American Eagle Outfitters Inc (AEO) 2003 Q3 法說會逐字稿

Good morning, my name is Crystal and I'll be your conference facilitator today.

I would like to welcome everyone to the American Eagle Third Quarter Results 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 period.

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

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

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

Sir, you may begin.

Thank you, Crystal.

Good morning, everyone.

This is Jim O'Donnell.

Other participants today include Roger Markfield and Laura Weil.

If you need a copy of our third quarter press release, it is available on our website, www.ae.com where you can 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 on current information which represent 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 results filed with the SEC.

Our third quarter results reflect a major miss to our sales plan.

The result was a negative 10% comp and earnings decline over last year.

Laura will detail the financials in a minute.

First, I'll discuss a few key initiatives that drive sales and profit improvements going forward.

The most significant and positive change is Roger's renewed focus on merchandising process and marketing for the American Eagle brand.

By redirecting Roger's role, he'll devote his full attention to the assortment, insuring that it is well positioned for our 15-25 year old target customers.

He will work closely with Susan Miller to strengthen the talent across all divisions, but particularly in the under-performing categories.

Misses in merchandising have been a major issue for our company and it's absolutely critical to our future success that we improve in this area.

Another top priority is our merchandising process, which is being streamlined and strengthened.

As Roger will discuss in greater detail, we are changing our floor-set calendar to improve product flow and maximize floor productivity.

Adherence to our design and merchandise calendar will enable us to place orders on a timely basis, avoiding late deliveries and reducing freight cost.

Our goals are to achieve a higher IMU while reducing markdowns and sell-offs.

We are also working toward increasing our inventory productivity through strengthening the planning and allocation process, which now reports to Laura Weil.

We see significant opportunities in this function which should contribute to an efficient utilization of our inventory investment and thus lead to higher merchandising margins.

Across our organization, we continue to look for efficiencies and productivity gains.

During the third quarter, we reduced census by eliminating 52 positions at our headquarters and New York design office.

Expense reductions will continue to be a top priority and we are challenging all areas to make contributions to this effort.

Turning now to our real estate plans, this year we are on track to grow our square footage by 10% through 59 new stores, 6 closings and 66 renovations.

Of our new stores, 25 will be in the West, 10 in the Southeast, 7 in the Midwest and 6 in the Middle Atlantic and 2 in the Northeast and 9 in Canada.

For next year, we currently expect to open 40-50 new stores, complete 50 remodels and close 10 stores.

This will lead to square footage growth in the range of 8-9%.

We are pleased with the new store performance.

Our 2003 stores are exceeding plan and performing at roughly 103% of our mature store sales.

Looking at our 2002 stores, the profit and return on investment are the best in two years, at 14% operating margin and 25% pre-tax ROI.

Business at our Bluenotes Division, that remains challenging in the third quarter.

Although we had positive response to repositioning, the business was reflected by power outage, late deliveries and a difficult Canadian retail environment.

As a result of the weak performance, we took an estimated goodwill impairment charge of $8 million in the third quarter and we've retained a third party to provide an independent evaluation, and will adjust the estimated impairment based on the evaluation results of the fourth quarter.

A decision regarding the future of this business will be made in 2004.

Now here's Roger.

Thanks, Jim.

Good morning.

Nobody here is at all pleased with our recent performance.

We are taking a very hard look at our merchandising process and structure and making significant changes.

We've grown fast and had many great successes, but we're at a point when we want to simplify and streamline our merchandising process.

We will eliminate redundancies in all of our processes, challenging our talent, especially on the creative side of the business.

We'll make us an organization that runs smarter, faster, more efficiently.

And I'm getting back to what I like to do and I do best, the creative side of the business.

I'll be spending a lot more time in New York working closely with design, setting merchandising direction earlier in the process, rebuilding under-performing categories, using consistently strong areas like denim, bottoms underwear, graphic tees, womens sweaters as models.

I'm going to be as hands on as I've ever been in my career.

One major fundamental change is that we're cutting back on the number of floor sets.

By doing this our major assortments will get more attention by our design and merchant teams.

It streamlines our calendar, reducing the strain on other areas such as logistics and product sourcing, and importantly it enables longer selling periods for the merchandise, minimizing markdowns and sell-offs.

We'll still freshen our sets with smaller new product flows and updated marketing.

This is an important change to the process and convinced we'll have a positive impact on topline and our margin.

We're refining our brand strategy to assure we are clearly focused on the 15-25-year-old High School and college students.

This wider demographic is right for our brand and a departure of where we've been.

Recently we've been too narrowly focused and non in line with the natural AE customer base.

Our new brand strategy derives from many challenges and recent interviews with over 2,000 customers across the country.

We've gathered insights about the positioning of the brand, assortment and importantly on fit, style and price.

We're now going back out to drill down even deeper into the most critical findings.

I'm certain that this research will lead to improvements on brand positioning and the quality and desirability of our assortments.

Now reviewing our third quarter, overall AE merchandise margins were flat compared to last year, but we failed to drive top line growth.

A number of categories was strong like women's denim, graphic tees, pants, woven shirts and underwear and in mens, woven shirts, underwear and accessories.

This classifications signify the strength of our brand where we do it right, as does the continued strong performance of AE.com.

Part of our third quarter miss, particularly in October was because of fewer promotions compared to last year.

Our fourth quarter plans have been carefully analyzed to insure that we anniversary traffic driving promotions.

Value pricing and promotional marketing are important components of our model and brand strategy.

They're what we are known for, and frankly, they're essential for customer loyalty.

Yet we'll minimize the negative impact on margin through the structure and timing of these offers.

Regarding holiday, women's is solid.

We have the right fashion bottoms, a great sweater collection and compelling gift items.

In mens we have some good categories but overall the line may be a bit too sophisticated for our target customer.

I'm working closely with Susan Miller and Mens GMM Henry Stafford and I'm confident we'll move the assortment in the right direction.

Our holiday marketing is squarely aimed at key gift items.

The store looks terrific with a strong holiday feeling and in our view the best in the mall right now.

I encourage you to visit to see it for yourself.

After a slow start to the month, recent sales trends have improved.

Month to date comps are negative low single digits as more seasonal weather, our clearance sale and the holiday floor set are driving better sales performance.

Now here's Laura.

Thank you, Roger.

Good morning, everybody.

Quite simply, our performance this quarter largely stems from missing our sales plan.

The 10% comp decline caused deleveraged fixed expenses.

As Roger discussed, our major initiative including merchandise content and process which should lead to better sales performance and higher margins, but additionally, we'll continue to evaluate our expense structure to achieve further savings and efficiency gains.

Turning now to the details of the quarter.

Total consolidated sales for third quarter declined .2% to $373.8 million from $374.5 million last year.

Total sales included $22.8 million from the Bluenotes chain compared to $21.7 million last year.

Third quarter comparable store sales for the AE brand declined 10.4%, compared to a comp decline of 5.2% in the third quarter last year.

The negative comp was driven primarily to a high single digit decline in the average unit retail price.

While product mix played a role, the AUR decline was primarily due to higher merchandise markdowns compared to last year.

Transactions per store decreased in the high single digits and the number of units sold per store decreased slightly.

Units per transaction rose in the high single digits.

Consolidated same-store sales declined 10.3%.

Comps for the Bluenotes stores decreased 9.1% compared to a comp store decrease of 27.5% in the third quarter of last year.

Our gross margin deleveraged by 100 basis points to 38.1% from 39.1% in the third quarter last year.

Higher consolidated merchandise margins were offset by the deleveraging of buying, occupancy and warehousing expenses.

Merchandise margins increased due to the improved mark-on and lower promotional cost partially offset by increased markdowns.

Within buying, occupancy, and warehousing costs, rent expense deleveraged due to the negative comp.

By division, AE contributed to the decline in gross margin while Bluenotes had a positive impact.

During the third quarter, we deleveraged SG&A expenses, largely due to the sales missed to plan and a negative 10% comp.

While SG&A expense was controlled and came in below plan as a percent of sales, it increased to 26.4% from 24% last year.

Within SG&A, much of our deleveraging and dollar growth was due to a few key categories including store salaries and insurance costs, as well as one-time expenses for severance and the cancellation of a network hardware lease.

Expense control remains a primary focus and we will attack all areas where we can achieve savings including repairs in maintenance, supplies and other discretionary expenses.

For the fourth quarter we expect SG&A dollars to increase in the range of 5-8% over the fourth quarter last year, due largely to expenses related to new stores.

Depreciation and amortization expense deleveraged by 30 basis points to 3.8% from 3.5%.

The $8 million non-cash goodwill impairment charge related to Bluenotes was included in operating income for the period.

Other income in the third quarter was $483,000 compared to $284,000 last year.

The increase in other income was due primarily to lower interest expense and higher interest income.

Net income for the quarter was $10.1 million including the $8 million goodwill impairment charge compared to $27.1 million last year.

Our balance sheet continues to be very strong.

We ended the period with $206 million in cash and short-term investments, an increase of 33 million the end of third quarter 2002.

Total consolidated merchandise inventories increased 6.5% to $193.8 million at the end of the quarter while our gross square footage increased 10%.

U.S. inventory per square foot declined 4.9% compared to last year.

We'll continue to manage our inventory conservatively given the current operating environment.

It is our current expectation that at the end of the fourth quarter, our inventory at cost will be lower on a per square foot basis compared to last year.

Capital expenditures for the quarter totalled $24 million and year to date totalled $54.5 million primarily related to our new and remodeled U.S. stores.

We continue to expect our capital expenditures for the year to be approximately 90 million.

We are encouraged by the recent pickup in business and feel good about our holiday assortment.

However, we are not giving sales or earnings guidance at this time.

It's still very early in the season.

The current retail environment is choppy and difficult to predict, and the Thanksgiving to Christmas selling period is very significant to the quarter.

As we look forward to next year, we are excited about the new initiatives we've outlined today, which we believe will lead to stronger future results.

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

We would like to limit everyone to one question.

Thank you.

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

We'll pause for just a moment to compile the roster.

The first question is from Jeff Kleinfelter's line from Piper Jaffray.

Yes, a question for you, Roger, in terms of the merchandising strategy going forward.

In our own research we have found that American Eagle has remained resilient with the consumers in top of mind despite the fact there's a choppy sales performance.

Clearly the brand recognition is there.

What we're trying to understand in terms of the merchandising now going forward, what is the strategy to get that average transaction value higher, either through more UPTs or stable pricing and in light of the competitive landscape out there with people on either side of you in terms of pricing, share more with how you get that customer to come through more often in that price?

Jeff, we agree with what you said.

Obviously the brand is as strong as ever.

We shot ourselves in the foot.

Where have we shot ourselves in the foot?

Obviously by not satisfying their needs when they come in in terms of some of the product.

So it's a very simple answer.

We've got to make the product compelling in all areas.

Where the product is compelling, we get the average unit retail and we drive the volume.

Where it's not compelling, we don't drive it.

What we need to do is to get the product perfect across the board.

In terms of the current trends, people in your genre or your style within the mall have been more challenged.

Do you see anything changing, young men's or women's in terms of the trends that will bring the customer back in through your doors?

If you take a look at our holiday assortment on the women's side, we hit pretty much all the fashion trends.

Our sweater assortment is the most outstanding in the mall.

We're into the entire trouser look in terms of the bottom.

We've got all the men's wear tops to go along with the trouser looks.

We're finally back into the fleece active business.

We've got the graphic business in a gift giving way, we're into the blazer business.

And while outerwear is difficult, our outerwear is awfully attractive.

Thanks, Jeff.

Your next question comes from Kimberly Greenberger's line with Lehman Brothers.

Good morning.

Roger, I'm wondering if you can share can us your initial thoughts on the time or weeks or months or whatever you think you can take out of your merchandising process from start to finish.

If you could remind us the time frame that process takes now and where you think you could get to and then if you could also remind us the number of current floor sets and how many you think you will end up with?

I'm not going to get into too much detail because of competitive reasons.

I will give you a sense of what you're doing.

When we started out as a company, we were doing four floor sets a year.

As we built the organization, we actually moved it up to ten floor sets a year.

We then retrenched to recognized that ten floor sets was causing all kinds of logistical issues and we couldn't deal with it.

We reduced it to six and four updates, but with four updates -- two of those four updates were quite complicated.

At this point we are reducing that and I don't want to get into the details of it.

Kimberly, that's what my feeling is on it.

Next question comes from Stacy Pak's line with Prudential.

A couple questions.

Roger, just on the change in strategy, how do you address the issue of newness and having enough and how do you think about High School versus college?

It seems like a pretty wide audience, so I'd like some comments there.

Jim, if you could comment on Bluenotes 2004 twelve months, maybe, some time frame when you might be looking at a decision and if someone could tell us what the loss at Bluenotes was in the quarter versus last year.

Jim, how you're going to be making that decision and finally month to date on the comps, that's a nice 7-point pickup but how was it on AE versus Bluenotes.

Let me answer on the freshness of the merchandise.

We won't have less than five sets and five sets is certainly as much or more as anyone does in the business.

The freshness factor, you don't need to worry about.

All of our research has always come up and even more so that we have a broad audience in our stores and quite frankly what we wanted.

At least a third of over population is High School.

It's really the edit point of the 18-20-year-old, but recognizing that as an edit point but the spread of the fashion we have must be inclusive to the High School customer.

And on the Bluenotes EPS, we lost 2 versus 6 a year ago.

Jim, do you have any comment?

And a comp, too.

I said the comp in my remarks, I believe.

No, I'm just wondering how much of the pickup this month to date was Bluenotes versus AE brands.

They are both running similar.

Both close.

Oh, right now.

Absolutely, sorry.

And, Jim, your thoughts on Bluenotes?

Stacy, the holiday '03 that we're in now is really what we'll term as watershed determiner for Bluenotes.

You've all heard these calls and especially the comments on Bluenotes odd nauseum.

I can assure you right now the holiday floor set that's in, that is for the very first time we've had 96% compliance, that means 96% of the floor sets in stores on time, which alleviates any so-called excuses.

We'll see how those results transform.

At the end of holiday, we'll take a look critically at the results both the positive and the not so positive and help to make a determination at that time.

I can't give you a calendar date when it will be part of the American Eagle arsenal.

Right now, we feel better about it, but we don't feel great about it.

The next question from Janet Coffenburg's line with JJK Research.

Hi, guys.

Hi, Janet.

Just a question on the repositioning of the assortments.

How much of the fix had to do with men's versus women's and given the turmoil in the men's industry, how easy do you think that will be to accomplish?

And, Laura, you said you expected the SG&A rates to be up 5-8% in the fourth quarter, I'm wondering if that's dependent on a certain number of comp sales increases?

No, just dollar increase.

Dollar increase.

Doesn't have anything to do with where comps come in?

No, it's based on the new store expense and other items we put into our budget and we feel confident that's what it's going to be.

And one point of confusion.

Roger said merchandise margins were flat in the quarter and Laura said they were higher, if you could clear that up.

Laura talked consolidated, inclusive Bluenotes and I was talking the AE brand.

And men's versus women's.

The women's, quite frankly, on the sportswear side is pretty solid.

On the what?

On the sportswear side, not including active.

We need to have a renewed freshness factor and a commitment to being more on the active side of the business.

Younger more fun active part and that we'll be tweaking.

When will that be accomplished?

You'll see it as we move into spring.

On the men's side, obviously, everybody that's in the private label part of the business are having difficulties on the men's side of the business.

That being said, I am a firm believer that it's only what we've done to ourselves in terms of assortment and the compellingness of the product is the reason we're not doing as well as we should be doing and I think that can be fixed by summer, big time.

You think you can outperform the men's industry once you reposition the assortments.

Yes, I do.

And on the five floor sets you're estimating for next year, will you be icing that with mini flows to increase newness?

Five flow sets is pretty big.

Every two months - every two and a half months we see a floor set.

Every two months you'll see a floor set.

And there will be some flow of new product, obviously.

Many thanks.

Your next question is a follow-up question with Kimberly Greenberger with Lehman Brothers.

Sorry about that.

Roger, on the first question --

Go ahead.

I thought to charge you.

Check's in the mail, Roger.

Just in terms of framing your total, your start to finish design to in-store process right now, not giving specific weeks, but just, is it like 9-12 months, right now is the duration and do you think you can take one or two or three months out of that time frame, just looking for some kind of general direction.

We'll cause a lot less confusion and less pressure on the design team in trying to do the number of sets they are doing now, we're putting tremendous pressure on them and the rest of the organization.

We think we'll get all of the benefits of fresh product if we do it five times a year properly, take the pressure off, have more compelling product, have a longer time to sell the product, get higher margins and be much more efficient.

Fantastic.

Thank you.

Your next question comes from Lee Giordano's line with Merrill Lynch.

A question on the price points, how different are they this year in the fourth quarter and then looking at the new strategy, is there a change in your pricing in the product to get the younger customer and the older customer.

What's going on there?

Our pricing is very favorable.

You'll see how powerfully we are back to value pricing.

That won't change.

The pricing is a bit lower this year than last year at this point in time.

And going forward with the new strategy, any changes?

In terms of pricing?

We want to be a value priced strategy.

Okay.

Thanks.

Your next question comes from Tom Filandro's line with SIG.

Thank you.

Tom, you changed your name.

Laura, I assume one question when you say that means in some form of dog years.

Very good.

I'll stick to one question per senior executive.

First, Laura, quickly and I might have missed this because I got out of the queue for a second, any comments on inventory carryover, then I have a question for Roger regarding, specifically you mentioned under-performing categories, any color on that.

And, Jim, the final question is store growth.

Given the changes going on, any consideration of slowing stopping store growth until things are back on track?

Start with the inventory, Tom.

We keep our inventories very clean.

We are clean at this point.

We are down 5% on a per square foot basis.

We'll be down at the end of the fourth quarter.

We are running our inventories very leanly.

And we don't have outlet stores and don't carry anything over so we are clean.

Did he have a question for you?

Under-performing categories.

Tom, the big chunks of the men's business are under-performing.

I don't want to get into the details of why, we know what to do.

We're going to fix it.

Fair enough.

Jim?

On new stores as I mentioned in my brief statement that our problems are not with our new stores.

Our new stores are performing well both on the sales line and on the operating margin line and as well the ROI, so, I don't see a compelling reason why we should slow down growth.

Our challenges are basically in some of our older markets.

We're not going to be as aggressive in our new store -- numbers of new stores, I can tell you that.

U.S. and Canada combined won't exceed 50 and this year we did about 60 stores.

Where we are going to slow down growth is in the remodels, the expansions.

Not going to do as many expansions.

We'll continue to remodel and update our stores when appropriate, but right now we're not going to go with the larger format and expanded stores.

We'll try to keep the stores within a 5500-6500 square foot foot print.

Thank you very much, and the stores do look great.

Thank you.

Your next question comes from Lauren Levitan's line from SG Cowen.

Thanks, good morning.

A question related to the last topic as well, can you comment if there was any share repurchase in the quarter and then also with respect to the remodels, Jim, can you give us a sense, it's the older markets where you are having problems, can you give us a sense how those stores being remodeled, how those have performed?

Thank you.

Then the press release that came out from a company this morning referring Greg Gemetti, who had been an American Eagle employee and sounds like he is staying with the company, can you count on whether whether or not that is true.

To your question, there were no share repurchases in the quarter.

Jim?

You asked a question on the remodels?

Yes.

In our older markets where we have remodeled stores, we have is seen a definite improvement in top line sales.

Low single digit as compared to the chain's double digit.

We will continue to look at those markets aggressively; although, we will not in most cases expand those stores.

We'll update them in our new format which is our -- what we call our 2000 look which is the white store.

As far as any comment on the release on Greg Gemetti, I prefer not to comment at this particular time.

We are still in the process of discussing and evaluating that whole situation.

Clarification on the remodels?

You'll continue to do them, just won't add the extra square footage as you do them?

In most cases.

Stores average around 4500 square feet.

I deem that appropriate right now in some of the older markets which have one and two stores, they're not primarily a major metropolitan markets.

Where we do have older stores in major metropolitan markets and we have strong indication that our stores should be larger and larger taken up to 5500 to approximately 6,000.

I'll make that decision on an individual store basis where the economics will drive the entire decision.

The new stores in line with expectations and the remodels are, how many are left in that in-between phase that you think are driving down the overall performance of the company?

Too many.

It's the core of our business.

Half of our stores are not remodeled.

Thank you.

Your next question comes from Lee Backus's line with Buckingham Research.

Can you comment whether the traffic has decreased as much as comps or whether when the customer is coming in, he's not buying?

In the month of October, we had a lot less traffic, less promotions out and that was obviously in the numbers.

In November we see the traffic equal to last year.

As you see in the numbers we're converting nicely.

Can you comment it seems the promotional calendar this year, for the holiday season is a lot heavier than last year.

Could you give us a sense?

Actually it's not heavy.

We know what units we drove in terms of transactions for marketing.

We analyzed it in many different ways.

It's a bit less this year.

We can anniversary the transactions.

There is no double dipping in the month of December.

It's very clean.

We'll go from one money card to another.

Thank you.

Your next question comes from Adrienne Tennant's line with Wedbush Morgan.

Good morning.

Just a couple of quick questions.

You talked about reverting or returning to value price orientation.

What ramifications does that have on gross margin on a go forward basis and secondly can you remind us of the weekly progression of comps last year in November?

Thank you.

The IMU for our company has been going up and I see that continuing to be the case.

As the product assortments become more compelling, the spread of the cost to the retail should remain the same but the selling price will be a bit higher.

So the fact we're going to be very focused on being value priced to take back our share of market should only work in our favor.

Gross margin should not be impacted at all, if anything on the upside.

So it's really going to be a mix of full price and markdowns.

That's correct.

Adrienne, on the cadence of comps for the U.S. last year, we had a mid single digit positive comp in the first week of last year a low single digit negative comp in week two, a high double digit negative in week three and a high positive double digit comp in week four.

But that three and four was the chang of how Thanksgiving went last year.

Right.

Thank you very much and good luck for holiday.

Thank you.

Your next question comes from Dawn Stoner's line with Pacific Growth Equities.

I have a couple of questions.

First, just a follow-on to the previous question on the marketing for Q4.

Wondering if you could update us on the nature and timing of the promotions last year.

Last year we had bouncebacks and we had money cards and we had direct mail pieces going out.

The problem last year, we caused an erosion in the margin.

They were able to use any one of the cards simultaneously with another.

This year it sequences so they have to use the money card or direct mail piece.

They can't use both and the money card is a sequence that one begins and one ends.

That's helpful.

Then a merchandising question for you, Roger.

I definitely think the bottom's business looks fantastic.

Clearly though tops is an area where you still have opportunity perhaps excluding graphics.

Just wondering what you're looking at to reinvigorate that business.

How do we look for the assortment to change as we head into spring?

Obviously our sweater assortment is great and our wovens are terrific.

As relates to knits, we recognize we have work to be done.

We are challenging both design and merchants and we'll get that right and active is a big part of it and we'll be into the active business.

Okay, great.

And lastly for Laura, the tax rate came in higher than I was looking for in the third quarter.

What rate should we be using, going forward?

Use the rate we used, the 38.8.

Great.

Thank you.

Do we have any more questions?

Your next question comes from Dana Telsey's line with Bear Stearns.

Good morning everyone.

You mentioned what you're doing advertising-wise.

Is the ads spend more or less in this quarter versus last year.

And just in terms of denim, basics verse fashion.

What are you seeing and you've done a lot of customer focus groups, how are you going to pace them going forward?

Thank you.

The denim business on the women's side in basic denim continues to comp in double digits.

Obviously, denim as a lifestyle brand, that's the most be critical item of all, so we are pleased on the item doing so well.

On the men's side, the two categories in denim have been terrific.

One we eliminated, which was a big mistake and I don't want to get into the details of it for competitive purposes but we'll go back into that business and that will make the difference on our denim side of the business.

As relates to true fashion jeans, all the wild types of details, that business is not happening, we don't have inventory, we cleaned out our inventory in the third quarter and very well set in the five pocket, all the different fit systems and washes and tints to maximize the business in the fourth quarter on the women's side of the business and that business is comping double digits.

Dana, our advertising spend is projected to be almost absolutely flat in dollars this fourth quarter.

Thank you.

And customer focus groups?

Any change going forward how you'll do that in the pace of them?

We'll continue to do focus groups both from a product on campus and every six months as it relates to the brand.

Thank you.

Your next question is from Michael Darhesh' line with Jeffries.

Congratulations.

The new floor looks wonderful.

There's some new hoodies on the website on the girls side and I don't see them on the floor.

When will the additional hoodies be delivered to the stores?

I have to clarify what you're seeing on the website, Michael.

This is Susan.

We do have a new hoodie program delivering to stores we are hoping to get at least some quantity out there for the Thanksgiving selling weekend.

So week four November is the next targeted delivery date?

And all the active inspired graphic sweat shirts and in large quantities once they get here for the fourth week set.

What's the color pallet?

Feminine.

Very feminine.

We are having success combining active kind of looks, but a girl still wants to be a girl, and it definitely speaks to that.

Any fleece bottoms to accompany those hoodies?

No.

Your next question comes from Jennifer Black's line with Jennifer Black and Associates.

Good morning.

Hi, Jennifer.

My question has to do, I was curious to know if you feel you are over assorted, are you going to narrow the assortment as you max these changes and focus on really presenting a better merchandise selection.

Can you talk about that, Roger?

In women's we are very key item driven, very focused.

The presentation in the stores frankly is very robust now.

We finally have full product even though as Laura said, the inventories are less than last year.

But we think that our customer choice count in our stores is right on the button as related to women's.

In men's, quite frankly not robust enough but too sophisticated and those changes will take place.

Will you be narrowing your SKUs and going deeper?

An SKU is what we call a stockkeeping unit.

Really what I think you're addressing the customer choice, how many styles?

In women's we think we have the right number and in men's in some categories, we are not compelling enough.

Thank you and good luck.

Thanks.

Your next question comes from Elliott Laurence with Jeffries.

Good morning.

Just a quick one.

What's the women's/men's mix at this point and how will that change as we go forward?

The women's is 60, men's is 40, and I think when we get men's right, Elliott, it will probably stay about that.

You might see it right now women's might move up to 62-63 as we move into spring and men's will come back as we move next year for back to school and holiday.

When the hoodies arrive and if they succeed as anticipated, will that take some of the pressure off the outerwear business?

I will say that since the weather has gotten cold, on the women's side, women's outerwear -- our assortment is by far the best in the market.

Women's outerwear is doing what it needs to do.

Men's is not.

Men's is a bit too sophisticated.

Women's have a hoodie program in now which is the velvet hoodie program and men's has their graphic fleece program.

Men's fleece is doing great.

We can see how much we are selling and how much we missed for back to school.

Women's does has a program doing relatively well and a new program in November will give women's an added shot in the arm.

Have you been able to fill in the men's so you consistently have enough men's hoodie inventory in the stores?

Yes.

Right now we have inventory and for the first time we are putting inventory in the reserve to flow it back to the stores.

Terrific.

Thanks, very much.

Your next question comes from Robin Murchison with Jeffries.

Hello.

Question is regarding -- it was my understanding you guys were going to ask during your mall interviews the question about age, a specific question about age, not age range.

Did you ask that question and if so can you share it with me?

We did not ask it.

Got stuck on the no.

It was not part of the list of questions is what we're asking.

Much more focused as Roger mentioned on style, fit and value.

Thank you.

Your next question comes from Richard Baum's line with CSFB.

Good morning, everybody.

Just a couple questions.

One for Roger.

You are repeatedly using this term "too sophisticated for men's" and for those of us not very sophisticated, can you say what that really means in terms of product.

If you take a look at our color pallet, it's probably a bit too earthy.

It's good looking but it's not exactly where I believe we should be in terms of the vibrancy and energy of the colors.

There's some items in the line that are terrific looking but just a bit older, very clean, very esoteric in terms of how they look.

I think we should have more fun, more energy and sprit and we'll be taking care of that.

A couple more quick ones here.

I was intrigued by your comment you've got to expand and be more inclusive of the High School age consumer, it's always difficult to be able to have a store that's appealing to both High School and college at the same time.

What do you think of the things you need to do in order to make that happen so you don't scare off one or the other group?

I think you have to be focused on the active side of the business and we haven't done that well enough.

You think you can do it, through just a product category?

The bottom line is the edit point is an 18-20-year-old.

That's a person in college.

That High School customer absolutely buys and wants to wear the same merchandise as the college customer but we got so focused on concentrating on the college customer that we looked at college and up rather than college and down.

It should be a natural thing for us to do, and a natural evolution.

It should not be an issue.

And just lastly, a question for Laura, you mentioned in your comments that part of the SG&A increase was due to a cancellation of hardware release?

Yes.

Can you provide commentary about what that's all about and why?

Yes.

Quite simply we upgraded our AS400s.

We had older leased items that we canceled.

And IBM wouldn't negotiate with you?

We didn't need to carry these on a lease, so we discontinued them.

Okay.

Great.

Thank you.

Your next question comes from Richard Jaffe's line with UBS.

A lot of my questions have been answered, but if we can go back to Canada for a second.

Talking about American Eagle Canada versus Bluenotes.

American Eagle Canada doing well, Bluenotes hasn't, same environment What are the problems with Bluenotes today and can we see hope in the future?

Our AE Canada business, we're new up there, we're the hot brand, the new guy on the block, so to speak.

All the stores are brand new, fresh look.

You can attribute some of the success to the newness.

I think the product is appealing to the Canadian customer.

I think Bluenotes is really a valued proposition strategy and I believe that over the past few years, we've gotten away from that somewhat.

We are focused on the Jeans business which is the cornerstone by far of the product line and we've taken the assortment and made the assortment much more in tune to the teenager.

The target is 17 years old High School kid and finding that all the fun stuff, the graphic t-shirts, some of the sweaters and accessories has resonated extremely well.

Where we've not done a good job is where we've tried to get too sophisticated in the bottoms end of the business and it has not done well.

Some of the things that sell well in the states, the hoodies the graphic t-shirts, and basic Jeans and at a price, does well there and we've had strong indicators but still a ways to go.

Thank you.

Okay.

I think we'll take one more question.

Okay.

Your next question comes from Liz Pierce with Sanders, Morris, Harris.

I have a question when you talk about the active, is it going to change as a percentage basis in terms of total mix?

Our active would grow on a percentage basis, yes.

Any indication of the magnitude?

I don't want to give that out.

Finally about the logo, active and logo, you were go to get more of that back in the fourth quarter.

Our logo, our brand is very powerful.

It's the biggest brand in this lifestyle destination.

Anything we put our brand on does great.

We try to keep it under control.

We don't want to put American Eagle Outfitters on the front chest of everything we sell.

We keep it to well under 15% of the total and we want our product to sell because of our product but we certainly know, that on the right product where the graphic needs to be, American Eagle Outfitters will be there.

And our Eagle is doing terrific on our knit polos.

Great, thank you.

So when you talk about increase in active, we won't see a corresponding increase on the logo.

Probably, yes, because active is inspired by a logo.

But close to that 15%?

15-20 but don't hold me to it.

Thanks, everyone.

We hope you have a great holiday.

Thank you for participating in today's American Eagle Third Quarter Earnings Results Conference Call.

This call will be available for replay beginning at 12:00 P.M. eastern time today thorough 11:59 Eastern Time on Thursday, November 27, 2003.

The conference I.D. for the replay is 3119592.

Again the conference I.D. number for the replay is 3119152.

The number to dial is 1-800-642-1687, or 706-645-9291.