American Eagle Outfitters Inc (AEO) 2004 Q1 法說會逐字稿

Good afternoon.

My name is Lynn, and I'll be your conference facilitator today.

At this time I'd like to welcome everyone to 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 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.

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

Thank you, sir, you may begin your conference.

Thank you, Lynn.

Good morning, everyone.

Other participants today include Roger Markfield, Laura Weil, Susan McGalla.

If you need a copy of our first quarter press release, it is available on our Web site, www.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 information which represent 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.

I'm extremely pleased with our first quarter financial results.

I believe this quarter marks the turning point for our company.

We entered the year sharply focused and determined to manage our business for higher profitability.

Our merchandising process has been streamlined and strengthened and our spring assortments reflect these initiatives.

From merchandising and design all the way to store level we are executing more efficiently.

We have strong disciplines now in place which will drive productivity and reduce certain operating costs on an ongoing basis.

We've managed inventory appropriately and curtailed excessive promotions which depressed our profit margins and also were not meaningful to our core customers.

We're executing initiatives to improve our brands positioning and bringing more fun and interest to our in-store experience.

Within the company the changes have been fully embraced and I'm very pleased with the positive response from our teams across all disciplines of our company.

The organization is reenergized and we're looking forward to a continuation of positive results.

Now, a few first quarter highlights.

We achieved record sales driven by 9.3% increase in consolidated comparable store sales.

Our gross margin hit an all-time high for the first quarter at a 42.8% led by strong merchandise sell-throughs and significant reductions in mark-downs.

Positive results were broad-based across the majority of merchandise categories as well as all geographic regions.

We continue to control our expenses resulting in 11.4% first quarter operating margin, our highest rate since 1999.

Cash flow was strong, with cash and short-term investments rising 112 million to 326 million at the end of the quarter.

During the quarter, we opened nine U.S. locations and closed four under-performing U.S. stores.

In Canada we closed one AE store and one Bluenotes store.

Our total square footage increased 9.4% over last year.

We are now on track to open 41 additional stores with the majority opening during the second and third quarters.

New stores have performed very well this quarter.

Our 50 new 2003 stores achieved over 95% of the sales per square foot of mature stores.

And we are also extremely pleased with our recently remodeled stores which are producing a sales increase of 36% on a 34% increase in square footage.

These stores are exceeding their sales plans by nearly 20%.

The Bluenotes division continued to improve during the first quarter narrowing its loss to 2 cents per share from a loss of 5 cents per share last year.

Sales trends strengthened, expenses declined, mark-down rates were significantly reduced compared to last year.

Bluenotes' gross margin improved over 1,000 basis points from last year.

With a solid operating plan now in place we will continue to work towards achieving stronger operating results.

Now here's Roger.

Thanks, Jim.

Good morning everybody.

I'm also truly pleased with our first quarter performance.

And I'm even more pleased with the talent all across our company who worked so hard to achieve it.

After a difficult year, everyone dug in, made a commitment to put fixes in place, and worked hard to make key changes in our business.

We restructured our design process going to six design lines that flow merchandise to the stores ten times a year.

We added new creative talent to our already great design team.

We're very excited to welcome Lee Ann Nails as Chief Design Officer.

Lee Ann will partner with Susan McGalla, our Chief Merchandising Officer, strengthening the connection between the design and merchant teams.

Susan has demonstrated excellent leadership and has driven many of the recent changes to our merchandising process.

The first quarter merchandise margins hit an all-time high rising over 500 basis points from last year.

Our mark-down rate was the lowest in over five years.

In addition to fewer products specific mark-downs we've significantly reduced the distribution of coupons.

Now they only go to our best customers through direct mail and we eliminated our April friends and family event.

Yet we continue to offer a strong value message through brand-defining items at compelling price points.

Strong key items offering a great value will be a powerful message during the fall season as well.

First quarter sales strength was broad-based across both men's and women's.

Our men's business comped with the mid single digit increase over last year and importantly margins were significantly higher.

Men's knits have been a major win for us this spring.

Woven shirts, denim and bottoms are strong categories as well.

As most of you know over the past six months we've reengineered our men's business changing fits, fabrics and styling making the line more democratic and accessible for our male customer.

It's classic, tasteful fashion at a great value.

Heading into fall you'll continue to see this business evolve.

Our women's business comped in the low double digits.

Nearly all categories were up to last year.

We're executing very well on the pretty feminine fashion that's fun for our customers and at the same time, we're branding core classic items like tanks and polos, making American Eagle a destination for these key classifications.

Our newly designed accessory assortment has added color, excitement and energy to the store.

And we're having a great time merchandising this for the fall season.

Overall we feel terrific about our fashion direction and positioning for fall and holiday.

Demonstrating the strength of our brand combined with the strong assortment all sales metrics were positive during the first quarter.

The average unit retail price rose in the low single digits.

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

We continue to get terrific feedback on the American Eagle brand.

In the latest True Research we ranked as one of the favorite, coolest and most shopped brand by 12 to 19-year olds.

I'm sure as you've seen our stores are clean, crisp, energetic and youthful.

Our brand strategy has been honed to be just what our customer wants, all-American, wholesome fashion at a value price, targeting the widest possible slice of the most desirable high school college demographic.

Thanks.

Now here's Laura.

Thank you, Roger.

Good morning everybody.

I am also very happy with our record results this quarter, which exceeded our expectations.

Our results were driven by an increase in comparable store sales and strong merchandise margins.

Clearly we believe we have significant opportunity for continued improvements to our sales performance and profit margins going forward.

Now I'll detail the first quarter financials.

Total consolidated sales increased 20% to $350 million from $292 million last year.

Total sales included $17.8 million from the Bluenotes chain.

First quarter comparable store sales for the American Eagle brand increased 9.8% compared to a comp decline of 5.8% in the first quarter last year.

Consolidated same store sales rose 9.3%.

Comps poor the Bluenotes stores increased 2.5% in the first quarter.

We achieved an all-time high gross margin rate for the first quarter leveraging 650 basis points to 42.8% from 36.3% in the first quarter last year.

The higher rate reflected an increased merchandise margin which is primarily due to lower mark-downs compared to last year.

As Roger noted our mark-down rate was the lowest in over five years.

Our IMU improved over 150 basis points due to lower merchandise cost as well as initiatives to control freight costs.

Within the gross margin we also leveraged buying, occupancy and warehousing expenses due to the strong comparable store sales increase.

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

We leveraged SG&A expense by 120 basis points over the first quarter of last year, declining to 27.2% of sales from 28.4% last year.

Within SG&A advertising, salaries, communication and leasing costs leveraged as a result of our ongoing expense control initiatives.

These improvements were partially offset by accruals for incentive compensation, an expense we did not incur last year.

Our operating income margin increased 810 basis points to 11.4% from 3.3% last year, our highest first quarter rate since 1999.

Other income in the first quarter was $977,000 compared to $641,000 last year, reflecting increased interest income due to a higher cash balance.

Net income for the quarter increased 290% to $25.1 million compared to $6.4 million last year.

Fully diluted EPS rose to 34 cents from 9 cents last year.

Our balance sheet remains very strong.

We ended the period with $326 million in cash and short-term investments, an increase of $112 million from the end of the first quarter last year.

We also had $24 million of long-term investments consisting of fixed income securities with an average maturity of 18 months.

Total consolidated merchandise inventories were flat to last year at $146 million at the end of the quarter.

U.S. inventory per square foot at cost declined 7% to last year.

We continue to manage our inventories prudently with a focus on increasing inventory productivity.

We are very pleased with our first quarter turns which improved by 12% as we gear up for our back-to-school season which sets in stores on July 14th we expect to end second quarter with inventories per foot up in the low single digits compared to last year.

Capital expenditures for the quarter totaled $15 million primarily related to our new and remodeled U.S. stores.

For the year we are still planning capital expenditures to be approximately 85 to $90 million.

Now regarding our outlook.

We expect sales momentum to continue into the second quarter.

As we indicated on our April sales call we are pleased with the customer response to our summer assortment.

At this time we are comfortable with the second quarter First Call mean estimate of 22 cents per share.

If sales momentum continues, and mark-down rates remain low, there could be upside to earnings.

We will update our earnings outlook on our May sales release on June 2nd.

Now we'd like to open up the call for questions.

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

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

Your first question comes from Janet Kloppenberg with JJK Research.

Everybody congratulations.

Thanks, Janet.

I wanted to just get a feel for the second quarter, Laura.

The 22 cents is based on what kind of comp outlook?

As I said in my remarks, we do expect the sales momentum to continue.

The comfort level is based on sort of mark-down rates in keeping with previous second quarters.

Okay.

And, Roger, if you could just talk a little bit about the men's business, what's happening in the bottoms business.

It sounds like the tops business is very strong and denim is strong.

Do you expect that to continue?

Will your investment in denim move higher for back-to-school, and if you could talk about other bottoms business including shorts.

I'm going to let Susan talk about some of the product categories.

First of all Janet the jeans business has been very strong for spring, stronger than in the past and we're very pleased about that.

As you know, we want to end our, the denim destination in the mall for our demographic and we will continue to build momentum as we move into the back-to-school time period on that.

Regarding now the other bottoms businesses we believed that we wanted to do a pant business in the spring side for the guy and that is happening for us.

We have some increased product offerings this year that we didn't have last year and that's driving some of the improvements in the men's bottom business.

And then the last point would be on men's shorts.

I would actually tell you on men's shorts it was somewhat soft in the first quarter.

I wouldn't say difficult, but it was a little bit soft.

That has since turned the corner for us and we're experiencing some nice positive results on the men's shorts business.

In both board and casual or how does it look there?

That's actually a very good question.

The casual shorts are where the strength is and the board assortment for us actually continues to be difficult.

Okay.

So the casual is good, the board is difficult.

That's correct.

On the women's side do you think this pretty feminine look that we're seeing be so strong here in the spring will be the continued strong message for fall?

We absolutely think that's the case, and I think what's happening with trend right now feeds into our brand so well and what our core competency is on the feminine side of the business and yes we do see that continuing.

And color as well.

Very much so.

Big time.

Thank you.

Your next question comes from John Morris with Harris Nesbitt.

Thanks.

Good morning.

Congratulations.

Great quarter.

Thank you.

Laura, the IMU, what's your outlook for the IMU on a go-forward basis in the next couple of quarters?

And also if you could remind us of the promotional cadence, promotional events in Q2 that did you last year and any commentary on whether you plan to continue with those again this year or not, or no comment on it.

Then finally, Roger, maybe just a little bit more color on, you know, fall, back-to-school.

You just touched on with it Janet's question, but maybe a little bit more in terms of your approach to the denim business.

Everybody's making a big bet there.

Where you're going to be differentiated, et cetera.

I'll start from the back and on the detail of the merchandise up second quarter I'll let Susan talk to that.

Certainly you know, John, that it's been our vision for the ten years that I've been here to build us to be a denim destination.

We're there.

The last marketing study that was done, we're as a vertical retailer, we're number three in the country.

We're very strong and growing.

We are very well positioned for back-to-school in denim.

In marketing, as you heard it, my beginning conversation, I'm very clear that we're only marketing to fundamentally the stories that we do with each set.

What our customer sees in our stores, what our customer sees in our windows is really where the emphasis is.

We are a very strong brand and our store real estate is the most important part of it.

Certainly we will have magazine ads, we do have the TV story for back-to-school but all of that extra promotional advertising we did we will be doing much, much less of it.

You will not see it.

On the IMU, the IMU has grown nicely for this quarter and will continue to grow in small amounts.

Susan?

John, what was it that you were asking specifically about second quarter?

Well, actually, just in terms of the second quarter I was wondering specifically what the promotional cadence was last year, sort of a quick follow-up to Roger's commentary.

What had you done last year that you're not intending to do this year in the way of friends and family, et cetera any of those events.

And then I was also just asking about the back-to-school styling trends that you see out there that you'll be continuing with, if you can give us a little bit more color on what you're excited about?

Okay.

I think Roger pretty much addressed that first part of what you reiterated there but the other thing on back-to-school is, I think, John, you can certainly count on us being wear now, more so than ever before, and we're excited about that.

The trends that are happening now continue.

We're reinventing that and it really fits in our sweet spot and we're going to capitalize on that.

And also, quite honestly, clearly, we didn't have a good back-to-school last year and we're going to capitalize on that weakness and turn it into a strength for this year.

And then the whole denim thing, Roger said it.

We talk about it all day long here, about the power of denim in this brand, and we won't disappoint for back-to-school.

Any change on initial price points as you head into the second half of the year?

Not really except, what you just, what for you're seeing from us for spring on the renewed sense of value, a great price for a great item that will continue.

Thanks.

Good luck.

Your next question comes from Jeff Klinefelter with Piper Jaffray.

Yes, congratulations, terrific start to the year.

Great recovery.

Thanks.

One question would be on denim pricing.

Clearly as a denim destination in the mall there are some competitors out there at somewhat similar pricing, maybe look to like a Gap or others.

How do you see yourself as being differentiated on that denim pricing or if you are going to be differentiated where you fit in on that pricing continuum for back-to-school as we anticipate a lot of people going after that business?

Secondly, on just kind of an overall growth story, there's terrific margin recovery here.

What do you see now going forward for square footage expansion potential of the American Eagle U.S. business and then kind of what would be the next leg of the growth story?

Thank you.

Jeff, in every business you have to be a student of the category.

Our success in denim has been there for many years, even with other difficulties that we had, our denim assortment for back-to-school in terms of wash, in terms of fabric, in terms of fit, in terms of pricing is very powerful.

It is by far the best line that we've developed.

We are ready for back-to-school.

Okay.

On the growth question, John, we're looking this year to grow somewhere between a low of 8 and a high of 10%, probably more on the 8 range, 8% range.

On the go-forward we'll still continue to open up approximately 40 American Eagle stores in the U.S., five to eight stores into AE in Canada.

As far as the square footage as it relates to size, I am not contemplating opening larger stores.

Our growth on our remodeled stores and our new stores will probably be in the range of 5500 square feet with our current old base of, and our existing stores of about 45 to 4600 square feet.

And you wanted to know what the next generation?

Yeah, I'm just curious if we're doing about 5% square footage growth going forward what are the ideas here and the thoughts in terms of next generation growth?

We are looking at a couple of different things.

At this particular time it would be a little premature for me to speak to them in any specifics, but I am reasonably confident that at some point this year we will be able to speak definitively about something that we're working on that will be a next generation strategy for American Eagle.

Great.

Thank you.

You're welcome.

Your next question comes from Stacy Pak with Prudential Equity.

Hi, thanks.

Couple questions.

First of all, just on the men's business overall, either Susan or Roger, maybe you could comment, it's, you know, comped positively first quarter, I think the last time was early '02.

I heard what you said about what's driving your business, but my question is how much do you think is AE specific versus just an improvement overall in men's fashion?

Then I have a couple of others, but why don't you answer that first?

Go ahead, Susan.

I think that overall, you're right, Stacy, the industry trend in men's has improved but I think with the polo preppy thing we're going to take our market share and capitalize on that and, you know, and feed into that.

I think that we've done some things intrinsically in our men's business to make sure that we do get our fair market of that and I think that we've talked about some things.

We've evolved a little bit on our fit.

We've done some really great market research with the guy, and he's told us that, you know, the whole thing that was happening with trend and lightweight fabrics, he didn't get it.

We've improved some quality of our knit tops and put a little bit more weight back into some of the fabrics and that's being very well received.

So part of it is trend, I think and part of it is what we really are doing to cater to that guy again.

Stacy, you know, in the ball field out there we are the slice of the classic customer at a value price.

We are the classic.

We are the preppy, and we got off of it.

We've adjusted our fits, we've adjusted our styling, as I said at the very beginning and it's righted on course now, and it will stay there.

Okay.

And THEN on the IMU, I'm sure you guys heard one of your competitors was also able to achieve a very nice IMU in their core in the first quarter.

Can you talk a little bit more, I mean, I heard you said it's going to be up going forward.

Should we expect it to be up the same sort of 150 going forward?

How much more opportunity is there on IMU, you know, what are you doing on freight?

And then as a broader part of that question overall, your views on what happens with China in '05, what happens with the availability of quota, are you going to be able to keep some of the cost reduction or do you have to pass it all on?

Right now our IMU is obviously doing well, and as you said, has grown over 100 basis points for this particular quarter.

What we've been able to purchase through back-to-school I see the IMU growing, not at that same rate.

Because of denim?

For a combination of things.

What happens as relates to China obviously we, you know, we have great trading partners, we're very strategic about all of the options that we may have to have in place, and one thing will trigger another thing.

Until those things happen we're very well prepared.

I think that perhaps you'd say in a year and a half if quotas really come off as relates to China, obviously there'll be a reduction in price.

And we will pass a big chunk of that on to our customers.

Okay.

And then final question, Laura, can you just talk about inventory plan for the remainder of the year and sort of update us on where you guys are on the initiatives, the planning and allocation mark-down, optimization, assortment planning, et cetera?

Okay.

Talking about inventory, we're obviously going to continue to manage our inventory as we said earlier prudently, and that means we are going to add where we think we need to, and clearly for back-to-school, as I mentioned, we're going to add some inventory, and we do expect our units and our inventory at cost per square foot to be up slightly.

As we move forward into the year, and we have to obviously look back at last year and what our unit position was and what our inventory per square foot was, we think going into the fourth quarter it will be somewhat flat to up a little, but obviously we're going to seed the business as we need to but manage the business conservatively.

And then the rollout of the initiatives?

Everything is on schedule.

I think that we're much more on calendar as we've mentioned to our investors from time to time.

That was a big initiative that everyone in the company, and Roger alluded to it in his comments, everybody took that on, it's had tremendous impact on our merchandise content as well as our mark-downs, and that's really the big story for 2004, is really a reduction in mark-downs and managing that part of our business better.

But the mark-down optimization did that really benefit Q1 or not?

No.

Mark-down optimization will roll into our business beginning with back-to-school in a moderate way, then in a more pronounced way for fourth quarter.

Thank you.

Your next question comes from Michael Delahar with Jefferies.

Good morning.

Congratulations everyone.

Hi, Michael.

Hey, Roger, just want to review back-to-school for just a moment.

If I remember correctly, there were some stock-outs last year in both rigid and stretch, but stretch in particular on the girl's side.

That's valid.

We're addressing it this year.

Great so is it fair to say that the middle of August, a gal is going to be able to buy the stretch jeans she wants in your stores?

We sure hope so.

And that would be a pretty significant change in terms of potential to drive a business in that classification from last year?

Yes.

And obviously one of the reasons that we're going to have our inventory up a bit.

Right.

Were those small stock-outs?

Were they pretty significant in key SKUs on the girls side?

We had some significant out of stock SKUs and we have set up a model stock program in our 701 which is our reserve area so that we can replenish three times a week, Jim assures me, out to our stores.

Great.

So the merchants can kind of scratch that issue off this year for back-to-school?

Sure hope so.

And then with respect to the wear now on 715, reasonable to assume that we'll see kind of new iterations of the polos and some of the other shorts lead, cut in stones that drove the business Q1?

Yes.

We will continue those looks that are very important in an updated way in the assortment but also obviously we'll be offering some newness on both the girls and the guys side of the business.

Okay.

But still a pretty clear emphasis on basically short sleeve cut in stones as opposed to any long-sleeve knitted goods for that first delivery?

No question.

Great.

Congratulations.

Thank you, Michael.

Your next question comes from Kimberly Greenberger with Lehman Brothers.

Thank you, good morning and congratulations as well on a great start to the year.

Laura, I was wondering if could you give us a little bit of sort of order of magnitude or quantify the improvement in merchandise margin in Q1 versus the leveraging on buying occupancy and distribution?

And also if you could do the same on the incentive compensation and if I remember correctly I wasn't sure that incentive comp was actually accrued at all in any of the four quarters last year.

If you could just confirm that.

As Roger pretty much alluded to the biggest improvement by far, four-fifths of the improvement was improvement in merchandise margin versus leveraging and buying, warehousing and occupancy costs.

We have not accrued until this quarter for two years incentive compensation so we did not have any incentive compensation in any quarter last year.

Did I miss one of the questions?

No, if you could just give us some idea of what the offset on the incentive comp was in 1Q and if that's sort of the magnitude you expect it to be on go-forward?

I would rather not do that.

It's obviously in SG&A, and I don't expect the magnitude to be quite the same.

I do expect to see leveraging of SG&A throughout the year and for the end of the year, including incentive compensation.

Okay.

Great.

And if I could just ask a follow-up for Roger.

If you could just update us, Roger, on how you're feeling about the progress on the fewer floor sets or the fewer design sets, and how the customer appears to be responding to that?

Well, the customer sees ten floor sets, so for the customer they see the freshness, the merchandise being fashion-right and current on a ten times a year basis, and our whole marketing approach behind it is like a Broadway show, and it supports it.

So it's very exciting and very energetic.

What has happened, by only designing six lines, which the merchants develop into ten sets, the design organization is much more focused and working much more efficiently and much more creatively and it's working great.

Great.

Thank you.

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

Thanks.

Good morning everyone and congratulations.

Thanks, Dorothy.

Could you give us the breakdown in the quarter between, or the split between men's and women's?

And then I had a question for Jim.

Where are you in the remodel/expansion process in terms of the entire store base?

How much more of that do we still have to go?

And lastly, could you just repeat the results for Bluenotes in the quarter?

I kind of missed that.

And as things have gotten better there, has that changed your thinking at all on the Bluenotes business?

65/35, women's/men's, Dorothy.

Okay.

On the Bluenotes question, Dorothy, we've lost 2 cents versus 5 cents last year.

And as far as my thinking on Bluenotes, it hasn't changed.

I'm still in the evaluative stage, and I'll continue to look clinically at this business and at some point if it continues to improve, that'll be great, and if it doesn't then there'll be some difficult decisions that have to be made.

As it relates to the remodels or what we prefer to call updating of the existing stores, to have them fully branded in the minimal of our 2000 design, we have 36% of the stores to go.

And I will continue to do 50 stores a year based on the lease renewals and also the priority of existing markets.

And in terms of flagships, larger stores, I know you've got the 34th Street store opening this year, are there any others that are slated or any others you're looking at?

Actually, there are.

Even though they're the most prominent there's only a handful of them.

I would say that we would do no more than half a dozen over the next couple of years.

Okay.

Great.

Thank you.

Your next question comes from Lee Giordano with Merrill Lynch.

Hi.

Good morning, everybody, congratulations.

Thank you.

Just wanted to get a better idea, I know you mentioned that you've put some stronger disciplines in place and you are executing a lot more efficiently.

Can you just give us some clarification on what those disciplines are?

And then secondly, you mentioned some new initiatives to improve the brand positioning and the in-store experience.

Also give us a little bit more color on that.

Thanks.

Well, there's a process.

In order to be able to deliver and do ten floor sets a year you have to have a very specific calendar that triggers all types of reactions.

We were not adhering to the calendar the way we needed to, and the fact that we were designing the ten lines a year, it got very complicated and the design group was not able to keep focused.

By changing it from ten design lines to six design lines, everything came into focus, they're being as creative as they need to be, they're able to keep on time line, and the ramifications of all of that for both the merchant organization, for the operational parts of the business, for how merchandise comes into the building, how it's bought, how it flows from the distribution center, the complexities have now been simplified, and it is all working on calendar.

It makes a huge difference.

And to the customer, the beauty is they're seeing ten fresh deliveries a year.

Lee, just to add a little bit to what Roger said, we put in some very strict guidelines in terms of freight and how we would air versus ship.

We also reduced our communications expense.

We, as Roger alluded to, we took a hard look at our advertising and promotion and decided to reduce unnecessary promotional activity which has a huge effect on margin and SG&A costs.

So we -- and we'll continue to look at leasing expense.

We're going to have tremendous savings, I think, in leasing costs, so we are taking a hard look at every single cost center in our company, and we will continue to manage those costs, and hopefully drop it to the bottom line.

And on the brand positioning of marketing, I'm not going to obviously get into the details of what we're doing, but when we do back-to-school, there will be, the stores will look exactly with what the magazines will look like, and the direct mail that goes out to the customer and the TV spot.

The combination will be very cohesive and very creative and directed right down the slice of our customer.

On the, I believe you asked something on the in-store experience.

Right.

Like so many of you have mentioned, and appropriately, as we challenge ourselves, it's the whole, what makes the brand, what makes the product differentiate itself from others in the marketplace, and it's our feeling that because of the demographic we address, we need to add a supplement, if you will, into our stores that's a little different, the experience, put some fun, some energy, and we're working on that.

You'll start to see the first pieces of this initiative at back-to-school.

Great.

Thanks a lot.

Your next question comes from Todd Slater with Lazard.

Good morning everyone.

I have a question about your second quarter guidance.

When your sales trend is positive as it is now and when your product is more on the mark, as it clearly is now, and the environment is positive, as it is now, second quarter profit margins historically are also pretty strong and even higher in the first quarter, was the case in, I think, back in '98 and '99.

Now on first quarter your EBIT rate came in at, if I'm correct here, 11.4% which was not just extremely strong, it was 250 basis points above your average over the last six years.

In the second quarter, your 22 cent guidance I think translates, if my numbers serve me, into about a 6.6% operating margin which is 100 basis points below your six year average, only half the rate of the first quarter, and significantly below your peak.

And not only is the sales trend in good shape and are you suggesting the sales trend will continue, IMUs are much higher, maybe than ever, and operating costs are lower, maybe in the, since the last six years, and I guess I'm just a little perplexed about this guidance, and I wonder what would keep from you achieving kind of sort of even average operating margin rates for the second quarter and for all of 2004, especially in light of your enhanced operating structure, your better merchandising execution, and the environment.

Well, for all those reasons, that's why we said there's upside.

You did a nice job of outlining our history and the future and we did not exactly, [overlapping speakers] and we didn't give guidance, all we did was confirm what is already out there, and I would add that it's up to you guys, obviously, to do your homework, do your numbers.

All we did was confirm the existing consensus, and we're only a few days into the quarter, and as I said, we'll give further guidance, or guidance we will give out in our May sales call.

Just seems that the confirmation is so materially off from the current trend that I'm just confused by why you're being so cautious.

I guess how we feel is that it's still very early in the quarter.

We have one fabulous quarter under our belt, record quarter by all estimations, and we would just like to remain conservative and measured in our guidance.

Historically, to your point, we have had actually lower margins by 300 to 600 basis points in Q2 versus Q1 by virtue of the way we plan and execute our mark-downs and our mark-down cadence.

So that's why we're staying conservative at this point but as you noted there are many areas of potential upside for second quarter.

Just to follow-up on one of the comments you made about your promotional activity, what was the unnecessary promotional activity you talked about?

Unnecessary?

Friends and family.

So there are no friends and family.

I didn't say that.

You asked me what would be one that would be unnecessary at the proper time.

I say you could do without a friends and family.

We don't have one in second quarter.

No, he said event.

Oh, event.

Right.

Okay.

Great.

Thank you.

Your next question comes from Lauren Levitan with SG Cowen.

Thanks, good morning.

I wanted to ask a clarifying question on the expense side, Laura.

You had commented in the past that we could look for SG&A growth to grow in line with square footage but I'm assuming that that didn't incorporate your thoughts on incorporating incentive compensation which obviously you accrue for in Q1.

Is that a fair assumption?

Should we look for the actual year-over-year growth rates to be higher than square footage?

Yes.

I believe in my most recent guidance I said that it would be up in the double digits.

I don't think I said that it was going to be equal to square footage growth.

Okay.

But you're absolutely right, Lauren, it's because of accruals for incentive compensation.

Roger, you had said in your commentary in early response about marketing and promotion you referred to pulling back.

I just wanted to get a sense of what you saw actual marketing as a percent of sales compared to last year.

Should we expect it's really just a reallocation, or do you actually see any trimming of the overall spending as a percent of sales?

On the percent basis it will be less.

Okay.

And then lastly I'm wondering if you could comment on any plan or when we could expect to get an update on plans for use of the growing cash balance and how you would set priorities for the deployment of that cash?

Thanks very much.

Lauren, we do look at our uses of cash.

Obviously Jim alluded to another concept.

We've stated in the past that we would look at share repurchase as well as dividends as uses of cash, and we'll continue to do that among senior management as well as our board of directors.

Thank you.

Your next question comes from Dana Cohen with Banc of America Securities.

Hey, good morning, guys.

Just quickly, a lot has already been asked.

In terms of leverage point on comps for buying and occupancy can you just remind us of that?

We have said, and we continue to believe, that a comp in the low to mid single digit range will leverage our buying and occupancy costs.

Great.

And then on, just should we just should sort of think on SG&A that the current run rate is sort of the right rate to think for the balance of the year assuming continued accruals?

It's higher, the SG&A rate for Q1 is higher than we see our, and it usually is, in Q1 versus the other quarters, and --

Growth rate in dollars?

The dollar, yeah, it's a little bit higher in dollars, too.

I sort of see the growth rate in dollars for the remainder of the year in the 12% range.

And that would already assume some bonus accrual in it?

It would absolutely assume all accruals.

Okay.

Great.

Thanks.

I think we have time for one more question.

Your final question comes from Tom Filandro with Susquehanna.

Thank you.

Laura, maybe I'll ask you this question.

On the mark-down rate comparison, thinking about the first quarter and the increase that you did have in the MMUs, sort of, as we go to the second, third, and fourth quarter can you give us a sense of how far off the norm you are in your MMUs heading into the remainder or the balance of the year?

I don't know that I understand what you mean.

I'm trying to get a sense of if mark-down rates averaged 35% in the first quarter versus a norm, versus, you know, in line with the norm over the last five years what are we looking at from a comparison standpoint going forward in second, third, and fourth?

What are we up against significant mark-down rates [a year]?

Yeah, I mean we were up against very high mark-down rates last year, but first quarter of this year was very low, and it was a result of great sell-through, having the right product, going in very clean into the first quarter.

I wouldn't expect to see the same level of reduction in mark-downs on the go-forward, but I absolutely believe that, you know, assuming our product continues to be as good as it has been, that we'll see a reduction in mark-down rates but clearly first quarter was a fabulous number.

So you're saying that first quarter only, not necessarily the comparisons are going to change, just that everything really worked so well in the first quarter you can't predict that going forward?

You can't extrapolate the same number going forward.

You can clearly, I mean we have absolutely no intention of repeating our mark-down levels from last year.

I want that to be really clear.

They were too high, we are not going to repeat that.

This question is, Jim, and it kind of relates back to Todd's question earlier.

Maybe I'll ask at slightly different way.

But if you look at the first quarter operating margin performance, and you sort of allude to the 1999 performance, it's running about a 85% of 1999's levels.

Is it fair to assume that there's a possibility that given everything that you've changed on the operations side and the merchant design process that you could achieve maybe an 85% rate relative to 1999 levels?

It's definitely a possibility, and may even be reasonable.

But, again, when you only have one quarter under your belt, and you understand this business as well as most, that, you know, you don't want to use the old cliche but you really take this business a quarter at a time.

You're as good as the assortments that are on the shelf.

But right now the indicators, both as we look at the first quarter history and we look at where we are on a go-forward, as well as the initiatives that have been placed and we are executing and maintaining to these disciplines, there's, it's very possible that we could see that run rate.

Thank you Jim very much.

Best of luck.

I want to thank everyone for participating in, we'll speak to you all another quarter from now.

Thank you.

Bye now.

This concludes today's American Eagle Outfitters conference call.

You may now disconnect.

Thank you.