American Eagle Outfitters Inc (AEO) 2002 Q3 法說會逐字稿

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  • Operator

  • Good morning.

  • My name is Mandy and I will be your conference facilitator today.

  • I would like to welcome everyone to the American Eagle Outfitters third quarter 2002 earnings result conference call.

  • All lines have been placed on mute to prevent background noise.

  • After the speaker's remarks, there will be a question and answer period.

  • If you would like to ask a question during this time press star, then the number 1 on the telephone keypad.

  • If you would like to withdraw your question, press the pound key.

  • Thank you.

  • I will now turn the call over to Mr. James O'Donnell.

  • Sir, you may begin your conference.

  • - COO, Director

  • Thank you, Mandy.

  • This is Jim O'Donnell, Chief Operating Officer.

  • Other participants are Laura Weil.

  • Hopefully everyone has a press release e-mailed out this morning and available on our website, www.ae.com.

  • If anyone needs a copy call cindy Jones at 724-779-5251.

  • Before we begin I need to remind everyone members of management will make forward-looking statements based upon current information which represents the current expectations or beliefs.

  • We caution investors that results may differ materially.

  • Based on the risks and uncertainties filed with the SCC.

  • Needless to say the third quarter was challenging and our performance did not meet our goals.

  • The retail environment remains promotional and hampered by periods of slow mall traffic; however, business did improve toward the end of the quarter.

  • As Roger will report, we are pleased with the holiday line.

  • Regarding the west coast shutdown, we are very comfortable with our holiday inventory position.

  • We were successful in rerouting shipments and have received goods at the west coast at the time of the shutdown and we clearly expect to be on inventory plans for the end of the season.

  • Our corporate initiatives are paying off despite negative comp in the third quarter.

  • SG&A expense as a percent of sales declined compared to last year.

  • And going forward, our efforts to control expenses and achieve efficiencies remain a major focus of the company.

  • We achieve notable improvements in certain areas of operation during the period including store pay rolls and distribution.

  • Our average wage rate at the store level declined over last year and unit sales per hour worked increasing in mid-single digits.

  • Our U.S. distribution centers achieved significant efficiencies during the quarter.

  • Total processing costs per unit declined over 20% on a double-digit unit increase.

  • Turning to real estate, year to date through the end of the third quarter we opened 55 stores and remodeled 29 American Eagle stores in the U.S.

  • Growing our total square footage by 12% over the same period last year.

  • Of these openings, 30 stores were in A malls, 19 in B malls and six in C malls.

  • Year to date by region 29 stores were added in the west, 13 in the southeast. 4 in the northeast, 8 in the midwest and 1 in the mid-Atlantic region.

  • We are on track to complete the opening of seven stores planned for this year and close 4 ending with 698 total U.S. locations.

  • And also complete 38 store renovations this year.

  • A note on our new store performance is very solid. 2002 new stores are annualizing at 85% of mature store sales and we are achieving strong comps in our newer markets such as California where comps have consistently been above the chain average.

  • Furthermore we are excited about our first major urban store in New York City located at 575 Broadway in the Soho area and expect to open November 23.

  • A quick note on AE Canada.

  • We experience continued strength on sales during the third quarter as well as a significant improvement in operating margin which exceeded our expectations.

  • We are pleased that AE Canada's operating margins are approaching those of the U.S. business.

  • This year we opened ten AE stores in Canada which completes our plans for 2002 ending with 56 stores.

  • Our initial plans for fiscal 2003 call for 50 new AE US stores, 60 in the U.S. and ten new AE stores in Canada.

  • That translates to a total square footage over 11%.

  • Here's Roger.

  • - Pres, Director and CMO

  • Thanks.

  • Good morning.

  • As Jim said our third quarter results were below expectations.

  • It was a challenging environment with heavy promotions in certain categories, very spotty mall traffic and a highly competitive marketplace.

  • In spite of the tough environment, our women's fashion was right on, enabling us to achieve a single digit comp in women's in the third quarter.

  • We had strength in a number of key categories most notably denim, skirts, graphic t-shirts, accessories and underwear.

  • Our men's business was difficult due in part to a lack of clear and compelling fashion trend across the country.

  • One bright spot was men's denim which performed well over a strong performance last year.

  • We are thrilled with the denim business across the board which continues to comp in the double-digits.

  • We have become a denim destination store and continue to have a meaningful assortment all year long.

  • A strong third quarter store metrics reflect the strength of the AE brand and gratifying in light of the tough environment.

  • Transactions per store increased in the low single digits, units sold and units per transaction rose in the mid-single digits.

  • Our negative comp was driven purely be a decline in average price which dropped over 10% in the quarter.

  • The decline in the average unit retail was caused by a combination of the promotional environment and by our sales mix which this year includes more underwear and accessories due to significant growth of these categories.

  • This fall we initiated a sun belt strategy where our stores reflected more assortment and presentation.

  • It was a successful program which drove comps in the heart region to a positive high single digit.

  • We believe there are tremendous opportunities to further drive our business through additional regional product allocation strategies.

  • All stores are now set with a holiday presentation and as Jim mentioned, we are very comfortable with our inventories and we will be fully in stock on all holiday items before the important Thanksgiving day weekend.

  • We believe our presentation of holiday merchandise is the best out there.

  • The merchandise is fashion right and we are perceived more and more as the gift-giving brand.

  • Importantly, so far our holiday brand has been well received.

  • Strength in our women's business has continued in most categories with particular success in sweaters which are producing double-digit comps.

  • We are happy with this performance given that women's sweaters are the important item in the fourth quarter.

  • On the men's side we have experienced some improvement with our holiday assortment and believe momentum will increase with the start of the holiday shopping.

  • While we are geared to a 20-year-old lifestyle, we are a destination store holiday for the entire family.

  • Our stores are bright, colorful and radiate holiday spirit.

  • Our marketing is strong and response to our direct mail campaign is positive.

  • We are clearly enthusiastic and feel good about hot holiday, the environment is unpredictable.

  • With inconsistent patterns in mall traffic and consumer spending.

  • We do believe, however, that this Christmas we'll get more than our fair share of the holiday spending.

  • American Eagle e-commerce business continues to improve marking twelve straight quarters of sales.

  • AE.com third quarter net sales rose 42% over last year's growth which about when sales increased 105%.

  • Concessions continue to rise up 23% over the same quarter last year.

  • AE.com is a profitable component of our overall business and we continue to explore new ways to maximize this venue.

  • Now a word on Bluenotes.

  • We acquired this business because we saw the long-term growth potential.

  • While the business is challenging, in time it will be a valuable asset.

  • For now it is a very small piece of our overall business but we are committed to nurturing it until it is right.

  • On November 21st, we will open our first fully redesigned Bluenote store outside of Toronto.

  • The new design clearly reflects the lifestyle we want this brand to represent.

  • In summary, we are committed to giving the best value to our customers and giving it faster than anyone else.

  • All the processes are in place to create and deliver fashion right merchandise ten times a year with frequent flows of newness to our target customer.

  • This process together with operational efficiencies, enhanced productivity and increased expense control will make our company stronger and more profitable in 2003 and beyond.

  • Now here's Laura.

  • - CFO

  • Thank you, Roger.

  • Good morning, everybody.

  • Total consolidated sales for the third quarter ended November 2, 2002 rose 3% reaching a record $374.5 million compared to $363.7 million last year.

  • Third quarter comparable store sales for the AE brand declined 5.2% compared to a comp increase of 2.6% in the third quarter last year.

  • Consolidated same-store sales which include both American Eagle and Bluenote stores declined 7%.

  • Our consolidated gross margin deleveraged by 200 basis points from 41.1% to 39.1% in the third quarter due primarily to lower merchandise margins and the deleveraging of buying, occupancy and warehousing cost.

  • By division AE U.S. and Bluenotes contributed to the decline in gross margins while AE Canada had a positive impact.

  • The decline in merchandise margins resulted primarily from increased markdown offset by an improved mark-on.

  • We also experienced deleveraging of rent utilities with occupancy and wear housing costs due to negative comp and below planned sales performance in the third quarter.

  • We leveraged SG&A by 40 basis points.

  • As a percent of sales, the rate declined to 24% from 24.4% last year.

  • In dollars, SG&A rose only 1.4% for the quarter on a 12% increase in square footage.

  • SG&A per square foot decreased 9% from the third quarter last year and SG&A per average store declined 6%.

  • The decline in SG&A is a percent of sales was driven primarily by the leveraging of home office salaries, leasing costs, services purchased and travel and entertainment with a number of expenses below last year's levels in terms of dollars.

  • Further expense reductions are a major initiative across the entire organization.

  • We expect current efforts to translate into continued leveraging in the fourth quarter and into the spring of next year.

  • Deppreciation and amortization expense as a percent of sales increased 40 basis points to 3.5% from 3.1% last year.

  • The increase was due primarily to our new and remodeled stores in the U.S. and deleveraging the negative comp.

  • Other income in the third quarter was $281,000 compared to $53,000 last year.

  • The increase is due primarily to higher investment income due to higher cash balances offset by reduced averaging investment rates.

  • Net income for the quarter was $27.1 million, a net margin of 7.1% compared to $30.7 million last year and diluted earnings per share were 37 cents compared to 42 cents per diluted share last year.

  • Now the balance sheet.

  • Our balance sheet continues to be very strong.

  • Cash and short-term investments increased by $88.2 million to $173 million from $84.8 million at the end of the third quarter in 2001.

  • During the third quarter we continued to control our inventory.

  • Total consolidated merchandise inventories increased 3.4% to $181.9 million from $176 million at the end of the third quarter last year while our gross square footage increased 12%.

  • U.S. inventory per gross square foot declined 9% at the end of the third compared to last year.

  • Looking ahead to the end of the fourth quarter, we expect inventory per square foot to be up 15% compared to a 10% decline at the end of 2001.

  • About half of the increase is due to our planned investment in denim and graphics.

  • These key categories have been strong and important drivers to our business in the early spring season.

  • Capital expenditures for the quarter were $18 million and year to date totalled $50 million primarily related to our new and remodeled stores, U.S. stores.

  • Our current Cap Ex projections for the year is $70 million below our previous forecast of $85 million.

  • The reduction in our 2002 Cap Ex plan is due to the delay of certain noncritical IT projects and Canadian distribution facilities.

  • In addition, the cost per square foot to build new stores and renovate existing stores has been coming in below projections.

  • For 2003 our Cap Ex plan is expected to be approximately 80-90 million.

  • During the quarter we repurchased 663,000 shares of our common stock.

  • Approximately 876,000 shares remain authorized for repurchase.

  • Although the economic environment remains uncertain, our outlook for the holiday season is positive.

  • Regarding November, it's important to keep in mind the shift of Thanksgiving to week four this year resulting in six fewer shopping days in November after the Thanksgiving holiday.

  • This will likely have an impact on November comps in the range of 3-4 percentage points.

  • However, we believe the impact on November and December combined will be minimal.

  • As Roger indicated, we are very pleased with the initial response to our new assortment and hope to have a solid holiday season and good fourth quarter.

  • Thank you, and now we'll open the call for questions.

  • Operator

  • At this time I would like to remind everyone, in order to ask a question press star and the number 1 on the telephone keypad.

  • We'll pause for just a moment to compile the Q&A roster.

  • Your first question comes from Dan Cohen of Bank of America Securities.

  • Hi, guys.

  • It's Dana.

  • Laura, on the gross margin, can you give us a sense of decline in the quarter, how much was contributed to merchandising margins versus deleveraging.

  • Any percentage.

  • And then in terms of sourcing costs at IMU, Roger, give us a sense of what is IMU and what you see for spring of next year?

  • - Pres, Director and CMO

  • We think it will continue to increase.

  • Many of the countries throughout Asia are still being reduced.

  • We feel that will benefit us.

  • - CFO

  • And on your first question regarding rent deleveraging versus markdowns, it was half and half, the impact.

  • Thank you.

  • Operator

  • Your next question comes from Jeff Klinefelter with Piper Jaffray.

  • A couple of questions.

  • First of all in terms of November comps, 3-4 points of pressure, any guidance where comps should come in for November and December and on the denim, Roger, it sounds very encouraging that that's becoming a key destination in the bottoms business important to that traffic.

  • Wondering if you could characterize a little bit year over year in terms of the pricing structure of the denim in men's and women's and characterize it how it's increased in prominence?

  • - CFO

  • Jeff, on the comps what we are looking at is flat to negative single digits.

  • Okay.

  • - Pres, Director and CMO

  • Jeff, on the denim equation, as you know I believe strongly we needed to be a denim destination about three years ago and we've been working on that and it has continued to improve each and every year.

  • These comps that we are experiencing now are very important to the overall business.

  • As you suggested when you start to really build a bottoms business, you build a repeat customer.

  • As you see in our units and our transactions as relates to market share, that continues to grow for us so we are really pleased.

  • And generally the pricing is about the same as last year?

  • Have you changed that mix at all?

  • - Pres, Director and CMO

  • No, the pricing is relatively similar and the number of choices has slightly increased.

  • Thank you.

  • Operator

  • Your next question comes from Robbie Ohems with Morgan Stanley.

  • Thanks.

  • I was hoping you could talk more about the average transaction size expectations going forth.

  • It was interesting about the mixed impact you're seeing in underwear accessories, how does that play out in the fourth quarter and the first half of next year.

  • With that can you talk about promotional plans for the fourth quarter as well.

  • Thanks.

  • - Pres, Director and CMO

  • Yes, the transaction size, we are getting more units her transaction but you see the average unit retail is down.

  • So the transactions are running down as a dollar amount probably 4-5%.

  • Obviously you never know in this business where it will take you.

  • We'll really pleased with the way holiday looks.

  • I don't have that crystal ball, Robbie, to know where it will come out.

  • I think we have a shot of coming out flat to last year.

  • And in terms of how you're planning promotional activity for the fourth quarter versus the way you guys were operating last year?

  • - Pres, Director and CMO

  • Right now not planning it to be stronger than last year.

  • Obviously we are -- we'll be involved in the competitive nature of the industry.

  • We'll have to watch it.

  • We think we have the proper assortment and we feel good about our positioning and price points.

  • If you visited the stores in the malls, you'd call and tell us how good we looked.

  • And, Roger, any change in price points and key categories like sweaters versus what you guys were doing last year?

  • - Pres, Director and CMO

  • We think on the women's side we'll be able to end up higher based on the sweaters being so good.

  • On the men's side it's very competitive and without all of the newness that's necessary and the trend not being there will be less than last year.

  • Great.

  • Thanks, a lot.

  • Operator

  • Next question from Janet Coffenbarch from JJK Research.

  • Just a couple of questions.

  • Laura, nice improvement on the SG&A line.

  • Wondering what you're looking at in the fourth quarter.

  • Say comps are flattish.

  • Can you get that same level of improvement or even better?

  • - CFO

  • I think we can do better.

  • We are projecting now in excess of the 40 basis points we saw in the third quarter.

  • And are you thinking comps better in December than November?

  • - CFO

  • Yes.

  • Maybe a positive comp in December.

  • - CFO

  • We certainly hope so.

  • Okay.

  • And the advertising spend year over year for the fourth quarter?

  • - CFO

  • It was flat to last year.

  • And Roger, can you talk about the men's business?

  • Other trends you can talk about and talk about the direction for spring then men's, please?

  • - Pres, Director and CMO

  • All of us in this industry on the men's side are experiencing men's business somewhat challenging and as you know, this is the first year while it's been a three year hiatus, this is the first year in men's we are experiencing it.

  • We like to think we'll be out of it in spring.

  • We have identified total new looks that we are pursuing.

  • When we set spring which we set on December 26, you'll see it.

  • You won't have to wait past that point and we'll know whether we are right or wrong.

  • For the moment denim is strong.

  • The graphic and fleece business is very good.

  • Thanks, very much.

  • Operator

  • Next question comes from Lee Backus with Buckingham Research.

  • First question, Laura, can you give us a sense of components or mix of inventory versus last year, how much fall versus new holiday of goods in the mix this year versus last?

  • - COO, Director

  • As you know we run current and most of the merchandise that we move into holiday with has been bought for the holiday season.

  • All of the fall merchandise that was not planned for holidays sits in the back fixtures of the store.

  • - Pres, Director and CMO

  • We're always current and clean.

  • How much you do have in the back fixtures this year versus last year?

  • - Pres, Director and CMO

  • Quite similar.

  • Also, Roger, could you talk about what you see out there for holiday more from a pricing issue to your competitors.

  • Have they lowered prices?

  • More promotional?

  • - Pres, Director and CMO

  • Lee, it's a bit too early to make that call.

  • Give me a call this week after I walk the malls a few days before Thanksgiving I'll give you my observations.

  • Thank you.

  • Operator

  • Next question comes from Marsha Aarons with Specific Growth Equity.

  • Can you talk about the design in merchandising.

  • Anything you are doing to change what they are doing or how they are doing it in response to what's happened over the last year and talk about the team at Bluenotes as well?

  • - Pres, Director and CMO

  • We are pleased with all of the changes we've made on the women's side as I indicated to you a couple of conferences ago and that is just working terrific.

  • Women's products for holiday looks great and doing very well.

  • The press releases on the transspring line which they all have samples is the best we ever heard.

  • We love the way it looks.

  • On the men's side, we are making a few changes.

  • Always must make yourself better.

  • And in Bluenotes, we are doing the same, making a few changes.

  • Anything you want to talk about in terms of changes?

  • - Pres, Director and CMO

  • Nope.

  • Thanks.

  • Good luck this holiday.

  • - Pres, Director and CMO

  • Thank you.

  • Operator

  • Next question comes from Joseph Teklits from Wachovia Securities.

  • Thanks and good morning.

  • First, Roger, you gave us a comp for women's for the quarter.

  • You said men's was difficult.

  • I wonder if you could quantify that.

  • - Pres, Director and CMO

  • Men's was down low double-digits.

  • And also the 15% per square foot inventory increased for basically spring.

  • Can you talk about the shelf life of the produces you -- products you mentioned, long-sleeve graphics and if the traffic doesn't show up, let's say, what's the lead time to when you could start to trim future inventory flows to offset impact and when would you have to make that decision to trim future inventory flows and be more promotional.

  • - Pres, Director and CMO

  • As you know, Joe, we are careful on inventories.

  • Inventories are an asset when they are right.

  • We are cautious all of the time.

  • With that said the two categories that sportswear will be flat to less than last year all categories with the exception of denim and graphic-Ts.

  • Graphic-Ts was a great business for us.

  • During January and February we were scrambling.

  • We were pretty much out of it and same on the denim side.

  • Just to be in presentation position to do the volume, we need to increase the levels in denim and graphics.

  • To us we see it as no risk.

  • Operator

  • Next question from Charlie Siegel with Sigma Capital.

  • Hey, guys.

  • Great job.

  • You mentioned that men's seems to be improving.

  • See if that business is now comping positive and what's driving that?

  • And I just had another quick question for you.

  • - Pres, Director and CMO

  • As you know, we don't talk about the businesses in the course of a month, Charlie, but there's been a dramatic improvement from where men's was to where it is at this point in time.

  • Once again, one never knows where it will go.

  • And just from the recent assortment?

  • - Pres, Director and CMO

  • That's correct.

  • And lastly, I was just wondering, I know everybody is so focused on holiday rightfully so, I was wondering if you could talk about EBIT margin targets thinking about it for '03.

  • - CFO

  • Hold on just a second.

  • Why don't we -- well, clearly better than this year.

  • But I don't have a full forecast with me.

  • I was using about 12-13%.

  • - CFO

  • Yes, that's well within our target.

  • Okay.

  • Operator

  • Next question comes from Laura Levinson with SG Cowan.

  • Two quick questions.

  • I know you felt you had all the inventory you needed in advance of Thanksgiving and all the delays from the west port didn't effect you.

  • What are the measures you took to get the product here in time and second I wonder if you could comment on your plans and expectations for the gift card business this year versus last year and any changes in the way you are promoting that business.

  • Thanks, very much.

  • - Pres, Director and CMO

  • On the dock strike, the impact is somewhere between $3-4.5 million and we don't have the exact amount just yet.

  • We felt, obviously, it was very important we have the merchandise.

  • Our logistical departments did a great job and we'll have everything we want just prior to Thanksgiving.

  • That impact was between $3-4.5 million.

  • Your second question?

  • With respect to the gift certificate and gift card business, just curious since you are driving the business as a gift destination, any plans you've made in how you are promoting that offer and what your plans are in terms of growth opportunity from the gift business?

  • - Pres, Director and CMO

  • It's a very important business for us and let Michael Leedy chat on that for a moment.

  • It was our number one item last year.

  • We created a new fixture for the gift card.

  • One fixture last year, two fixtures this year and on the west side much higher profile.

  • We're expecting those changes to drive the business.

  • Does that make any suggestions where the flow of sales should come in the quarter since those won't get recognized until they are redeemed?

  • - Pres, Director and CMO

  • You know that last week, the week for us after Christmas continues to grow and grow and grow and we expect that will happen this year as well.

  • - CFO

  • The redemptions follow the trend of last year, be a higher number.

  • Great.

  • Thank you.

  • Operator

  • Next question comes from Travis Bell with RBC Capital Markets.

  • Thanks for taking my call.

  • Could you please remind me of the comparisons of men's in Q4?

  • - Pres, Director and CMO

  • What was the comp last year in the fourth quarter?

  • - CFO

  • For men's? [ pause ]

  • - Pres, Director and CMO

  • We'll have to get back to you on that.

  • Okay.

  • Thank you.

  • Operator

  • Next question comes from Richard Jaffey with UBS Warburg.

  • This is Bridget's sister, Richard.

  • - Pres, Director and CMO

  • Hi, Richard.

  • That explains why your women's business is so strong right there.

  • Promotional initiatives for the fourth quarter, you talked about one mailer in place.

  • Richard, hi.

  • It's Michael Leedy.

  • Our catalog which is one of our brands.

  • You there?

  • Richard, can you hear me?

  • Yeah, no problem.

  • Go ahead.

  • First of all, the catalog which is one of our brand pieces at this point, we are extremely pleased with it.

  • It is outperforming last year.

  • What I would tell you is overall we are not planning a higher level of promotional activity.

  • We are anniversarying what we did in the past.

  • We are making strategic changes from the way we are doing it and pretty much across the board.

  • A question for Roger on the inventory buildup.

  • You've operated a lean business and seems like a big commitment with denim and T's which is a longer life, what's the other half of the buildup or increase year-over-over?

  • - Pres, Director and CMO

  • Actually, it's not.

  • Other than the denim and the graphics, the inventory will be flat to less, Richard.

  • Okay.

  • And then I guess the initial markup, is the strength really coming out of better sourcing or if you could take us through what's going on there?

  • - Pres, Director and CMO

  • It's coming -- well, initially it's coming through better sourcing, better costing and the product more right, frankly, than last year at this point in time.

  • Okay.

  • That's it.

  • Thanks, very much.

  • Operator

  • Next question comes from Kimberly Greenberger with Lehman Brothers.

  • Great.

  • Thank you.

  • Good morning.

  • Roger, how do you see the competitiveness within the denim category and as Gap starts to show improvement, does that mean it will be a better rival and if you could comment on the men's fair-leg style.

  • You identified that as an emerging trend in the second quarter call.

  • Any news on that and a follow-up on Bluenotes.

  • - Pres, Director and CMO

  • On the first question, obviously we expect our competition to as we do get better all of the time.

  • And we think we do likewise and hopefully we can keep the spread.

  • The Gap is a different lifestyle at this point than American Eagle.

  • In our demographics, we think based on all our information is that we dominate and this denim business for us running at this rate is very powerful and we think we can continue that and probably grow it.

  • Now your second question?

  • Just the men's flair-leg denim plant.

  • You identified that as a potential driver on your second quarter conference call.

  • Any update how that is doing?

  • - Pres, Director and CMO

  • It's doing nicely.

  • Okay.

  • And then just a follow-up on Bluenotes, can you comment whether Bluenotes is going to be accretive or dilutive and can you remind us what the impact was in 2001 and at this point, is Bluenotes free cash flow positive?

  • - CFO

  • Okay.

  • This is Laura, Kimberly.

  • It will be dilutive for this year, and hopefully not for next year.

  • In terms of cash flow, it's basically neutral.

  • Thanks, Laura.

  • Operator

  • Next question comes from Dorothy Slater from CIBC World Markets.

  • Thanks and good morning, everyone.

  • Can you tell me what women's ended up as a percent of sales in the third quarter and also, Roger, you talked about how key women's sweaters are in the fourth quarter.

  • What they can represent as a percent of sales or what they historically represented.

  • And, finally, if you could give more color on the inventory allocation strategies which have been helpful to you in this quarter, what can we look forward to going forward.

  • And then last but not least, just a question for Laura, is the cost or the extra cost you incurred because of the west coast port situation, is that included in your estimation that we should see leverage in SG&A in the fourth quarter?

  • Thank you.

  • - Pres, Director and CMO

  • The women's business has grown from 52% of the business, Dorothy, to 57%.

  • I don't want to give the percentage though we have it on women's sweater but it is the single largest category of volume based on sales and based on our plan, and we're really delighted it's doing what it's doing.

  • - CFO

  • On the cost due to dock strike, the cost for us would be included in the gross margins and we're estimating and it is included in what we previously forecast, so we're thinking that the costs are going to be in the range of 2-3 million for fourth quarter.

  • Okay.

  • - CFO

  • And for Travis if you're listening regarding your question, the men's comp for fourth quarter last year was negative low single digit.

  • Operator

  • Next question comes from Richard Baum of Credit Suisse First Boston.

  • Good morning, everybody.

  • - Pres, Director and CMO

  • Hi, Richard.

  • This question for Roger.

  • You talked a lot about sweaters and denim.

  • Could you talk about some of the other categories.

  • They may not be as important but outerwear accessories, other tops besides sweaters and nondenim bottoms.

  • In terms of what you saw in the third quarter, what your expectations are in the fourth quarter and also as regards men's versus women's.

  • Thank you.

  • - Pres, Director and CMO

  • Right.

  • In most categories of women's were all positive.

  • Pant business, skirt business, shirt business and accessory businesses.

  • Outerwear depending on when it's cold we do well and when it's warm, we are soft.

  • On the men's side, bright spots in the accessory businesses, active businesses, fleece businesses and in the denim business.

  • And how about men's -- you were fair to call out outer wear in women's is weak.

  • What categories have been underperforming on the men's side?

  • - Pres, Director and CMO

  • Well, other than fleece and denim and active and some accessory areas, the performance is not where we want it to be.

  • And which categories are doing the worst?

  • And what's your explanation for why they are doing so poorly?

  • - Pres, Director and CMO

  • Well, the casual pant business is very difficult.

  • There is no new trend there and you don't want to put inventory in a place where there is no new trend.

  • On the plus side, we don't have heavy inventories and the supplies are fine.

  • Anything else?

  • Any other categories like casual bottom?

  • - Pres, Director and CMO

  • No, no, nope.

  • That's what I addressed was the casual bottoms.

  • And in women's, one, let's call it low light instead of highlight on the category side or women's good across the board?

  • - Pres, Director and CMO

  • Women's was good across the board.

  • Okay.

  • Thank you.

  • Operator

  • Next question comes from Liz Don with Prudential.

  • Hello?

  • - Pres, Director and CMO

  • Hi, Liz.

  • Hi.

  • Just a couple of quick questions just to classify your flat to negative single comp side for November or for the quarter?

  • - CFO

  • November.

  • November.

  • And are you prepared to share guidance for the quarter?

  • - CFO

  • I think it's a little bit early.

  • Let's focus on November for now.

  • Okay.

  • And then did the balance of the cost for the fourth fall into the third quarter because you said it was $2-3 million?

  • - CFO

  • Yes, it fell into October in third quarter.

  • - Pres, Director and CMO

  • Total impact as I said would be between 3-4.5 million.

  • Some of it was still in the third and 2-3 in the fourth quarter.

  • Okay.

  • And then just finally, should we take -- does it indicate anything in your get together catalog there was a little bit of markdown, initial like taking a sweater from 39 to 29 and I didn't notice that in last year's catalog.

  • Can we take that to indicate anything or just a different strategy?

  • - Pres, Director and CMO

  • No, totally planned.

  • Thanks.

  • Good job.

  • Operator

  • Your next question comes from May Lee Clark with Senaca Capital.

  • Hi, most of my questions have been answered.

  • Can you give us guidance for the fourth?

  • - CFO

  • I'm sorry?

  • Shares outstanding for the fourth quarter?

  • - CFO

  • Sure.

  • Just a second. [ pause ] At the end of the fourth 72,376,000.

  • Thanks.

  • Operator

  • Next question comes from Michael Novack with Frontier Capital.

  • What do you expect the growth rate to be in SG&A dollars next year when you look at your budget?

  • - CFO

  • Hold on one second, please.

  • In dollars.

  • I have to calculate it.

  • Give me one second.

  • Just a dollar amount, if you want.

  • - CFO

  • You got to earn your keep here. [ pause ] Very low.

  • In the neighborhood of 3-5%.

  • Great.

  • And then second question, the share repurchase.

  • I didn't hear the number.

  • Did you say 683,000 shares repurchased?

  • - CFO

  • 663.

  • And are you still active in the share repurchase and do you intend to be and if not what else do you intend to do with your cash flows?

  • - CFO

  • Good question.

  • Right now we're not in the market but as we noted we have over 880,000 shares left in our authorization to repurchase.

  • Clearly we are continuing to build stores.

  • We are renovating 60 stores.

  • Both our new stores have a first year return of around 60% or renovations first year return of 40%.

  • We think our stores are a good investment of our capital.

  • But that's in your Cap Ex budget of $80-90 million next year.

  • - CFO

  • Yeah.

  • You're not going to increase your square footage growth rate.

  • - CFO

  • No, we've given guidance on that.

  • You're still going to throw off a lot of excess cash.

  • - CFO

  • Yes, we will.

  • What was the average price you repurchased your shares at in the quarter?

  • - CFO

  • Around 15.28.

  • Operator

  • Next question comes from Dana Kelsey with Bear Stearns.

  • Can you talk about the spring and as you move forward, the flow of fashion or basic into the assortment, any changes into the way that's done and how you are looking at this upcoming spring season.

  • Thank you.

  • - Pres, Director and CMO

  • Dana, we have a process in place that allows us to deliver ten fresh floor sets a year might say ten Broadway shows a year.

  • Even in difficult times, our net profit is a pretty damn good number even though we'd like it to be higher.

  • Even when everything works well and the customers are out there.

  • I think we're the only ones that deliver fresh floor sets and it works well for us.

  • We don't have plans to change that.

  • With that being said, we continue to refine it to be even faster and to be able to have more of the right fashion merchandise in a shorter period of time.

  • And that we continue to do.

  • And the balance between fashion and basic, how do you view the assortment?

  • - Pres, Director and CMO

  • We know as a company we have to be as a leader now.

  • We are no longer the follower.

  • We believe we're the dominant lifestyle brand in this age group and we want to be on fax trend.

  • We have all of the processes in place to do just that.

  • We think our holiday assortment is the most current, the freshest and the most right on the women's side of the business.

  • When you see the trans-spring set, you'll say the same thing.

  • When you see spring you'll feel that way as well.

  • We think we are where we want to be and have the right processes in place.

  • We, quite frankly, have proven it.

  • Thank you.

  • Operator

  • Next question comes from Todd Slater with Lazard.

  • Good morning, can you hear me?

  • - CFO

  • Yes, Todd.

  • Most of my questions have been answered.

  • I just have one -- [ Inaudible ].

  • If you look across the industry, women's businesses have obviously been outperforming and you see a lot of companies moving to increase their women's mix.

  • Is there limits that you will not go beyond in women's or will you go where the business kind of takes you?

  • - Pres, Director and CMO

  • Right now at 57%, Todd.

  • Obviously, you know, I guess you look to the industry and take it up to 65 and at that point you have to decide whether you want it to go higher or not.

  • We'll make that determination and let you know.

  • You think 65 is about your limit?

  • - Pres, Director and CMO

  • As I sit here today 65%.

  • Thanks.

  • Operator

  • Next question comes from Ryan Tunic with JP Morgan.

  • Just three questions.

  • First one is AE Canada.

  • Can you comment on where you are as far as profitability and the EBIT margin relative your plans?

  • - CFO

  • We are very pleased with the results in Canada the new stores are opening up at a higher percentage than the U.S.

  • The productivity we caught on as a brand much more quickly than planned.

  • The EBIT margins are not yet at the U.S. but closing in and by next year should be very, very close.

  • Very close.

  • Okay.

  • The second question, as far as new growth lag, sounds like it's been pushed out from this year, if the business continues to trend at this rate, do you think we could hear about something next year?

  • - Pres, Director and CMO

  • I sure hope so.

  • Okay.

  • And obviously no comments again on what that could be.

  • - Pres, Director and CMO

  • That's correct.

  • And lastly as far as your new store growth for next year, can you break down the percentage of A, B, and C malls you'll be opening?

  • - CFO

  • The breakdown, Brian, is very similar in terms of A, B and C next year.

  • Just use this year's breakdown.

  • And do you have that?

  • - CFO

  • Yeah.

  • Hold on.

  • In A was 40%, Bs 50% and Cs, 10%.

  • And could Jim comment on what he's seeing on the rent side out there today?

  • - COO, Director

  • Actually it's been very competitive from the retailer for a change.

  • Our rents for 2002 are less than last year at a dollar per square foot.

  • Looking at anywhere between 5-10%.

  • - CFO

  • Lower.

  • Per square foot.

  • Terrific.

  • Thanks, very much.

  • - CFO

  • One more question, Mandy?

  • Operator

  • Yes, your final questions comes from a follow-up question from Kimberly Greenberger with Lehman Brothers.

  • Just a follow-up question for Jim.

  • Jim, can you talk about the total store potential for AE and the U.S. and how you view the potential for AE in Canada and if you have color around what parameters you use to define A, B and C malls.

  • That's.

  • - COO, Director

  • Well, Kimberly, for American Eagle U.S., based on our latest looks, probably around 800-850 stores and that mix would change somewhat from shopping malls to more lifestyle and urban centers.

  • The New York store is going to be an indicator to us whether we can perform adequately in a city or urban market.

  • Lifestyle centers we are in now, we are 17-18 and performance is similar to our mall stores. 800-850.

  • If the urban stores perform hopefully to where we think they could perform, could be 900 stores.

  • As far as AE Canada, we'll max out at 85 stores.

  • As far as a breakdown on how we look at A, B and C based on a dollar per square foot, A's are $350 or greater, C's run 275-350 and Cs are $275 a square foot.

  • Great, thanks, Jim.

  • - COO, Director

  • You're welcome.

  • - CFO

  • Thank you for your participation today and we look forward to talking to you soon.

  • Thank you.

  • Operator

  • This concludes today's American Eagle Outfitters third quarter 2002 earnings results conference call.

  • You may now disconnect.