American Eagle Outfitters Inc (AEO) 2002 Q4 法說會逐字稿

Good morning, my name is Summer and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the American Eagle fourth quarter 2002 earnings results conference.

All lines have been placed on mute to prevent any 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, simply press star, then the number one or your telephone key pad.

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

Thank you.

I would now like to turn the call over to Mr. James O'Donnell, Co-Chief Executive Officer.

You may begin the conference.

Thank you, Summer.

Good morning, everyone.

This is Jim O'Donnell.

Other participants today include Roger Markfield and Laura Weil.

Hopefully everyone has a copy of the press release of our fourth quarter results that was e-mailed out this a.m. and is available on our web site, ae.com.

If anyone needs a copy please call Cindy Jones at 724-779-5251.

Before we begin, I need to remind everyone that during this conference call, members of management will make certain forward-looking statements, based upon current information which represents the company's current expectations or beliefs.

We caution investors that the results actually realized may differ materially from those expectations or beliefs.

Based on the risk factors described in our quarterly and annual report filed with the SEC.

We are clearly disappointed by our fourth quarter financial performance.

Which was well below our goals and expectations.

As a company, we are absolutely committed to achieving better performance in 2003.

We have significant opportunities for improved merchandise margins, and we will continue to control our SG&A expense.

Additionally, our Bluenotes division now has the right leadership in place where a number of changes and execution are under way.

We expect this to lead to performance improvements in the latter half of this year.

Despite the overall challenges of the fourth quarter, there were a number of successes.

Our cost control initiatives led to a decline in SG&A dollars.

Enabling us to leverage our expense.

And as I said, this will be an ongoing initiative in 2003.

Our store payroll productivity improved in the fourth quarter but a 13% increase in units sold per hour worked.

And our U.S. distribution operation continued to achieve productivity gains with totaling the processing our cost per unit dropping 33% in the fourth quarter, and declining 15% for the entire year.

Our sunbelt product allocation strategy has been very successful.

Leading to higher sales productivity in our southern and West Coast stores.

We believe there are tremendous opportunities for additional initiatives including regional size profiling combined with indexing of store selling profiles.

Turning to real estate.

In 2002, we opened 69 stores and remodeled 38 American Eagle stores in the U.S.

Growing our total square footage by 13.8% from 2001.

Of these openings, 36 stores were in A malls, 26 were in B malls and 7 in C malls.

And by region, 35 stores were added in the west, 19 in the southeast, 6 in the northeast, 8 in the midwest, and one in the mid-Atlantic region.

And we also closed four stores ending the year with 697 total U.S. locations.

Our new store performance is quite good.

New stores are achieving roughly 80% of our mature store base.

We continue to outperform in newer markets such as California where our comps have consistently been well above the chain average.

We remain pleased with our American Eagle Canadian stores.

Sales productivity remains high and the operating margins continue to improve.

This year, we opened 10 American Eagle stores in Canada, ending the year with a total of 56 stores.

Our initial plan for fiscal 2003 calls for 50 new U.S.

AE stores and 10 new AE stores in Canada, leading to 11% square footage growth.

Remodeling.

Our remodeling program is based on the fact that we are going to remodel older stores, will become a greater focus in 2003 with anywhere from 60 to 70 store renovations planned.

The fact is, we perform significantly better in our updated new store format and we have a number of older stores that need to be upgraded.

The majority of remodels call for a significantly larger store to accommodate our new product categories and generally we upgrade the store location within the mall.

This strategic initiative has led to improved store performance.

Now here is Roger.

Thank, Jim.

Good morning.

As Jim indicated, we are not pleased with our fourth quarter financial results.

But there's ongoing encouraging news in our women's business, which I'll get to in a minute.

The challenges we encountered in the fourth quarter stem mostly from our men's business.

Due to a tough environment, and the lack of a new fashion trend.

Reacting to that, we increased our promotions, which significantly impacted our merchandise margins.

Comps in most men's categories were down from last year, driven by a lower average unit retail price.

However, there were a few positive exceptions.

Including men's denim, which was positive high single digits, and graphic T-shirts which comped in the mid-single digits during the quarter.

Now turning to fourth quarter women's.

We were very pleased with the performance of our women's business.

The momentum that was created when we refocused our efforts towards fashion for the college-age woman early in the fall season continued through holiday.

Our fall and holiday assortments were fashion right, and strongly differentiated in the marketplace.

Fourth quarter women's comps increased in the mid-single digits.

Our most important category was women's sweaters, which comped in the high single digits over last year.

Other strong areas were women's graphic T-shirts which increased in the mid-30s and denim and woven shirts both comping in the positive high teens.

Underwear and personal care items were also very strong.

Our sales metrics reflected the highly promotional environment during the fourth quarter, with the average unit retail price dropping in the mid teens, compared to last year.

Although the decline in the average price was disappointing, it's important to note that we still gained market share.

With the number of transactions per store increasing nearly 1%, our unit volume per store increased in the low teens.

And the units sold to transaction also rose in the low teens.

As we have stated, we are committed to providing the best fashion at value to our 20-year-old target customer.

That means being fasted to fashion and very nimble in our process.

Initiatives that we are executing successfully in our women's business.

We believe that we are very much on trend for spring and summer.

Exciting new fashion trends are emerging, which mesh perfectly with the American Eagle lifestyle.

Regarding our men's spring business, while we see areas of improvement and believe our spring line is fresh and fashion right, it appears that overall demand for men's apparel will remain soft.

Therefore, we have planned this business down to last year in the first half of this year.

Although we are excited about our spring and summer assortments and our prospects for the entire year, I will tell you, February has been difficult.

Cold weather, snowstorms and the high terror alert have dampened mall traffic, particularly in our core regions.

As we move through spring, we do expect business to improve as weather warms and our customers get ready for spring break.

Our spring two floor set arrives in stores tomorrow morning.

Our year end inventory position is in line with our plan.

Total U.S. inventories per foot are up 23%, compared to a 10% decline at the end of last year.

All of the increases in spring and year-round categories.

With fall and holiday inventory down compared to last year.

This year we have taken earlier receipts of spring goods, and as we discussed previously, we have made incremental investments in denim and graphic T-shirts.

These two categories have been very strong and important to the continued growth of the American Eagle brand.

Our E commerce business continues its impressive steady improvement marking 13 straight quarters of increased sales.

AE.com fourth quarter net sales rose 38% over last year's growth of 56%.

User sessions continue to rise up 21% over the same quarter last year.

AE.com is an increasingly valuable and profitable component of our overall business.

Bluenotes.

Without question it was a very difficult quarter.

As I have said before, repositioning a brand does not happen overnight.

Importantly, we are committed to the brand and strongly believe in both the direction we are taking and the image we are shaping for it.

I'm very happy now to have Fred Grover leading this business.

Fred is a seasoned, skilled and talented merchant who worked closely with me on the transition of the AE brand and has been instrumental in the company's growth over the past eight years.

I'm confident that with Fred's leadership the performance of Bluenotes will improve significantly in the latter half of 2003.

To sum it up, although 2002 did not meet our expectations, there are several positives to take away.

We continued to gain market share and build the American Eagle brand.

And our AE brand is now the second favorite brand among teens according to Teen Research Unlimited.

We continue to dominate in the denim category.

We refocused the American Eagle business to address our 20-year-old target customer, an initiative that is really paying off in our women's business.

And importantly, we ended the year with an excellent balance sheet, and $240 million in cash.

Now, as we enter 2003, we have significant opportunities to improve our financial performance.

We are committed to improving our margins, through a better mix of average unit retail price and transactional volume.

We will do that by being trend right, fashion right and fast to market.

We have made the investment in design and have a strong process in place.

And the talented organization behind it all.

We know we can execute better than we have and we will.

In the near term, we are adjusting our business plan to reflect the softness in men's.

And we are increasing our flexibility by leaving more inventory dollars available and the long term plan hasn't changed.

Improving our process, our distinctive AE interpretation of fashion trends, our inventory fine tuning with the ultimate goal of returning to continued increased profitability.

Now, here is Laura.

Thank you, Roger.

Good morning, everyone.

Total consolidated sales for the fourth quarter rose 5.9% reaching a record $491.6 million dollars, compared to $464.3 million dollars last year.

Fourth quarter comparable store sales for the AE brand declined 3% compared to a comp decline of 2.1% in the fourth quarter last year.

Consolidated same store sales which include both American Eagle and Bluenotes stores declined 4.6%.

Our consolidated gross margins, deleveraged by 450 basis points from 40.5% to 35.9% in the fourth quarter due primarily to lower merchandise margins and the deleveraging of buying, occupancy, and warehousing costs.

By division, AE U.S. and Bluenotes contributed to the declining gross margins while AE Canada had a positive impact.

The U.S. merchandise margin was impacted primarily by higher markdowns and increased freight expense stemming from the West Coast dock strike, partially offset by an improved mark-on.

Within buying, occupancy and warehousing costs, rent and utilities deleveraged, due to our negative comp in the fourth quarter.

We are very pleased with the expense reduction initiative which enabled us to leverage SG&A by 200 basis points despite the negative comp.

As a precent to sales, the rate declined to 20.7%, which is our lowest rate to sales since the fourth quarter of 1997.

SG&A dollars declined $3.9 million dollars or 4% in the quarter on a 13% increase in square footage.

SG&A per square foot decreased 15% and SG&A for average store declined 12% from the fourth quarter last year.

The decline in SG&A as a percent to sales was driven primarily by the leveraging of salary, advertising expense, leasing costs, supplies, and services purchased, all of which were below last year's levels in terms of dollars.

Depreciation and amortization expense as a percent to sales was flat at 2.7%.

Other income in the fourth quarter was $1.4 million dollars, compared to $874,000 last year.

The increase is due primarily to higher investment income, due to higher cash balances.

Net income for the quarter was $38.9 million, a net margin of 7.9%, compared to $43.9 million dollars last year.

And diluted earnings per share were 54 cents compared to 60 cents per diluted share last year.

Our balance sheet continues to be very strong.

Cash and short-term investments increased to $241.6 million dollars from $225.5 million at the end of fiscal 2001.

As Roger discussed, our inventory is clean, with the increase in spring and year-round categories.

As we look forward, we are projecting inventory at the end of the first quarter to be up roughly 12% on a 6% decline at the end of the first quarter last year.

The vast majority of the increase will be in denim and graphic T-shirts.

By the end of the second quarter, we are currently projecting inventory per square foot to be flat.

Capital expenditures for the quarter were $11 million, bringing our full-year total to $61 million, which primarily related to our new and remodeled U.S. stores.

For 2003, our CAPEX plan is expected to be in the range of approximately 90 to $100 million dollars.

During the quarter, we repurchased 140,000 shares of our common stock.

This brings our full year total to 1.1 million shares, which were purchased at an average cost of $15.65.

Approximately 736,000 shares remain authorized for repurchase.

Now regarding our outlook.

As Roger indicated, our spring and summer assortments are on trend and fashion right.

And we expect continued momentum in our women's business.

Our men's business is planned conservatively in light of the industry-wide softness.

With that said, February has been a challenging month and we are below plan.

Mall traffic has been slow likely due to cold weather, snow storms, and the high terror alert.

Because it is still early in the quarter, with March and April representing roughly 75% of first quarter sales, we do not have visibility and therefore we are not commenting on first quarter earnings estimates.

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

At this time, I would like to remind everyone, in order to ask a question, please press star one on your telephone key pad.

The first question comes from Dana Cohen of Banc of America Securities.

Hi, good morning, all.

Couple questions.

Laura, the first is on the 450 basis points of gross margin decline, what is the contribution from the deleveraging of buying occupancy?

Good question.

It was approximately 20%.

Okay.

And then what was the -- you gave the comp for women's for the quarter.

What was the comp for men's?

Roger, do you have that?

Comp for men's was done in the mid-single digits.

And then lastly, --

I'm sorry, the comp was down -- about 12%.

Okay.

That sounds about right.

On the inventories, which are up a bit more than I thought, can you just give us the breakdown of how much is early receipts, versus some of these investments, and then, you know, obviously you know with February coming out light, it's not a big piece, but you know, what type of liability does it create?

The increase in inventory is predominantly in the denim and graphic T category.

Dana, if you look at -- at the end of this quarter, we will have about $33 and change on a cost basis per square foot and that would be against 30 something dollars and change last year.

That entire three dollar change is 90% of that is graphic T-shirts and denim.

And that is our commitment to staying in business in those categories.

Isn't there some portion of that is early receipts, though?

For the first, the quarter that we're in now, part of that number was early receipts, but at the end of the first quarter, no part of that would be earlier than last year.

Okay.

And then any question on the liability issue, given February.

There is no liability predicated on inventory.

Whether, you know, business would have to obviously start to churn up based on weather conditions, but based on inventory, there is no liability and the inventory is totally clean.

Great.

Thank you.

The next question comes from Jeff Klinefelter of U.S. Bancorp.

Couple quick questions, one could you give a little more clarity on the February business?

We understand that it was very, very tough the first part of this week because of the storms.

Any insight on how things were turning before the storm and how they have recovered kind of by region to get a feel for the run rate of the business and then also any updates Roger generally on the strategy.

It sounds like you're going to focus this year on a low square footage growth and a lot of remodels.

Any other thought in terms of as we go forward what the ultimate size of the AE adult business is and other growth strategies?

A lot of questions, I see if I can just give you a sense.

The entire month of February has been soft in the colder regions of the country.

Where the weather is more normalized, West Coast, Texas, and Canada being the same as last year, the business appears to be pretty decent.

Running on positive basis.

But in the core parts of the country, the cold regions, it's difficult and we actually believe we have to wait for the weather to warm up a bit.

It's much colder than last year.

The snow on the ground across the country.

Jim can talk to the renovated stores, but all of the stores as a group that we have renovated, as a group, are running positive.

And have run positive through the fourth quarter.

Thank you.

Your next question comes from Brian Tunick of J.P.

Morgan

Brian?

Anybody want Brian's question?

The question has been withdrawn.

Your next question comes from John Morris of Gerard Klauer.

Good morning, thanks.

Just a follow-up Roger to the last question.

Were you saying that business was above plan in the warm weather regions, otherwise, in February?

That's correct.

And then also, Laura, it looks like CAPEX has been increased from your previous guidance of 80 to 90 up to about 90 to 100.

Right.

Why is that?

What we have in the plan right now is -- and it's a plan.

The 90 to $100 million I think is just covering all contingencies.

We have some IT projects in there that, you know, are planned, but we may or may not go forward with.

We also have planned in there a new building to house some -- on our headquarters property.

So we may or may not complete those projects this year.

But we put that in our budget.

And just can you also quantify, in basis points, how much of the IMU was up and do you expect that to continue?

IMU was up roughly 100 basis points.

Okay.

Great.

Thanks.

And we do expect to see continued improvement in the IMU.

Okay.

Great, thanks.

Your next question comes from Lee Backus of Buckingham Research.

Yes, Roger could you update us on the breakdown of the business for last year, between men's, women's and accessories?

And your expectation for this this year?

Yes, the total breakdown of fourth quarter for ladies was about 56% of the business.

And men's ran about 39% of the business and footwear ran about 6%, Lee.

On an annualized basis, women's ran around 57.5%, men's running at 36%, footwear running at just a bit over 6%.

And we expect for the lady's business to continue to increase its market share.

Could you quantify the increase?

Well, what we think that women's can certainly move its way up to about 65% of the business.

For this year?

Not for this year but over a period of two years.

Okay.

Also, you talked about remodeling 60 to 70 stores and you, I believe Laura you said 11% square footage growth just on new stores but the remodels will increase square footage.

Could you give us a sense of total square footage growth for '03, including the remodels?

The 11%?

Is that included in the 11%?

It is, yes.

The incremental square footage that we would add on the 60 to 70 stores that we plan to remodel in the cases where we expand the store, square footage is added into that number.

Okay.

Is there any change in the planned square footage, the size of new stores?

No.

No, actually, we stepped it up, Lee, from approximately 4800 square feet and now we're up approximately about 1,000 square feet so they run around 5,800 to 6,000 on average.

Okay.

Thank you.

The next question comes from Lee Jordano of Merrill Lynch.

Hi, good morning, everyone.

Hi, Lee.

Can you give us a quick update on the lifestyle center stores that you're opening?

How many are you going to open this year and if you still feel comfortable expanding aggressively this area.

We have right now approximately 17, and so far, on the books, we have, we're going to open about five.

We'll probably, for the whole year, somewhere between 8 and 10.

Our performance is pretty much parallels new stores and shopping malls so we're pleased on average.

There is a brief learning curve that we've gone through and we think we kind of have the, you know, the formula down now as far as the tenant mix, location, and then also proximity to existing shopping malls has to be taken into consideration.

But this is the wave of the future right now, with construction costs being what they are, real estate costs and so forth where you're finding these lifestyle centers or centers without majors popping up throughout the United States.

Once confined primarily to the south and the west, but now we're finding in the midwest and the northeast that these centers are also now being put up, so my take is that it's -- the last study that I looked at, that probably there is about 50 to 75 centers that we would consider going forward.

Great.

Thanks.

Your next question comes from Todd Slater of Lazard.

Good morning.

Hi, Todd.

Hi.

You guys have done an outstanding job on reducing expenses and offsetting some of the gross margin pressure.

I'm just wondering how long think you can continue to lower SG&A in dollar terms and not lose any competitiveness.

Well, Todd, looking forward just to Q1 and Q2, we see the opportunity to reduce SG&A, not necessarily in dollars but as a rate to sales of about 50 to 100 basis points.

I think we start to anniversary some of the reductions that we made beginning in the third quarter.

So I -- we do anticipate continued savings on the expense side, versus a year ago in Q1 and Q2.

Okay.

What's the -- on a question on the renovations, for this year, compared to last year, what is the -- it sounds like you said 5800 square feet, Jim.

Yes.

What's the average percent increase of those stores, square footage increase in 2003?

How does that compare to the increases let's say in renovated stores in 2002?

The percent increase between the old to the new?

Yeah, and the space, how big are these --

The renovated stores, on average, are about 6,000 square feet.

So basically they're up probably 25% to 30%.

Okay.

So they would come out of the comp?

They come out of the comp.

All of them or some of them once they're above a certain -- What's the---

25%.

25%.

The ones that are below 25%, stay in the comp and the ones that above out will go out?

Yeah, there's probably a half a dozen that would not be expanded.

Okay.

And also could you give us a final cost on the increased shipping expenses related to the four closures for the quarter?

In basis points?

In the fourth quarter, we think that it was roughly 125 to 150 basis points.

Okay.

Margin impact.

Okay.

Great.

Thanks.

And I'm just curious about your rent expense.

I know you hired a seasoned real estate executive to help bring, you know, your expenses in line compared to some of your competitors, you know, you're increasing size of your store, you're getting some better positioning within the mall.

How is that affecting your role, real estate cost structure and what impact is your new executive having on all that?

We're approximately down about 10% in rent.

Per square foot.

Per square foot.

And the individual we brought in, Buck Sappenfeld who is a seasoned real estate, retail real estate individual who has been on both sides of the table as we say in this business, he's worked with the developers as well as with the -- with other retailers, is, to date has done a very fine job and he is surfacing property that are very desirable and the economics within those, within those properties is quite favorable to American Eagle.

We're trying to do a number of things.

We're trying to upgrade in location but also not increase our overall rent structure, as well as achieve our goals of at least 80% of our stores with tenant allowance or a combination of free rent.

Great.

And lastly, just to follow-up on John's CAPEX question about raising it about $10 million, it was -- I understand what you're looking at doing, and that sounds similar to what we already had expected to you do, is there a project or projects that you added in the last quarter that, you know, amount to about $10 million?

Yeah, that would be an estimate of the building that we would be adding to our home office complex.

Okay.

Great.

And that -- I must say, that is still very speculative.

It is a place holder right now.

I have yet to even come close to finalizing the initial plans let alone getting into the detailed drawings.

Right.

So it's just in the budget but not necessarily going to be done.

Thank you very much.

Your next question comes from Stacey Pack of Prudential.

Hi, I have a few questions.

First, did you say actually what is the comp running in February?

Did I miss that?

We didn't actually say that, Stacey.

Do you want to say it now?

We don't want to give precise information out but since February is an obvious month where we stand at this point in time, we wanted to give you a sense of the business.

What was planned?

We haven't -- we have not disclosed that.

So you don't want to say anything on that?

It's just next week when we release our February sales.

Okay.

In terms of the remodels, what are those comping versus the rest of the base?

I mean have you some that are more than a year old, correct?

Yes.

So what are those comping versus the rests of the base?

They run anywhere between a low of six depending in which year you select of the last three to as high as 19% as a group.

Okay.

And Laura, should we expect the same sort of 100 basis point improvement --

I'm sorry.

Go ahead, ask your question.

I'm sorry, Stacey.

From store [INAUDIBLE], should we expect the same level of improvement in the first half?

A bit less.

A bit less.

So could you more like 50---

Depending on the mix of the merchandise so it's somewhere under 100 but it's still an improvement.

50 to 100?

Yes.

Okay.

And then what percent of your business, Roger, you would say, I know the target is a 20-year-old, but what percent would you say is high school versus college?

Well, you know, we do market surveys and I'm going to let Michael Leedy talk to it but it's probably 50/50 at this point.

The interesting thing is when we got that market survey from True Research, which is probably the best indicator, they put as number two in terms of customers desire to shop at -- in a teen space.

And that was a 14 to 19-year-old study.

And number two, when you consider that number one was Old Navy and the size of Old Navy, we were really, we felt great about it.

We would like to -- everything we're doing at this point is clearly focused on the 20-year-old.

And clearly, we're happy with the aspirational high school customer who wants to shop in our store.

But we're determined to stay focused on the 20-year-old customer and it's working big time for us on the women's side.

Okay.

Thanks.

And then just one final question, on the advertising, what would you be spending either in dollars or basis points by quarter this year versus last?

Hopefully, flat to less than last year.

It's actually planned down with our sales plan, but right now, it looks like it's flat.

Okay.

And Roger, there's been a lot of talk about potentially discussing a new concept.

Does anyone want to say anything about the potential new concept?

It's really too early.

We're clearly looking at it, working on something, but it's too early for us to make any statements.

All right.

Thank you, good luck.

Thank you.

Your next question comes from Dorothy Lakner of CIBC World Markets.

Thanks, good morning, everyone.

Hi, Dorothy.

Could you talk a little bit more about the sun belt strategy?

You went over that quite rapidly at the beginning but I know you were talking about things that you expected to get out of that strategy this year.

Having seen higher sales productivity in the south and the west, just what -- what can that do for you in '03?

And then maybe Roger could talk a little bit more specifically about what the plan is for Bluenotes, I guess this year now that Fred is in place.

And lastly, just in terms of the marketing in '03, if there are any changes, new medium or anything new that you're doing in terms of marketing in '03.

Thanks.

As far as the sun belt, which basically encompasses our Arizona and southern California markets, it's a combination of fine tuning our merchandise mix which entails fabrication changes from -- the looks primarily -- they stay somewhat similar although there is some different styling in product.

And also it's a timing issue as to when we land the goods.

The floor sets, the timing of the floor sets are the same.

It's just that the content is somewhat different from what would be the northern and the midwestern stores.

So far, you know, as I stated, and others have stated we're very pleased with the results.

We think we are going to continue with gaining market share and improving our overall sales performance, absolutely.

I believe right now, that we -- this is just the tip of the iceberg.

We have learned a great deal over the last two-plus years that we really got behind this initiative, and thus far, our results have been quite good and if you put together the new store strategy and the remodel store strategy, you will see that the majority of our new stores are being opened in the south and in the far west.

So we're not only tweaking the merchandise but we're also improving our overall market position.

Would you say 90% of the new stores are in those territories are is it all of them?

Oh, no, no, no, no.

I would say right now we're running about half of our new stores, a little over half would be in the sun belt, which would be the south and the far west.

No, we still continue to open up about.half of our stores in the other parts of the United States.

Now on Bluenotes?

Well, Fred started today.

You know, Fred is -- the real issue here was us having the commitment to put somebody in who understood our process and has lived our process for many years.

It is a complicated process and one that works.

We made a commitment to fix this business, because it is a terrific high school strategy.

And we would like to have a high school strategy.

And we believe that all of the exposure and experience that Fred has had should work for it.

So we look forward to Fred coming back to us, living -- he's going to be living in Toronto, he will be there on a seven days, 24 hour a day basis.

On the next conference call I hope to be able to give you a little bit more detailed information.

And Michael, I think she had one other question on marketing.

Right.

Dorothy, now, with the number of innovations that we brought to the market in the past, and how quickly they were knocked off, I don't think I want to really talk about anything that is new or that is in our future.

But we have a very strong calendar tied to the merchant team, and there's some great new product that we're in sync with, a number of events planned through the spring that I think you will be pleased with.

Okay.

Great, thank you.

The next question comes from Lauren Levitan from SG Cowan.

Good morning.

Hi, Lauren.

A couple questions.

Obviously your cash balances is quite formidable and I know you commented on the increase CAPEX for this year but I'm wondering if you could give us any sense of any additional uses for that cash balance, including increasing the share repurchase activity and opportunity there, and also appetite for acquisition.

And then secondly, I'm curious if -- with respect to spring marketing, if you're -- if the timing associated with that or the timing of future merchandise flows, is it all impacted by the Easter shift, does the fact you're focusing on much more on that college student whose calendar really isn't changed that much, does that mean we won't have very many changes versus a year ago?

Thanks very much.

Lauren, I guess in terms of our cash, we had a very successful repurchase program in 2002.

It was accretive to our earnings.

And we certainly believe in -- in managing our return on equity and using our cash to its highest returns.

So we have over 700,000 shares that are still authorized.

It's an issue that we will bring up this spring.

And -- but I do think that everyone believes it was a very successful program and something that we will continue.

What else did you -- The other question was the marketing question.

That covers the cash question.

Okay.

Good.

Go ahead.

Really the calendar, is similar to a calendar we had a couple years ago and we think it's positive because of the break between college breaks and high school breaks for us so it really plays pretty well for us.

And in terms of average unit retail for the spring season, Roger, does mix alone lead you to anticipate a return to more normalized levels versus Q4, or will that shift in the AUR via function of what the promotional level ends up being?

Obviously it will be the resultant based on what the promotional activity is out there, but more than that it's really how we drive it in terms of the mix of the merchandise.

For first quarter, I suspect it will be down and I -- my plan at this point in terms of the whole strategy we have in place is you will see a slight increase hopefully taking place in the second quarter and the transactional value, the amount of the transaction, increasing as well.

And if we're successful with that, and we continue to grow the units, and the total transactions will have the benefit of all of it.

And I'm looking for that to happen in the second quarter.

And can I ask one one last question related to that?

Can you give us a sense of what percent of the business denim represented both on the men and women's side or on the total basis in Q4 versus a year ago?

All right.

I actual I will have that.

I have to find where I have it.

I will tell you what.

I'm sorry. 6% in men's and 11% in women's in the fourth quarter.

And how does that compare.

I'm assuming it was up --

It was up nicely.

Okay.

Thank you.

The next question comes from Joseph Teklits from Wachovia Securities.

Thanks, good morning.

Hi, Joe.

Hi, Laura, question on your expense reductions, you listed them dollar advertising and leasing, et cetera.

Are they in any particular order there, top to bottom?

Yeah, the biggest decrease was in salaries and incentives.

Could you break that down a little bit for us then, between management and bonuses or store level payroll?

All I can say is that the majority of the decrease was in salaries and incentives.

Okay.

But there were significant savings in controllable expense.

Where we actively reduced expense in leasing, in advertising, in services purchased, communications, and those are -- those will be continuing.

Okay.

Two other questions.

I guess for you, again, Laura, can you just break down the timing of the 50 stores in the U.S. and ten stores in Canada for us for '03?

Sure, do I have that?

It will follow probably the same --

You mean when they open?

Yeah when they open.

We opened approximately 40% of the stores in the states and in Canada in the spring and 60% open in the fall.

With fall being defined as back to school right up prior to Thanksgiving.

We pretty much hold to that year in and year out and the deals are kind of flowing that way right now.

Oh.

I have a consolidated number for Canada and the U.S. by quarter.

Okay.

10 in Q1, 19 in Q2, 25 in Q3 and 6 in Q4 for a total of 60.

Again that's a projection.

Perfect.

And then finally, last question, Jim, you said something, on a question about advertising, you said advertising could be planned down with the sales plan.

What did you mean by that?

Actually I said it.

Okay.

Well, you know, I think that it's something we have to look at.

Obviously, you know, our advertising and marketing is absolutely essential to our brand and we certainly believe in it and it's built our brand to be the number two brand among teens.

But I think that we have to look at where we have the highest return on investment and certainly there could be some discretionary areas that we would look at.

Okay.

Thanks very much.

Your next question comes from Richard Jaffe of UBS.

Thanks very much.

Roger, if I could just follow-up on the women's business versus mens and the opportunity to rebalance that or to focus on your success in women's, you had talked about an ultimate goal of 65% women's, how do you see that playing out?

How what can we expect from you this year in terms of building on the women's opportunity?

Well, obviously, Richard, you're familiar with our process.

And we have identified in women's, based on early checkouts and early sets, some really strong emerging trends for us.

Which I mentioned work within the lifestyle of American Eagle.

Based on the speed sourcing, we're now, by third week of March, we will be in position on lots of these hot items that you know drive our business.

We're holding back men's right now, based on the trend in men's, so we're taking the investment dollars that we had on hold for receipts for March, April, May and feeding them into women's and holding back on men's.

So women's will start to rise in terms of the percent to total.

How high, I'm not certain at this moment in time.

Based on what we've committed to, however, it will be rising upward, close to 60%.

That's good to hear.

I guess I'm very encouraged to hear the success in the sun belt on the -- what's obviously you know, the spring or spring summer assortment.

Keep in mind that most of the country is -- most of our stores are in the -- still in the core part of the country.

Right, but I guess my thought is if they like it in San Diego today, when it's San Diego-like up here, they should like it up here, too.

I sure would hope so.

I don't know why not, either.

But, you know, I -- there are no guarantees.

Though those are the numbers.

No, I understand.

I guess the marketing initiative has been key as Laura pointed out you can talk more specifically about a marketing initiative.

It's an obvious chance to save money to send out fewer catalogs to be less visibility.

Can you talk about initiatives and plus the expenses involved?

I'll let Michael address that.

Richard I don't want to get into the expenses specifically.

The reality is we've had a lot of success growing the brand and there are only so many magazines that we want to be in, one of the beauties of being so targeted is we don't need to keep expanding that mix.

So Roger is gesturing to me talk louder because I talk so low.

So really, you know, there are so many magazines we really want to be in.

There's only so many television shows we want to advertise on, and we're really hitting that point now, and hitting our stride and we're going to continue to maximize hitting the customers we want know and leverage that cost.

So rather than spend more just to take advantage of what you have and leverage it with new stores and hopefully more sales.

Exactly.

Correct.

We don't have to keep spending more dollars.

Just a final question on Bluenotes, obviously you have a new management team, but the repositioning, has been under way for quite some time.

Roger, if you could just take a second and talk about what's happened there, obviously a business that was based on a -- the low cost provider of jeans in the mall, to a much more fashion driven business and a clearly higher price point, if you could talk us through the thought process of where you think you will be end up in the business in terms of positioning that would be very helpful.

Obviously we didn't want it to be a jeans store, we wanted it to be a lifestyle store.

In our American Eagle up in Canada is incredibly successful and continues to be.

Probably my guess is based on our current trend, and the numbers I'm looking at, we're probably the most successful retailer up there.

And we believe that we profiled the branding strategy for this Bluenotes, in terms of a high school strategy, and we love what we've done.

And certainly, you know, I think you've been up there, Richard, I think you saw it.

And anyone who has seen it kind of likes it.

Unfortunately, it's not performing, and I've identified that they're not following the process the way it needs to be done.

As you know, this is a very sophisticated detailed process.

And I don't blame anyone, I think you have to have lived through the process to be able to execute it.

And that's why we've made the commitment of sending one of our top merchants up there to fix it.

We think the strategy is right.

We think the concept is right.

But we've done a lousy job in the execution of the process.

And I don't blame anyone.

We needed to send one of our top merchants up there to do it and that is what we expect to happen.

Roger, you don't think the narrower price points and the more narrowly focused or more fashion driven assortment is putting off some of your traditional Bluenotes customers?

Price points are coming down.

When we will see that?

Starting in the second quarter.

We'll see it in the second quarter.

Will that go back to historical levels or somewhere in between?

It will be priced between Old Navy and American Eagle.

Okay.

Any ideas that if Bluenotes is high school, American Eagle is college?

That's correct.

Thanks very much.

The next question comes from Kimberly Greenberger of Lehman Brothers.

Good morning.

Thank you.

Hi, Kimberly.

Good morning, Laura.

I have a question for each of you, if I could.

Roger, on the inventory increase, if you could talk about the split on men's versus women's you're clearly planning the men's business down.

Men's inventory is down and the entire total inventory increase is in women's.

So you're reallocating it or you've already reallocated it.

That's been done.

Okay.

Excellent.

Jim, on the new store productivity, could you just comment on -- you indicated that the new store prototype is performing better.

Clearly with a bigger box, you know, we would certainly expect I guess on a sales per store basis to see that improvement.

Can you talk about the new prototype on a sales per square foot, or four wall profitability kind of metric versus the old format?

Yeah, let me pull up the number here.

The broad based benchmark we used is the 80% or better of what we would call mature stores.

And we try to get the dollars per square foot for you.

Yeah, we run on ROI of over 50%, and we're down slightly in sales per square foot, and naturally we're up just slightly in dollars.

But the A's being the most profitable, and also the most productive, the A shops.

So the A malls are actually are on an ROI basis the most profitable?

Yes.

Okay.

And Laura, last question for you.

The accrued compensation on the balance sheet was down over $14 million.

Does that relate to the reduction that you talked about in --

Incentive complication?

Right

Yes.

Is that the entire reduction?

Pretty much.

Okay.

Great.

Thank you.

Your next question comes from Richard Baum of CSFB.

Good morning, everybody.

Hi, Richard.

Just a couple follow-ups.

Given the shortfall against plan with -- in the February business, are you going to have to take any accelerated markdowns in order to clear February receipts for the next floor set?

Not at this point.

Okay.

Keep in mind that the month of February, which has, you know, still one week to run, it only represents 23% of the entire quarter's business.

Right.

Okay.

And then secondly, just in regard to the merchandise, I noticed, we've noticed in the stores that some of the graphic T's are, to use a bad pun, getting a little more graphic, and starting to look like some of the T's that one of your competitors puts out.

And you know, I was just wondering whether you've changed your tone at all in terms of kind of being all American for American Eagle, or whether you've perhaps tied in more to the consumer who wants to, you know, purchase T's that are a little bit more riske and suggestive.

I will less Susan Miller who happens to be here answer that.

Hi, Richard.

No, we want to keep them within the brand of our licenses or the lifestyle of our brand.

We like to have fun with them.

We are catering to a 20-year-old customer, who, you know, I think likes to see them get a little bit hip and edgy but we will only take it to a certain point and we want to keep it within our brand and our lifestyle.

Okay.

I guess constantly moving target, right?

A constantly moving -- I guess so.

It's all about fashion being fresh.

But we will keep that to a small percentage of our graphic mix.

Okay.

And then just lastly, for Jim.

I know you guys are not very far down the road of this mysterious building on the headquarters location, but I'm curious as to what is, if this building is built, what is it meant to house?

Okay, that's a good question, Richard.

I think king Roger.

No, we're actually --

Roger's castle, is that right?

Right, Roger's castle.

But basically, what we're doing is.

It's a lean-to, that's all it is.

Our forecast right now has us pretty much out of space in our current facility.

And as we looked at our forecast for where we want to be out five years from now, it's rather obvious that we're going to have to do one of two things.

Either build a new facility, and/or lease space in the close proximity of our current facility.

We are actually actively reviewing both as we speak.

And we're in multiple building here in Warrendale.

We don't have all of our home office together and we would like to have the group together if possible but we're not settled on a new headquarters.

What would happen, Richard, is if we did build a new building, Roger and the merchants and the marketers would probably go to phase one, it's a two phase project, but then we would move people to Laura's point from our annexes into our now main building so our people would then just be housed in two locations.

Okay.

All of it on the campus of American Eagle.

Okay.

Great, thanks.

You're welcome.

Your next question comes from Tom Solandro of Goldman Sachs.

Good morning, two questions.

Laura, first on the SG&A comment you made I think you said 50 to 100 basis points opportunity in the first half.

Can you just clarify what kind of comp assumption you thought through in that model?

And then I have a follow-up question.

Okay.

In that particular model, it's a flat and slightly positive comp.

Okay.

Thank you.

And the second question, I guess it's a question for Michael, but just, can you guys give us a better understanding of what your experience was with the change in the money card strategy for the fourth quarter, sort of the learned and successes and failures and what maybe could change in 2003?

Tom, without getting into specifics, it's kind of the same answer I gave Dorothy.

It was positive.

We got a better result out of the money card with the changes that we made so we think it helped us in gaining market share and driving traffic.

But I wouldn't want to get into the details or the mechanics of how it worked.

So Michael you're saying that you don't necessarily feel with some of the buy one, get one-half off events going at the same time that you had a money card, that it was too much promotional activity.

I would say that, no, I don't think it was too much promotional activity, with what I know now.

Okay.

Thank you very much.

Good luck.

The next question comes from Jennifer Black of Wells Fargo.

Good morning.

Can you hear me?

Yes.

Hi, Jennifer.

Hi.

I have a couple questions.

The first question I have is, I know you said that buying and occupancy was about 20% of your gross margin.

I wanted to know what kind of a comp do you need to get leverage?

You know, we've looked at that a lot in our rent expense.

And we think it is because of the number of new stores in the mix, it is in the low single digits.

Okay.

And then my second question, you talked about, I think you were referring to the new stores were you opening around the country, as far as cold weather versus warmer weather states.

I wondered if you could give on a percentage basis those statistics.

We don't want to get into the specifics within a month, please.

It's not within a month.

I'm just talking about where the stores are located.

Yeah, I think I said, basically here is where they are.

By region, --

I'm talking about total, your total company.

The total company?

Oh, total okay.

Of the 700 we have currently --

Jennifer we may have to get back to you on that, I'm not sure we have a summary.

Okay.

Wait, hold on.

Just ballpark.

Hold on.

Okay.

Ballpark, are these new stores?

Total, about 9% of the stores are in the mid-Atlantic region, 24%, and I'm just rounding so so if it adds up to more than 100 --

That's okay.

Okay? 24% are mid west. 21% are northeast, 21% are southeast.

And 26% are west.

Okay.

And that's only in the comp store base.

Okay.

So that's -- but that would is that the total?

Oh, my goodness.

Sorry.

I was looking in another column.

It is the 697 stores at the end of the year.

That's very helpful.

Thank you very much.

The next question coming from Dawn Stoner of Pacific Growth.

Good morning, thanks.

Two questions.

First off, just wondering if you could give us any color on how the denim and graphic T categories are performing, spring season to date given that you have made bigger investments in those areas.

Very well.

Even in the cold weather markets, then, I would assume?

Very well.

Great.

And then second, just to clarify, Roger, earlier on the AUR, based on your mix and promotional plans for spring, did you say that you see them down in the first quarter and up in the second?

Up slightly in the second quarter and down in the first quarter.

Would you care to quantify the magnitude for the first quarter?

At this point I can't tell you exactly but it will be down the first and up for the second.

Thanks.

Summer, I think we have time for just one more question.

The last question comes from Lauri Brunner of RBC Capital Markets.

Thanks very much.

If we look at the spring of fiscal '02, can you talk about what was the mix of business that did you in graphic tees and denim, please.

Denim, last spring, men's and women's, was about 11% of the business.

And graphics, last year, was about 12% of the business.

Okay.

And then if we back up to Q4, can you comment on the performance of outerwear in the fourth quarter, and what was the percent of business done in outerwear and then how were your inventories going into the first quarter of this year?

Thank you.

Outerwear was just about out of the outerwear business, all of our outerwear is marked out of stock, and leaves the premise, it's gone.

And in the fourth quarter, outerwear -- I'll give you for the fall season, outerwear represented about 7% of the company's business in the fall season.

Okay?

Thank you.

Okay.

Thank you very much.

And hopefully there be better news to come.

Bye, thank you.

This concludes today's conference.

You may now disconnect.