American Eagle Outfitters Inc (AEO) 2003 Q4 法說會逐字稿

Good morning.

My name is Theresa, and I will be your conference facilitator today.

At this time I would like to welcome everyone to the American Eagle Outfitters fourth 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 period.

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

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

Today's speaker will be Mr. James O'Donnell, Chief Executive Officer.

Thank you.

Mr. O'Donnell, you may begin your conference.

Thank you, Theresa.

Good morning everyone.

This is Jim O'Donnell.

Other participants today will include Roger Markfield and Laura Weil.

If you need a copy of our fourth quarter press release, it is available on our Web site, ae.com, or 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 upon current information which represents the company's current expectations or beliefs.

We caution investors that actual results may differ materially from those expectations or beliefs based on the risk factors described in our quarterly and annual reports filed with the SEC.

Now our fourth quarter adjusted earnings increased 6.7% year-over-year excluding the charge for Bluenotes remaining goodwill.

Total sales in the quarter rose 5.2% while comp store sales declined 4.7 as Laura will detail in a few minutes.

Our gross margin improved 170 basis points over last year.

We continued to control SG&A expenses, however, there were a number of one-time expense items this quarter, including severance expense and store impairment charges.

In 2004 expense control will remain a top priority across the company.

We ended the year with $338 million in cash and short-term investments, an increase of $96 million over last year despite a very challenging year.

Although our fourth quarter business improved year-over-year, and strengthened from the third quarter, we are not satisfied with our financial performance.

Our company is capable of much stronger results.

Entering 2004 we are focused on achieving higher comp store sales and lower markdown rates to maximize our gross margin opportunity.

While it's still early in the spring season, we are very pleased with the initial customer response.

Consolidated February comps through yesterday are up in the mid teens.

On our third-quarter conference call, I described a number of key changes in our organization, which are now in place.

Roger's renewed focus on merchandising and design is reflected in our spring and summer assortments.

He will continue in this role focusing on developing talent and refining our merchandising process.

Our 2004 merchandise assortments will have a stronger point of view with a clearer message to our customers.

In 2003, we opened 59 new stores, closed 8 locations, and completed 67 renovations, growing square footage by 10%.

We're thrilled with the performance of our new stores we opened in 2003, which are achieving sales of over 90% to our mature stores.

First year pretax ROI's on new stores are exceeding 70%.

We entered new, exciting markets in 2003, including Hawaii where we opened 4 stores, and in December we entered Puerto Rico, where our store in San Juan reached $1 million in sales in just seven weeks, a company record.

This year, we plan to open 50 new American Eagle stores and renovate approximately 50 locations.

We are pleased with the performance we achieve after renovation.

We've consistently experienced about a 15 point lift in sales performance after the remodeling is complete.

Roughly 30% of the chain is still in our old format, and the majority of these locations are in the midwest and the northeast where we have the greatest opportunity for improvement.

We will however, be more selective on how large we expand stores, keeping most to around 5,000 to, excuse me, 5,500 to 6,000 square feet.

Regarding our Bluenotes division we wrote off all the remaining goodwill during the fourth quarter.

Excluding this charge the loss per share narrowed to 2 cents compared to 5 cents last year.

While obviously we're still disappointed with Bluenotes' performance the business is improving.

Sales trends strengthened, expenses were down versus last year, and markdown rates were reduced compared to last year.

And the brand appears to be regaining traction with its customers.

In fact, the spring season is off to a positive start.

With that said, our long-term plans for this business are still being evaluated.

Now here's Roger.

Thank you, Jim.

Good morning everybody.

Fourth quarter ended by hitting several strong notes for us.

It was great to see the business pickup so dramatically after Christmas.

Our planned denim promotion was successful and our spring transition assortment was very well accepted.

We're now into our spring season, and very pleased with sales trends to date.

More on that in a minute.

With the exception of the post-Christmas season, our fourth quarter business was challenging.

Certainly not where it needed to be.

Although our gross margin improved versus last year, and our markdown rates were lower, we did not achieve the level of volume or the profitability that this brand is built to produce.

Most disappointing was our men's business and both our men's and women's outerwear.

Right now we're finalizing powerful strategies for each of these businesses for next holiday, and we feel we're heading in the right direction for a strong performance for each of them.

Fourth quarter positives include women's apparel with denim, pants, skirts, knit tops and woven shirts all up to last year.

A few categories within men's increased, including denim, graphic tee's and woven shirts.

Our denim business continues to gain momentum.

For our customers, we are the denim destination.

And as men's denim evolves to a more democratic style and fit this year it should only get better.

The mid-single-digit drop in our average unit retail price was the biggest driver of our comp decline.

Units per store increased in the low single digits, units per transaction were up in the mid single digits and transactions per store declined in the low single digits.

Our direct business continued to strengthen in 2003, achieving annual sales growth of 20% to $54.6 million.

Profitability improved as well.

Now on to spring.

We are off to a great start and yet I'd be remiss to not mention that it is still very early in the season, but with almost four weeks behind us we are very pleased with all aspects of the business.

Both men's and women's are comping positively.

All metrics, including the average unit retail price, units per store, units per transaction, and transactions, are positive month-to-date.

And our men's business in general is undergoing a positive turnaround right now.

Women's spring business is just terrific.

We have the key fashion looks for spring, it's exciting, fresh, colorful, and very compelling.

Our stores look clean, crisp, youthful, and wholesome.

It's as good a match of product and venue as there is in this sector, and I happen to think it's the best.

Our overall brand strategy is a perfect matchup with what our customer wants.

All-American wholesome fashion at a value price, targeting the largest slice of the desirable high school demographic.

Let me wrap up by saying that I feel the company is in a good place now and recharged for the new fiscal year.

Jim O'Donnell has instilled important disciplines across the country and the company and we have excellent product teams in place in both Pittsburgh and New York.

We're optimistic about the changes we've made, we know they've put us in a great position for a successful 2004.

Now here's Laura.

Thank you, Roger.

Good morning everybody.

I'd like to reiterate that we are not pleased with our overall performance in the fourth quarter.

However, I am very excited about our recent initiatives and disciplines now in place and believe we have tremendous opportunities for growth in top line sales as well as profitability in 2004.

Turning now to the details of the fourth quarter.

Total consolidated sales increased to 5.2% to $517.3 million from $492 million last year.

Total sales included $26.7 million from the Bluenotes chain and $21.6 million from our direct business.

Fourth quarter comparable store sales for the American Eagle brand declined 5.1% compared to a comp decline of 3% in the fourth quarter last year.

The negative comp was due to a mid single digit decline in the average unit retail price.

The lower AUR was driven by our sales mix which was weighted toward lower priced items within certain merchandise categories.

Consolidated same store sales declined 4.7%.

Comps for the Bluenotes stores increased 0.8% in the fourth quarter.

Our gross margin leveraged by 170 basis points to 37.6% from 35.9% in the fourth quarter last year.

Higher consolidated merchandise margins were offset by deleveringing of buying occupancy and warehousing expenses.

Merchandise margins increased primarily due to improved markon combined with lower markdowns compared to the fourth quarter of 2002.

Within buying, occupancy, and warehousing costs, rent expense deleveraged due to our comp performance.

By division the AE brand and Bluenotes both contributed to the improvement in the gross margin.

SG&A expense as a percent to sales rose to 21.8% from 20.7% last year.

Within SG&A there were a few items that we do not expect to recur, including severance expense and store impairment charges which caused roughly half of the deleveringing.

Excluding these items, SG&A rose 8% which was in line with our plan.

Due to the negative 5% comp we deleveraged certain fixed expenses, primarily store salary and services purchased.

Other income in the fourth quarter was $383,000 compared to $1.4 million last year.

The decrease in other income was due to lower interest income.

Net income for the quarter was $35.4 million after the $6.1 million impairment charge related to the remaining Bluenotes goodwill.

Our balance sheet continues to be very strong.

We ended the period with $338 million in cash and short-term investments, an increase of $96 million from the end of the fourth quarter last year.

Total consolidated merchandise inventories declined 3% to $120.6 million at the end of the quarter.

U.S. inventory per square foot at cost was down 12% to last year.

However, it was up compared to our 2001 inventory per square foot.

Last year we entered the first quarter with too much inventory.

We are comfortable with our current position and have plans to flow spring and summer goods to the stores early if the current business trends continue.

Capital expenditures for the quarter totaled $9.7 million, and for the year totaled $64.2 million, primarily related to our new and remodeled U.S. stores.

In 2004 we expect capital expenditures to be approximately 85 to $90 million.

As Roger said, we are very pleased with our initial spring business and enthusiastic about our opportunities for the first half as well as for the year.

Yet it is still very early.

February is a smallest month of the first quarter representing just 25% of the quarter's business.

The majority of first quarter sales and earnings are realized in March and April.

Therefore, at this time we are not providing sales or earnings guidance.

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

We ask that you please limit yourself to one question so that we can field as many different questions as possible.

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

Our first question will come from Kristin Larn of SG Cowen.

Good morning.

It's actually Lauren Levitan from Cowen.

Laura, could you comment on where you stand in terms of your expense control initiatives?

I know you gave that non-recurring portion for Q4.

When exclude those can you talk about where the opportunities may still remain in '04?

And then, Jim, you made a reference to still looking at what the long-term plans might be for being evaluated for Bluenotes.

Could you comment on what the gating items might be or what milestones you'll be looking for to make determinations about the growth potential of Bluenotes?

Thank you.

Lauren, it's Laura.

In SG&A I think it's pretty clear that we've said and we will continue to manage our expenses and hold back on expense as much as we possibly can.

There are some areas that we feel that we can continue to reduce expense.

Some are in areas such as marketing, but that's just one of many areas.

Travel and entertainment.

We'll continue to look at our freight expense, but freight and the biggest opportunities may exist in our gross margin line.

So when we look at our expense, we obviously carry certain expenses in our cost of goods sold, and then obviously in SG&A, but we're looking at both, and we're seeing opportunities in the gross margin line as well as in SG&A.

Lauren, on Bluenotes, as I stated earlier, is that we've showed some positive signs towards the end of '03, and we're encouraged with '04, and having said that, though, I have established, along with Fred Grover, who is the President of the Bluenotes division, benchmarks in both sales, gross margin, and naturally, bottom line profit for '04.

At this particular time, it behooves us to see how the first and second quarter roll out and how we're meeting the threshold of the goals that we have affixed to that brand.

So at this particular time I know there's been a great deal said about Bluenotes and what are we going to do with it, but at this time we're being very conservative, and we're watching, and we're just going to evaluate it on a month by month and a quarter by quarter basis and see if the early signs in '04 continue on.

And if they do, be just great, and if they don't I'll have to make a decision.

Thank you.

Your next question comes from Neally Tominga of Piper Jaffray.

Best pronunciation of my name ever.

Congratulations on a fantastic February.

Do you have some more detail on that?

Just looking for a sense of what your carry-over was heading into February?

And then also Laura, how fast can you react to this trend?

Where can you be back into this if you are selling through denim, when can you be back into it in a meaningful way?

Just a little more color of how you can respond.

Neally, I'd like to turn that question over to Roger.

It's near and dear to his heart so I'd let him answer it.

Obviously we're pleased with the trend of the business and we have trigger points on all of our merchandise to speed up the process to deliver quicker.

It depends on the product.

Some product we can move as fast as 35 days, and some product takes us 55 to 60 days.

But all of the trigger points, where it's appropriate are being triggered, but we want to run a very conservative inventory basis.

Okay.

Then in terms of the carry-over units heading in.

We have less carry-over on an average store basis this year than last year.

Fantastic.

Thanks and good luck.

Thank you.

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

Laura, can you talk a little bit about the board's thinking as far as new concept developments that I think a year ago the company talked a lot about, and then obviously with the big cash balance, you know, the thoughts about potentially, you know, establishing a dividend?

I'm going to let Jim O'Donnell answer that question.

As far as the new concept is concerned, we have nothing definitive to announce at this particular time.

That does not necessarily translate into we would never entertain a new concept, but right at this particular time we have no plans.

As far as the dividend, I really have no comment on the dividend.

Fantastic.

Thank you.

Your next question comes from Stacy Pak of Prudential Equity Group.

Hi, thanks.

I was just chuckling at that fantastic.

Anyway -- I don't know if y'all heard me.

I have a couple of follow-ups.

My big question, is Roger, just for you, if you can give us some more direction on spring and maybe, you know, just, are we going to start seeing the long-sleeved sherbet stripped wovens in your stores and the scarf belts?

And just give us more direction on spring.

And then a couple follow-ups for different people.

Jim, on Bluenotes do you need to be breakeven, or thereabout?

Is that part of the trigger?

And Laura, you mentioned expense opportunities in gross margin and sort of focus on SG&A.

Can you give us basis point reductions or dollar growth in SG& A or what the expense opportunities are?

A little more detail on those.

And also inventory planned for at least the first half.

Stacy, first on the merchandise, obviously for spring I think the floor set that we have in place I'm sure most of you on the call have seen it.

It is very refreshing.

It's very tight.

It's the right items, it's the right theme, and it's in the right colors.

We've got it looking in the store very fresh.

The marketing looks great with it.

And we're set and ready to do business, and the customer is responding, and we're delighted.

Jim, do you want to talk about Bluenotes?

Yes.

Stacy, on Bluenotes, the benchmarks that we've established that would lead us to feeling that we were headed in a more favorable direction are basically three.

And they would be rather obvious, I'm sure, to everyone on this call.

One is that we would reduce the loss of '03 dramatically, but may not breakeven.

We do have a scenario to breakeven and then we have a stretch scenario where we could be somewhat profitable although that is a stretch at this particular point based on current information.

Okay, Stacy, it's Laura.

In terms of SG&A, the way I'm looking at it, we were flat, or there was no increase per square foot in SG&A for the fourth quarter, and what I would like to see with square footage growth at about 7% in Q1, I would love to see our SG&A track that, in terms of growth in dollars.

So I would, in other words, I would hope that our SG&A would be somewhere in the high digit dollar increase.

High-digit percentage dollar increase in the first quarter.

And what about on the gross margin?

Gross margin, if you look at our gross margin over the past couple of years in Q1, last year we had a 36.3.

Obviously that was a very big disappointment for us and we would certainly hope that we have opportunity there.

But you had said expense opportunity, so I'm just trying to zero in there.

Oh, the expense opportunities.

In the margin.

You said gross margin.

In cost of goods, I would say that it will be an annual opportunity.

I'm not sure that we'll be able to get as much in the first quarter but we're looking at several million dollars over the course of 2004.

And is that sourcing?

No.

It's freight and other opportunities in logistics.

Okay.

And the last one was the inventories.

I forgot the question.

What's the plan for the first half?

Oh, I don't think you asked that.

At the end of the first quarter, we think that inventories are projected to be down slightly on a per-square-foot base.

Okay.

And Roger, congrats on the GQ pickup for the Springer shirt.

Yeah, you like that one, huh?

I did like it.

Green is hot.

Green is big.

Thanks.

Thanks, Stacy.

Your next question comes from Lee Backus of Buckingham Research.

Roger, I'd just like to discuss that.

February comps, certainly you're over easy comparisons with the weather.

Could you give a sense of how comps are running just on sort of normalized days when you didn't have stores closed?

Also, do you think February comps are cannibalizing March in anyway maybe as far as clearance merchandise that running out earlier?

And maybe you can also comment on the new, I mean you're bringing in some new styles right now, maybe you can comment on the changes right now that are going on as far as the floor set.

Right.

Lee, obviously I, you know, in this business you never know what's going to come.

We can only tell what you we know.

The month of February is driven entirely by year-round and spring merchandise.

The clearance part of is it a very small part of it.

And obviously on the snow days, you do much better, but we're doing pretty good every day across the whole country right now in most categories of the merchandise.

And on the new set, you know we change our floor sets, we only do, we now clearly only doing six design lines a year but from the six design lines a year we're doing ten floor sets a year, and we, the freshness factor in our stores is great, and it looks terrific right now.

Okay.

Thank you.

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

Thanks.

Good morning everyone.

Hi, Dorothy.

I wanted to look maybe at a bigger picture.

I realize it's early in the first quarter.

February looks great, but you don't want to make any predictions about the quarter yet.

But if we look out on an annual basis and maybe just longer term with what would seem to be a lot of opportunity in gross margin, where do you think gross margin can go or should go over time, assuming the merchandise continues to be responded to favorably?

Can you get back over the 40% mark or even as high as almost a 43% rate that you reached at one point in time?

Is that realistic, and what kind of timeframe can you give me?

Laura?

Dorothy, obviously if you look at our six-year history, 2003 would be at the low for that entire six-year period.

The most common number is in the 39 point range for gross margin over the last several years.

The last two years have obviously been a disappointment.

I certainly can't make you any promises at this point but if you look at our history and you look at how we're sourcing and improvement in our product and execution of our brand strategy, I would certainly hope that we could return to historical levels.

Not maybe 99, which was obviously a historical high for most, especially retailing, but certainly higher than we've seen in the last two years.

On the topic of sourcing, can you talk about what impact you would see coming from the end of quota that everybody's talking about in 2005?

How are you looking at that, and what can we expect?

Obviously we're strategizing that and we have some strategies in place, and we will go according to our strategies.

When quota goes away there will be a cost savings.

So we will benefit from that cost savings, and our average cost right now is still being reduced somewhat.

Okay, Dorothy?

Yeah.

And then just lastly, Laura, you've done a fantastic job on the expense line.

Where do you see that going over time?

Can it go lower than the percentages that you're at now?

Where do you think it can go?

Well, as I mentioned, Dorothy, on a dollar basis with new stores it tends to go up pretty much in line with square footage.

The trick is top line growth.

And what we haven't seen in the last two years is that comp growth in top line growth.

So our goal here is obvious to improve that gross margin line but also we need to stimulate top line sales.

When we get that top line sales growth you will see the rate of SG&A coming to more historical rates.

And any change in the way you're looking at the promotional cadence?

I know you said earlier in the fall you were not promotional enough and it really hurt but as the merchandise is improving are you thinking any differently about your promotional cadence?

We did even before the business looked this strong quite frankly, and the marketing is to enhance each of these floor sets that we do, so all of the marketing is really an image, fun type of branding, both in store and direct to the consumer.

We're definitely planning on doing less promotional merchandise for the promotional sense.

We think we don't need it, we think the brand is very strong, and when you have the right product, what you want to do is really get behind the product in a creative way, and that's what we're doing right now.

Great.

Thank you.

Your next question comes from Lee Giordano from Merrill Lynch.

Hi, it's Lee Giordano.

Can you guys talk a little bit about your Cap Ex plans for 2004?

I know it's a little bit higher than last year.

And can you break it out by IT spending, new stores, and remodel?

Secondly, can you give us any update on new IT projects that are upcoming or any new technology you put in place that's changing your business?

Thanks.

Let's tackle the Cap Ex number.

The Cap Ex number is a projection at this point, Lee.

We've put in some projects.

Obviously we know we can estimate our store expense at roughly $57 million of that expense for new stores and remodels.

The next big bucket is obviously an information systems, and we're doing some work in our distribution center up in Canada, we're modernizing it and putting in some new systems there.

There is a bucket related to our headquarters that we are in the process of evaluating.

So there is a part of our Cap Ex projection that we put in our earlier comments that is still under discussion.

And in terms of IT projects, you know, we're embarking on ProfitLogic this spring, and, you know, it's a markdown optimization software product and that should be installed by summer, late summer.

Great.

Thanks a lot.

Sure.

Your next question comes from John Morris of Harris Nesbitt.

Thanks.

Good morning.

Question about just your initial price points and where you're setting your initials.

Any thought there looking ahead in terms of what your plan might be with initials, thinking about others around you, actually looking at increasing price points in certain collections?

And then a follow-up to that is, also, Roger, on the men's side of the business, we've heard how men's is picking up here.

What do you think it is?

What do you think's behind that?

And is it picking up relative to women's, or -- just that.

I mean, is there something else going on there style wise?

John, on the pricing, we want to be a mass quality fashion value chain.

We're very, very focused on being value-priced.

Now, with saying that, obviously when you're able to sell it at our ticket price, there's big room for improvement in the margin line, and that we'll see as the product is right.

So with that, we're satisfied.

And as relate to men's, obviously men's has had a soft period for two-plus years, so relative to itself it's starting to come back.

Our women's business on an average store basis has consistently been pretty good, but relative to women's, men's and women's are both picking up similarly.

Thanks.

Good luck for spring.

Your next question comes from Ron Murchison of Jefferies.

Hey, it's Robin.

That's a new one.

Usually it's the last name they mess up.

Roger, now maybe I've missed something, but in your remarks you said target the largest likes of high school demographic.

That's not a 20-year-old.

I just want to you expound on that a little bit.

High school and college.

He meant high school and college.

I said high school and college.

Okay.

Sorry, I missed the college.

Thank you.

If I didn't, it's high school and college.

It's in my speech.

Okay.

Thanks.

Your next question comes from Kimberly Greenberger from Lehman Brothers.

Thank you.

Good morning.

Hi, Kimberly.

Laura, looking at your gross margin line, just using maybe 2000 and '01 one as a benchmark we're down about 350 basis points, give or take.

Could you tell us how that breaks out between deterioration in merchandise margin versus negative leverage on some of the other costs like occupancy, distribution, and buying?

That would be great.

I'll tell you, it's about two-thirds markdown related, and about one-third deleveringing of buying, occupancy, and warehousing costs.

Theoretically, as we work through '04, with potentially, you know, better merchandise execution and a lower promotional cadence, is it possible that that's where you could see some improvement in the gross margin line, in that markdown portion?

That's where we're targeting.

We have to reduce our markdown cadence.

If you could just tell us the promotions that you had in Q1, Q2 last year that you're considering either scaling back or pulling back on that would be great.

We are doing that but I don't want to broadcast it.

Okay.

Thanks, Roger.

Thanks, Kimberly.

Thank you.

Your next question comes from Janet Kloppenberg of J J K.

Hi, Roger, Laura.

Hi.

Congratulations.

Thank you.

Roger, I was wondering if you could talk a little bit about the men's business and if it's new styling that's driving it or if it's the polo and denim business, and also if you could comment on the health of the logo business?

And also, Roger, we've seen start this with men's before with men's, a little fit and start and then it slows down again.

I'm wondering your thoughts on the potential of that happening again and what would be driving sort of this renewed spending by men.

And lastly, if you could talk about any anticipated disruption late this year with respect to the quota changes going on.

In other words, you won't be able to borrow quota later in the year.

Could that hurt deliveries in the fourth quarter?

Thank you.

Yes, logo, new style, and color is all helping the men's business.

I certainly don't have a crystal ball to know whether it would continue or not.

My instinct is that we look a lot better, we're a lot more colorful, we're a lot more fashion right.

We see no disruptions taking place for us based on what's going to take place in terms of quota and not being able to borrow.

Remember, Janet, there are many quota-free countries.

Right.

Okay.

Roger, let's just go back to the men's business for a second.

Is there any new style that's driving the business, or --.

I really don't want to get into the details of the fashion part of the business.

And you can understand why.

I absolutely can.

And any thoughts on doing some TV marketing, or other new forms of marketing?

We don't want to give away our strategies at this point as relates to marketing.

Okay.

Thank you very much.

Your next question comes from Adrianne Tennant of Wedbush Morgan.

Hi.

Can you hear me?

Hi, Adrian, yes.

Hi.

Congratulations.

I'm sorry, I'm on a cell today.

Just a quick question on, you're seeing some strength, some emerging strength in the men's.

I was wondering, are you planning for the spring season, are you planning any difference between the men's and women's split and can you give us the split from last year?

And then secondly, are there any categories that you've seen in early spring that you could be deeper in?

And then finally can you just give the breakdown of stores by quarter?

Thanks so much.

As relates to the split between men's and women's in the first quarter, we're planning similarly to last year, since they're both trending up.

Laura, the second question you want to answer?

What was the split last year?

Last year in the first quarter, the men's business was about 39% of the business, and that's where it's planned this year again.

Okay.

Great.

Okay?

Your next question comes from Richard Baum of CSFB.

Good morning, everybody.

Question for Roger.

I know you're reluctant go into a lot of detail here, but when you look at the, comparing the performance of men's to women's so far in the spring season, are you seeing, where are you seeing differences in terms of categories or color pallets, or is the performance pretty uniform, you know, when you look at some qualitative measures of how the two businesses are performing?

We're really pleased with the performance in both, Richard.

I will only go as far as saying that knitwear in both men's and women's is very strong.

All right?

Your next question comes from Richard Jaffe of UBS.

Good morning.

Thanks very much.

I guess I'd love to hear more about the business, Roger, and I sense your reluctance to talk about it, but in the broadest terms, are you seeing trends that will go forward through spring break and into summer?

That is to say, what's working, has some legs and some visibility into the next six months?

You know, I've been in this business a long time, Richard, and we're really pleased with what we're seeing.

I don't know why it wouldn't continue, but I've seen these things before, and in the fashion business, all of a sudden one day everybody stops shopping together across the country.

It has happened.

So, you know, we like what we have, we like what we see ahead right now.

And in terms of, I guess, the bigger issue, the sourcing opportunity, you know, prices in the Far East have been falling, your margins have been falling as well.

If the product is proving more desirable does that suggest not only margin recovery but perhaps even upside?

Yes, absolutely.

That would be terrific.

Thank you.

Your next question comes from Jennifer Black of Jennifer Black and Associates.

Good morning.

Hi, Roger.

Hi, Laura.

Hi, Jennifer.

I wanted to know if you could talk about your operating margins.

I know you don't want to give guidance, but should February translate into really the balance of the year, it seems realistic that could you get back to above a double-digit operating margin.

For the year?

Yes.

Just one second, Jennifer.

Yeah, I do think it's within the realm of possibility.

Obviously one month, and particularly the smallest month, February, which is similar to January, does not make a year.

But as we've said throughout this call, obviously, you know, we need to turn around our margin performance and our operating performance, so we're clearly targeting to improve that.

And can you speak to California?

It seems as though business is really coming back for several of the companies I follow, especially southern California.

Can you speak to how many stores you're opening in California and how your performance has been?

Well, our West Coast business has been very good, and our southern California business has been in the high double-digit comps throughout all of last year, and they continue into so far into February of this year.

We're very pleased.

I think we closed last year in southern California with approximately 24 stores.

I believe we currently will have at the end of the first quarter probably, I think we have opened one more, but our position, the way I want to position it is, we probably will have a 40 to 45 store market there in southern California that would include everything from Santa Barbara south to San Diego.

Jennifer in the fourth quarter California was the number one state for the chain.

Okay.

Well, congratulations, and I'm excited for the year.

Thanks.

Thank you.

Your next question comes from Holly Guthrie of Morgan Keegan.

Good morning everybody.

Congratulations.

The comp store inventory number for the end of the year could you tell us what that was, the comp store increase or decrease?

We'd look at it on a square footage basis, and are you asking what the comp was at the -- .

Just the inventory level per store.

Pardon?

The percent change of the inventory.

It was down in the high single digits.

Okay.

So similar to the total inventory?

Yes.

Catalog.

The catalog is slated to ship I think at the end this month, any day now?

You should be receiving it at home this week.

Great.

Is that a million?

One million circulation.

Great.

Now, most recent floor set, I believe, dropped at the end of January.

When are the next couple of floor sets?

There was one that took place on December 26th, there was another that took place in the last week of January, and we just set a new one that you'll see if you go to the mall today you'll see a new floor set.

Okay.

And then when are the next couple going to occur?

Two weeks after Easter will be the next set.

Okay.

And then just a follow-on to Janet's question, a little bit different take on it, though.

Where are you getting your inspiration from?

What is driving your creative juices now versus the last two years?

We get our creative juices from many, many places.

And how does it differ?

I'm trying to get a feeling for the sustainability.

We're much more focused on exactly what the brand is and who the customer is, and we're very precise on how we're getting our information.

Great.

Thank you and good luck.

Thanks, Holly.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

Mr. O'Donnell, are there any closing remarks?

No, I'd just like to thank all of the participants and hopefully that the February results will continue to replicate itself across the entire calendar year of '04, but time will tell.

Thanks all very much.

Ladies and gentlemen, this concludes today's American Eagle Outfitters conference call.

You may now disconnect.