American Eagle Outfitters Inc (AEO) 2025 Q3 法說會逐字稿

Welcome to the AEO, Inc., third-quarter 2025 earnings conference call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Judy Meehan, Head of Investor Relations and Corporate Communications. Please go ahead.

Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer; Jen Foyle, President and Executive Creative Director for American Eagle and Aerie; and Mike Mathias, Chief Financial Officer.

Before we begin today's call, I need to remind you that we will make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results actually may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise, except as required by law.

Also, please note that during this call and in the accompanying press release, certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis. Reconciliations of adjusted results to GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at www.aeo-inc.com in the investor relations section. Here you can also find our third-quarter investor presentation.

And now I'll turn the call over to Jay.

Thanks, Judy, and good afternoon. I hope everyone had an enjoyable Thanksgiving weekend. I am extremely pleased with the trend change we've seen across brands, reflecting a number of decisive steps we've taken from merchandising to marketing to operations. These delivered actions are having a positive impact on near-term results and also serve us well for the long run.

We delivered record revenue in the third quarter, and very strong momentum has carried into the fourth quarter. We are seeing encouraging responses to the newness that teams are delivering, with each new collection gaining steam. Most notably, Aerie and OFFLINE are generating exceptional growth across categories. As discussed last quarter, we made incremental investments in advertising, which is contributing to stronger demand while better positioning our business for enhanced long-term brand awareness and overall customer engagement. At the same time, we are focused on operational improvements and cost efficiencies to drive higher profitability in what continues to be a dynamic macro environment.

Turning to the quarter, total revenue increased 6% to $1.4 billion, a third quarter record. Operating income of $113 million exceeded our guidance of $95 million to $100 million, fueled by higher-than-expected demand and well-controlled costs. As previously noted, our results also included about $20 million of net impact from tariffs. Diluted EPS for the quarter of $0.53 increased 10% compared to the adjusted EPS last year.

The strong top line reflected a return to positive comps, which increased 4%. This was a meaningful acceleration from the 1% decrease last quarter. Improvement was made across both brands and channels, all posting positive comps. Aerie’s 11% comp in the third quarter was a real standout, where strong demand was broad-based across all categories. Growth accelerated throughout the period, which has continued into the fourth quarter, where we are seeing exceptional demand so far.

As we look to the future, we continue to see untapped opportunities within Aerie and OFFLINE, which are rapidly emerging as important customer destinations. At just under $2 billion in revenue and less than 5% market share, this indicates a significant runway for future expansion, underscoring our ability to capture a much larger piece of the market as we execute our strategic initiatives. American Eagle’s comp grew up to 1%, marking a sequential improvement from last quarter. Strength in jeans coupled with better results in men’s were among the drivers.

As Jen will review, AE’s business strengthened with greater in-stocks in our strongest sellers and new product flows. Positive rends have continued so far in the fourth quarter, including a terrific Thanksgiving weekend. Beyond product, our results have benefited from the success of our recent marketing campaigns, which have driven engagement and attracted new customers. We are encouraged by the impact of the campaigns and collaborations with Sydney Sweeney and Travis Kelce, and now holiday gifting with Martha Stewart. We see measurable benefits, especially across our digital channels. Looking forward, we will build on this momentum with more exciting campaigns ahead.

All in all, I'm very pleased with the progress and meaningful turnaround from the first half of this year. Now the holiday season is upon us and the fourth quarter is off to an excellent start, we are seeing a clear acceleration from the third quarter, including a record Thanksgiving weekend with strong performance across brands and channels. As a result, we are raising our fourth-quarter outlook. We remain well positioned with exciting new collections centered on gift-giving and advanced plans throughout the season to continue to delight our customers.

Before I turn it over to Jen, I want to take a moment to acknowledge our incredible team for all their hard work and tremendous dedication. Their efforts have fueled a meaningful trend change across our leading brands. Great work continues, and I couldn’t be more optimistic about the long-term outlook for our business. We look forward to driving more success as we head into 2026 and beyond, driving profitable growth and enhanced value for AEO.

Let me turn it over to Jen.

Thank you, Jay, and good afternoon, everyone. I am very encouraged by the stronger performance across our brands, marking a significant turnaround from the first half of the year. This demonstrates the resilience and product leadership of our portfolio of iconic brands. The increasing customer demand, which has accelerated in the fourth quarter, is spanning new and existing customers, fueled by a well-coordinated effort across both merchandising and marketing. Compelling product collections combined with higher engagement and expanding brand awareness are driving our performance. The teams are executing very well, leveraging our expertise in key categories and, most importantly, by listening to our customers.

Let me walk you through a few highlights in the third quarter, beginning with Aerie. The Aerie brand continues to exceed expectations. We achieved record revenue with third-quarter comps up 11%, fueled by strength across all categories, including intimates, apparel, sleep, and OFFLINE. Aerie and OFFLINE’s performance has been especially impressive with a meaningful acceleration in demand since the spring season. In fact, comps have strengthened with each new delivery.

The resurgence in intimates has been very encouraging, with solid growth in both bras and undies. Greater depth and breadth of our signature fabrications strengthened new fashion across bralettes and crop tops and fun prints with matchbacks to apparel are just a few highlights fueling the brand’s double-digit growth. Aerie apparel remained consistently strong, driven by bottoms, fleece, tees, and sleep, which has emerged as a powerful growth category. OFFLINE by Aerie also continues to gain meaningful mindshare as we expand awareness and movement in newer markets.

We remain highly focused on growing the activewear segment. We are building on our signature fabrics and franchises such as our core leggings while also launching newness with updated fashion silhouettes. Needless to say, we are very excited about our future for both Aerie and OFFLINE. We are well positioned for the remainder of the holiday season and continue to believe in the substantial long-term opportunities ahead.

Now moving to American Eagle, which posted a positive 1% third quarter comp, demonstrating a meaningful improvement from the spring season. Positive demand was fueled by trend-right new fall collections combined with bold marketing and exciting product collaborations. Underpinned by our dominance in denim, our strategies to reset the brand and firmly position American Eagle at the center of culture are beginning to yield results.

The quarter marked an improvement in our men’s business, where we saw nice wins across tops, sweaters, fleece, graphics, and knits, all areas we have been working to recapture. Bottoms provided a stable foundation with jeans and non-denim pants trending positive. And favorable trends have continued into the fourth quarter, reflecting the positive reception of our new products.

In women’s, although we had a very good back-to-school season, the quarter in total was not as strong. Robust demand early in the period led to a number of out-of-stocks in some of our best-selling items. Non-denim bottoms, shirts, and dresses proved more challenging, while knit and fleece tops as well as jeans were positive highlights where we continue to see strong demand. Importantly, better in-stocks late in the quarter drove positive results which have continued into the fourth quarter. AE is a true holiday destination with amazing gift-giving focus combined with fun fashion and party dressing. The response to date has been highly encouraging.

Now shifting gears to marketing. This fall season American Eagle launched its largest, most impactful advertising campaigns ever, which are delivering results. By collaborating with high-profile partners who are defining culture, we are attracting more customers and have more eyes on the brand than ever before. Combined, the Sydney Sweeney and Travis Kelce partnerships have garnered more than 44 billion impressions. Total customer counts are up across brands, and customer loyalty grew 4% in the quarter. AE is clearly building long-term awareness and desirability and has captured the attention of both new and existing customers.

Traffic has also increased consistently throughout the quarter, which is most evident within our digital selling channels that include both AE and Aerie. Although it is still early days of our renewed marketing strategy, we know that having the right talent amplifies our brand and product at key moments. We are very encouraged by our progress and expect to continue fueling brand excitement into 2026 and beyond. Our recent holiday campaign with Martha Stewart is yet another example of how we are creating fun moments to delight our customers while reinforcing our position as the go-to gifting destination.

The holiday season is in full swing, and, as Jay mentioned, we are encouraged with the results so far. We are heads down and focused on the rest of the year to deliver long-term sales and bottom-line growth. Thanks to our amazing teams, and thanks to all of you for your ongoing support. I wish everyone a happy and healthy holiday season.

And with that, I'll turn the call over to Mike.

Thanks, and good afternoon, everyone. I'm pleased to see the steady progress throughout our business which led to strong revenue and profit above our expectations in the third quarter. In addition to generating meaningful top-line improvement, we successfully controlled costs, created efficiencies, managed promotions, and navigated through a highly dynamic sourcing environment, minimizing the impact of tariffs. Validated revenue of $1.36 billion increased 6% to last year, fueled by comparable sales growth of 4%, with Aerie up 11% and AE up 1%. We saw growth in transactions across brands driven by higher traffic.

The average unit retail price was flat to last year. Gross profit dollars of $552 million increased 5%, reflecting higher demand. The gross margin declined 40 basis points to 40.5% compared to 40.9% last year. Net tariff pressure was as expected at $20 million or 150 basis points. Higher markdowns were largely offset by positive sales growth and lower non-tariff costs, including favorability in freight. Buying, occupancy, and warehousing leveraged 20 basis points due to higher sales and a continued focus on operational improvements. For example, we drove lower cost per ship within our direct business, which has been an area of ongoing focus.

SG&A increased 10% due to investment in advertising as previously discussed, with our focus on long-term brand benefits. The campaigns are already delivering results and helping to advance our goals of expanding our reach and generating growth across brands. The balance of expenses leveraged, reflecting our ongoing cost management program. Operating income of $113 million was above our guidance of $95 million to $100 million, driven by stronger-than-expected demand. The operating margin of 8.3% declined from an adjusted margin of 9.6% last year. Consolidated ending inventory cost was up 11% with units up 8%. Inventory is balancing better in-stocks for American Eagle jeans, new store openings, and the demand acceleration at Aerie and OFFLINE.

The increase in cost includes the impact of tariffs. Third-quarter CapEx totaled $70 million bringing year-to-date spend to $202 million. We continue to expect CapEx of approximately $275 million for the year. As a reminder, this includes a one-time spend of about $40 million to relocate our New York Design Center as we previously disclosed. We are on track to open 22 Aerie and 26 OFFLINE stores, which are coming out of the gate quite strong. We'll complete about 50 AE store remodels with full upgrades to our modern design. A few examples of recent store upgrades are the Aventura Mall and Sawgrass Mills in Miami and our new Soho location in New York City.

All of these A-plus stores are among our best, and we want to ensure the customer experience is unmatched. The upgraded footprints have allowed us to showcase our signature brands AE, Aerie, and OFFLINE. We are utilizing new technologies to elevate the shopping journey and create a cohesive and modern retail experience. Overall, our remodeling program is generating comps nicely above the average.

As we continue to position our fleets for profitable growth, we are also on track to close about 35 lower productivity AE stores. Our capital allocation priorities remain unchanged, and we are focused on prudently investing in growth to continue to build our brands while returning excess cash to shareholders through dividends and share repurchases. As a reminder, during the first half of this year, share repurchases totaled $231 million and year-to-date dividend payments have totaled $64 million. We have a strong balance sheet and ended the period with cash of $113 million and total liquidity of approximately $560 million.

Now turning to our outlook, the fourth quarter is off to an excellent start. As the team noted, we are encouraged by the broad-based strength across brands and channels with particular strength in Aerie and OFFLINE. Our inventory and product offers are well positioned to deliver a successful holiday season, and we are all focused on achieving a strong fourth-quarter result. Based on quarter-to-date sales trends and the recognition that we have important selling weeks still ahead, we are raising our fourth-quarter operating income guidance to a range of $155 million to $160 million based on comp sales growth of 8% to 9%, with similar growth in total revenue. Guidance includes approximately $50 million in incremental tariff costs.

Buying, occupancy, and warehousing costs are expected to increase due to new store growth for Aerie and OFFLINE and increased digital penetration. SG&A is expected to increase in the low- to mid-single-digits driven by investments in advertising. Given the top-line strength, we expect both BOW and SG&A to leverage in the fourth quarter. The tax rate is estimated to be approximately 28% and the weighted average share count will be roughly 173 million.

To wrap up our prepared remarks, clearly we are very encouraged by the progress made across our brands. We are highly focused on delivering the remainder of the year, driving strong profit flow-through and sustaining this momentum into 2026.

Now we are opening up the call for questions.

(Operator Instructions) Jay Sole, UBS.

My first question, I think, is for Mike. You talked about the acceleration in the fourth quarter to date and then you raised the guidance, the comp guidance, I think you said 8% to 9%. It is pretty significant from where you ended Q3. Can you just talk about where you are trending quarter-to-date to be able to guide to that level and what's driven the acceleration?

And maybe for Jen, you mentioned strength in denim. If you could elaborate a little bit, if people aren't wearing skinny pants like they were, what are the new silhouettes that are working and how durable are those trends? Do you think the trends that you are seeing can last well into 2026 or beyond? If you can help us understand, that would be great.

I can talk you through the guidance. So the 8% to 9% comp increase includes a nice improvement or acceleration for both brands quarter-to-date from what we just reported in Q3. I would say if we break it down by brand, we'd be looking for the AE brand to be in the low to mid-single digits and Aerie in the high teens, mixing to that 8% to 9% comp, and both brands are ahead of that quarter-to-date. But we know we've got some big weeks ahead of us, only about half the quarter in, but definitely pleased with how November turned out and where we are quarter-to-date through the Thanksgiving weekend.

Yeah, and denim has been very strong. In fact, particularly in women’s, we saw acceleration throughout the quarter, getting into the back half of Q3 and into Black. It has been our number one Black Friday as far as denim is concerned. The jeans are certainly winning for us and, as you know, that's our key competency business. Look, silhouettes are changing faster than ever, and I always reemphasize that our team strategically does extensive testing and scaling.

We did have some out-of-stocks, particularly in women’s in Q3. Sydney Sweeney certainly accelerated some of that, and we needed to move swiftly to get back into business. And I like what we're seeing at the end of Q3 and headed into Q4 with the denim business, so we are excited.

Matthew Boss, JPMorgan.

Great, thanks, and congrats on the improvement. So Jen, at Aerie, maybe if we could dig a little deeper. Could you speak to the drivers of the same-store sales improvement over the past two straight quarters? And with that, maybe could you break into customer acquisition trends that you're seeing and initiatives in place to sustain double-digit comp growth in your view?

Yeah, it's certainly exciting to see Aerie back on track. Coming out of Q1, we definitely needed to pivot as a team, and we really hunkered down and really thought about our strategy and what we needed to get back to win. Not only coming from our core competency businesses, which all accelerated and have been accelerating starting in Q3 and Q4, but also there are new businesses in town. Sleep is doing quite well for us and it is proving to be a year-round business for us, so a new category there.

Obviously, we have OFFLINE too, which is our secondary business coming off of Aerie, and that business is proven. Where you're hearing some decel in the athletic apparel areas, we are holding our own and our leggings are still tried and true and winning for us.

The customer acquisition has been strong. Our customers are spending more. We are seeing even coming off Q3 as we head into Q4, our acquisition has been accelerating. Last week was an incredible week for Aerie where we saw a huge amount of customer acquisition, so we are taking advantage of our traffic. We are winning our customers.

I think we are showing up really proudly. We launched our new 100% REAL campaign which is tied to our core competency of how we launched this business, what our platform is, and it is talking to our community. It's speaking to her. It's playing off of no airbrushing our models. And now we've leveraged some of that into the AI world and thinking about how we approach that differently.

So Aerie does things differently. We always think into the white space that sometimes can be scary, but we are so proud of what we do in this brand, and I think the team is doing an incredible job leveraging our community, amplifying marketing, but also it's 100% about our product. What we do every day is about our product and winning our customer.

That's great. And then Mike, could you speak to expectations for markdowns in the fourth quarter relative to the third quarter, just overall health of your inventory and how best to think about gross margin levers remaining into next year?

We can start with inventory, Matt. I mean, we are very pleased and comfortable with the plus 11% in total dollars and plus 8% in units. It is positioned well to continue to fuel this Aerie and OFFLINE trend. We definitely, as Jen talked about in her remarks, kind of resetting some denim inventory to make sure we continue to be in stock and don't miss a sale within the AE jeans category. Again, that plus 11% cost includes the impact of tariffs along with just supporting those businesses.

On the markdown front, look, we competed in the third quarter. Markdowns are up a little bit in terms of the total impact of the quarter. We expect Q4 to be similar. We are ready to compete in these big days. We competed over the weekend. This November trend that we have seen is the quarter-to-date trend includes a little uptick in markdowns to compete, but definitely winning in terms of the top-line growth and the overall margin dollar growth attached to that.

It is in a couple of places. I mean, Aerie has a similar markdown rate to last year, so we're driving this trend on markdown rates similar to history. We are not driving it through promotion, and then really competing in jeans more than anything from a category perspective, that's adding to the markdowns a bit, but we think that is the right strategy from here.

Gross margin then in total, really pleased with the third-quarter results. We disclosed -- or we hit the $20 million guidance roughly on the tariff impact. That's about 150 basis points, but as you can see, gross margin only deleveraged 40 basis points on a 4% comp, so the team is doing a great job not only just mitigating tariffs on the front end but then finding opportunities and efficiencies on other non-tariff impacted line items within our cost. We highlighted freight, but there is more work than just on the freight line.

So Q4, similar, and we're guiding to a $50 million impact in the net absolute value, where the net impact of that -- absolute impact of that would be about 300 basis points, but we are obviously not guiding gross margin down that much. So we expect to see the same opportunities in terms of offsets and other line items. And just on 8% to 9% comp, obviously we're leveraging a lot of expense lines that are up in gross margin, including -- and BOW, so including rent, digital delivery, distribution cost, compensation up there as well. But other cost line items within our product costs are being leveraged too, so we continue to expect to do that going forward.

Paul Lejuez, Citi.

Hi, this is Kelly on for Paul. First question for you guys, could you talk about why, given you've had these very flashy and high-profile marketing campaigns that were more based on American Eagle marketing campaigns, why you did not see that accrue more to AE versus what you are seeing in Aerie where it seems like you are benefiting a lot from whether that's the product assortment or maybe some of the marketing campaigns? Just help us understand what's happening there.

And then secondly on the tariff impact, I think you said $50 million impact in the fourth quarter. Is that the right net impact that we should be thinking about for the first half of '26?

Sure. As a company, we're leaning into advertising. We need to compete when we see what our competition is doing. There was definitely an opportunity for us to lean in. And certainly, Sydney Sweeney and Travis, I mean, with the 44 billion impressions, really it was something that we did not expect. And certainly, I mentioned some of the out-of-stocks in women’s particularly, but men certainly turned around in the mid-single-digit comp zone and that was really -- we were so pleased to see that.

And I just wanted to say sometimes there is a halo effect in marketing, right? As we saw that and got into in-stocks in denim, we got our inventory back to more normalized levels toward the end of the quarter. We saw acceleration, particularly in women’s and into Black. As I mentioned, it was an incredible week for us. Thanksgiving week and Friday were amazing. So we're seeing the results now.

And, look, this is important for our future. We need to remain strong and competitive, and we need to amplify our product. The teams have been working tirelessly on this price-value equation that I think American Eagle does better than anyone, and we are leaning in. This marketing will certainly amplify.

And again, I would also add, we also see a significant increase in our loyalty members, too. We saw over a million more loyalty members joining us in these past few months. And as Jen said, you don't see right away the impact right away. It is interesting with Sydney Sweeney—the jeans that we made specifically for her sold out within two days. They boomed right away.

Then I can take the tariff question. I think the best way to provide some color is to give the quarterly impact we expect go forward if tariffs hold as is. In terms of the impact, we'll see how that continue to progress. About a $25 million to $30 million impact in each of the first and second quarters, so call it somewhere between 200, maybe 225 basis points of impact in Q1, same impact in Q2, $40 million to $60 million probably in the first half.

Next Q3, on the $20 million we just incurred in Q3, we expect Q3 on a full basis to be about $35 million to $40 million, so call it $15 million to $20 million impact incrementally next year and then with the anniversary, roughly the $50 million that we are guiding to this fourth quarter, so it's about a 200- to 225-basis-point impact on a full-year basis. But again, with continued offsets and work, we expect the gross margin to not even be impacted to that level, just like we've seen here in Q3 and Q4.

And Mike, there may be like a supreme court ruling coming on shortly, too. And it may have changed everything right away. We've got to push.

Right, yeah.

So the assumption then would be that you will be taking some like-to-like pricing into next year?

Yeah. So thinking of it on a pricing front, we definitely do not have a specific strategy to pass through the impact of tariffs to our customers. We continue to take shots where we know we can, where we're making price news that still fit within our price value equation that the customer expects, and we don't see any resistance to those price changes from the customer. And just take a change will allow us to create a little more room on the promotional front to make some decisions within our relief lines.

So we'll continue to do that. I think we're seeing success doing -- or approaching it that way in the back half right now. We'll continue to do that into next year.

Jonna Kim, TD Cowen.

You mentioned strong customer acquisition across both brands. Maybe you can give us a little bit more detail around who those customers are and if you are gaining more higher-income cohorts? Just curious on who you are gaining share from as you acquire new customers. And then another question in follow up to that is, what are your strategies around retaining those customers you gained in the last two quarters?

Look, both brands have -- our customer file is stronger than ever, and we certainly have seen acceleration, as I mentioned, going into, even leaving Q3, exiting Q3 and going into Q4, with some really -- It's really high-end problems here that we're seeing. Look, it's what we do every day. Our teams need to focus on the retention, and we've been -- all year long, that's what we've been up to.

Our retention is not even -- we're winning on retention. We are winning on customer acquisition. The teams have strategies. Those I tend not to share publicly, but the strategies are already paying off. You can see it in the news that we're just reporting today.

We're getting talent. We're working on our influencer programs. But we're also working on our communities, and that is the most important thing. We have powerful brand platforms that we stand for something, and it wears the test of time. And when that works and we have the great products attached to it, we can win and show up in a new way.

And the teams have many strategies, whether it is upper funnel, getting out there and bringing in new customers, or working on our performance marketing and influencer strategies. So it's not only -- it's never about one part of the strategy. It's about getting the product right first and making sure our tactics will amplify that strategy. Certainly, Sydney -- and our example, Sydney and Travis, but even the more recent Martha, I mean, that is talent that is upper funnel. It's getting our brands out there in new ways.

But if you lean into Aerie and how they're working their marketing strategy, they're leveraging our community in a new way and showing up with how do we go from not airbrushing our models I just mentioned into what does AI mean to such a pure brand as Aerie with such an amazing platform?

So it is about -- we have two different brands. We have a portfolio of brands in the same token that we leverage our brands. Certainly, we share a platform, but it is about making sure that we play up each brand DNA in the right way, and it's working. That strategy is working. I can say that now, and there is work to do always.

As we look ahead, we have exciting collaborations, new talent, and just new ideas. We're constantly thinking of new ideas.

Rick Patel, Raymond James.

I wanted to double-click on your expectations for AUR in Q4. If you think about the company remaining competitive with promotions but also factoring in some product and perhaps some pricing range, where do you see AUR landing in the fourth quarter?

And then second, what are your expectations for inventory at year-end both in terms of dollars and units?

Yeah, the AUR for the third quarter was relatively flat even with a bit of a markdown increase, just the mix of the businesses between the brands and category mix. AUR was relatively flat at the company level. We are expecting a similar outcome in Q4. November to date year, we saw it play out that way. Aerie is actually driving these comps on some uptick in AUR.

We know we are spending a little more on markdowns in the jeans category to drive the business. So the mix for the quarter we would expect right now would be similar, around relatively flat AUR for the fourth quarter. And I think that is the way we really expect to plan the business going forward.

Great. Any thoughts on inventory?

Q4, we are not providing specific guidance, but at the end of the day, with the uptick in the trend exceeding plans, we are definitely in chase mode here, which is a good thing when we make it -- we see a lot of profit flow-through when we are doing that, especially on the Aerie side of the house. So we expect inventory in line with sales. We got into the plus 8% to 9% comp, and as of now, I would expect similar kind of inventory aligned with sales or at least units in line with the sales growth, knowing there will be a tariff impact ongoing. We are not providing specific guidance at this point, but that's what we'd expect to see.

Chris Nardone.

So first, can you just refresh us on how we should think about plans for both the Eagle and Aerie store fleets heading into next year and if the recent results of both businesses have changed how you're thinking about that versus maybe 90 days ago?

Yeah, Chris, I think for the AE brand, we talked about closing roughly 35 stores at the end of this year. We're looking forward into the plan next year, we expect that to slow down as we have largely closed, I think over the last three or four years, the lower productivity stores in the fleet, in the mainline AE fleet. So 35 at the end of this year here in January, maybe something lower than that I would expect next year.

On the Aerie and OFFLINE growth front, we talked about 22 Aerie and 26 OFFLINE openings this year in 2025. We're looking at a similar 40- to 50-store count at the moment, probably similar weighting OFFLINE a little -- a little higher count OFFLINE than Aerie. But we are looking at this tremendous growth, and if we did anything, we'd maybe accelerate some openings on the Aerie and OFFLINE side. Those plans are still in work. Right now, a similar 40 to 50 count is what's in the plan.

Okay, got it. And then just a quick follow-up, I think you alluded Aerie comps are running above the high teens for the quarter, quarter to date, and if AUR is roughly flattish, can you just unpack a little bit further? It sounds like you're seeing inflections across the product suite, but are there particular channels, whether that's digital versus retail or certain categories, where you are seeing the biggest inflection? We're just trying to understand a little bit better what has changed so drastically over the last six months.

Yeah, look, correct, the guidance we are giving at the 8% to 9% comp. I will just reiterate American Eagle low to mid-single expectations, Aerie high teens. Both brands are running ahead of that trend November to date or through the Thanksgiving weekend. Digital ahead of stores, and I think the marketing campaigns that Jen and Jay are talking about, the traffic we are seeing digitally off those campaigns is significant, and that's where we are seeing a lot of the gains from those efforts and the effectiveness of those campaigns.

So digital was -- both channels were positive in Q3, but digital was on the high end or the high-single-digit level for Q3, and we would expect for Q4 at an 8% to 9%, same kind of outcome that digital would really outpace stores. And we've seen that through November and especially over the holiday weekend here where both channels were positive, and we are happy with success in both channels, but digital is where we are seeing the outpaced growth at the moment.

And in Aerie specifically, as I mentioned before, men’s we saw an incredible turnaround, and Aerie specifically, all categories are working. When you have to pivot coming off Q1, we focused on our product and winning that customer back and ensuring that we could get that momentum that we deserve again. This brand is incredible and I need to remind everyone on this call that Aerie’s brand awareness is only at 55% to 60%. So when I think about our opportunity as we build into 2026, we have an incredible runway in front of us. We are pulling in product as we speak. We are chasing and the team is working fast and furiously so that we can continue this momentum into next year.

Okay. And also, Jen, I think our merchandise is better too, which helps.

I would like to say that, yes.

Alex Straton, Morgan Stanley.

Thanks so much, and congrats on a nice quarter. On these big campaigns that you guys have pursued, can you give us some context on where you think you will end the year on marketing expense as a percentage of sales versus typical? Are you investing more than history? And then as we think about next year, should that line item continue to move higher, or how do you think about that flywheel between the marketing investment and growth?

For this year, yes, we, I mean, obviously made a significant investment in Q3. Q4 is up as well within our guidance, not anywhere near the increase on a percentage basis that Q3 was. Really pleased with the SG&A leverage, we'll see in Q4 off of this comp guide. Advertising is still deleveraging a bit, but we are leveraging all other expense categories as intended pretty significantly in the fourth quarter. For the year, we are going to wind up somewhere in the mid-4s as a percentage, and historically we have been more like last year, for example, around 4%.

So we're definitely resetting a baseline for advertising spend at the moment. It's working. We're continuing to monitor it. Jen and I and our teams are working very closely and cross-functionally on a week-to-week basis on how we are pulsing the spend and advertising on top of the campaigns that are obviously planned well ahead of time.

I would expect in our initial plans for next year to continue this in the first half, possibly passing more to a 5% type of rate to reset ourselves and then leverage all other expense lines, funnel some investment toward advertising, and anniversary this comp next year around this time in the third quarter. I think that 5% is a good sweet spot that we would like to maintain over time. So as we are resetting the baseline, we are passing toward 5%. We like the top-line growth we are seeing from it. Again, just to reiterate, anniversary will come next year and start to maintain that type of rate, and we will evaluate things from there.

And Mike, we have more tricks in the bag too. We are not saying, but we have more tricks in the bag.

Yeah, more to come. We will talk about some things on our fourth quarter call in March, probably to talk about more exciting things to come.

That’s great. Maybe one follow-up for you, Mike, just kind of zooming out here. I know there have been some wrenches in your medium-term outlook since you provided it a couple of years ago, but maybe as we move into the final year of that plan and excluding some other non-controllable headwinds like tariffs, can you just big picture talk about where you have made the most progress versus that plan and where there is still more work to be done in this final year here?

Yeah, I mean, starting at the top line, I know we obviously had a few missteps in the first half of the year in the first quarter, but the net result of this year with this guide is actually going to wind up kind of in that low to mid-single-digit or within the algorithm we talked about wanting to achieve every year. So we'll be at a kind of low single-digit trajectory on a full year with this back half being mid to high single-digit range. So I think that's the continued focus.

I would also say we made a lot of headway in just the culture change around expenses in total, so we continue to control costs across the P&L. The leverage that we are seeing here in BOW, this back half of the year and then SG&A in the fourth quarter, is a testament to that even with the significant increase in advertising this year that you just asked about and I just provided the color on. All the other SG&A line items are leveraging in this year, and SG&A in total will be relatively flat on the year at the kind of low single-digit total year outcome.

So I think that's a big change for us over the last several years. It has been a massive focus to have a different mentality around controlling expense. It is allowing us to funnel some of these dollars toward advertising, and so we will continue to do that.

And yeah, to your point, the tariff headwind is something we cannot control, but our goal is still this 10% aspiration. Tariffs are going to set that back a little bit, but we are going to continue down the path that we are on, controlling all other costs, investing some dollars in advertising, fueling Aerie and OFFLINE, hitting that kind of low single trajectory in AE, and passing back toward that 10% that is still our ultimate goal.

As a general thing, this team after the first quarter, and Jen could not emphasize it enough, really took a hard look at everything. We went through all the different areas of the business, every single area, every opportunity, from the merchandise to the operations, looking what's important, what's not important in this company. The dedication of the associates has been amazing in the last few months, and I am so proud of this team because that first quarter, we got kicked very hard and nobody quit.

Nobody cried about it. Nobody quit. Everybody went to figure out how can we do things better. Transformational, looking for where the real opportunities are, looking for where we should go in the future, where the opportunities are, and what should it take to be the best.

One thing I am very proud of, if you go into our stores, we have the best-looking stores, the best-maintained stores in the mall. If you walk in the mall, our stores look the best. If you go look at our new stores, you go down to Soho and you look at our new store we just opened, you go to Aventura down in Miami, you would be very impressed by the stores. They are very impressive stores. They are very functional stores.

I think that we are very excited. I know what we have planned for marketing next year. I know where the merchants are focused. I know the excitement that everybody has in this company, and it is going to be great.

Janet Kloppenburg, JJK Research Associates.

Hi, everybody, and congratulations. And Jay, I agree, the stores look terrific, Aerie in particular, but American Eagle as well. I just wanted to ask about, I think you had to chase products earlier in the year as well, Jen, and I'm wondering what's going on there and if that situation is resolved now with the comps being as healthy as they are.

And then for Mike, on a 4% comp, did you leverage the buying and occupancy? I think you may have, and what is the target point on that? And in terms of price increases, are they all behind you now? Have you taken them all, or are there more to come?

Yes, for sure. Thanks, by the way, Janet. Primarily, it's men and women’s denim, to be frank. We have been sort of in chase mode since Q1, and quite frankly, we have not been able to keep up with the demand. We have a huge shorts business, and that business never really turned on. We expected shorts to turn on as we entered Q2, back half of Q1 into Q2, and that never happened. So then we continued to see this demand in long legs, and we really could not keep up with that demand.

So moving into Q3, we felt like we were in a better position, but we wanted to be prudent as well with our inventories, as denim is probably a higher cost of goods as well, but it is our biggest business, so it is always an art managing that business. With the launch of the Sydney Sweeney and actually Travis Kelce, we could not really keep up with that demand. The teams worked swiftly. We were definitely in the right businesses. We definitely had the right pillars and the right investment in silhouettes, which led to some of that out-of-stock.

Good news there, bad news, we needed a little bit more inventory to carry and to get that business moving, to get women’s in total because of the penetration of denim. So good news is, certainly in the back half of Q3, we saw nice levels of inventory getting back into our key silhouettes. The top five jeans, just to give you some perspective, we planned top five jeans styles in women's. We planned up 25%. They were up 50% on demand.

So we had a lot of work to do. We feel better as we head into Q4. And nodding to what Mike mentioned, we are going to look at denim a little bit differently. We're maintaining that business in growing categories.

In denim, yeah, we did leverage BOW by 20 basis points in the third quarter on the 4% comp, and that is a good target for us, that low to mid-single-digit result to leverage expense really across the board other than this advertising reset we are talking about. And then the fourth quarter on the 8% to 9% comp, we would definitely expect to leverage BOW with that kind of result as well and SG&A will leverage significantly on that kind of result for the fourth quarter.

Okay. And then just on pricing?

Yeah, we talked about it a little earlier. AUR is flat for Q3. We are expecting similar AUR in Q4. We are not passing through the impact of tariffs to the consumer purposely.

We are taking our shots on price moves where, as Jen said, we maintain that price-value equation that our customer expects and make sure we are not impacting conversion, and get ourselves a little room on the promotional side when we do that as well. So we will continue to optimize that, take our shots, but net AUR similar to last year is the intent.

Janine Stichter, BTIG.

Congrats on a great quarter. With this quarter-to-date acceleration, it sounds like a lot of it has been driven by traffic and new customer acquisition. Just wondering what you are seeing on conversion, particularly with some of the product improvements you have made. And then maybe if you can share your thoughts on the Gen Z consumer. We have certainly heard a lot about that consumer potentially being pressured and pulling back, but it does not seem like you are seeing that at all in your business. So I'd just love to hear your thoughts on where the consumer is and how they're spending.

Yeah, I think on the metric side of things, traffic was definitely a driver in Q3. We continue to see that here in the fourth quarter through November. With AUR flat, it has been a mix of traffic and then ADS or the UPT part of the ADS equation. AUR flat, some uptick in UPTs, and then traffic with conversion being relatively flat, with AUR being relatively flat. That's where your mix of metrics that we saw in the third quarter.

And early days here in Q4, obviously a big traffic uptick that we've capitalized on through November and through Thanksgiving, and we'll see how that continues to play out. But with AUR relatively flat, we would assume a similar kind of mix of metrics, traffic being a driver, ADS being a driver, with AUR flat, conversion relatively flat. And we'll see how it pans out through December.

Yeah, we are not feeling that -- We are entertaining Gen Z in all of our brands. Even when you look at Martha Stewart, that might be a question mark, right? Why Martha Stewart? But Martha Stewart resonates with Gen Z. That's a perfect example of what we're up to.

We are seeing momentum in all age groups. We do have still some opportunity on the lower age scale in AE, women’s in particular, and we're up to invigorating some product to entertain that age bracket. But honestly, we're not seeing it. And also, this is a critical time for gift giving too, so we see mom and dad out there purchasing as well.

Cory Tarlowe, Jefferies.

Mike, I just wanted to ask on SG&A for Q3 and Q4 and just how to think about it next year from a dollar perspective. Is there anything that either comes in or goes out, whether it's marketing. I think you talked, maybe you talked about incentive comp in prior years, how to think about that? Just structurally, understanding on a rate basis, obviously with Q4 sales being so strong, there is going to be a bit of a delta there, but curious what you could unpack for us.

Sure, I think as I said, we would expect to see some continued investment in advertising through the first half of next year incremental to where we have been. Attention to the path forward, we call that 5% rate annually, so anniversary things in the back half that we're doing currently.

Incentive comp is a bit of a TBD. We are still setting plans for 2026. The annual plans are based on specific targets as the success metric, so we will probably give more color in March around 2026 SG&A and how we think that will pan out by quarter, with advertising and possibly a bit more incentive comp in the mix. More to come in March.

Great, thanks. And then just a quick follow-up on Aerie. The momentum has been very, very strong. Curious what you think is specifically working there versus the competition when you either walk the mall or look at the competitive set. How do you think about your market share gains and the opportunity there?

Yeah, I did mention the brand awareness is -- we have opportunity there. We are still only at 55% to 60%. So as we gain and look toward the future, we have a lot of opportunity there. It is never about one thing. Certainly, we doubled down on the product. The design team and merchant team really came together and thought about our future strategies and where we were seeing some losses and how we recalibrated all of our categories.

And the team did an excellent job from launching new ideas to rebuilding old franchises, i.e., undies. Undies is a firestarter for any order, any basket, and our R&D tables have never looked better. So it is all about the product, but strategically we built into the promotions that make sense and pulled back in other areas where it does not make sense.

Then you layer on this great marketing campaign that we have had in Aerie, which has been really resonating—100% REAL. It is what we are all about, and the team doubled down. Our influencer campaign, getting our clothes on influencers, has been a real win and there is more to come. We have so many great new ideas and innovations for the future.

The team is 100% locked and loaded on thinking about each category, new fabrications, new ideas, new launches. Newness in general has been a win for Aerie with our new drops, and that has been really working. So we have a lot in store for 2026, but in the meantime, we are pulling goods in to pull out Q4. We are excited about what is happening right now.

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