to be.

  • Sales and margins were pressured as a result.

  • I am pleased with how quickly our team responded to drive improvements to the merchandise assortments and marketing efforts.

  • We cut planned expenses and demonstrated better inventory control.

  • Our business began to stabilize by midyear with financial improvements in the third and fourth quarters.

  • Now a few fourth quarter highlights.

  • The team executed very well, particularly given the challenges within our sector.

  • Net revenue increased 3%.

  • EPS of $0.36 increased 33%, driven by a significant reduction of markdowns.

  • We successfully reduced promotions and saw sequential progress with sales turning positive in the post-holiday period.

  • AE saw improvement across the assortment, driven by innovation, quality, and better style.

  • Aerie had a solid year from start to finish.

  • They delivered greater assortment depth, new product lines, and a marketing campaign that truly resonated with our customers.

  • From a financial standpoint, consolidated inventories were well-managed during the [period], and expenses were controlled.

  • We ended the year in excellent financial condition with $411 million in cash and no debt.

  • We invested $245 million into the business, and paid out $97 million in dividends to our shareholders.

  • As we look ahead, we are encouraged by the early momentum we are experiencing.

  • Yet we also remain vigilant on our priorities.

  • Roger will review our merchandising strategies in a moment, which are critical to maintaining momentum and achieving a recovery in markets.

  • In 2015, we'll continue to focus on the following.

  • One, growing our digital business and enhancing our customer experience.

  • This year we will launch a complete redesign of our digital site.

  • This will optimize our mobile [cap] capabilities and improve the shopping experience.

  • Later in the year we will open a localized site in the UK, to be followed by a rollout of other EU countries.

  • Additionally, we will expand online product lines for both AE and Aerie to build upon and complement our best sellers.

  • Next, we will continue to advance omnichannel capabilities.

  • This year we will add reserve online and work to maximize our existing tools, including buying online, ship from store, and store to door.

  • Our goal is to drive better inventory utilization and customer satisfaction.

  • This year we will roll out the new point-of-sale system across the US store fleet, enabling mobile checkout, enhance customer security, and provide a workforce management tool.

  • We continue to improve the profitability of our stores and rationalize the US fleet.

  • We have flexibility with our portfolio of stores, with nearly 350 AE stores with leases expiring in the next two years.

  • And we will continue to expand our global presence, primarily through new licensed stores, combined with select company-owned markets.

  • We'll work on maximizing productivity and profitability on those newer markets.

  • Before I turn it over to Roger, I'd like to thank our entire organization for their hard work and commitment in 2014.

  • I'm extremely proud of the progress we've made, and I'm encouraged by the strength so far this spring.

  • We remain focused on the future potential to deliver profit improvement and returns to our shareholders.

  • Now I'll turn the call over to Roger.

  • Roger Markfield - Creative Director

  • Thanks, Jay.

  • Good morning, everyone.

  • As Jay said, we've made great progress across the organization.

  • Our vision and priorities entering the year were the right areas of focus, and we are beginning to deliver positive sales and improve margins.

  • Our fourth quarter results were fueled by better comparable sales, and a successful reduction in markdowns and promotional activity.

  • The period marked the continuation of sequential quarterly sales gains, experienced throughout the year as we drove continuous improvements to our merchandise assortments.

  • We saw sales accelerate in January, due in part to a positive response to the spring transition line.

  • The positive comparable sales have continued into the spring season.

  • I'm extremely pleased by the team's execution, particularly in the light of unprecedented competitive pressures.

  • We're seeing strong sell-through rates and are chasing best sellers.

  • Inventories are lighter than we'd like, due to delayed receipts from the port, which we expect to be fully resolved in the second quarter.

  • In the fourth quarter, we delivered 400 basis points of merchandise margin expansion.

  • More compelling merchandise, combined with more relevant brand marketing enabled us to successfully reduce store-wide promotions.

  • We did not anniversary 35 days of these events from last year, driving a much healthier business.

  • We saw solid growth from digital sales across brands.

  • And as Jay mentioned, we have exciting new advancements planned across digital and omni, creating greater choices and a better brand experience for our customers.

  • Consolidated sales metrics reflected a healthier business, with increases in the average unit retail price, units per transaction, and transaction value.

  • Our assortments are better quality, more trend right, and consistent with the DNA of our brands.

  • During the quarter, greater innovation and attention to detail drove the best performance in our signature categories, including men's and women's knit tops, women's denim, sweaters, and accessories, as well as men's pants.

  • Aerie had an outstanding quarter completing a breakout year.

  • Comps increased 13% and margins strengthened.

  • While we saw good strength across the business, some of the best categories were intimates, PJs, and soft bottoms, and innovation in accessories such as blanket scarves, all of which were trend right, and played into Aeries's emphasis on gifting.

  • Looking forward, we've just begun to scratch the surface of what we can achieve.

  • Our margins remain below historical levels, and we have plenty of opportunity to deliver stronger sales, productivity and margin gains.

  • Now I want to review our key areas of emphasis as we move in to 2015: product, people, process, and presentation.

  • Starting with product, we will continue to differentiate our merchandise assortments, leveraging our competitive strength, and sector-leading denims and bottoms businesses.

  • Driving sales in tops is a very meaningful opportunity.

  • And for the first time in a long time, we're seeing positive reads in top categories.

  • This is an early, yet very encouraging sign.

  • The team will continue to ensure we deliver great quality and fashion.

  • In the competitive landscape we need to up our game by using innovative fabrics, washes, great styling and product details.

  • Next, people.

  • I was thrilled to announce the promotions of Chad Kessler and Jennifer Foyle to Global Brand Presidents for AE and Aerie.

  • Chad has been instrumental in leading the improvements within the AE brand assortments, driving better sales and markdown rate.

  • And Jen has had a strong and consistent performance, posting positive comps in each quarter of the year and steadily improving profitability.

  • Under the new structure, the teams are aligned the right way, creating a singular brand and customer experience.

  • Chad and Jen are the right leaders to take us in to the future.

  • They are with me here today, and you'll be hearing a lot more from them in the future.

  • Now process.

  • Early last year, we worked to strengthen our process, including our production calendar and testing capabilities.

  • We are currently testing new fashion items and denim fabrics for the upcoming back-to-school season.

  • From our Don't Ask Why fashion capsules, we have successfully adopted new key items into the main line business.

  • We built a good chase process to quickly replenish strong sellers, and flow more newness to the floor.

  • We continue to present 10 new floor sets a year, with updated key items and fresh marketing.

  • Lastly, presentation.

  • As a lifestyle brand, we must tell a strong story that connects to each new merchandise flow with consistency across digital and stores.

  • We need to ensure an emotional connection to our customers.

  • I think we made good progress in 2014, and expect to get even better in 2015.

  • I look at spring right now, and I see the right trends, a strong point of view with well-curated outfits around themes that tie perfectly into our lifestyle, all in a more fun and exciting store environment.

  • To wrap it up, we made great strides in 2014, and I'm very optimistic about our future.

  • Our AE brand is extremely well-positioned, and operating from position of strength against its competitive set.

  • Aerie has tremendous runway ahead, as a truly different and real intimates brand.

  • I'd like to end by thanking the entire team at AEO.

  • Everyone came together to end 2014 on a very positive note.

  • We will all continue to work hard to see that momentum carry into the future.

  • Thanks, and now I'll turn the call over to Mary.

  • Mary Boland - Chief Financial and Administrative Officer

  • Thanks, Roger.

  • Despite the very competitive holiday season, we are extremely pleased with our fourth quarter performance, as sales were above our expectations.

  • We effectively reduced markdowns and controlled expenses.

  • This led to adjusted year-over-year earnings growth of 33%.

  • Now looking at the details of the quarter, total net revenue increased 3% to $1.07 billion from $1.04 billion last year.

  • Consolidated comparable sales were flat.

  • By brand, AE comps were down 1%, and Aerie increased 13%.

  • On a consolidated basis, the number of transactions decreased due to decline in traffic.

  • However, the average transaction value increased in the high single-digits.

  • This was driven by a mid single-digit increase in the average unit retail, and a low single-digit increase in units per transaction.

  • Additional sales information can be found on page 10 of the presentation.

  • Total gross profit increased 13%, and as a rate to revenue, rose 320 basis points to 35.1%.

  • The margin improvement was driven primarily by reduced markdowns.

  • This was partially offset by 90 basis points of rental leverage, combined with higher delivery costs due to an increase in direct orders, including orders filled through buy online, ship from store.

  • SG&A expense of $227 million increased 5%, and deleveraged 50 basis points to 21.2%.

  • The dollar increase was driven by planned investments in marketing and incentive compensation, as well as new international store openings.

  • Through good expense management, including reductions in overhead and other expenses, we were able to significantly mitigate the impact of these investments.

  • Depreciation and amortization increased to $37 million, deleveraging 50 basis points, due to omnichannel and IT investments, new factory and international stores, and the new fulfillment center.

  • Operating income grew 31% to $112 million, and the operating margin expanded 230 basis points to 10.5% as a rate to revenue.

  • EPS of $0.36 increased 33% from adjusted EPS of $0.27 last year.

  • Now I'd like to spend a few minutes reviewing 2014.

  • The year was a tale of two very different halves.

  • The first half was weak, with comparable sales down 9%, and EPS of $0.05, down 82% from the prior year.

  • We were pleased to see that improvements made throughout the year led to better financial results in the second half, when we saw comparable sales decline 2%, and EPS of $0.58, an increase of 26% from last year.

  • Now getting back to looking at the year in total.

  • Revenue decreased 1% to $3.3 billion.

  • AE brand comps decreased 6% and Aerie comps increased 6%.

  • Gross profit increased 1% to $1.15 billion, and the gross margin increased 60 basis points to 35.2%, primarily due to lower markdowns which were offset by 140 basis points of deleverage of rents on negative comparable sales and higher delivery costs.

  • Selling, general, and administrative expense increased 2%, deleveraging 70 basis points as a rate to revenue.

  • The increase resulted primarily from planned strategic investments and advertising and incentive costs, which were partially offset by reductions in corporate overhead and variable expenses.

  • Operating income increased 11% to $207 million, and adjusted EPS of $0.63 decreased 15% from last year.

  • For additional information, please refer to page 6.

  • During the period, we took a $0.04 charge related to lease obligations in connection to the exit of the 77 Kids business in 2012.

  • The charge was net of proceeds provided by the purchaser, and ends the obligations related to the discontinuation of this business.

  • Now turning to the balance sheet.

  • Starting with inventory, which can be found on page 11 of the presentation, we ended the quarter with inventory at cost per foot down 5%.

  • We currently expect first quarter ending inventory at cost per foot to be down in the low single-digits.

  • We ended the fourth quarter with $411 million in cash and investments compared to $429 million last year.

  • Capital expenditures totaled $245 million for the year, above earlier expectations due in part to incremental strategic omnichannel investments including retail fulfillment in the Hazelton DC, as well as the pilot of our Oracle point-of-sale system.

  • We expect CapEx to be approximately $150 million in 2015.

  • This includes the chain-wide rollout of the point-of-sale system and supporting technologies, the completion of our new fulfillment center, and new and remodeled store investments.

  • 2014 store openings were focused on new factory stores, Aerie side-by-sides, underpenetrated markets, and international locations.

  • We also prioritized international licensed stores, ending the year with 99 locations across 16 countries.

  • As we look to rationalize the domestic fleet, we closed 70 stores including 49 AE and 21 Aerie stand-alone locations.

  • In 2015, we plan 20 to 25 targeted openings, and we'll close another 70 stores.

  • Additional store information can be found on pages 14 through 16.

  • Now regarding our first quarter outlook, based on a positive mid single-digit increase in comparable sales, we expect first quarter EPS of $0.09 to $0.12, which includes about $0.02 per share of negative impact from the port slowdown.

  • The guidance compares to EPS of $0.02 last year, and excludes potential impairment and restructuring charges.

  • Regarding the year, it's important to note that we have meaningful opportunity in the first half of the year, as we anniversary a very weak period and low single-digit operating margins.

  • While we see potential in all quarters, certainly the growth in the back half of the year will be a bit more muted, due to the recovery we saw in the back half of 2014.

  • For the year overall, we are targeting a further reduction in markdowns, fueled by product improvements and better inventory utilization.

  • We continue to drive lower fixed SG&A expense dollars through reduced overhead including salaries, professional services, and other expenses.

  • Any increase in variable SG&A would [lead] to strong sales and related incentive costs.

  • As Jay and Roger said, we'll stay focused on our priorities, and look forward to delivering better returns.

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

  • Operator

  • (Operator instructions)

  • Adrienne Tennant, Janney Capital Markets.

  • Adrienne Tennant - Analyst

  • Hi, everybody.

  • First, kudos to the entire team, returning positive comps, and spring looks great at both brands.

  • And then secondly, congratulations Chad and Jennifer on your promotions; well-deserved.

  • Chad Kessler - Global Brand President of the AE Brand

  • Thank you.

  • Adrienne Tennant - Analyst

  • Roger, so you were one of the first people, I think, last year to be optimistic about incremental trends in 2015.

  • Can you expand upon the comments you were saying about knit tops.

  • When was the last time we had a strong knit top cycle?

  • And then secondarily, when do you expect to be fully in stock, ahead of spring break with your inventory due to the port delays?

  • Thank you.

  • Roger Markfield - Creative Director

  • Thanks for all your compliments.

  • Adrienne Tennant - Analyst

  • You're welcome.

  • You deserve them.

  • Roger Markfield - Creative Director

  • We're happy with how good the stores look for everyone, but most important for our customers, which is really our boss.

  • Our top business in the women's side of the business hasn't been good for years.

  • I think that Chad and team have just been terrific, with the design organization, and getting it right.

  • We hit the trend.

  • We know where the trend is moving, and our concept team has never been working better in alignment with the design organization.

  • So we think that this trend for us will continue.

  • We're really delighted.

  • Adrienne Tennant - Analyst

  • Great.

  • And in stock?

  • Roger Markfield - Creative Director

  • In stock?

  • Well, we think we're -- goods are flowing very well right now.

  • Probably take us another three to four weeks to get our inventories to the level that we need them.

  • If you look at it from your perspective, we're turning our inventories at over 10 times a year at this point in time, which is quite fast.

  • But the sell-throughs are great.

  • Operator

  • Simeon Siegel, Nomura Securities.

  • Simeon Siegel - Analyst

  • Thanks.

  • Good morning, and congratulations on the results.

  • Mary Boland - Chief Financial and Administrative Officer

  • Thank you.

  • Simeon Siegel - Analyst

  • Can you talk about your longer-term store targets, between full price factory, maybe domestic and international?

  • And then, just great results on the gross margin.

  • Mary, can you quantify the ongoing markdown improvement opportunity you see longer-term?

  • Thanks.

  • Simon Nankervis - EVP, Global Commercial Business

  • So it's, Simon, Simeon.

  • In relation to full parts versus factory, we have been fairly clear over the last year.

  • We've got a very strong approach to fleet rationalization.

  • I don't think we have a fixed number in mind, but we definitely have a perspective that we do need to see a rationalization of our domestic fleet.

  • We still continue to see improvement in our factory stores.

  • They're still delivering returns above the balance of chain.

  • But we have seen a shift in traffic patterns over the last quarter in particular in our main line, business which is positive.

  • In relation to domestic versus international, we've really only started to scratch the surface internationally.

  • We've got 99 stores that are licensed today.

  • We only have a very small owned and operated fleet outside of the US.

  • We'll continue to invest in that business, as the rates of return continue to provide incentives for investment.

  • But our focus is still on continuing to develop the licensed fleet in that business.

  • And then, as our opportunities to invest and expand in under-operated markets occur and arise, we'll then look to those investments at the same time.

  • Mary Boland - Chief Financial and Administrative Officer

  • Regarding the markdown improvement, we expect to see a good markdown improvement, certainly in the first half of the year as we anniversary a bit of a weak first half of the year last year.

  • And as I think about how that all flows through to gross margin, we expect to see higher gross margin as the year plays out.

  • We're not providing annual guidance at this point.

  • But with the improvement in markdown certainly in the first half of the year, we'll see an improvement there.

  • Operator

  • Thomas Filandro, Susquehanna Financial Group.

  • Thomas Filandro - Analyst

  • Hi.

  • Thanks.

  • Nice job across the board in the execution as well, and congratulations as well to Chad and Jen.

  • A question for Jay first.

  • Obviously, you've elevated here, or Chad and Jen have been elevated.

  • That's great news, but like what's the latest update on the CEO search?

  • And then, again, separately for Jay, can you tell us where you're spending the bulk of your time to drive the strategic changes in the business?

  • I'm going to slip in one quick one, Roger, you mentioned the Don't Ask Why assortment, can you help us understand how you're leveraging that assortment?

  • Thank you very much.

  • Jay Schottenstein - Interim CEO

  • Hi, well, first of all, as far as CEO search, the search continues.

  • And as soon as we have something to announce, we'll take the announcement.

  • The bulk of my time, this past year, we knew we had a merchandise problem.

  • We knew we had to work through the first and second quarter.

  • And with Roger and the team, we put a lot of emphasis to make sure, we start making the product the way that we'd be very proud of it.

  • I am very proud of what the team has done, and where they're going, and the merchandise I see coming for the -- for this coming year, I'm very excited about.

  • And now we see opportunities in certain of our expenses areas to get under control, to do a better job at -- and there's lots of opportunities there.

  • The good news is, there's a lot to do, which means there is a lot of opportunities.

  • And the team is very focused.

  • We have a great team.

  • I feel very good about all the key officers of the company, and they keep me busy.

  • (Laughter)

  • Roger Markfield - Creative Director

  • Tom, thanks.

  • I'm going to let Chad answer the Don't Ask Why question.

  • Chad Kessler - Global Brand President of the AE Brand

  • All right, Tom, thanks.

  • And just one, I'd like to take a moment to thank the whole AE team that I work with.

  • I appreciate people's comments on Jen and my recent promotions.

  • But the turnaround in 2014 that we saw, wouldn't have been possible without the team that was already in place when I arrived.

  • Don't Ask Why is a terrific testing lab for us, for the brand.

  • We really have an opportunity through our partnership and partners in Italy, and the trend team here to really find new fabrics, new washes and new fits, and get them testing in our most trend-forward stores at a very quick rate.

  • And then, we're able to take those sales, and create those styles overseas and Asia, more cost effectively and supply them to the entire fleet.

  • We're finding that as we find best sellers in Don't Ask Why, we are really able to leverage those to grow the whole tops business especially.

  • And it's really, I think, a key part of how we've turned the tops business around.

  • Operator

  • Randy Konik, Jefferies.

  • Randy Konik - Analyst

  • Great.

  • Thanks a lot.

  • Just a couple quick ones.

  • So Mary, the guidance on the mid single-digit comp for the first quarter, is that -- you noted in the fourth quarter average transaction value drove the results.

  • So has traffic turned up in the first quarter thus far?

  • And do you think that is a sustainable inflection point?

  • I guess, second for Roger, you noted some opportunities on the supply chain and improvement in speed.

  • Can you give us some specific examples on what you've been doing there to improve chase?

  • And then lastly, as it relates to the commentary around international strategy, a great job of keeping your capital light with a licensing model, and you talked about some owned opportunities.

  • How do you think about keeping that capital light versus capital intensive model long-term on the international side?

  • And what international markets of the 16 countries are showing the most promise from a demand standpoint for the brand right now?

  • Thanks a lot.

  • Mary Boland - Chief Financial and Administrative Officer

  • Real quickly on traffic, yes, we did see traffic start to improve, especially in January and in February.

  • February has been a little bit challenged with weather, so a little tough to call a trend, but yes, we've seen an improvement.

  • On chase strategy?

  • Michael Rempell - COO

  • Great.

  • And on chase, Randy, this is Michael.

  • Like Chad said, we have been able -- we have a number of ways that we have been able to drive that capability.

  • Don't Ask Why has been one of the key drivers.

  • But like Roger indicated in his prepared remarks, we also really got our testing process back on track.

  • So we're out far ahead of where we need to be, in terms of looking at washes, fabrics, fit, silhouette, and styles, and we've been able to leverage that effectively.

  • We're leaving open to buy like we haven't in the past.

  • We have platform fabrics and trends at our vendors.

  • We have capacity available for us, and we built processes and systems to use quick approvals to get goods in, in as little as 30 to 45 days.

  • So it's been very effective for us here in the back half of the year, and we plan to build on it in 2015.

  • Simon Nankervis - EVP, Global Commercial Business

  • And Randy, it's Simon.

  • In relation to the international strategy, at the moment we have 16 licensed countries and 5 countries that we own and operate.

  • We've signed -- we opened Thailand and Indonesia in Q4 of last year.

  • We signed Chile and Peru, which will open shortly.

  • We have a number of other countries under negotiation for licensing.

  • So our focus is definitely to continue on developing the license business.

  • In relation to the balance between our owned operated and those licensed doors, it goes back to what I was saying earlier.

  • As we see the profitability of those countries and the return on investment in our owned markets improve, we'll continue to focus and expand on those markets where it's appropriate.

  • But there is a big focus this year, especially in western Europe and the UK on developing our international digital capabilities, which we would see it going global in the next couple of years.

  • Randy Konik - Analyst

  • Can you hear me?

  • Mary Boland - Chief Financial and Administrative Officer

  • Yes, Randy.

  • Randy Konik - Analyst

  • Just wanted to ask another follow-up.

  • Of all the international markets, just from a demand standpoint, where are you seeing the most demand for the AE brand right now?

  • I'm just curious.

  • Thanks.

  • Simon Nankervis - EVP, Global Commercial Business

  • Well, I think it's pretty even across the globe.

  • I think it really depends on the penetration we have in each country.

  • So it's sort of hard to say which one.

  • But I can say that generally, we've got equal demand in all markets, and we've seen positive momentum in our sales over the last year, as we've become more penetrated.

  • Operator

  • Anna Andreeva, Oppenheimer.

  • Janet Lan - Analyst

  • Hello.

  • It's Janet Lan on for Anna.

  • Congratulations on a great quarter.

  • We just had a couple quick questions.

  • First, on the mid single-digit comp guide, is that what you're currently running?

  • And then, with the big improvement in the women's business, congratulations on all the progress there.

  • What are the plans to improve men's?

  • Mary Boland - Chief Financial and Administrative Officer

  • In terms of the mid single-digit comp, that's our guidance for Q1, so that's what we expect to run for the quarter.

  • Chad Kessler - Global Brand President of the AE Brand

  • In terms of the trends in the business, we did see coming out of Q4 that the women's business was a bit stronger with a positive comp, and men's trailing slightly.

  • In spring, right now the businesses are running much more closely together, with both looking positive.

  • We're seeing strong momentum in the men's bottoms business, and a similar increase in men's tops that we're experiencing in women's.

  • So it's looking strong for men's, as well.

  • Operator

  • John Morris, BMO Capital Markets.

  • John Morris - Analyst

  • Thanks.

  • Congratulations on the quarter, and also to Chad and Jen.

  • Chad -- well, a question for Chad and Jen.

  • Chad, at dinner in Orlando, we talked about the bottoms category.

  • You are such a destination in bottoms.

  • I think that the way that you're doing some of the athlete shirt trends and whatnot.

  • How is denim doing?

  • What's the outlook for denim currently?

  • Have you seen a continued improving trend there?

  • And then Jen, with the Aerie business, key drivers, you mentioned them in the remarks.

  • Wondering if you can elaborate a little bit more, and talk about the profitability going along with it?

  • Are you seeing a commensurate improvement in merch margins there as well?

  • Thanks.

  • Chad Kessler - Global Brand President of the AE Brand

  • In terms of bottoms, yes, we really do well -- we are a huge bottoms destination for our customer, a denim destination for our customer.

  • We really are focusing on his and her entire bottoms wardrobe, and seeing nice gains there in total.

  • In terms of denim, we're actually pretty excited about denim.

  • We had a good fall in women's after launching Denim X, and that momentum continues into spring.

  • Men's, we are seeing a stronger trend in denim coming out of holiday, with the destroy capsule we delivered for the trans floor set.

  • And we're testing some innovative denim fabrications and fits in men's that we're getting strong reaction to, so we feel good about denim overall, both men's and women's, and the entire bottoms business entirely.

  • So we talked a lot about tops.

  • Bottoms are definitely a foundation, and we feel strong about that.

  • Jen Foyle - Global Brand President of Aerie

  • And in Aerie, certainly, yes, the profits followed with the sales and the top line growth.

  • As you recall, we resized the fleet to leverage the side by side opportunity, closing some nonproductive stores, as well as driving the direct business, and then certainly delivering the product attached to that.

  • So that whole combination and the team really delivering really hit the profit line.

  • So we're excited with what we saw.

  • Operator

  • Rick Patel, Stephens Inc.

  • Rick Patel - Analyst

  • Good morning.

  • Great progress.

  • I'll add my congratulations to Chad, Jen, and the team, as well.

  • So can you talk a little bit about omnichannel?

  • And you've rolled out the capabilities to new stores, any way to quantify the impact this is having to comps or to conversion?

  • And then, as a followup, can you provide some color on AUC, perhaps how that changed in the fourth quarter?

  • And any way to quantify how we should expect that to change in the first half versus back half of this year?

  • Michael Rempell - COO

  • Great.

  • it's Michael Rempell.

  • I'll take both of those.

  • So on the omnichannel side, the team had a lot of success this year.

  • So the buy online -- sorry, the ship from store program that you mentioned before, really exceeded our expectations this year.

  • It allowed us to leverage inventory in the store.

  • The team executed really well.

  • A lot of people can implement technology, but very few companies I think could execute across the board, across stores, operations, technology and planning the way our teams did.

  • So it did have a nice impact on comps.

  • We did approximately $50 million in revenue through that program, which was about double our expectation, and that was in really the third and fourth quarter.

  • So we're looking forward to having that for the full year, and we see plenty of other opportunities.

  • Jay mentioned the reserve in store program that we're going to have this year.

  • We know we are going to -- we are very confident in our ability to execute that, and we're very excited about the ability for that program to drive -- really qualify traffic into our store.

  • On the AUC side, we are seeing opportunity for AUC in the back half.

  • To quantify it, we're seeing anywhere between 3% and 7% improvement in AUC.

  • But what I would tell you is, consistent with our strategies, we plan on taking a portion of that, and flowing it directly through the bottom line, and a portion of that and reinvesting in to the product, supporting our strategies of better product, better value, and ultimately a less promotional business.

  • Operator

  • Dana Telsey, Telsey Advisory Group.

  • Dana Telsey - Analyst

  • Hi, good morning, everyone, and congratulations.

  • And congratulations, Chad and Jen on the promotions.

  • As you think about both the cadence of promotions being planned going forward, how do you think about the cadence as we go into the spring break season?

  • And on the drivers of the mid single-digit comp guidance for the first quarter, how do you think of the elements underneath that?

  • Thank you.

  • Chad Kessler - Global Brand President of the AE Brand

  • In terms of -- thank you, Dana -- in terms of the promotional cadence for spring, we do continue -- our strategy is to continue to try to reduce the promotions that we're running in the store, fewer box off promotions, smaller discounts.

  • But our goal is to try to drive more traffic into the store.

  • We know we can convert, once we have the customer in there.

  • So our goal is to try other make our lease signs and promotional activity more engaging for the customer.

  • We set a new floor set this week, this weekend with a new lease sign, which I think will speak to that somewhat.

  • But you can go see it this weekend.

  • But the goal is really to try to engage the customer, get them excited about being in the store, excited about the product, and really speak to product first, price second.

  • And we've started to see that being an effective way to drive both sales and profitability, and continue to make that our goal.

  • Jen Foyle - Global Brand President of Aerie

  • And that's ditto for Aerie.

  • The nice thing about the business is, in both Aerie and AE, we're up against less promotion from last year.

  • So we set the course to prepare ourselves for easier hurdles, pulling back from the promotion last year.

  • So it's nice to be able to get in front of that, and just surprising and delighting our customers.

  • Mary Boland - Chief Financial and Administrative Officer

  • Yes, and I would say, in addition to traffic and conversion, which as Chad and Jen just mentioned, we are looking for AUR to be up mid single-digits as well, as we deliver that great and compelling product, and are able to reduce the reliance on markdowns like we did in the back half of 2014.

  • Operator

  • Paul Alexander, BB&T.

  • Paul Alexander - Analyst

  • Hi, thanks for the question.

  • Jay, you noted that there's no news to talk about yet in the CEO search.

  • But can you talk a little bit philosophically about the search?

  • It doesn't seem like there is a ton of urgency to name one right away, and it sounds like you love your current team obviously.

  • So just what's your thinking about the need for the CEO, and what are you looking for in a CEO that -- to add that you don't currently have?

  • Thank you.

  • Jay Schottenstein - Interim CEO

  • I said earlier, as soon as we have something to -- as far as announcing, we'll announce it.

  • But from my standpoint, I want to make sure the person we put in is the right person.

  • I want to make sure that we have the right temperament of the person.

  • That whoever we put in this position will bring something to the table, bring something to the plate, and has a certain vision we buy into.

  • And that's what we're looking for, is a person who can draw -- who can bring everyone together, and has a vision.

  • Operator

  • Lindsay Drucker Mann, Goldman Sachs.

  • Lindsay Drucker Mann - Analyst

  • Thanks.

  • Good morning, everyone.

  • I just wanted to clarify, the $0.02 impact that you're talking about from the port issues in the first quarter, is that a function of higher shipping costs, or is that a function of having less goods to sell in 1Q, and more of a -- something that might be weighing on the comp guidance?

  • And so, maybe we should think about the underlying comp guidance of mid single-digit being higher if you weren't held back on some of these units?

  • And also, did you have any port costs in the fourth quarter number?

  • And then, the second thing is how should we think about tax rate for FY15?

  • Thanks.

  • Mary Boland - Chief Financial and Administrative Officer

  • Okay.

  • I would say the $0.02 impact is roughly half and half, half shipping, half inventory-related.

  • In Q4, minimal -- seriously minimal impact, in terms of freight issues in Q4 related to the port strike.

  • The team was able to manage through that, I think pretty effectively.

  • And then the tax rate for 2015, assume around 40%.

  • Operator

  • Paul Lejuez, Wells Fargo.

  • Jennifer Davis - Analyst

  • Hey, it's actually Jennifer Davis on for Paul.

  • First question, Mary, could you talk a little -- I know you haven't given full year guidance, but maybe some thoughts around SG&A?

  • I think you said fixed costs would be flat.

  • But I also think on the last call, you said that you expected SG&A for the year for 2015 to be flat to down slightly.

  • So just wondering if that's changed at all?

  • And then secondly, a clarification on the buy online, ship-from-store.

  • I know you said it had a nice impact on comps, a $50 million benefit to revenue.

  • Could you talk a little bit about margin there?

  • Other retailers have been talking about lower margin than they originally thought, given the increased shipping costs, et cetera.

  • So a little color on that would be helpful?

  • Thanks.

  • Mary Boland - Chief Financial and Administrative Officer

  • Okay.

  • Regarding SG&A for 2015, the team continues to stay focused on expense reduction, and I think doing a really nice job.

  • We do expect our fixed expenses to be flat, to decline as we look forward into 2015.

  • The one caveat is, obviously, variable expenses.

  • So depending on how the year plays out, what ultimate comps we do end up delivering for the year.

  • Those expenses will, of course, be driven by positive sales and performance throughout the year.

  • We do expect though to leverage our operating expenses for the year, with our fixed expenses being down, either flat to down slightly, and whatever variable expenses flow through.

  • I think in terms of your question on gross margin for buy online, ship-from-store, we are seeing good flow-through on our gross margin.

  • It's to our expectation as we had planned it for the year.

  • Chad Kessler - Global Brand President of the AE Brand

  • Right.

  • And I would just add that when you think about that program, and we analyze the profitability, not only does it show a nice profit, albeit there are some incremental delivery costs.

  • What it really allows us to do is leverage our inventory across the Company as a whole.

  • So we're able to actually get -- drive a higher margin rate through our e-commerce business, because we have higher sell-throughs leveraging inventory that we have in the stores.

  • Operator

  • Susan Anderson, FBR Capital Markets.

  • Susan Anderson - Analyst

  • Hi.

  • Thanks for taking my question, and congratulations on a really good quarter.

  • On the international expansion, with now opening owned stores, I don't know if you could give a little color on what you think the timeline of the profitability of these stores will be?

  • And then, with the finalizing of the fulfillment center, is there any benefits that you would talk about for this year through the P&L?

  • Thanks.

  • Simon Nankervis - EVP, Global Commercial Business

  • So in relation to our international expansions, I think it's early days for us, with our global footprint of the owned and operated.

  • The way we look at our international business is in totality, including the licensed business with the owned and operated business, and we're actually seeing good flow-through from that business today.

  • So the way we -- the strategy we entered the markets with, was that we would say, that our licensed business would enable us to grow international -- the owned and operated markets without us needing to significantly invest, and that strategy is playing out at the moment.

  • So we have been very happy with what we're seeing.

  • Chad Kessler - Global Brand President of the AE Brand

  • On the distribution center, I appreciate the question.

  • We're -- what you're going to see this year in terms of costs, we will have some opening costs as we shift retail from our existing fulfillment center into Hazelton.

  • But I do expect leverage in the back half of the year, and we should see that in our processing costs.

  • You have to keep in mind that, that DC, the reason we're so excited about it is, because while a lot of people are building e-commerce or converting DCs into e-commerce DCs, this is a DC built to handle both retail and direct in the same distribution center.

  • So there's a lot of efficiencies, and a lot of leverage both in inventory, and in our associates in the DC, and a lot of flexibility with how we allocate those resources.

  • Operator

  • Janet Kloppenburg, JJK Research.

  • Janet Kloppenburg - Analyst

  • Good morning, everyone.

  • Congratulations to Chad and Jen, and congratulations to Roger on a really great turnaround in a very difficult year.

  • Roger Markfield - Creative Director

  • Thanks for that.

  • Janet Kloppenburg - Analyst

  • Two questions, really quickly.

  • Do we think that, or do you think that the denim business is turning because of new trend in the business?

  • Or is it simply a function of replenishment on bottoms?

  • And just for Mary or anybody, I was wondering what the outlook, was in the outlook business.

  • I know it had been challenging in FY14, and I am wondering if you're seeing improvements there as well?

  • Thanks so much.

  • Chad Kessler - Global Brand President of the AE Brand

  • Hi Janet, in terms of denim, we're seeing --

  • Janet Kloppenburg - Analyst

  • What?

  • Chad Kessler - Global Brand President of the AE Brand

  • Sorry, there's some banging on the line.

  • (multiple speakers).

  • I think we're seeing a lot of positive things happening in the denim business.

  • First, with the denim business being, really our, and our bottoms business being our foundation, we really are careful to make sure that we're invested enough inventory that we can have the sizes available to our customer.

  • And I think that, that compared to some competition that might not be taking those positions, I think is important.

  • But I think beyond that, I think we're seeing that there's a lot happening in terms of silhouette, fabric -- silhouette and fabric innovations both in men's and women's.

  • We've seen a big shift that we've talked about before in women's, when we set the Denim X collection in September, and continued to expand that this spring with Sateen X that is launched.

  • But the fabric innovation in denim is really driving excitement for the customer, and I think becomes a conversion opportunity in stores.

  • In men's, we're also looking at innovation that we're -- as I mentioned before, we're currently testing in our Bullish on for fall.

  • We're also seeing silhouette changes happening.

  • So I believe there's a lot of newness happening in denim that we're excited to talk to our customer about, and remain bullish on the category going forward.

  • Simon Nankervis - EVP, Global Commercial Business

  • Janet, in relation to your question on our factory business, we still remain incredibly positive about our factory business.

  • That's slate is healthy.

  • It generates a four-wall profit in all of the stores.

  • It's a double-digit four-wall profitability.

  • It still performs above the balance of the main line fleet on a turnover per square foot basis.

  • Have we seen a shifting in the way the consumer is shopping?

  • Yes, we've seen that in the last year, but we still remain committed to the investment, and we are still seeing great returns.

  • So we'll continue to expand that footprint, although it will be at a substantially reduced new store rate over -- as we go through this year and beyond.

  • Operator

  • Richard Jaffe, Stifel.

  • Richard Jaffe - Analyst

  • Thanks very much,, and I'm pleased to hear how well Aerie is doing.

  • If you could elaborate a little bit on the success of the side by side stores, the shop-in-shops, and how you see this business growing, and how big you think it could be?

  • That if, say, if you take your most successful shop in shop, could you see that in every location?

  • And if so, how much larger would the Aerie brand become?

  • Jen Foyle - Global Brand President of Aerie

  • Yes, sure.

  • Well, first, just thinking on the year, the team put a plan in place and delivered.

  • I'm really proud of the work the team did, and we assembled the team not too long ago.

  • So that said, we're only just beginning.

  • I think we're really excited about the opportunity.

  • There's certainly white space for this customer that we see.

  • We think that there is certainly opportunity leveraging the box, leveraging AE.

  • They're a big brand.

  • They have a huge customer base, and we speak to the same girl.

  • So certainly by doing so, opening up the side-by-side stores, the shop within shop opportunities, we are seeing nice leverage on the square foot base there, reducing obviously the square foot, where we had some bigger stand-alone stores.

  • And then just, again, delivering the product that she wants to see.

  • We launched several product categories this year.

  • One being that's been a huge success in bras, the Sunnie bra.

  • That bra is winning over so many customers, and we're thrilled and we're going to leverage that going forward.

  • And then undies, those two categories are just amazing for us, and certainly the roots of the business.

  • But I think what we've seen going forward is there's opportunity in other categories.

  • For instance, in holiday, we leveraged PJs and sleep, and also the gifting category.

  • Roger mentioned in his opening comments, the blanket scarves.

  • That was an incredible gift that really the customer loved to see in holiday.

  • So we'll continue to offer exciting other categories, as well as our fundamental businesses.

  • Simon Nankervis - EVP, Global Commercial Business

  • Richard, just to provide a little bit of color on the numbers, we doubled our side by side fleet last year.

  • We doubled the square footage.

  • We actually reduced the total square footage in Aerie.

  • But we actually only -- our square footage was halved in those side by side locations from the freestanding stores.

  • But we were able to retain over 80% of the revenue on incremental profitability.

  • So we see the strategy being very, very profitable for the Company, and it's something that we're focused on expanding over the next two years.

  • Mary Boland - Chief Financial and Administrative Officer

  • Kevin, we have time for one more question.

  • Operator

  • Oliver Chen, Cowen and Company.

  • Oliver Chen - Analyst

  • Thanks a lot, and congratulations on really a great-looking product and all the execution.

  • Regarding the excitement on women's top going forward, how are you feeling about the breadth versus depth of this category, and where do you see it evolving as you look to the enthusiasm you're seeing?

  • And I was just curious about the price point angle too, and how you're feeling about the assortment, and how that may move?

  • And then, Mary, as we model merch margins, are we -- is it a back half opportunity as well, in terms of overall context for that line on the income statement?

  • Thanks.

  • Chad Kessler - Global Brand President of the AE Brand

  • Hi, Oliver.

  • In terms of the women's tops assortment, we have a limited size box.

  • I don't see us really expanding the breadth of the assortment much beyond what we have today.

  • I think where we've fallen down in the past few years, in terms of women's tops is not having the trend right items, or not having the right outfitting for the customer to go with the bottoms.

  • So our focus really in growing that business is around building a strong assortment that provides great outfitting, great quality, great value to the customer, not necessarily a much bigger assortment.

  • Of course, we'll ebb and flow in terms of the categories within tops, in terms of how the trend is going.

  • But the total customer choices in stores will remain relatively constant.

  • In terms of the AUR, I think part of the challenge we had in the spring last year, in addition to some fashion missteps I think in terms of tops, was also, was actually trying to compete too much on price.

  • Really, I believe strongly that our customer loves American Eagle for the value we provide.

  • And if we can provide great trend, great quality at the right price, which she perceives as it being good value, then we'll get a strong return there.

  • So we expect and we're -- our strategy includes getting slightly higher AURs which we're seeing so far.

  • Simon Nankervis - EVP, Global Commercial Business

  • And then, in terms of merch margin, yes, we definitely see opportunity throughout the year, including the back half of the year.

  • But Q4 2014, we had a -- over 400 basis point improvement in merch margin.

  • So that will be a little bit difficult to anniversary at that kind of magnitude.

  • So a little bit more muted in the back half, but clearly still opportunity.

  • Judy Meehan - VP of IR

  • Okay.

  • That concludes our call today.

  • Thank you every one for your participation, and continued interest in American Eagle Outfitters.

  • Operator

  • Thank you.

  • That does conclude today's teleconference.

  • You may disconnect your lines at this time, and have a wonderful day.

  • We thank you for your participation today.