American Eagle Outfitters Inc (AEO) 2004 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the American Eagle Outfitters third 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. [Operator Instructions].

Thank you.

Mr. James, O'Donnell, Chief Executive Officer, sir, you may begin.

Thank you, Tamara.

Good morning, everyone.

This is Jim O'Donnell.

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

If you need a copy of the third quarter press release, it's available on our website, 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 managements 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 risk factors described in our quarterly and annual reports filed with the SEC.

I'm quite pleased with our third quarter financial performance which dramatically exceeded our expectations.

In fact sales and profit margins reached record levels in the third quarter.

The primary key to our success were comprehensive and consumer appropriate merchandise assortments for back-to-school and fall season.

Comp store sales increased 25 percent in the quarter.

Sales combined with a significant reduction in merchandise markdowns drove a 900 basis point improvement in gross margin.

Leading to a record third quarter earnings, which were three times higher than last year.

I cannot emphasize enough the importance of the process changes we implemented late last year.

Our design and merchandise groups are now working in lock step and across the entire Company we are operating more effectively.

I'm extremely proud of our entire organization for executing to record levels.

But it doesn't stop here.

We have tremendous opportunities for continued growth within the American Eagle brands, as well as our pursuit of another U.S. concept.

Our cash position is strong with cash and short term investments totaling $385 million, increasing by $179 million from the end of the third quarter last year.

Based on strong cash flow and signaling confidence in our future, we initiated a dividend payment at the annual rate of 24 cents per share.

We paid our first quarterly dividend of 6 cents per share last month.

Now for a few store highlights.

So far this year we've opened 36 U.S. locations and closed 5 underperforming stores.

In Canada, we opened 4 AE stores and closed 1, and at BlueNotes, we opened 2 stores and closed 4.

We are on track to open 10 additional AE stores this year giving us square footage growth of 7 percent for the year.

New stores continue to perform extremely well.

Newer markets including Hawaii, Puerto Rico, and Quebec continue to exceed our expectations.

We are also performing well in alternative real estate formats including lifestyle centers, urban locations, and mill centers, giving us confidence that we can operate anywhere from 900 to 1000 locations in the U.S.

This provides us with several more years of store growth and we expect to open roughly 30 to 40 stores per year going forward.

Renovating older stores has been an ongoing initiative for us.

They continue to experience strong sales increases significantly above the current comp trend, and we will continue to renovate anywhere from 60 to 70 stores next year.

At the end of the year, we will have 225 stores yet to be remodeled.

On BlueNotes, sales trends remain inconsistent; yet, operating margins continued to improved in the third quarter due primarily to lower markdowns.

This quarter the business lost 1 cent per share compared to 2 cents loss last year.

While we are obviously not satisfied with this performance, we continue to manage the business prudently and work towards achieve stronger operating results.

Now I'd like to comment briefly on current business and our long-term growth strategy.

As Roger will discuss, we are absolutely thrilled with our holiday assortment.

It looks great, and we are realizing a positive sales trend to date.

Currently we expect to have a productive fourth quarter with a significant increase in earnings, which Laura will review with you in a few minutes.

Looking forward to next year, we are working diligently to maintain our momentum and continue to grow market share.

We've identified areas of opportunity within our merchandise assortments and anticipate incremental sales growth.

Also, launching new merchandise systems will assist us in achieving improved profitability.

One of the key marketing team goals is to continue to build emotional and loyalty around the American Eagle brand.

We will continue to upgrade our organization through new talent hires and internal promotions thus assisting to us achieve our long-term goals as well as developing a new U.S. concept which we expect to open in 2006.

At American Eagle we are very excited about the future and expect continued success and growth.

Now here's Roger.

Thanks, Jim.

Good morning, everybody.

I am delighted with our third quarter performance.

Yes, we had a great first half of the year, but sales trends accelerated with our back-to-school and fall assortment.

Our stores were clean, fresh and colorful and featured strong key items that delivered great value.

We stayed absolutely focused on our customer message of lifestyle and value through AE brands defining items such as denim, polos, and hoodies.

Our denim business, both men's and women's, was truly compelling.

We are the denim destination for our customers, and we will continue to drive this business in every month of the year.

New MPD data ranks AE jeans as the third most purchased specialty retan [ph] denim brand, up from sixth place last fall and second with the 15 to 25 years old.

Our concerted design, marketing, and merchandising efforts continue to make AE jeans dominant among our target customers.

Another survey shows that our age group thinks AE is among the coolest brands out there.

That's vital to our branding, of course, but it's really only a good thing if the customer follows through and buys.

The American Eagle customer has great follow through.

While denim continues its growth as a cornerstone of our brand, importantly, sales strength in the third quarter was broad-based.

Both men's and women's achieved a positive comp increase in the mid 20s and most merchandise categories produced a double-digit comp increase.

The steady improvements in our business stem from key design initiatives and fashion right changes to our fits, styling and fabrics.

We are closer to our customers than ever, seeking and getting continual feedback and making sure we always deliver what they want.

Third quarter sales metrics reflect our strong product performance and significantly reduced markdowns and promotions.

The average unit retail price increased in the low double digits.

The number of transactions per store increased in the mid-teens.

Units per transactions were up in the low single digits, and units sold per store increased in the high teens.

We are very pleased with our e-commerce business which continues its solid growth quarter after quarter.

Sales in the quarter were up 35 percent and profitability doubled over last year.

We began shipping internationally this quarter.

Our record gross margin was driven by a 670 basis point increase in the merchandise margin.

Lower product cost drove 150-point basis point increase in our IMU.

The rest of the improvement stemmed from a dramatic drop in our markdown rate, due to increased full price selling and fewer promotions.

Coupon distribution was down 60 percent compared to last year.

With discounts offered only in direct mail pieces with a strong image in brand building component.

We have also reduced money card distributions and increased the threshold rate which is yielding higher profitability.

With holiday off to a good start at this point we expect to remain less promotional.

We set holiday two weeks ago.

Entering the season with exciting energy behind us and our customers are responding.

They love our takes on key fashion holiday items, and judging by early indications, we think this could be a very, very solid Christmas for us.

I'm convinced that we are hitting two holiday targets at the same time.

Getting and gifting.

Customers can quickly fill their own fashion needs and just as quickly grab many of the gifts they need for friends and family.

We set out to be the gift giving destination, and we executed to that with a focussed assortment of key items and our wholesome brand plays across all generations.

Parents and grandparents can find the gifts they need in a warm and friendly environment.

Our holiday tag line says it all: Good friends, good times, great gifts.

Our stores are absolutely beautiful for holiday, full of exciting color and magnetic displays.

It's all about polos, denim, hoodies, track jackets, down vests, and women's sweaters this year, and we have the right assortment of cold weather accessories, bags, and boots making our store shopping experience irresistible.

We also proudly feature a charity bracelet promotion this holiday and a strong promotion after Thanksgiving with Sony Connect.

Both technology and music are a very important part to our customers.

I invite you all to shop in what we think is the best store in the mall for holiday.

American Eagle Outfitters has become the dominant go-to brand for the widest segment of high school and college students.

We are in a great place with our target customers right now and we intend to stay there.

Spring is right around the corner and we are excited about our opportunity.

While we had a solid spring and summer this year we have identified a number of areas that were not maximized.

We feel great about upcoming fashion trends, knowing that it matches up perfectly with American Eagle's key strengths.

We gained a lot of ground over the past nine months and we are excited about the future and fully committed to continue strengthening our brand positioning and market share.

I want to take this time to wish everyone listening a great, happy and successful holiday season.

Now here's Laura.

Thank you, Roger.

Good morning, everybody.

I'm extremely pleased with our record results this quarter.

Our top line sales growth accelerated, driven by strong full price selling and fast inventory turns.

Mark downs were significantly lower as a result of a terrific merchandise assortment and fewer promotions.

We continue to control our expenses, leveraging rent, store payroll, and advertising costs.

Now I will review the third quarter financial results.

Total consolidated sales increased 34.7 percent to $503.4 million from $373.8 million last year.

Total sales included $23.9 million from the BlueNotes chain.

Third quarter comparable store sales for the American Eagle brand increased 26.8 percent compared at a comp decline of 10.4 percent in the third quarter last year.

Consolidated comps increased 24.9 percent.

Comps for the BlueNotes stores declined 0.9 percent.

As a percent of sales, our gross margin leveraged 900 basis points to 47.1 percent from 38.1 percent in the third quarter of last year. 47.1 percent was an all-time high gross margin for our company, reflecting a stronger merchandise margin, as well as the leveraging of buying, occupancy and warehousing expense.

The increase in our merchandise margin was largely due to a significant reduction in markdowns.

Our IMU improved 150 basis points, reflecting lower merchandise costs, and importantly, initiatives to control air freight and reduce sell off.

Strong comp store sales enabled us to leverage buying, occupancy, and warehousing expense by 240 basis points due primarily to the leveraging of rent.

By division, the American Eagle brand contributed to the improvement in the gross margin, while BlueNotes had a neutral impact.

We leveraged SG&A expense by 150 basis points over the third quarter last year, declining to 24.9 percent of sales from 26.4 percent.

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

We also leveraged home office and store salaries.

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

Excluding incentives, SG&A dollars increased 12.5 percent as a result of square footage growth of 7 percent combined with higher variable expense associated with a strong comp store sales performance.

The third quarter operating income margin increased 1,330 basis points to 19 percent from 5.7 percent last year.

This was our highest operating margin rate since the fourth quarter of 1999.

In the quarter we incurred other expense totaling $596,000 compared to other income of $483,000 last year.

Higher interest income reflecting a higher cash balance was offset by expense related to the early termination of our Canadian swap agreement and term loan facility.

Fully diluted EPS more than tripled to 77 cents per share.

Our balance sheet remains very strong.

We ended the quarter with $385 million in cash and short term investments, an increase of $179 million from the end of the third quarter last year.

In addition to this, we have $34 million of long-term investments consisting of fixed income securities with maturities of less than two years.

At the end of the quarter, total consolidated merchandise inventories were up $11 million to 205 million.

U.S. inventory per square foot at cost was flat to last year, however.

Units per foot were up 4 percent.

We are very comfortable with our current inventory level and composition.

Our inventory turn improved 21 percent in the third quarter and 15 percent year-to-date.

Looking out to the end of the fourth quarter, we expect U.S. inventory at cost per foot to be up in the mid single digits.

Capital expenditures year-to-date totaled $78 million, related to our new and remodeled stores as well as the purchase of our home office building, which totaled 20 million.

For the year, we expect capital expenditures to be approximately $90 million.

Now regarding our outlook.

We are very pleased by the current pace of business and the good response to our holiday assortments.

At this time we are providing fourth quarter earnings guidance in the range of $1.00 to $1.03 per share.

Last year we earned 57 cents per share in the fourth quarter, which excludes the goodwill impairment charge of 8 cents per share related to BlueNotes.

Looking out to next year, as Roger and Jim noted, we have tremendous opportunities.

The AE brand has strong momentum and we will continue to maximize our business category by category.

We have improved our execution across the board and focus on operating efficiency is now part of our corporate culture.

For 2005, we have planned the business prudently.

We have identified merchandise opportunities that will enable to us achieve positive same store sales growth next year.

As far as margins go, we expect to leverage buying, occupancy and warehousing costs as well as SG&A with a minimum of a low single-digit comp increase.

Based upon our current outlook, I believe we can achieve at least a double-digit increase in earnings next year.

Thank you and now we will open the call for questions.

Tamara?

[Operator Instructions].

Richard Jaffe, Legg Mason.

Tremendous quarter.

Could we just talk a little bit about the future of BlueNotes?

What's worked up there and what's not working and how you see that business unfolding going forward?

Sure.

As I stated earlier, we are disappointed with our current results and I'm considering other alternatives and at this time I'm not at liberty to -- to give you definitive -- what the definitive results may be of the study.

But when I do reach that decision I assure you there will be an announcement made very quickly.

Just a follow on, could you talk about this year's ad spending and promotional efforts, both dollars and initiatives versus last year in the fourth quarter?

Hey, Richard, it's Michael Leedy, how are you?

Hey, Mike.

Good to hear from you.

Just from an expense standpoint the consolidated number I am going to give you through the third quarter this year actual were lower, 3.1 percent of sales versus 4.1 percent last year.

So big improvement over the year before.

And I think there's a, the big story is we are doing a lot more with the dollars.

I think we are doing things better.

We are doing things differently.

If you look at what we did with the AE campaign for back-to-school it clearly captured our customers imagination, drove profitable traffic to the stores.

And when you look at the market share gains that Roger talked about that's something, that's a collective effort of the whole team but the market had gone a big piece to do with that.

So for fourth quarter will you stay on that 3.1 percent track which will be down but --

We are on a track to be down versus last year on a percent of sales basis.

We are on a really healthy track and the trends of basically doing more with less dollars we are continuing on.

We have a lot of exciting thing happening for holiday.

I think Roger mentioned a couple of things in his comments.

We are very, very happy with the great gifts program that we have.

Again capturing the brands in a major way, emotional of the brand. raise half a million dollar for charity with our campaign and we are looking bracelet campaign.

We are looking forward to the season.

We have a lot of great thing town.

There will be a press release tomorrow announcing our relationship with Sony connect that we are going to offer our customers.

There's over 800 stores between the United States and Canada, the best promotion we can do is have the best looking stores and I think if you 50 our store right now and look at our windows and look at what's inside it says it all.

That's the best advertising we can have.

Absolutely.

I look forward to it, Roger.

Thank very much.

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

Hi, guys.

Couple questions.

Laura, I sort of got confused on your comments on inventory.

Can you just start with that, just repeat the numbers?

Sure.

Inventory per square foot was flat.

Right.

Inventory in total was up in units mid single digits.

So units per square foot is mid single-digit, dollar per square foot is flat.

Right. 4 percent per unit.

Okay.

I got a little confused there.

Sounds like you guys are pleased with early business.

Can you just, last time I think you guys started this call by saying you had seen no change in trends.

Can you just talk a little bit more about that?

And then lastly on the BlueNotes issue, is there any sort of time horizon without getting into details but I mean obviously this has been the sort of one issue out there this year in what was is turning out to be a stellar year?

I mean what sort of time horizon internally do you have to deal with it?

Dana, let me, I would rather not comment on the sales question you have.

Other than to say we are pleased with the start of the month of November.

And with regard to BlueNotes, no, I don't have a particular or a definitive time line but I am, I am considering a number of alternatives and at the appropriate time when a decision is made I will be sure to get an announcement out to everyone.

But I have not really locked into a date or a time.

Then lastly I think what you said was that the new concept would be an '06 event.

Is that correct?

That is correct.

Our current plan calls for spring of '06.

Thank you.

You're welcome.

Your next question comes from Jeff pipe setter with Piper Jaffray.

A couple questions, Klinefelter.

In terms of the new concept back at your last investor event I think you mentioned sometime within the next 90 days you would be announcing something.

Is that still on track to have some kind of announcement coming on what that will be?

Then secondly in terms of the new and remodeled stores it sounds like about 30 to 40 new, 60 to 70 remodeled, what does that shake out to in terms of a square footage growth rate for next year?

Okay.

Thanks for the kind words, Jeff.

On the new concept, let me put a little color around where we are with it.

Several months ago we were pursuing actually two separate alternatives for the new concept.

One of those was a joint joint venture which would have resulted in pawb announcement.

This alternative no longer exists.

We chose to move forward and do it organically.

At this particular time I would say the timetable for an announcement would be within the next 60 to 90 days.

With some definitive, maybe with some definitive direction.

Square footage for next year, Jeff, is right now in the range of five to 6 percent including new stores and remodels.

This year it was roughly seven.

So, Laura, your guidance on doing, on achieving at least low double-digit EPS growth rate next year --

I didn't say low I said at least a double-digit.

So you are baking in that square footage growth rate some positive growth rate trends.

I sure am.

And ongoing leverage, is it more I. M. U. or is it ongoing efficiencies with mark down reductions?

It's both.

I think that the I. M. U. is -- I think we will see some improvement but we are not baking in some extraordinary increase.

I think that we've reached a level of productivity in our stores and sales per square foot that allow us to leverage our rent and other expenses in the business with a very low comp.

So I think it's a combination of continued good performance and merchandise margins along with reaching that productivity level that allows us now to leverage with a reasonable comp expectation.

Great.

Thank you.

Good luck with the holidays.

Thank you.

Your next question is from Richard Baum with CSFB.

Good morning, everybody.

Hi, Richard.

Congratulations as well.

Stunning quarter.

I've got three questions.

One is, could you talk a little bit about the new systems that I think Jim mentioned that you will be launching next year and what you expect them Todd?

Secondly, for Roger when you talked about the rating of the AE genes, I guess I would be curious as to what the number one brand was Juan is the spread between yourself and the number one brands?

Thirdly you talked about quote, unquote closer to your consumers.

Can you talk about thing that you are specifically doing with regard to consumer research or any other marketing initiatives that have improved the flow of information that you are getting from your consumers that's enabled you to get fashion right merchandise?

Thank you.

Laura is going to take the first one, Richard I recollect Richard, one of the most exciting initiatives we have going in information technology is the installation of profit logic.

We installed that this fall.

It is now up and running.

And what it enable us to do is optimize our markdowns and also very importantly and most immediately take markdowns on a region lived basis.

We are already seeing some powerful results from our installation but we don't think that we can give any real guidance on what it will do for our mark down rate until we've gone through a full cycle in both our men's and women's business and finish the season.

So some time in the spring I think we will have a good idea of what this means for us on an apples-to-apples basis.

This year so far our mark down improvement is really the result of better merchandise and fewer promotions versus last year.

So next year I think we will be on a level playing field and will be able to give you a better idea of just how powerful this tool can be for us.

Richard, MP D.s report from July through September on the 15 to 25 years old put American Eagle as number two. 10.9 percent buying the share of market, that's a dollar volume share against last year's 7 percent is an enormous increase.

The only company ahead of us was Old Navy and obviously predicated on the size of their stores and their price points and the size of the square footage that they have this is an amazing, amazing statement of the brands.

I am going to have Susan talk to how we are closer to the consumer.

Roger, before you leave that what were Old Navy's numbers.

Old Navy was 13.2 percent according to the MP D. study.

And last year what were they.

15.6.

I'm sorry?

15.6.

Have they lost share?

In this 15 to 25 years old, according to MP D. which is what we all use.

Right.

Okay, Richard, to comment on the consumer research, as Jim talked about in his opening comments the disciplines around the business, our consumer research approach is really multifaceted and there's some ongoing disciplines and some new disciplines in our business.

As we talked to you many times before about our testing strategy we are passion it in about listening to the customer as it comes to actually putting product out there and testing it and it's a part of our process and that's a very important part of our consumer research.

The other thing are we have ongoing focus groups that are part of our process.

As a matter of fact I spent two all day with 18 high school and college kids listening to them talk to us about the brands and our product Juan they are 92.

That's a very important part of our world here.

Some new thing that we have done.

We have some grassroots efforts out there to listen to the customer but also what we've done interestingly in the last year that's been very valuable to us is some in-store fit clinics.

Actually getting out there with some of our key items and finding out in all size ranges, how they feel, what their feedback is on the product, how they like it, what they would rather see from us and that's been an ongoing process from us as well.

Those are just a few things that make up what consumer research is for us.

Thank you.

Good luck in the fourth quarter.

Thanks.

Your next question is from Lauren Levitan with SG Cowen.

Thanks.

Good morning.

Hi, Lauren.

Roger you made some comments about spring and some of the areas where you thought you might have some opportunities that weren't fully addressed last spring and you also mentioned you felt good about some of those forward fashion trends.

I'm wondering if you can elaborate a little bit, maybe give us a sense of these with any existing categories or new cat divorce and then also for Laura or for Jim, just curious if you can give us some update or thoughts on how some of that cash might be be deployed and how much of that is necessary for pursuing the new concept that you will talk about with us shortly.

Thank you.

Lauren I know you would be shocked if I gave that information out so I won't.

Even in terms of the sense of are you talking about things from last spring business --

Combination.

Combination of new thing we see that are very appropriate.

The fashion trends work very well with us.

And thing we've identified.

Okay.

Lauren, from the cash position, yes, we are in an extremely strong cash position as Laura has stated.

The new concept will probably be the number one driver in use of cash for next year.

And hopefully in the ensuing years.

There are a number of other initiatives we are looking at but I'm really not at liberty because we have not really approved or truly defined what we might actually might do but we are considering other opportunities for use of cash.

Is there a target level of cash that you would like to maintain on the balance sheet for a rainy day?

You know we like cash in American Eagle.

But I think now that we are, we added a 179 million this quarter year to year and we are projected to ends the year with a very healthy 500 million in cash, we've recommended to the board that we pursue a varied deployment of cash.

I don't think I can tell daughter exactly what the level of cash is that we want to keep in the business but we are cognizant that we want to give the highest and best return on our shareholders.

We initiated the new dividend.

We have the new concept that we will be launching in '06 and we will obviously explore share repurchase.

Very helpful and good luck in the fourth quarter.

Thanks.

Your next question comes from John Lawrence Morris from Harris Nesbitt.

A couple quick questions.

First of all, Laura, could you clarify, it sounded to me like on the SG&A you said absent accrual dollars would be up 12 percent.

That's correct.

Were you, can I infer from your comments regarding some of the parameters you gave on this line for the beginning of next year, the first half, that SG&A might be up about the same order of magnitude, all thing being equal, something like low double digits?

I don't think it will be up quite that much.

I mean right now our current projections and again it's a projection, is up in the high single digits.

That makes sense.

Then also just to clarify, I had in my notes I may be mistaken but I thought maybe inventories for the fourth quarter in previous conference call I think on the second quarter call had you talked about being up, planning up about low single digits and now you are looking up mid single digits.

Am I correct that that's acknowledged up acknowledged up acknowledged up a little bit, the majority of the increase is den nine and as Roger and Susan and everyone has said we are the denim destination.

We basically double our market share in denim and we are going to have an appropriate level of denim going into spring.

That makes a lot of sense.

Just finally quotas coming off open-ended question but Roger or Hoover wants to speak to it, what are your initial thoughts about how you might be positioning yourself and taking, capitalizing on that opportunity.

We have a great source of supply, John, at this point in time.

We are protecting those sources of supply like everyone else we are waiting to see exactly what happens in China.

China is a big player for us.

Our sourcing partner with is very much involved in it.

Whatever right decisions need to be made at the right time they will be made.

Great.

Good luck for holiday, guys.

Thank you.

Thanks.

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

Thanks.

Good morning, everyone, and congratulations.

Thanks, Dorothy.

Just a follow up a little bit different on sourcing and just if you are seeing any kind of delays coming through the West Coast ports I guess is back in the news again and obviously you've had a great business and are well set up for holiday but just any concerns there, especially in terms of what that might do to transportation costs and so forth?

Then could you just remind us what kind of promotional activity you did last year in the fourth quarter?

Obviously that seems a lot less necessary this year.

And finally just a break down of men's and women's as a percent of sales in the quarter.

Thanks.

Dorothy, I will take the first part regarding the potential transportation delays vis-a-vis the West Coast ports.

We have not experienced any undue delays primarily through our anticipation of potential problems there and combined with the ability to move product to various other ports.

We moved products into Seattle and into the East Coast ports whether they come through New York or Miami.

We have been able to go through other ports and also have a strategic plan in place to fly certain product into the United States so that did not encounter any delays.

We are very pleased with the product flow and to date we are not experiencing any problems with fourth quarter and so far our first quarter product looks like it will be on time.

Dorothy, I will comment on the promotional stance for holiday.

First of all just to comment briefly on third quarter, our commitment to our value proposition has opened up a lot of doors for us quite honestly.

If you look throughout the third quarter we went through the third quarter without any kind of clearance event.

They were all planned promotions at our lease line and that's really why with our customer and we are backing up holiday with that same successful strategy and you will see planned promotions, very exciting items at the lease line that will entice the customer to come in for gift giving.

The other thing I want do match mention just to reinforce that Roger mentioned in his opening comments again that our strategy on our couponing we have 60 to 70 percent less coupons that we are planning to have out there for the holiday season.

So we are very, very pleased with the direction of our business as relates to our promotional stance.

So 60 percent less also in the fourth quarter?

Yes.

Great.

Then men's and women's breakdown?

It's about 65, 30.

Great.

Thank you.

Thanks, Dorothy.

Your next question comes from Dana Telsey with Bear Stearns.

Good morning everyone and congratulations.

Thanks, Dana.

Can you talk a little bit about it pits and beauty, how the 50 in-store departments are doing, how the initial side by side tests are doing and where you see that going further?

And I think you had mentioned earlier that traffic counters have been placed in some of your stores.

How is that helping you expanding it and lastly as denim seems to be seeming more like an all year rounds category not just back-to-school where do you want it to be as a percentage of the mix?

Thank you.

I will do traffic counters and Susan will talk about personal care.

The traffic counters, we have them in generally all the stores and what they've allowed us to do is really measure our conversion rate.

And as a result we've been able to tell -- we've also been able to link it to our payroll and to better plan payroll around the time that our customers are in the stores.

So the traffic counters have already been a big plus to our business and I think they will continue to be even more powerful as we use them in an versus release in all of anniversaries in our stores.

We aren't comfortable competing you a percentage.

What the customers wants we will be sure to give it to them on size and stock in all the key item.

As relates to it pits intimates expansion that is clearly a growth strategy for us.

We are the only person in our life style segment that offers this in a way that we do.

And we are out there right now just briefly to touch on it. we have kind of a laboratory of a test going on.

We have about 12 stores, two of them are side by side locations.

Ten of them are expanded in-store shops.

And our early indications of that, the numbers coming back through and the consumer response is quite positive.

So what we are doing to respond to that is we are building a team.

We've hired a very talented team to come in and head it up, Kathy bottleker.

She's heading up that strategy for us.

She joined us a few weeks ago and we are building a team to set that thing up for success.

We don't have a lot of detail for Jew you on backgrounds.

She has extensive experience with vanity fair and some other companies.

And dance kin.

Some terrific leadership, management and strategic experience in this segment.

Thank you and congratulations once again.

Thank you.

Your next question comes from Janet including Berg with JJK Research.

Congratulations.

Just a couple of questions when you look out to '06 do you think about the opportunity for further gross margin increases, the level the rate of change this year has been quite substantial and if you do do you think that comes from higher I. M. U.s or lower promotions or how do you see it coming, the easiest way, Roger, without having to add to the environment?

I am going to let my financial partner -- secondly.

Thanks, Janet.

I'm sorry, I'm sorry, Laura, please answer the question, I don't care who answers the question.

As far as the new concept goes, I was wondering if you could talk about if you've built a team there or when that team would be in place and if you could talk about whether there would be any costs associated with building up that infrastructure that would come through the P&L in '05?

Thanks.

Okay.

Janet, I am going to, just to address '05 and a little bit on '06. '05 we do see opportunity for improvement in the gross margin.

We absolutely do.

Slight but improvement.

Clearly we don't have a crystal ball about what will happen with quotas.

We are working in China.

The opportunity is obviously to see better I. M. U.s especially when we combine it with our Powell full brands we think we can obviously retain some of that improvement.

But '06 is a long way away but I would like to see us be consistent.

I would like us to improve upon our expected GMs.

This year for next year and I also think that one of the things that happens in gross margin in addition obviously the most important thing is our merchandise margin, Mark down level on the I. M. U. but also leveraging rent.

Our next big investment is really our stores and we've added some incredibly powerful stores and I think we will continue to see leveraging and rent occupancy and buying costs.

Great.

So do you think about being a less promotional brand as we've seen other brands move towards that direction or do you think that your customer is driven by promotion?

Clearly this year is a great example of letting go of a lot of unnecessary promotions.

So when the product is right.

When the product is right.

And as Susan pointed out we are a value brand.

We are a great fashion at a great value.

So it's a different strategy from some of our competition.

On the new concept?

Janet, on the new concept, I've been working on this for, in my mind for a couple of years but actual format in the last six months quite strenuously.

I think we've come up with a format and a concept that is quiet something.

And as Jim said it's, in about 60 to 90 days we will make a statement on it and we will open up the first group of stores in '06.

I think it's something that's not out there.

I think it's something for the 21st century the same way I felt about the gap in the 70s and 80s you new and the same way I felt about American Eagle in the 90s.

I think this is very special and very big.

But what about the team?

We are very close to putting together a world class team.

Thank you so much.

Your next question comes from Stacy Pak with Prudential equity.

Thanks.

I was wondering if markdowns for the year will be at a record low?

And then I was wondering if you can talk about, I know you don't want to give a lot of detail but, Roger or Susan, do you think prep appearing the prep pea prep trends is going to be as strong next year '05 as it was this year?

Is bow hoe something that you are going to address?

And on the men's business were woven convenience and Polo going to be there as strong isn't the summer next year or is there something to take over that continues to drive the men's business generally?

I'll take marks downs.

You got the easy one.

The markdowns clearly this year we expect them to be the lowest that we've seen in a number of years.

But I can't tell you for sure if it will be a record but it appears as if it will be.

So far they are?

Yes.

Okay.

Susan is going to answer the other one but I hope she doesn't tell you too much.

Come on Susan, we are friends.

Preppy and boho coming on the season our design team is really talented.

They are going to take all this information and interpret it the right way for the American Eagle customer.

And the good news for us is preppy continues but there are some new takes on it and we will make sure that we are exciting in our stores.

So stay tuned.

Regarding the men's business and categories I can just assure you that again we are, with Henry Stafford his whole team and driving the men's business we have broad-based success, many categories are working and we are making sure to give the guy what he wants.

You successfully said that, thanks.

Tamp a, are there any more question.

Your next question comes from Holly Guthrie with Morgan Keegan.

Thank you and congratulations everybody on a great, great quarter.

Thank you.

My first question, '05 growth, could you just talk a little bit more about what remodels will add to the growth and as far as in the remodel base how many are expansions, how many new intimate stores or beauty avenue X rays adjacent seas or store intimate or beauty areas you expect to expands, and catalog, you tested catalog in the past, I was wondering if that feeds into the '05 top line growth at all?

Holly, on the remodels, the remodels probably constitute about a third of the new square footage growth.

So that's what you should figure in.

But I would just add that the remodels and new stores are performing at the highest levels that we've ever seen in the company.

The once that we've an versus read for 2003.

Anniversaried for 2003.

They are performing at extremely high productivity rate.

But on a square footage basis about a third.

On the intimate expansion by mid next year we will expands our testing to five side side by sides.

And the other thing we are looking at on these internal opportunities, the shop within our store, we will be looking at not only new real estate opportunities but also existing large square footage stores that we currently own and see how to best use that space as relates to expansion.

On the last part of the question we are not looking attesting a catalog in '05.

Are the expansions or the additions of the intimates, are they in your square footage growth number for next year if you add more intimate stores?

Yes, they are but that's a preliminary plan but there could be more.

Then as far as just a near term question on Q4, could you talk a little bit about what's in your SG&A and your cost for the fourth quarter as far as cost per system, Sarbanes, any kind of bonuses because if you look, the product right now look the best that I've seen in the last five years so beyond why you won't see the same kind of increase in Q4 as you saw in Q3.

I'm trying to understand what am I missing in the cost of the organization?

On SG&A I think that the SG&A number in terms of, the biggest difference probably from previous quarters is that we won't be accruing as much in sensitive compensation.

So the SG&A growth will be lower year to year in dollars.

Incentive than the previous three quarters.

And as you know we typically do leverage SG&A pretty significantly in the fourth quarter.

I don't know what the rest of your question was.

And on Sarbanes expense is included in that number.

Sarbanes has been included in the entire year.

The we've forecasted know unexpected costs that we see in the fourth quarter.

Advertising is expected to leverage in the fourth quarter.

So the key drivers of SG&A are built into our forecast.

You have to do the numbers and you have to come up with your own estimate for the fourth quarter but I would remind everyone that it is only a few weeks into the fourth quarter.

I was just meaning, I was going back to some of the initial comments that you are looking to upgrade the team.

You are always looking for new talent.

I didn't know if there would be any, any expenses in Q4 as you hired new people and then incremental systems for '05, I didn't know if you were looking to expense any of those given the tax law changes that are imminent for '05 in Q4.

On the new hires, we will not be experiencing any increase in expense in '04.

The new concept team that Roger mentioned will all be in the '05 expense.

Thanks.

I think we have time for one more question.

Your next question comes from Andrea Newell with Wells Fargo.

Hi, everyone.

Good morning, Andrea.

I have just a couple quick questions.

I'm wondering on denim had you great success with the basic denim and I'm wondering if there are any new washes or denim styles to come for the balance of year if you are working on something for spring and are you seeing any difference in the fashion versus the basic styles at this point in the season?

Yes, there is new fashion and new washes.

And we will have them.

Okay.

And a second question, have you spoken about the possibility of taking markdowns on a regional basis, is there, can you talk a little bit about your ability which I think you already have to merchandise by region for warm weather versus cold weather stores?

Yes, Andrea.

We have just embarked on the mark down optimization tool within the last two to three months.

We've been unfolding different parts of the company and all parts of the coy are now on board.

We are do the sum regional markdowns.

It's happening more in our clearance area at this point.

We are very sensitive to customer response and the customer experience that they are not confused by size color markdowns, presentation then kind of thing.

So we are walking before we run to realize different opportunities that that tool can give us but it's happening more back in our clearance area at this point.

Okay.

And anything about the different product that you are putting in buy region depending on weather whether it's a warm weather or cold weather store.

That's a very important strategy for us it's very, very is successful right now.

It applied much more to the Q3 and Q4 side of our business where the weather is more of a factor.

A good example I can give you is we have a very successful sweater conversion strategy happening down in the south where a lot of it is very cotton based.

Thing like that are really, really working for us and we plan to continue it.

Is that new this year?

No, we are just getting better at it.

Thank you very much.

Thank you all very much and we wish you all a very healthy and happy holiday.

Thank you.

This concludes today's conference call.

You may now disconnect.