Operator: Greetings, and welcome to the American Eagle Outfitters Third Quarter 2023 Earnings Conference Call.

[Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to your host, Judy Meehan. Thank you. You may begin.

Judy Meehan: Good morning, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer; Jen Foyle, President, Executive Creative Director for AE and Aerie; and Mike Mathias, Chief Financial Officer.

Before we begin today's call, I need to remind you that we will make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. Results actually realized may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, you can find our third quarter investor presentation posted on our corporate website at www.aeo-inc.com in the Investor Relations section.

And now I will turn the call over to Jay.

Jay Schottenstein: Good morning. Overall, I'm pleased with our third quarter performance. Although the macro environment remains highly dynamic, we are seeing encouraging trends. Our brands remain stronger than ever, and our strategic priorities are propelling us forward. AEO's customers are at the center of our strategy, driving constant innovation that enables us time and time again to deliver exciting collections. And this fall was no exception.

Additionally, we provided an industry-leading customer experience, reflecting our investments in data-driven insights and operational excellence. With the launch of our profit improvement program, structural initiatives to drive growth and higher margins are taking hold.

Now a few financial and strategic highlights from the quarter. Third quarter revenue hit a record of $1.3 billion, driven by 5% comp growth, reflecting growing brand momentum and terrific fall merchandise collection. Our market-leading brands are true lifestyle destinations for our customers, and that was evident this quarter. Aerie returned to double-digit revenue and comp growth and AE generated positive revenues and comps. We also saw significant strength across digital and stores with new merchandise and strong execution, driving improved traffic across AE and Aerie.

The digital channel was a star performer, accelerating to 10% growth. We are seeing great momentum here. Under the leadership of our new Head of Digital, David Zhang, we have introduced innovative customer engagement tactics, enhance our use of data and analytics to drive stronger KPIs. This work has yielded a remarkable improvement in our e-commerce business will receive plenty of runway ahead.

Stores were also positive in the quarter. We are pleased with early results from new store designs, including our Gateway store in SoHo. The store encompasses all of our collections across AE, Arie, OFFLINE, AE77, AE 24/7 and our unsubscribed seamlessly under one roof. New Arie and OFFLINE stores are also coming out of the gate positive to expectations.

Turning to profit. We achieved our second highest third quarter gross margin and operating income in over a decade. This was only -- second only to 2021 when stimulus fueled exceptional results across the industry. Margin expansion to last year was driven by improved markup as well as numerous structural changes aligned with our ongoing focus on profit improvement.

A few highlights of this work include maintaining tight inventory and promotional discipline, changing our clearance strategy to yield higher profit, scaling Aerie and shift in the product mix into higher-margin categories, modernizing our delivery network to reduce costs and optimize AE's Real Estate footprint. As we continue to drive strong demand and build momentum on this work, we are raising our full year operating income guidance to the high end of our prior range. We now expect to be in the range of $340 million to $350 million from $325 million to $350 million prior.

Lastly, our capital allocation priorities remain unchanged. We are committed to investing in our brands and continued growth while returning capital to shareholders. Our balance sheet is resilient and we maintain a healthy liquidity position. We ended the quarter with $241 million in cash and nearly $900 million in total liquidity with no debt.

Looking ahead, we remain intently focused on advancing our long-term strategic priorities to; one, drive consistent growth across our portfolio of brands; and two, generate efficiencies and cost savings for improved profit flow-through. We continue to advance towards our priorities and investing in talent, which further positions us for future success.

During the quarter, as part of our COO, Michael Rempell succession plan, we made 2 key leadership appointments. We are excited to welcome Sarah Clarke, our new Chief Supply Chain Officer, who is responsible for ensuring operational excellence across our global supply chain from sourcing through distribution. And a welcome to Valerie van Ogtrop, our new Head of Brand Operations, a role we created to drive greater collaboration and synergies across AE and Aerie's growth and profit plan. Sarah and Valerie nicely complement our teams of experienced executives and excellent bench of division leaders and associates.

There's a high level of focus and energy across the organization around our profit improvement project. We've had strong engagement from our leadership teams with great support from our Board of Directors. We are harnessing our innovative spirit to rethink how we operate every day and with work streams focused on unlocking both revenue growth and efficiencies moving forward. We intend to host an Investors Meeting in Spring of 2024, where we will unveil specifics on our go-forward strategy and provide long-term financial targets. And in near term, with incentives fully embedded in our 2023 expense base and early benefits from our profit improvement initiatives, I am confident of our ability to leverage expenses, even on modest sales growth in 2024.

AEO has enduring brands, robust operations and strong talent. I am confident that with our strong foundation and new strategic direction, we have the right recipe in place to build revenue and profit from here and deliver shareholder returns.

With that, I'll turn the call over to Jen.

Jennifer Foyle: Thanks, Jay, and good morning, everyone. As Jay noted, we had a strong quarter with sequential improvement across brands and channels. All collections were well received, and I am proud of how the teams executed on our brand strategies. It was incredibly exciting to see American Eagle return to growth with revenue and comps of 2%. We delivered a winning assortment that showcased our incredible brand heritage and an exciting customer experience.

Women's was particularly strong where we wrote positive comps across tops and bottoms. We are seeing strong demand for fleece, tees, skirts and newer bottoms such as twills, cargoes and wider legs. Men's saw strength in tees, sweaters, twill bottoms and shorts.

AE also delivered strong operating profit growth, up 6% to last year, aligned with the strategic plan we laid out in 2021. We have made significant progress in improving the health of the AE brand over the last few years. We stepped away from low-margin sales, rationalized SKUs to eliminate unprofitable offerings and optimize our brand's Real Estate footprint.

As a proof point, third quarter brand profit is up 20% and relative to third quarter 2019 levels with revenue modestly down 2%. With profit restored to a healthy level as discussed in prior quarters, we are strategically focused on growth. Early initiatives have been highly impactful, and I'm pleased to note that AE returned to growing its customer file this quarter. Casual wear is a lifestyle that continues to evolve providing exciting new trends for us to drive and play into.

We are focused on expanding our dominance in denim, leveraging our industry-leading fits and fabrics to deliver newness. At the same time, we are also making investments to better penetrate categories and occasions that are important to our customers with collections like AE 24/7 and men's activewear and AE 77, our premium capsule.

We are also continuing to invest in our store fleet to improve productivity and ensure we put our best foot forward. We have seen a positive response to AE's new store design with remodeled stores delivering significantly improved comps. Based on the success of these initial tests, we are expanding our remodel program next year to include additional stores while continuing to close and reposition low productivity locations, and we are also focused on improving inventory allocation and replenishment to better serve our customers.

And lastly, we continue to leverage and innovate marketing campaigns and amplifying excitement around the AE brand. This fall, we collaborated with the Ziegler sisters on a limited-edition capsule to showcase key fashion items for back-to-school season, this included our [indiscernible] event, a powerful takeover on the High Line in New York City and immersive installation that stopped New Yorkers in their tracks. We showcase the quality and versatility of our iconic denim assortment underscoring and our strong heritage and dominance in the category. The campaign outperformed our expectations, driving strong sales, both online and in stores.

Now turning to Aerie. We had an exceptional quarter with revenue and comps 12% and profits expanding 34%. Newness and assortment changes in our core intimates business drove a nice sequential recovery. We grew market share and had our best-ever third quarter performance in core brand. We also continue to see rapid growth in our core apparel business with particular strength in fleece and sweaters where new collections are resonating very well. And our activewear collection OFFLINE also had a great quarter, achieving double-digit growth.

Aerie has seen incredible expansion over the last few years, growing into a beloved destination for exciting fashion and comfy cozy fits in intimates, apparel, slimmer and activewear. Since 2019, we have doubled our sales and quadrupled our profit. We are gaining new customers every season with our total customer file now over 10 million. Yet with just a low single-digit share of close to $80 billion total addressable market, we are just scratching the surface. Activewear, in particular, provides an attractive opportunity fueled by strong demand for athleisure. We see a unique opportunity to build share here with OFFLINE. Aerie's vibrant and playful take on activewear as we continue to develop the assortment. We are focused on continuing to build brand awareness as we leverage investments in our store fleet and innovative marketing strategies to grow our customer base and share of wallet.

New store performance remained strong, providing a positive lift to comps as they come into the company. Additionally, OFFLINE openings are exceeding plan. On the marketing side, Aerie's fall campaigns were focused on elevating the brand as the go-to for high-quality, fashionable and comfortable intimates and apparel. We showed up across the season within the way of notable influencer talent and programs. This included a first-to-market partnership with a popular dating app Bumble, encouraging users to find their company match with Aerie. We also hosted the Hidden Gems Marketplace, a fun, interactive customer event in New York City that generated strong marketing KPIs.

We have 2 of the best brands in retail. Through over a decade, we have consistently ranked in the top 3 brands in the Piper Sandler Taking Stock with Teens survey. AE is the market leader in denim in the age 15 to 25 cohort, the #2 brand across all ages and the #1 brand for women in particular. Aerie is one of the most exciting brand platforms in fashion, celebrating body positivity and empowering women to feel their best selves every day. It's a strategic priority to profitably grow our portfolio of brands and I see meaningful opportunity ahead.

Before I turn this call over to Mike, a big thank you to the AE and Aerie teams for their hard work in delivering a strong quarter. Our brand, category and channel strategies are gaining momentum, which is a true testament to this talented team.

And with that, I will turn the call over to Mike.

Mike Mathias: Thanks, Jen. Good morning, everyone. As Jay mentioned, third quarter results marked continued progress on our strategic priorities to grow our brands and set us up for improved profit flow-through. Strong brand momentum, combined with actions taken on our profit improvement initiatives, resulted in improved gross margins and operating income year-over-year. We entered in the quarter with momentum that continued into the early holiday season, fueling a strong top line result.

Consolidated revenue of $1.3 billion was up 5% to last year, and comparable sales also rose 5%. Operating income of $125 million reflected a 9.6% operating margin. Gross profit of $544 million increased $64 million, representing a gross margin of 41.8%, up 310 basis points to last year. As Jay noted, we achieved some of our highest merchandise margins on record, reflecting strong demand, lower costs and a number of benefits from our profit improvement initiatives.

Inventory discipline resulted in lower markdowns as we maintained healthy promotions. With the change in our clearance model announced last quarter, we continue to sell through end-of-season merchandise at better margins. We also saw leverage on rent, reflecting our focus on strengthening fleet productivity at AE and the ramp-up of new Aerie stores as well as delivery, distribution and warehousing costs with efficiencies across several key metrics, including lower shipments per order and lower cost per shipment.

SG&A expense of $362 million was up 16% from last year and in line with guidance. Consistent with strong business trends, roughly half of the increase was driven by incentive expense after 0 accruals last year. As discussed last quarter, incentives are weighted to the back half of this year. The payroll also increased largely due to higher wages. Depreciation was up year-over-year and in line with guidance provided last quarter, primarily reflecting our investment in new stores.

As noted previously, we have reset incentives to reflect improving business performance with incentives now on our base and an ongoing focus on cost efficiencies, we're well positioned to leverage our expense based on modest top line growth next year. EPS for the third quarter of $0.49 per share.

Turning to our brands. Aerie revenue and comparable sales increased 12% in the third quarter, a positive noncomp lift from these stores was offset by lower third-party fell off, reflecting greater inventory control and our shift to a more profitable clearance model. Aerie's operating margin of 19.3% hit an all-time high, expanding over 3 points to last year as the brand continued to scale, and we saw improved markups, lower markdowns and early benefits from the clearance shift. American Eagle revenue and comps increased 2% with the operating margin expanding 70 basis points to 21.5%. As we discussed on numerous occasions, our focus over the past several years has been strengthening the profitability of the AE brand. I'm extremely pleased with the progress we've made, expanding profit margin by 400 basis points since third quarter of 2019.

We're now turning our attention to growing the top line with a sharp eye on profit flow-through. Consolidated ending inventory cost was down 4% compared to last year with units down 3%. Inventory levels remain healthy and controlled as we maintain buying discipline and case demand. We ended the quarter with a balance sheet in a strong position, including $241 million of cash and total liquidity of $875 million, including our revolver.

Capital expenditures totaled $43 million, and we continue to expect full year CapEx to be in the range of $150 million to $175 million. Our plan for our consolidated store count in 2023 remains roughly flat to last year, reflecting approximately 25 new Aerie store openings offset by approximately 25 net closures for the AE brand.

Before I move on to our outlook, I'd like to provide more color on our ongoing profit improvement work. Last quarter remained an important change to our clearance model. This is tracking in line with plan to generate $25 million in savings in 2023 and $50 million in savings on an annualized basis. As we continue to lock down efficiencies that have supported our gross margin expansion, other significant work streams within SG&A have also been identified and are being actioned on.

We are instilling an internal culture around continuous improvement and expense management. The results of which are incorporated into our 2024 plans. As a result, next year, we expect to drive continued gross margin expansion, leverage on SG&A and depreciation, operating rate expansion and healthy earnings growth, structuring the business to deliver this at low single-digit revenue growth. A more positive trend would drive incremental leverage and profit flow-through. We'll give further details in future months as we provide our specific expectations for 2024 and beyond in the spring.

Quarter-to-date, we are seeing sustained momentum across our brands with revenue up in the mid-single digits. Additionally, we continue to make good progress in executing on profit improvement initiatives. With this background, we're raising our full year outlook for operating income to the high end of prior guidance. We now expect to be in the range of $340 million to $350 million. This reflects revenue up mid-single digits with comps up low to mid-single digits.

For the fourth quarter, this implies operating income in the range of $105 million to $115 million, with revenue up in the high single digits, including a 4-point tailwind from the 53rd week. Comp sales are projected to be up in the mid-single digits. SG&A is expected to be up approximately 20%, including a 5-point impact from the 53rd week. As previously discussed, it also includes higher incentive accruals, which are skewed to the back half of this year. As Jen mentioned, we look forward to providing more color on our long-term strategic priorities and financial goals at our Spring Investor Meeting.

With that, I'll open it up for questions.

Operator: [Operator Instructions] Our first question comes from the line of Matthew Boss with JPMorgan.

Matthew Boss: So Jen, could you speak to key areas of acceleration at Aerie in the third quarter and just how you see the brand position for holiday? And on the return to growth at American Eagle this quarter, how do you view sustainability of positive comps at this concept moving forward? And then, Mike, could you just elaborate on the profit improvement project and maybe the modest top line to leverage SG&A next year? Just taking a step back how that compares to historical flow-through in the model.

Jennifer Foyle: Sure. And happy Thanksgiving to all, by the way. Look, I'm going to take a small victory lap here. I just loved what we saw in Q3. And let me just say one thing. This team, okay, my team, Jay's team, all of our American Eagle team, they were in stores last week. We saw almost 20 stores in basically 2.5 days. This is what my team commits to. We're in this for the long haul. That's all I can tell you. To grow year-over-year, day over day, quarter after quarter, you have to have a long-term strategy. And I'd like to say we're delivering on it.

Really proud of what we accomplished in Q3. Women's, in particular, in AE, we did double down there. Their comps definitely superseded the men's comps and we're going to continue that. And I love what I'm seeing for spring, more fashion, more nudge to what I think is relevant in today's trends. We went back and we decided that we needed to get same as for our [indiscernible] categories, and we've been up to that for 3 years now. And now it's time to jump off in American Eagle and well, do I like what I'm seeing in the future for trends.

In Aerie, well, I think this is long overdue. Keep in mind, Aerie held their market share in bras in a declining business. We held our own in Q3. It's an $80 billion opportunity for us to grow into that category, and the team is up to it. I like what I'm seeing early on. Q4, it's still -- we have many weeks ahead of us. And as you know, the big week ahead heading into what we call Green Friday, not black. I think we're ready to go. Like I said, we were in 18 stores, almost 20, in 2.5 days, and we are ready to compete on our terms. And as Mike alluded to, we're going to talk more in the spring season when we speak to you all about our long-term growth plans. But I can -- I see it. I see what's happening here, and we're going to deliver and build this incredible brand strategy.

Jay Schottenstein: Yes. And Jen, when you were in the stores, you would agree that our stores were the best -- we're like the best-looking stores out there, too.

Jennifer Foyle: I think so. I think the way we operate. It's one thing to grow your business is another thing to deliver operational excellence. That's what I have to say.

Mike Mathias: Yes. And on profit improvement work, Matt, the third quarter was another proof point on where we've had the focus, which has been expenses and margin improvement, all generating and providing that gross margin expansion. So now -- for 3 quarters now, we've seen gross margin expansion. We've leveraged the expenses in gross margin. Fourth quarter, we'll do it again. As we talked about, this work is sort of a multiyear journey and the SG&A piece of that would take a little longer as we've looked at labor models, services, things type of contracts and vendor, vendors that we're negotiating either reductions to current rates or looking to consolidate or move vendors. That work, we have line of sight now that we have into 2024, and we know what the benefits look like.

So on top of the gross margin expansion that we believe that will continue next year and now we've got the opportunity to leverage SG&A at low single-digit revenue growth next year, if that would be the result. Anything better than that, we'd see even higher leverage against that historical model.

Operator: Our next question comes from the line of Paul Lejuez with Citi.

Kelly Crago: This is Kelly on for Paul. Could you just talk about how the clearance strategy change impacted the P&L this quarter? Was it a headwind to sales? And how much of a benefit, was it the gross margin at 3Q? And how do we expect -- how do you expect that to impact 4Q and F '24 from both a sales and margin perspective? And then I have a follow-up.

Mike Mathias: Yes. I think the headwind to revenue was 1 or 2 points in the quarter just based on the sell-off revenue not being booked, which is unprofitable. And that's the story around this improvement, the $50 million annualized benefit that will happen over a 12-month basis. Historically, we [indiscernible] hits in Q2 and Q4, for the most part, selling off clearance versus clearing it ourselves now, which is what we're doing.

So we'll see this benefit across a 12-month period, saw some benefit in Q2. There's some benefit in the Q3 results. Again, most of that benefit is markdown management, inventory management in total and then leverage of our expenses and gross margin in Q3. And then Q4, we'll see another slight benefit. But again, those other pieces are bigger than the clearance benefit. So it's a 12-month model now versus sort of Q2, Q4 sell-off model, we'll see that $50 million annualized across the 12-month period go forward.

Kelly Crago: And just on the SG&A guidance for the fourth quarter. I think coming into today, we -- you sort of had guided the SG&A up mid-teens in the fourth quarter. So I just trying to understand what's driving the greater growth in fourth quarter relative to your previous expectations? Is that all accrual of incentive comp? Or -- and I guess, on that, I mean, we -- you've been talking about sort of finding cost savings for a while now. Just wondering why we would be seeing more offset.

Mike Mathias: Yes. I think the plus 20% includes 5 points from the 53rd week that gets you back to sort of mid-teen growth, which was similar to Q3. And yet half of that is based on changes -- and change to the incentive accrual. So half of that mid-teens would be incentive, the other half have other expenses. Again, the work we talked about on SG&A, we knew it would be a longer path. There are some benefits embedded in there, but not what we're expecting now in 2024 that we've got full line of sight to some of those work streams within the work completing as we speak. The teams are embedding that into 2024. We've always said the SG&A benefits would come more next year and then even into '25. So there's a couple -- there's some components that continue past even this coming year. So we're not -- the gross margin focus is what's coming through the P&L in the back half, really pleased with the proof point that, that's providing of all the work that the teams are executing next year when SG&A and depreciation leverage kick in.

Kelly Crago: Just a follow-up on that. So the mid-teens guidance prior did not include 53rd week?

Mike Mathias: It did include 53rd week in the new guidance includes movement in the incentive accrual between quarters.

Operator: Our next question comes from the line of Dana Telsey with Telsey Advisory Group.

Dana Telsey: As you think about the store remodels, and I was in the 1 on downtown on Broadway on Sunday, and it was busy and it looked good with all the concepts together. How do you think of the remodels? What type of lift are you getting? And how much of CapEx would that play into it? And when you think about the digital and store channel performance by brand this quarter, biggest differences that you saw and how you're planning promotions for holiday in each channel?

Jennifer Foyle: I'll start, Mike, and then you can take over. The Gateway, we're calling it The Gateway, as a reminder, it's the first facade that you see as you enter Soho. And this incredibly talented team came up with and they did some research. And thus the name The Gateway. And what a place to highlight all of our brands and all the work we're up to. So I could not be more proud on that delivery and there's more to come there. And there's learnings that I think we're going to leverage for the future.

That said, as we think about the new store design, there's more out there. American Eagle has this incredible new lived in store design. And I mentioned it in my comments, those comps are exceeding, when I say exceeding the average sales comp in the brand. So many learnings there, and we're going to test and scale but we love this new design. It's so fun. And it's been a long time coming for the American Eagle brand to show up the way we deserve. So I love what I'm seeing there.

As we fast forward, there's so much good in play here. The learnings that we've had over the past 3 years in American Eagle particular. We've definitely rationalized this brand. We've closed stores. We've done everything, and now it's time to forge forward and get what we deserve back. And I love what I'm seeing from the teams. I just looked at spring concept and our windows and the product that's coming in and like a good bottle of wine, it gets better with age. There's a lot to hurdle out there but I feel really proud of what this team is doing Aerie, that's a whole other story. It's about time. We have that halo effect on the comps with the new stores. And we did say that in prior calls. We acknowledge that, that it takes time to halo a new store opening and learning from that, and well, here we are. So we love what happened in Q3.

And then on direct, well, so everyone talks omni but I think the best retailers look at each channel and drive what they are best at. And this is what the direct team is up to. You heard the comps are at 10%. But I want to say that this company is very modest in its ad spend and so we do it with a lot of return, and I love what this team is up to. David and team have tested and we have so many new ideas that we can launch, and we're going to do this over time so that we see steady growth. That's what we're up to.

Mike Mathias: Just to add a little bit of color on remodels, we -- as Jen said, we've got the several locations and love what we're seeing out of that store but we also have 4 mall-based locations that we remodeled. We're reading early indications are that we see -- we are seeing significant and positive sales lift from that -- from these locations as well. We're going to be coming out and talking about sort of the detailed plans around the AE brand growth strategy in the spring but part of that will be remodeled supporting a lot of other things as Jen and the team are doing to grow the brand. preliminary number now, which will refine as we get closer, around 50 more remodels is what we're looking at into next year to help fuel that growth strategy.

Operator: Our next question comes from the line of Jay Sole with UBS.

Jay Sole: Jen, you mentioned you're excited about the spring product assortment. Just talk about swim a little bit what you're seeing in that category, how do you think [ U Bra ] expect to perform versus last year? And then maybe just, Mike, I believe the company has a business in the Middle East through some of its franchise partners. Can you just talk about how that business has trended since October and if that has an impact on the quarter or your guidance for fourth quarter?

Jennifer Foyle: Sorry, I got disconnected. Swim, interesting category for sure. Lots of learnings here. It's still a great business for us, high margin business. I would like to say that the teams have taken away how to think about the business on a more profitable growth trajectory for the future. My teams are just in Brazil actually coming back with what I think are the best trends out there and we're certainly putting them into play and near in. And we're definitely doing a little bit more test and scale there. And for sure, we're looking at -- what's interesting, we have American Eagle and Aerie and we have American Eagle women's and Aerie, which is a women's brand.

And so as I think about our opportunities as a company, we take that into play, right? We're better together. And that's what I was -- as we talked about The Gateway stores, you see all of our brands house together. And guess what, we're seeing growth in both women's business, Aerie OFFLINE, both Aerie OFFLINE and then AE. So it's amazing what we can do if you just think about the business that way. So as I think about swim or as I think about trends, not only do I think about Aerie or OFFLINE, I think about American Eagle too and what are the women wanting and how do we position our company for growth in all of the categories. And that's, I think, a competitive edge.

So going back to swim, as I think about that, that's the way we're thinking about the business. And certainly, we're making sure that we don't over pitch the plan, again, high-margin business and testing and scaling there. And I think we have other businesses that we can leverage in all brands. So more to come there. Spring looks great. And I hope we can continue to deliver.

Jay Schottenstein: Okay. I'll take the question like about the Middle East. Like we have a strong international business there. There -- like the first couple of weeks, it did get a little whack, but the last couple of weeks, it is coming back pretty strong. So we're very optimistic there. And we're playing for peace as far as like down the road in that area -- in that region.

Operator: Our next question comes from the line of Simeon Siegel with BMO Capital Markets.

Simeon Siegel: I just want to say a quick thank you for your show of support at your Times Square store, it meant a lot. Can you -- so any color you can add on to speak to the gross margin drivers into next year would be helpful. And then congrats on the nice growth in the brand level EBIT dollars. Any color on just to think about that growth in general corporate expense dollars that we should think about going forward?

Mike Mathias: On gross margin expansion, we've got line of sight into our first half buys. We see tailwinds fill in our initial markup, so benefiting margin on that front. There's still annualization of a lot of the benefits that we were seeing through expenses and gross margin. So our shipments per order, cost per shipment, we've got line of sight into the first half still as well, see some of those benefits continuing through the expense buckets. We are -- so rent, delivery, distribution, warehousing, we still see benefits that we're capturing that will have an annualized effect of the next year on top of the expansion and markup that we have at least half the year embedded in our plans at this point.

Jay Schottenstein: Yes. And Mike like we also see like an opportunity like the international part of the business still growing. We see that as a great growth vehicle, too, international part too.

Simeon Siegel: Great. And then just the corporate expense dollars?

Mike Mathias: Yes. It's again, just tied to everything else we talked about from a profit improvement perspective. There's pieces being embedded into our plans as we speak for next year, really across all areas of the P&L, just expanded on the gross margin opportunity that still exists, and then corporate expenses that really straddle both gross margin and SG&A, making changes to labor models in the next year, services line items, maintenance line items, those tender being embedded, all the benefits we're seeing from the work happening as we speak being embedded in the next year's plan.

Jay Schottenstein: Yes. Also, Mike, I think -- I also think Mike is also saying that he doesn't see really the SG&A increasing for next year.

Mike Mathias: Yes, yes.

Simeon Siegel: Yes. Great. And then just a quick one, it's follow-up. How should we think about the right total sales to comp spread for Aerie at this point?

Mike Mathias: It's only a few points now. I think as we anniversary all that store growth in '21 and '22, that comp spread definitely less than digitalist comp. We're only opening 25 stores this year. So really, as we get past this year, you only have those 25 in a noncomp base. So it's maybe a point or 2. It's probably low single-digit spread.

Operator: Our next question comes from the line of Chris Nardone with Bank of America.

Christopher Nardone: Two questions. First, could you clarify how comps are trending quarter-to-date for each brand, specifically? And then as we think about next year, how much do you think operating margins can expand? And is this low single-digit sales growth you mentioned, is that your base case for next year? Or is it more of a point that you can still leverage costs on that level of sales growth?

Mike Mathias: I'll have the second part first. Yes, it's more of a -- we're not providing specific revenue guidance in that color. It's just to make the point that we can expand operating rate, leverage expenses on just that level of modest sales growth next year based on how plans are coming together. And then quarter-to-date, it's -- comps are similar. So we're providing guidance at similar on top of the 5% we just achieved in Q3. Right now, we're only a few weeks into the quarter. We've got only about 20% of our revenue and the peak weeks really to start now but we're within the guidance, expecting similar type results for the brands.

And I think on operating leverage, I think, look, this year on the low to mid-single-digit comps that we're guiding to the year, we're going to expand operating rate by 100 to 150 basis points. As we get to early next year, provide color and guidance specifically for 2024 in March, we'll provide some level of expected leverage on varying revenue results. Again, the initial color is just to make the point that we see opportunity to leverage and expand gross margin, expand operating rate by leveraging expenses across the P&L, not just in gross margin like we've been able to do in the back half of this year. And that's, again, just an early indications, some early color on what we have -- our line of sight into '24. We'll provide more specifics on that [indiscernible].

Operator: Our next question comes from the line of Jonna Kim with TD Cowen.

Kathryn Hallberg: This is Katy on for Jonna. I just wanted to dig in a little bit to the intimates category and how you're thinking about Aerie's brand positioning there as well as the performance within intimates. I know you mentioned market share was pretty consistent across bras, I believe. And then just briefly, I'm sorry if I missed this, but can you talk a little bit about traffic trends through the quarter?

Jennifer Foyle: Great question. I mentioned we're holding our own in the intimates category as far as market share with -- it's an $80 billion opportunity and we're only just scratching the surface here. I will say that when we launch new idea, so smoothies is now a cornerstone of our business, and we added on to that category in Q3, we win, right? So the customer trusts us in this category. They love the way it feels on their body. It totally represents our brand platform. So more to come there. I think we have now a jumping off point to really sort of compete on our terms. And it's just -- again, it totally fits the bill as far as what Aerie's up to on a day in and day out. This is what we do, right? We make women feel great about themselves and smoothies does that. So more to come there.

Look, the bra business has changed. It's not what it used to be. And the one thing I can promise you is the design team and the merchant teams are constantly thinking of new ways to entertain this customer and we have so much in store for the future that I really believe that we're going to really compete again on our terms, that's accounts. How it fits into the bill of our brand platform and how we show up with product categories and more to come. But I can't share all my secrets. I guess that's what I'm saying. But I think there's lots of opportunity as far as the market space, it's been underserved, and we're going to serve up to our customers what she's demanding.

Mike Mathias: Traffic was healthy throughout the quarter. We saw positive traffic across brands and channels, so both in stores and in digital. And this is sort of kudos to the team. Within our profit improvement work, we're not looking at reducing marketing expense but we've done a ton of work to optimize how we're spending media to drive healthier and more qualified traffic.

And then we're actually seeing significant benefits to digital conversion, especially really conversion in both channels but the work that David and team are doing on the digital side to convert that traffic and make A/B testing, making continual changes to our customer journey and how we're messaging the customers we're seeing the digital benefits. So we've got a lot of work happening on driving healthy traffic and then a lot of work happening on converting that traffic, and we're seeing those benefits to the back half and believe that's going to continue into next year as well.

Operator: Our next question comes from the line of Corey Tarlowe with Jefferies.

Corey Tarlowe: Great. Jen, you talked about your growing customer fleet, your file, excuse me, I believe it's now over $10 million. Could you maybe provide a little bit more color as to what you think the major drivers of that are perhaps contextualize the growth that you've seen in this customer file and how that's benefiting the overall enterprise?

Jennifer Foyle: Sure. Let me just [indiscernible]. Sorry, let me just reiterate that both brands that are customer file groups. So really exciting to see AE take a position on growth as far as not even just their comps but their file and Aerie grew nicely. Both brands are just really dominating on a 360 approach to marketing. So not only are we spending on performance. In fact, when we spend on performance marketing, we ensure that it delivers a return on investment because it's an easy game to go out there and overspend on performance and dominate. It's not that easy to have a 360 approach to marketing, right? So that means when we think about what we did actually, coincidentally but not so when we had installations in the Meatpacking District in Aerie, and in AE, we took over that district in New York City.

Well, how many eyeballs are on our brands, right? Between that, between our influencers, between our store influencers, don't forget about that, our stores represent our customer, right? So when we go to a store, we see our customers, they're our employees. And by the way, they spread the good news of our brands, and they see all the work that we're up to, right, delivering better product, delivering innovation, delivering new store concepts. We haven't stopped.

As a reminder, The Gateway, I find this just as a testament to the team. In July, we came up with this idea to put all of our brands near in together in SoHo and see what it means to our company, AEO, Inc. And well, in July, we came up with a concept and lo and behold, we have a whole new store design, brand new ideas, innovative -- innovation at its max. So again, it's not just one thing when it comes to delivering sustainable long-term growth and brand power. This is what we're up to. We believe we were next in show to the #1 brand out there, I'm not going to say, but trust me, it's a big brand. And top of mind is AEO, Inc. And so when we think about our brands that way, we think about the long-term growth, long-term strategies and how we're going to be one of the most powerful brands in retail. So again, it's not about just one tactic in marketing, it's about thinking about the future and how we're going to be the best in town.

Mike Mathias: Jen -- the other thing I'd add that Jen is with the 25 or so we're opening this year since '21, we would have opened 100 very specifically, 150 locations. And that's obviously part of the strategy too, customer file growth, customer acquisition, those stores are still earlier in the maturity curve, we'll be adding more stores again next year. So everything you're talking about from a marketing perspective, combined with that brick-and-mortar expansion for the brand. We still have opportunity to expand the store base and it's just adding to the customer file within -- again, brands that play within a pretty sizable addressable market that we only have a small percentage up still.

Corey Tarlowe: Got it. And then just to follow up on that, Mike, on the topic of store openings. Could you provide any color as to how to think about the AE store fleet as we look ahead? And then just did you also talk about how AUR trended in the quarter? I know you talked about traffic but could we get color on AUR trends and then how you think about that throughout the remainder of the year?

Mike Mathias: I hit AUR first. AUR was up in the quarter. We talked about kind of holding on to that AUR position that we've been able to grow too over the course of the pandemic, the brand equity we've built, we're not giving back up. It's part of the gross margin expansion story for sure. Your question on AE store count, we're still talking about a net 25 closures this year. But we're coming to the point where that, that number will be similar to maybe down. We're actually continuing to explore repositions in market versus net closures, and we're seeing healthy results from some of those strategic moves. So again, as part of an AE brand growth strategy, we'll articulate where we think the fleet is going when we provide more color in spring but square footage reduction won't be as significant as it's been in the last several years as we've reset the profitability of the brand.

Operator: Our next question comes from the line of Alex Straton with Morgan Stanley.

Alexandra Straton: Perfect. Maybe taking a step back, what part of the profit improvement plan has been the most impactful in your eyes so far? And then how should we think about the next leg? And then secondly, I feel like we haven't heard your latest thoughts on the Quiet Logistics business in some time. So perhaps if you could provide an update there, that would be great.

Mike Mathias: I think the dates -- I mean we talked -- we've been talking about this for about 9 months. We talked about the focus being within the gross margin area. So [indiscernible] margin and markdown the inventory management but the expenses in gross margin, there were 60 basis points of leverage in the -- from those expenses in the third quarter. We've leveraged the expenses in gross margin every quarter now this year. We expect to do that going forward.

So that -- so this year's results, that's -- that leverage is a proof point to the work we're doing. And the fact that's where the focus has been, we're driving results there, it gives me a high level of confidence in what we're now landing in our '24 plans around SG&A and depreciation to drive the same thing.

Jay Schottenstein: Yes. Yes. And Mike, on the Quiet part of the question, Quiet has provided us like enormous benefits to our brands and we're starting to see a flow through like on the gross margins. We're starting to use it more in our sister company, Todd Snyder will go onto the Quiet platform this year. And we're also seeing an opportunity to still strengthen our third-party business too.

Judy Meehan: Melissa, we have time for one more question.

Operator: Our final question today comes from the line of Janet Kloppenburg with JJK Research Associates.

Janet Kloppenburg: A couple of questions. First, Mike, could you provide the breakdown of the gross margin improvement? I'm just wondering about how much came from freight and how much came from markdown improvement and what we should look forward to going forward? Also on SG&A, I know you said you'd leverage next year, which is terrific. But when I look at the SG&A increases in the first half of this year, they were mid-single digit. So should we expect first half next year to have higher bonus accrual? I'm not sure there.

And Jen, if you could help on AE men's, was it positive for the quarter? And what's your outlook book there? And maybe you just talk a little bit about the legging business because I know that's a very high-margin business for you at Aerie.

Mike Mathias: On the gross margin components, we really benefits across the board, product margin benefits, markdown rate management, some lower markdowns as well and then leverage of expenses through gross margin. So it was all 3 components. On SG&A next year, yes, I think the growth in the first half was mid-single. Our plans for -- the plans we're embedding in '24, we talked about 80% of our SG&A spending compensation line items, advertising services, some maintenance areas. There's changes coming that would not have embedded in anything this year. So we're making changes to those -- all those components in our '24 plans. To your point, we may have a little bit of a quarterly flow on incentive comp versus this back half weighting that we're absorbing now but we can provide some more color to exactly how the quarters will look once we get to more specific guidance in March.

Jennifer Foyle: For sure, men's was softer than women's but we saw that coming as we entered into Q3. We definitely doubled down on the women's side of the business in American Eagle. And certainly, we reached the results of that the comps were definitely more significant in women's versus men's. Again, that does not mean that we don't have opportunity in men's. In fact, we see that as some little hanging fruit as we get into back half of this year right now, Q4 and as we head into Q1, Q2. So we've been working hard at it. I definitely see men's as an opportunity to be a little bit more productive. I think in the past, maybe we were a little bit over assorted there, and we definitely can have a little bit more productive SKUs as we continue to double down on the women's business.

Leggings, I don't know if I should call that my middle name, that business is never going to go away. I think we have a cornerstone as far as innovation there. I just -- if anyone hasn't tried our leggings you must try are lagging the our leggings, the Aerie Real leggings, they are incredible. The Real Me leggings, they sit at 1 of the #1 SKUs in our entire company, and it's because of the outstanding design and the comfortability. And again, everything has to move back to what your brand stands for.

And Real Me is what Aerie stands for. So there's so much more good stuff happening in OFFLINE. In fact, we had a rallying cry this week on really what OFFLINE means to the Aerie brand or on its own, wow, you should see in the same mall, we're getting great comps in OFFLINE and in Aerie at the same time. They like what they're seeing. And keep in mind, we still have some crossover categories in both stores in the same mall. So that would tell me that as we continue to test growth for Aerie, there's some more opportunity for both brands in the future.

So again, wagons, they're not stopping. I don't know what anyone is ever going to see about that business. And what I love about this, I'm going to finalize with this is the denim business in women's, in particular, we're seeing some really great reads early on. And so what I'm saying is we can do both. She can wear things inside, she can go to a gym class in leggings and then she can go out in our denim and that's what we're up to.

Operator: Thank you. That concludes our question-and-answer session. I'll turn the floor back to Mr. Schottenstein for any final comments.

Jay Schottenstein: Okay. Thank you, operator, and thank you for all joining the call this morning. I hope this is clear in our third quarter results, we are seeing like -- we're seeing momentum build across our growth and profit improvement initiatives. This is a strong testament that our strategies are working. Like Jen was saying, we're here to build enduring brands, whether it be AE, Arie, OFFLINE and Todd Snyder. We are focused also on driving consistent profit growth and return to our shareholders. Thank you for your interest and investment in the company, and we look forward to updating you in the coming year.

Thank you.

Operator: Thank you. Sorry -- thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.