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Operator
Good morning.
I will be your conference facilitator today.
At this time, I would like to welcome everyone to the American Eagle Outfitters first quarter earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session.
If you would like to ask a question, simply press * and the number 1 on your telephone keypad.
If you would like to withdraw the question, press the pound key.
Thank you.
Now, I would like to turn the call over to your host, Mr. James O'Donnell, CEO.
Sir, please begin.
James O'Donnell - COO, Director and Co-CEO
Thank you.
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 first quarter results e-mailed this morning and available at www.ae.com.
If anyone needs a copy, call Cindy Jones at 724-779-5251.
Before we begin, I need to remind everyone 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 realized may differ materially from those expectations or beliefs, based on the risk factors described in reports filed with the SEC.
Needless to say, the first quarter was challenging and our financial performance did not meet our goals.
The retail environment was difficult.
We believe cool weather had an impact and the war in Iraq likely affected consumer spending.
With that said, as Roger will discuss shortly, we did not execute to the level that we should have.
We are making adjustments for the fall season, which we expect to lead to better financial performance.
During the first quarter there was a wide variance in comp store in our performance by region.
Partially due to store maturity and competition, we believe weather conditions did play a role in first quarter sales.
For example, by climatic regions comps in hot stores increased in mid-single digits and warm stores declined in low single digits.
Moderate stores were down and cold stores declined in low double digits.
By geographic region, the poorest performance occurred in the Midwest and Northeast, which are our largest contributors to comp store base.
For your information, they are classified as cold and moderate weather stores.
Stores in these regions on average are older, with over half of the current store base in our old store format, which has direct affect on performance.
Thus, remodeling initiative continues to be a top priority this year with 70 renovations planned.
Once we upgrade to the new design, store performances improve.
In fact, 2002 remodels achieved sales gains in low double digit over the past two quarters and thus are exceeding our plans.
We are please wide new store sales which was nearly 90% of our mature store sales.
Of special note, our two new high-profile flagship stores in New York's Soho area and in Third Street (inaudible) Santa Monica are performing well and exceeding our expectations.
Turning to real estate.
During the first quarter we opened six locations and remodeled 12 American Eagle stores in the U.S., growing total square footage by 12.6% from the first quarter of last year.
Of the openings, five stores were in A-malls and one in a B-mall.
Four stores were added in the West and one in the Southwest and Midwest region.
We closed one store, ending with 702 total U.S. locations.
For the year, we plan to open 50 American Eagle stores in the U.S., including 18 in the second quarter, 23 in the third quarter and three in the fourth quarter.
We remain pleased with our American Eagle, Canada stores.
Sales productivity remains high and operating margin continue to improve.
During the first quarter we opened three AE stores in Canada, ending the period with 59 stores.
Now here is Roger.
Roger Markfield - President and Co-CEO
Thanks, Jim.
Good morning.
Jim said it already but it certainly bears repeating.
We are not at all pleased with our financial results.
Our spring assortment was fashion right from a merchandising and trend standpoint.
However, we carry too much inventory for what ended up to be a challenging retail environment.
Reacting to that, we took pricing action, which in turn depressed our average unit retail price and ultimately our merchandise margin.
We are tightening our inventory levels for the back half of the year and expect to end the second quarter with more conservative plan.
More on that in a moment.
For all the challenges during the quarter, I want to stress that the AE brand strength remains consistent.
Our unit volume per store rose in the mid-single digits, while transactions per average store and units sold per action increased in low single digits.
The pressure on comps was solely due to a high single-digit decline in our average why you want retail.
The men's business was most difficult as it was for much of the industry, with comps declining in low double digits.
Despite this, there was some positive exceptions, including men's denim, woven shirts and footwear.
Now women's.
Our spring fashion was trend right, with romantic military being dominant theme.
Key items were in sheer fabrics.
We had several strong selling classifications, including rapid T-shirts, sheer knit-tops, denim, military-inspired bottoms, skirt, underwear and footwear.
Our women's assortment was too broad, particularly in the top's category.
In addition to hitting the key looks, we went after high-fashion secondary looks too aggressively and the color range was too wide.
We ended up being more promotional, causing decline in average unit retail price, which drove women's comps down in low-single digits.
We ended the first quarter with inventory up 14% for the cost, following 6% decline last year.
Our inventory was higher than our original plan, due in part to early receipts of back-to-school denim.
Excluding early receipts inventory was up 7% per foot at end of the first quarter.
We will enter the fall season clean and are currently planning our inventory position to be in the range of flat to down per foot by the end of the second quarter.
Tightening up inventory levels for fall and holiday has been a major focus of the merchandising team.
In light of a competitive environment and soft economy, we will enter the season lean, having fewer units will ease pressure on average retail price.
Our back-to-school and fall assortments are focused on more narrow and scope.
The color pallet is clearer and cleaner.
We are solidly established as destination store for back-to-school shopping.
This year we have a powerful combination of denim and military-inspired bottoms which mesh with the American Eagle lifestyle.
We stand ready to capitalize on our ability to speed source product if and only if, strong demand is there.
In the past we have been most successful when we chased the business.
That is our plan for fall.
AE.com had another positive quarter, with sales up 30% use of sessions increased 24% and conversion rate improved by 6%, that is 14 straight quarters of increased sales with continued growth in operating income, which doubled over the first quarter last year.
This important component of our overall business demonstrates continued strength of our brand.
Now, Bluenotes.
As you know, we put brand new management in at the start of the year.
The team was headed by Fred Grover.
They are having a meaningful impact on the business.
For fall the assortment will be stronger and more consistent with the brand strategy and the marketing will be more targeted and focused.
While we expect improvement in the second quarter, it will be fall before we saw bulk of financial improvement.
We are moving forward the whole organization.
We are dedicated to achieving higher profit margins and we have tools in place to do that job.
We are improving inventory planning process.
We are dedicated to creating clearer point of view in the American Eagle line.
We know our target customer and we will provide a fashion-right, quality assortment at a good value.
We are totally committed to taking our process and executing it better in the future.
The ultimate goal is returning to continually increasing profitability.
Now, here is Laura.
Laura Weil - EVP and CFO
Thank you, Roger.
Total consolidated sales for first quarter rose 5%, reaching record $291.9 million, compared to $277.9 million last year.
First quarter comparable store sales for AE brand declined 5.8% compared to comp decline of 5% in the first quarter last year.
Consolidated same-store sales, including both American Eagle and Bluenotes stores declined 6.5%.
Consolidated gross margins de-leveraged by 330 basis points from 39.6% to 36.3% in the first quarter, due to lower merchandise margins and the deleveraging of buying, occupancy and warehousing cost.
By division, AE U.S. and Bluenotes contributed to decline in gross margin.
While AE Canada had a positive impact.
U.S. merchandise margin was impacted primarily by higher markdowns offset by improved markon.
Within buying, occupancy and warehousing cost, rent and utility deleveraged in the first quarter.
SG&A as percent of sales increased by 30 basis points to 28.4% from 28.1% last year.
The increase is a rate to sales was due to salaries, largely a fixed expense, which deleverage due to negative comp store sales and the low volume nature of the first quarter.
Expense control remains a primary focus.
Despite the negative comp, we leveraged purchase, leasing cost, communication expense and advertising.
SG&A dollars increased at a lower rate than square footage growth, rising 6% on a 12% increase in square footage.
Depreciation and amortization expense as percent of sales increased to 4.6% from 4.3%.
Other income in the quarter was $641,000, compared to $661,000 last year.
The decrease in other income was due to lower yield on our investments compared to a year ago.
Net income for the quarter was $6.4 million, compared to $12.7 million last year and diluted earnings per share were 9 cents compared to 17 cents last year.
The Bluenotes business lost 5 cents in the quarter compared to 3 cents per share in the first quarter of last year.
Our balance sheet continues to be very strong.
Cash and short-term investments increased to $214 million from $182 million at the end of the first quarter 2002.
Capital expenditures were 13.6 million, which primarily related to new and remodeled U.S. stores.
For the year, our capex plan is expected to be approximately $80 to $90 million, which is down from our previous forecast of 90 to $100 million, due to delay of new corporate headquarters building.
Now, turning to our outlook.
The retail environment remains challenging.
Sales trends to date inn May are better than the first quarter trend with May comps down slightly versus a year ago.
It is still very early in the season and in light of the environment, we have limited visibility into the rest of the quarter.
Therefore, we are not giving specific second quarter sales or earnings guidance at this time.
However, we do expect merchandise margins will be pressured compared to the second quarter of last year.
As Roger indicated, we will enter the third quarter with clean and fresh inventories and tightly controlled unit investment.
We will be well positioned for a solid fall season and a more profitable third and fourth quarter.
Thank you and now we will open the call for questions.
Operator
At this time, I would like to remind everyone in order to ask a question please press * and the number 1 on your telephone keypad.
We will pause for just moment to compile the Q and A roster.
Your first question comes from David Berman with Berman Capital.
David Berman
Could you talk about what you believe is the right level of inventory going forward?
Because your turns are fairly fast, even though you grew at high rate, they are still fairly fast by industry standards.
Laura Weil - EVP and CFO
Roger, do you want to talk about that?
Roger Markfield - President and Co-CEO
Yes, I am in New York and my partners are in Pittsburgh.
We will go back and forth.
David, we believe our inventory respective to other competitors in the marketplace is relatively low, that we want fast turn inventory.
We want to turn the inventory one time per quarter.
We absolutely on a retail methodology want to turn it four times a year plus.
We want it to be a bit tighter than where it is now.
Take out the early receipts, we are up 7% and want it to be flat.
David Berman
Okay.
That is on the year-over-year basis.
Okay.
And if Laura, could you comment on unredeemed value cost gift certificates, which is up 35%.
Can you comment on what that is?
Thank you.
Laura Weil - EVP and CFO
It is just increase in our gift cards.
We continue to see tremendous response to our gift card business.
It is simply a reflection of that.
David Berman
It is so much stronger than the rest of the business.
Laura Weil - EVP and CFO
It is just a strong part of the business.
David Berman
Your accounts payable are down 14% and inventory up 28%, which would lead you to believe inventory has been sitting there a while.
Can you comment on that?
Laura Weil - EVP and CFO
This is not accurate, actually.
We are running about 40% accounts payable to inventory, which is our current trend and we expect to be running on the-forward.
We are processing our invoices more timely and we think it is quite appropriate.
Our inventory is quite clean.
James O'Donnell - COO, Director and Co-CEO
David, we take mark out of stock at the big season.
We don't carry any merchandise over.
We are always on a current basis.
We are not in the outlet business.
David Berman
Thanks a lot, guys.
Operator
Your next question comes from Todd Slater with Lazard Freres.
Todd Slater
Good morning.
Another inventory question that is more big picture for Roger and Laura.
Both of you guys are seasoned veterans who understand the perils of having too much inventory.
Good to see you are getting religion for the second half.
I am curious as to what perhaps you saw that derailed you from normal inventory disciplines?
Maybe Laura, what was your thinking and how has this changed?
Was there a blip in your expectations or your overall projection for consumer spending or strength?
Just curious what was going through the thinking process?
Laura Weil - EVP and CFO
Sure.
When we come up with our sales and inventory planning, it is a concerted effort with a lot of very seasoned people working on it and looking at history and looking at macro economic trends and doing the best job we can in terms of planning our business.
I think the number one mistake we made, we over-planned the men's business.
We traditionally have been a destination for men in the mall.
I think that we have always really offered great quality, great product for men.
The men's business is in a slump.
So, I attribute a big part of our over inventory positioning and need to take heavy markdowns to a slowness in the men's business that I guess, we were reluctant to recognize.
Todd Slater
So, there isn't the same -- in the inventories in women's as percent of total is much more healthy, but is that also still above plan?
Laura Weil - EVP and CFO
I'm sorry, what was the question?
Todd Slater
You mentioned it was all because of the men's business.
Laura Weil - EVP and CFO
Women's was -- I want to add, I think the biggest trimming would have been in men's.
Yes, (inaudible) we thought the economy would be a little better after a rough 2002.
You know, I think we were overly optimistic and are pulling in the horns and going to be conservative.
If we see things start to happen, we are completely capable of chasing the business.
Todd Slater
Also, switching to Bluenotes, can you quantify what type of drag that is on the first quarter earnings?
Laura Weil - EVP and CFO
I quantified it.
It was a nickel versus three cents last year.
We think that we will close the gap and it will not be a greater loss in the second quarter.
We certainly hope that by the back half of the year we are working very hard, our team up in Canada is working night and day, so that we can hopefully erase the loss of the back half for this year.
Todd Slater
Okay.
Thank you.
Operator
Your next question comes from Kimberly Greenberger with Lehman Brothers.
Kimberly Greenberger
Thank you.
Good morning.
I have a question for Roger.
Roger, you talked about improving the inventory planning process.
Can you talk about what you felt sort of where you felt the holes were and your strategy for go forward?
Roger Markfield - President and Co-CEO
Right.
The biggest part of it, obviously, when you plan to increase the volume by 2 or 3 points and end up being down 5 point, that spread of 8 points, Kimberly, on $300 million business is a $20-something million swing.
In this business you must remain current.
But, with that in mind, and bringing in and getting very tight, the planning that in mind, and bringing in and getting very tight, the planning organization has been given direction to hold it to absolutely to a flat comp basis at this point in time.
All the inventories have been readjusted and we will be at that number at the end of this quarter moving into the back-to-school quarter.
Kimberly Greenberger
Okay.
So, if comps are closer to flat, that would essentially eliminate challenges that you had in first quarter?
Roger Markfield - President and Co-CEO
That is correct.
Keep in mind -- we are going to hold it flat to last year, which was by far the biggest year we ever had and believe the entire military-inspired bottoms which comes in the total aspect, which will be the increase that will happen.
If denim is stronger than last year, which we are planning it to be flat, then we will be big winners.
Kimberly Greenberger
Okay, great.
Thanks, Roger.
Operator
Your next question comes from Jeffrey Klinefelter, US Bancorp Piper Jaffray Inc.
Jeffrey Klinefelter
Two quick questions.
First of all on the sourcing Roger, you mentioned how agile you guys are sourcing which was providing a lot of flexibility.
Can you discuss was there any impact so far on the issues in the Far East, how you are happening contingency plans and where the growth categories like the wovens and sheer tops and military influence bottoms are coming from?
Secondly, promotional planning for the second quarter, relative to LY what is your promotional schedule for Q2?
Roger Markfield - President and Co-CEO
Answer second one first.
Promotional calendar is second quarter at point and same as last year with one exception.
We are dropping one event.
I don't want to talk about what event it is.
We think it did not pay off on bottom line.
We don't need it and don't want to over-promote.
Our units and transactions are pretty favorable.
So, right now we are holding to the calendar we had.
As relates to sourcing, I guess really what you are looking for, the ability for us to still have lower cost structure and a higher IMU is out there.
We will be experiencing, that will continue to increase.
Jeffrey Klinefelter
Okay.
Any issues thus far with your particularly out of China and Hong Kong?
Roger Markfield - President and Co-CEO
As relates to SARs
Jeffrey Klinefelter
Yes.
Roger Markfield - President and Co-CEO
No, there is not.
The only difference is that we don't have our people traveling to China.
And all of our sourcing partners are not coming here and the communication is strictly by telecommunication purposes and obviously Fed-Ex.
Jeffrey Klinefelter
Okay.
Thank you.
Operator
Your next question comes from Stacy Pak with Prudential Securities.
Stacy Pak
A couple of questions.
First, can you guys just talk a little bit more about Bluenotes?
One number question, how much did they lose in quarters two through four by quarter last year?
Then, go over again for us the initiatives that are being put in place in merchandising stores, pricing, advertising and design.
You know, why you are confident that it is going to turn around.
How long do you give it?
Secondly, can you comment on the markon opportunity going into Q2 and finally, whether there will be any changing in marketing or promotional plans for back-to-school?
Laura Weil - EVP and CFO
Stacy, I will take a couple of your questions.
First, I will give you the quarterly breakdown of the loss of 16 cents last year and then a bit on the markon.
In Q1, as we stated, the business lost 3 cents.
In Q2 it lost 2 cents.
In Q3 it lost 6 cents and Q4 it lost 5 cents for total of 16 cents.
As I stated in response to an earlier question, we think the upside opportunity is in the third and fourth quarter where we are up against negative 30-plus comps.
It did not take a substantial comp for us to break even in the back half of the year.
The markon has already improved.
That was an initiative that we really took on last year.
We are seeing significant improvement in the markon and continue to believe we will see continued markon opportunity on the go forward.
The biggest thing that has to be eliminated are obviously the markdown.
We cleared through the merchandise.
We have taken our markdowns.
We will be clean going into back-to-school.
I will let Jim discuss some of the strategic initiatives that we have taken that we feel good about in terms of the improved profitability of the business.
Stacy Pak
Laura, just one question before Jim steps in.
Is markon increase versus LY lower in Q2 than Q1 or lower in back half than in Q1?
Laura Weil - EVP and CFO
No.
Stacy Pak
Okay.
Laura Weil - EVP and CFO
Jim.
James O'Donnell - COO, Director and Co-CEO
Let me see if I can address your questions as it relates to strategic initiatives.
The Bluenotes has traditionally been and we will continue in the denim business.
It is top of mind, number one with women as a brand and number three with men on the latest surveys we have had.
We will continue to be a very strong denim dominated brand.
Having said that, the denim that we will carry will have more of a value proposition affixed to it.
That means that the year-ago where there was a dominance in fashion product, especially so in women's and it was not as well received as we had planned.
This year for both men's and women's, we will have a standard or a traditional proposition and a basic looks, as well as feeding the assortment with fashion denim.
Also, we will see the assortment with some branded products.
And even though the majority of the assortment will be private label Bluenotes label, it will be seated with probably right now for back-to-school, three highly recognizable brands that will give the youth market an identity with Bluenotes as being a hip place to go, so to speak.
The early call-outs right now that are promising is that Bluenotes was notoriously weak in tops.
Right now, we are running in women's about 120% over last year and we are beating plan in tops.
We are running 180% increase in accessories, which is also exceeding plans.
These are two positive call-outs right now.
Where we are not meeting our plan is in the denim business, primarily due to us re-assorting and getting ready for back-to-school.
I don't know if there is anything else.
As far as marketing, most marketing will be internal within the stores itself, we will do external in greater Toronto area, but no guarantee.
Stacy Pak
The three brands, can you call those out?
James O'Donnell - COO, Director and Co-CEO
No, I can't.
We are just finishing negotiations with the people.
Operator
Your next question comes from Richard Baum with Credit Suisse First Boston.
Richard Baum
Good morning, everybody.
Three quick questions.
One for Laura, first.
The reduction in capex indicated that it was because of the headquarter building.
The question is does this have anything to do with the weakness in your business you want to push out the capex?
If not, could you just provide more color as to what the reason is and will this capex reappear next year and is being deferred.
Then, two other questions.
Laura Weil - EVP and CFO
Okay.
It is actually not -- we just decide that we didn't need to build the building right now, the timing wasn't right.
We are focused on our business and that is where we want to have our focus.
So, as you know, we have a lot of cash, no debt.
Were we to decide to build something, we could.
We are focused on building the new stores, on renovations and some IT projects and that is it for 2003.
Richard Baum
Okay.
Fair.
Two questions for Roger.
First, could you just comment a little bit more on the move into some high-fashion product that you mentioned didn't work in first quarter.
I guess the question is if you could describe what some of the product was, why you decided to do it and what your view is on this type of product for the back-to-school season?
Roger Markfield - President and Co-CEO
Right.
Richard, on the major theme, which on the last conference call I indicated was our emphasis in women's to be on the romantic, military theme, with pretty fem nine tops related on the sheer techniques.
We hit that right on the mark.
Those products for the most part are doing very well.
We see, also, as a company, we wanted to really be right on the fashion trend and because of our over aggressiveness to be on the fashion trends, when we saw other looks happening, like the '80s look, some of the Mark Jacobs influences and some of the Monty influences, we thought we would bring them in to update the store and stay on the hottest, newest trends.
In hindsight, we are all smarter.
What happened was that it over-assorted the floor and over assorted the colors so that focus of main floor got hurt a bit and we absolutely did not need that additional merchandise.
That is what caused the erosion in average unit retail.
It hurt us both on the high fashion we needed not to have and it hurt the core basic part of the business.
So, we are going to be very much fashion right on fashion trend, but we're not going to chase the latest, hottest new look.
That's not part of really what American Eagle lifestyle is.
I think that is best said that way.
Richard Baum
Okay.
Thanks.
My last question, the toughest one of all, and Roger, this is for you.
Roger Markfield - President and Co-CEO
I thought the last one I answered was.
Richard Baum
This one is.
I want to understand the derivation of the term romantic military.
It seems an oxymoron, particularly when we have just finished Operation Iraqi Freedom
Roger Markfield - President and Co-CEO
Right.
That the beautiful part of it.
It is really taking the military-inspired bottoms, but mixing them with feminine tops and taking the military-inspired bottoms and doing them in a sexy way.
Richard Baum
Okay.
I hope our armed forces abroad agree with you.
Roger Markfield - President and Co-CEO
I think the guys do.
Richard Baum
Thanks.
Operator
Your next question comes from Lee Backus with Buckingham Research.
Lee Backus
Yeah, Roger, just have you been able to affect all these changes you are talking about for the back-to-school season since we will ship the season soon?
Roger Markfield - President and Co-CEO
Yes.
Lee Backus
Maybe you can talk about speed sourcing and what testing you have done in the back-to-school line at this point in time.
Could you quantify how quickly you could get back into the fall season?
Roger Markfield - President and Co-CEO
In February, we did the back-to-school floor set test, which probably represented about 60% of the back-to-school merchandise.
Based on these reads, we then reevaluated how large different programs would be.
We are very focused on going back to the testing that we did the way we used to do it.
I think we got a little careless, quite frankly.
My entire merchandise is testing in the proper way.
Lee Backus
Thank you.
Operator
Your next question comes from Richard Jaffe with UBS Warburg.
Richard Jaffe
Thank you.
Roger, if you could talk about the promotional calendar for fall this year, particularly the fourth quarter.
Last year you had a lot of different things going and it seemed confusing and cost a lot, but not get the job done.
Can you talk about how you will rationalize the promotional effort both in terms of qualitative product experience and the add-spend, what you think the dollars will be on a percentage basis year-over-year?
Roger Markfield - President and Co-CEO
Richard, I think your question is quite valid.
I think that we unfortunately, in reviewing what we did, we had some duplications of asset at the same timeframe.
You know, we do fundamentally, six major floor sets per year with four updates, which is 10 floor sets.
For each set that we do, we have a campaign that marrys up to those particular floor sets.
It is combination that hits and obviously work well for us.
We do drive units and we do drive the transactions.
But, we got sloppy and spent too much money at the same timeframe doing two or three events around a particular set, when in effect, one would have worked just as strong.
So, we're cutting back and going to be much more efficient and at the same time, we are analyzing at this point the combination of the direct mail pieces we do with the TV that we do and the magalog that we do.
At this point, for competition purposes, I don't want to give the information out exactly what we are going to do.
Richard Jaffe
But, in terms of add-spend on absolute dollars -
Roger Markfield - President and Co-CEO
We will not be spending more money.
Richard Jaffe
Will you spend less this year?
Roger Markfield - President and Co-CEO
Spending the same or less.
Richard Jaffe
You mentioned TV advertising, is that part of the strategy for the fall?
Roger Markfield - President and Co-CEO
We are discussing that now.
Okay.
Helpful.
Thank you.
Operator
Your next question comes from Dorothy Lakner with CIBC World Markets.
Dorothy Lakner
Thanks.
Good morning, everyone.
A question I guess for Roger going back to Richard's question, I think.
Could you elaborate more on what you consider testing in the proper way?
I mean, tell us what you did that you didn't like and what you are going back to?
Then, just the arrival date for back-to-school floor set and updates, what we should look for in second quarter?
And finally, just update us on percentage of women's versus men's at American Eagle and whether it is the same in the U.S. versus Canada?
James O'Donnell - COO, Director and Co-CEO
On the first question, Dorothy, hold on one second.
On the testing process, I think quite frankly our organization, including myself, got a bit sloppy.
We had a great success from '98 right through 2001.
And I think that we thought we had the answers on an awful lot of product and that we needed not to test it.
And I tell you that this business quite frankly, is too difficult to be sure about what direction to take.
Dorothy Lakner
Does it mean testing more the assortment or does it mean testing in more store.
I mean what is that right balance you think.
James O'Donnell - COO, Director and Co-CEO
Its a combination.
There was a tendency of testing lots of little things that doesn't mean anything at all.
And you really need to test the big ideas and you need to test them together.
And its complicated but this organization knows how to do it.
I have insisted now that we go back to that process.
Dorothy Lakner
And you think if you don't go looking for the latest, putting in latest hot fashion ideas such as the Monty or the Mark Jacobs, does that eliminate a lot of confusion?
James O'Donnell - COO, Director and Co-CEO
I think it does eliminate a lot of confusion.
There are big ideas you want to be right on, I am talking about the big ideas.
The one big idea we tested effectively was the whole military romantic-inspired merchandise that we came back with a year ago.
When we tested, we knew it was a winner.
On the Monty, we did it out of inspiration.
It really caused a problem.
We didn't need to have that problem.
We are aware from that now and focused on what we are doing.
We have the discipline in place on the testing process and all is in place for big-time for holiday.
Dorothy Lakner
Okay.
James O'Donnell - COO, Director and Co-CEO
On the men's and women's relationships, the women's obviously, will be is continuing to grow.
The men's business is difficult for everyone is still going down a bit.
You can see based on the comp number, women's was down one or two comp for the quarter and men's was down 12 comp for the quarter.
Obviously that relationship is continuing to switch.
Inventory investment is being done the same way.
Dorothy Lakner
What was the percentage that you ended up with in the second quarter women's to men's?
James O'Donnell - COO, Director and Co-CEO
Laura, do you have that number there in Pittsburgh?
Laura Weil - EVP and CFO
Yes, I do.
Women's in the first quarter was about 63% and men's was about 37.
Dorothy Lakner
Is it the same in Canada?
Laura Weil - EVP and CFO
It is a little higher percentage of women's.
Dorothy Lakner
Okay.
Operator
Your next question comes from Dana Cohen with Banc of America Securities.
Dana Cohen
Hi, guys.
Two questions.
Laura, I know you don't want to give guidance, can you at least give us some sense for what you think SG&A trends are going to be going forward?
Do you think SG&A dollars grow at a similar rate from here as we move through the quarters?
Laura Weil - EVP and CFO
I think in Q2, where we can forecast pretty closely, Q2 dollars should be about the same level as the increase in Q2 as they were in Q1.
Okay.
I think that there is a little bit of opportunity leverage, I think the opportunity to leverage declines as we anniversary some of our expense reductions in Q3 and Q4.
Dana Cohen
Okay.
And then, I guess maybe this question is for both of you for Roger.
You know, clearly, getting inventories to flat is a very positive move in the right direction.
Can you just help us why not to take it a step forward and take inventories down in the back half of the year to really take pressure off of yourself in terms of anniversarying the promotions of last year, which I think we all would agree were excessive and really further insure the margin opportunity?
Laura Weil - EVP and CFO
Roger.
Roger Markfield - President and Co-CEO
Yes.
I'm giving you on the top line, they are going to be flat.
In reality, they are going to be down.
Dana Cohen
Inventories will be down?
Laura Weil - EVP and CFO
Yes, going into third and fourth quarter.
Roger Markfield - President and Co-CEO
We think we have the ability to really chase.
Dana Cohen
Uh-huh.
Laura Weil - EVP and CFO
Inventories will be down and gives us the opportunity to do obviously better sales number.
But, on both third and fourth quarter, we will have our inventory down versus last year.
Roger Markfield - President and Co-CEO
We are in agreement with you.
Dana Cohen
Great.
Thank you.
Operator
Your next question comes from Janet Clogenberg with JJK Research.
Janet Clogenberg
Hi, Roger and Laura.
I wanted to ask Roger, I did note fashion influencing your assortment this spring.
I wondered,, Roger, if you could reiterate who your customer is and what the target market is for that you are targeting?
Because I was confused this spring.
I would like to get a hear it from you, what this kid is like and what kind of product they want to wear?
Roger Markfield - President and Co-CEO
I will keep it simple, Janet.
The focus for the entire organization is on all-American college girl and a guy that is 20 years old.
The entire focus and we are not confusing it.
Janet Clogenberg
Okay.
Are you going to go back, then, to a simpler, for lack of better word, prepier (ph) or classic look than we saw this spring?
Roger Markfield - President and Co-CEO
I would say the detailing will be simpler.
The silhouettes will be more focused and basic, but the proper details will be there for the fashion implements.
Janet Clogenberg
And assortment will be tighter?
Roger Markfield - President and Co-CEO
The assortments will be, SKUs will be equal.
The number of customer choices will be less.
Janet Clogenberg
Okay.
Roger Markfield - President and Co-CEO
It is the number of customer choices that causes confusion in terms of the clarity of the presentation.
Janet Clogenberg
Okay.
That is what I meant by SKU.
Roger Markfield - President and Co-CEO
SKU is a stock keeping unit, CC is customer choices and item and color.
Customer choice will be tighter and narrower, total number of units will be less for the inventory and cleaner than certainly the spring.
Janet Clogenberg
This question was asked before, I wouldn't mind if you elaborate.
Given you learnt that some of these fashion influences weren't appropriate for the assortment this spring, given you learnt that, did you have time to enact the changes to the assortment for back-to-school period?
Roger Markfield - President and Co-CEO
Back-to-school has been adjusted.
Janet Clogenberg
So, no influence there?
Roger Markfield - President and Co-CEO
That is correct.
Janet Clogenberg
Men's and women's mix, 63, 37, that is tight mix, will be that static going forward or do you see the women's going up?
Roger Markfield - President and Co-CEO
Probably around 2-1 relationship, Janet, where it looks like demand is at this point in time.
Obviously fourth quarter will watch it.
We will not predict it.
Last year fourth quarter was very difficult.
All the years I have been in the business, I have never seen fourth quarter be as weak as it was.
My guess is it will get a bit better as we start to enter the fourth quarter, but no guarantees.
Janet Clogenberg
One last question, outlook on the fall season for a good sweater business?
Roger Markfield - President and Co-CEO
You know my feeling both in denim and sweaters.
Denim for back-to-school, you must be dominant on it.
We have done a great job on that.
Last year and for five years, we have been very strong in sweaters.
I believe that is an important category to dominate in, as well on the women's side.
Janet Clogenberg
Thanks so much.
Laura Weil - EVP and CFO
Okay, we have time for one more question.
Operator
Your final question comes from Marcia Aaron with Pacific Growth.
Marcia Aaron
Good morning.
My last conference call anyway.
Roger, can you talk more about the brand positioning where it was, maybe three years ago and where it is today?
And the reason I ask this, it seems like your imaging has changed a fair amount.
We look a couple of years ago, you were at pictures of kids in places like Hoodriver (ph), Oregon and now they are on rooftops in major cities.
I am curious about that.
Roger Markfield - President and Co-CEO
That is a good observation, Marcia.
We have added and this is good, as we enter the California and the cities and entering New York and some of the as Jim talked about, absolute opportunities on real estate.
We think there is a slight urban influence in our customer.
And we think that it's in our assortments.
That kind of merchandise we are doing very well.
But, the total focus of our profile, as I said before, is still the wholesome American college guy and gal that is in college.
We are very focused on that.
There is a slight bit of the urban influence in our assortments.
Marcia Aaron
What would you, can you call out some items that are in store right now that are having urban influence you think you're doing well.
Roger Markfield - President and Co-CEO
The military influence is strong in urban and very powerful across the country.
So, if you don't touch it and get the inspiration while it is happening in the urban centers, you will miss it across the country.
Marcia Aaron
Then, Roger, could you talk a bit about maybe that is part of the answer to my next question, where you think you fit in the competitive landscape given obviously you have new interns over the last several years or some reinvigorating growth, specifically like Arrow and Holister (ph), where do you think you fit in that whole environment and what are you trying to do to make yourself stand out?
Roger Markfield - President and Co-CEO
Obviously, you know, some of the marketing studies that have been done, our brand has gotten over the last three years has gotten much stronger.
I think where the as a true marketing research that has been done the last report that I saw, which was from the fall season of last year, we were number two or number three as the most desirable shopped store of the teen-age customer, though our focus is college age.
We are inspirational brand.
So, the high school customer wants to shop in a store like that.
As related to denim, as a brand, we were seventh biggest brand and five years ago we were not on the charts.
From marketing perspective, we are powerful in terms of the acceptance of the brand.
We see that in units and transactions.
We see that in units per transaction.
So, we are real happy about the positioning of the brand and where we are.
There are lots of new entrants in the business, they are really on the younger high school age group.
I guess, you know, the Holisters of the world, (inaudible) of the world, the PackSun's (ph)of the world, they are in the high school game.
We are very focused on college.
I hope that answers your question.
Marcia Aaron
It does.
One last clean-up, what were same-store sales at Bluenotes in the quarter?
Laura Weil - EVP and CFO
Uh, Negative 15.
Marcia Aaron
Great.
Thanks and good luck.
Laura Weil - EVP and CFO
Thank you.
Good luck to you.
Thanks, everyone, we appreciate your participation today and will talk to you soon.
Operator
Thank you for participating today's American Eagle Outfitters first quarter earnings conference call.
You may now all disconnect.