American Eagle Outfitters Inc AEO
Q1 2013 Earnings Call Transcript
Transcript Call Date 05/22/2013

Operator: Greetings, and welcome to the American Eagle First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Judy Meehan, Vice President of Investor Relations. Thank you. Ms. Meehan, you may begin.

Judy Meehan - IR: Good morning, everyone. Joining me today for our prepared remarks are Robert Hanson, Chief Executive Officer; Roger Markfield, Executive Creative Director; and Mary Boland, Chief Financial and Administrative Officer.

Before we begin today's call, I need to remind you that during this conference call, we will make certain forward-looking statements. These statements are based upon information that represents the Company's current expectations or beliefs. The actual results realized may differ materially from those expectations or beliefs based on risk factors included in our quarterly and annual reports filed with the SEC.

Our comments today will focus on results from continuing operations and exclude non-GAAP adjustments. Please refer to the tables attached to the press release. We have also posted a first quarter financial supplement on our website, which Mary will refer to.

Now, I'll turn the call over to Robert for opening remarks.

Robert L. Hanson - CEO: Good morning, everyone. Thanks for joining us today. As expected the first quarter was difficult, but we remain confident in our strategic direction and ability to deliver. While our execution wasn't fully to our standard, the macro environment presented challenges. Cold weather after last year's record warmth and soft consumer demand for spring apparel impacted store traffic. Within the context, it was tough to generate growth against a very strong quarter last year.

With that said the execution of strong inventory principles, fleet repositioning and the distortion of our online business, led to a high level of profitability. First quarter total revenue declined 4% and consolidated comparable sales declined 5%, coming off a 17% increase last year. Negative comps caused deleverage of fixed costs which increased only slightly to last year and promotions were higher. Despite these pressures, our gross margin improved driven by product cost benefits including supply chain efficiencies. We netted operating profit of $57 million, a rate of sales of 8.4%.

We maintained a healthy financial position ending the period with total cash and investments of $496 million after funding capital expenditures of $46 million and share buybacks totaling $33 million. Adjusted EPS was $0.18 compared to $0.22 last year, a decline of 18%. While disappointed with the decline to the prior year, I'm pleased that our results were within our guidance range and our outlook for the remainder of the year is favorable.

Looking at our merchandise performance for American Eagle Outfitters, we had a mix of wins and misses. Fashion overall performed well and is a point of competitive differentiation for our brand. The team executed well, interpreting current trends, identifying the right styles, fits, fabrics, colors and patterns and making them relevant from our brand for our customers.

Categories that performed particularly well included, men's and women's pants, long sleeved woven tops, fleece, and men's denim. The men's business declined 3%, ahead of women's, which was down 7%. Shorts and tees underperformed and the prevalence of bare looks in women's dresses and knit tops caused soft demand. We also transitioned the women's denim line to crops and distorted toward shorts too early in the season.

As we move forward, while we certainly can't control the weather, we will ensure our transitional assortments are more balanced and that our famous four denim line is better positioned consistently across seasons. The team is responding quickly and we entered the second quarter balanced, in good inventory position particularly in our core famous four categories where our in stock position is 95%.

Our new summer line arrived last week adding freshness to the assortment as the weather turned warmer. We feel good about the continuation of our fashion innovations and as an example in women's the team has fast tracked 40 choices for the second quarter based on early spring results. As we look forward, we are confident about the creative direction for back-to-school, with strong execution in our key categories, denim, shorts, knit tops and color supported by a strong marketing campaign.

Aerie had a solid quarter. Comps rose 4% and profitability more than doubled. Initiatives to edit the assortment to focus on our famous four Intimates line and (indiscernible) swim category are having a positive effect on sales and margin. We are very encouraged by the response to our new swimline which is based on our best-selling bra sales. Although still small this business has doubled in size and is a great complement to our core product line. We continue to gain new customers and I believe the Aerie brand is in a very good place strategically led by a strong team.

We will continue to reposition the store fleet closing poorly positioned standalone stores, maximizing side-by-side and shop-in-shop locations and distorting our online shop opportunity. Factory stores performed ahead of mainline stores. We saw good results from made-for-factory merchandize which will continue to grow in store penetration. Our online business did not see the traffic pressure our stores felt in the quarter. In fact we continued to see strong online growth with sales rising 24%, led by a higher traffic and conversion. Our broader assortment higher in stock position in men's and women's denim and new online Aerie swim shop contributed to the strength.

I'm excited about how well our brands are performing in markets outside of the U.S. A few examples include two strong licensed store openings in the Philippines and in Mexico, our first Company-owned store in the Perisur mall is well exceeding our expectations, and is tracking to be in the top 20 volume stores in North America.

We're highly focused on resuming profitable revenue growth and are committed to improving our execution in the near-term. We have not wavered from our financial targets and longer-term strategies. I'll provide an update on our progress after Mary reviews the financials.

Lastly, over the next several quarters, we will begin implementing a transition plan as Roger prepares to retire from the Company at the end of the fiscal year. He has generously agreed to remain available in an advisory role for me and the product team for the next few years to ensure a successful succession.

Roger is a great friend and has been a strong partner during my first year. I'm confident in that depth, talent and experience of the product team he has built across the organization. This gives us both confidence in American Eagle Outfitters future.

With that, I'll turn it over to Roger.

Roger S. Markfield - VC and Executive Creative Director: Thanks, Robert. Good morning, everyone. Robert said it well. I have tremendous confidence in the future success and growth potential of American Eagle Outfitters. We have outstanding talent, smart, hardworking people and great brands with proven global appeal. With Robert, you'll have a CEO with true strategic vision and a roadmap for transformational profitable growth.

I believe the AE brand is perfectly positioned as leader domestically, ranked as number one, with our customer by NPD, with the potential to be a powerhouse on the global stage. Aerie just continues to get better and better. With a long runway of success ahead, I've had an amazing 20 years here and look forward to watching the success continue. Of course, I'm committed to ensuring a smooth and successful transition. I will be available to support Robert and team over the next several years when called upon.

With my pending retirement, it's about time you get to know our brand leaders, who'll be answering your questions. Joining us for the Q&A, are Fred Grover, EVP, Global Merchandising and Design, AE Brand, Tana Ward, Senior VP, Chief Merchandising Officer, AE Brand and, Jen Foyle, Senior VP, Global Merchandising and Design, Aerie Brand.

I'm sure many of you have met Fred over the years. He's been here since about 1977. Fred has a wealth of merchandising, marketing, online stores and operational experience. Over the years, I think he's successfully done, just about everything here. He's a highly talented and experienced brand leader, currently overseeing our multichannel global design and merchandising's efforts for the AE Brand. Tana Ward and Jen Foyle were my first executive hires in 2009 and 2010 respectively after I returned to AEO.

After a long and successful career at Gap, Tana joined AEO and has been instrumental in moving our merchandise forward, resulting in our most recent business momentum. She has a great eye for product and is a top notch merchant. I'm really proud of how Tana has embraced our operational and planning processes and is developing into a strong business strategist. Jen Foyle brought a wealth of talent and experience as a leading merchant and brand leader at both Gap and J. Crew.

She has redefined the Aerie into something truly special. In addition to leading assortment improvements, Jen has been instrumental in our strategic plan which includes the channeling positioning and operational and financial improvements. I am confident that under Jen's leadership the Aerie brand will continue to grow and deliver strong returns to our shareholders in the future.

Now I'll turn the call over to Mary.

Mary M. Boland - EVP, CFO and CAO: Thanks, Roger and good morning. Given the macro climate and soft demand for seasonal merchandize, delivering growth over a strong quarter last year was difficult. Our gross margin however did expand benefiting from the cost reduction in cotton costs, some supply chain efficiencies and inventory disciplines. Total revenue decreased 4% to $679 million. Consolidated comparable sales declined 5% due to lower transactions and a reduced transaction value. Our average unit retail declined 1%, primarily due to promotion.

Consolidated American Eagle Outfitters brand comps decreased 6%, Aerie comps increased 4% and the total online business grew 24%. The gross margin expanded 30 basis points to 39.1% from 38.8% last year. The higher margin rate was driven by 240 basis points of improvement in product costs. The favorability was partially offset by 70 basis points of decline due to higher markdowns. Buying, occupancy and warehousing costs deleveraged 140 basis points, primarily due to higher delivery costs and the deleverage of rent a negative comps.

Selling, general and administrative expense was up 1% in the quarter versus last year. Due to the negative 5% comparable sales, operating expense deleveraged 140 basis points as a rate to sales. The minimal dollar growth was driven by investments in advertising and fortifying our corporate team partially offset by lower incentive compensation.

We will continue to focus on expense management and we remain committed to our annual SG&A rate, targeted rate in the 23% range as we look ahead. Depreciation and amortization declined $4 million to $28 million and leveraged 40 basis points. The dollar decline relates to last years' store impairments and maturing assets.

Operating income was $57 million, down 11% to last year and adjusted EPS of $0.18 decreased 18%. GAAP EPS of $0.14 included $12 million or $0.04 per share consisting of non-store asset write-off and severance cost.

Now, turning to Page 6 of the presentation for inventory data, we ended the quarter with inventory at cost per foot down 6%. Looking forward, we expect second quarter ending inventory at cost to decline in the low-single digits.

Now, looking at the balance sheet on Page 7, we ended the quarter with $496 million in cash and investments. During the quarter, we repurchased $1.6 million shares for a total of $33 million and capital expenditures were $46 million. We continue to expect to spend between $250 million and $280 million, which includes ongoing store growth and maintenance cost, a new distribution center to support our growing omnichannel business and a new point of sale system for our store fleet as well as a new merchandise planning tool. We are also implementing working capital initiatives and despite the significant investment in our business, we expect to end the year with a cash balance above last year.

On store activity, please refer to Page 9. We opened seven new stores, of which, five were factory stores. We closed 14 locations, including 10 Aerie stores. Total square footage is expected to increase in the mid-single-digits in 2013. As seen on Page 10, we had a total of 57 international locations in 14 licensed countries.

Now, turning to our outlook, we feel great about our investments in growth including factory stores, new mainline stores and our online channel as well as the many process improvements to our business, all of which are expected to add incremental returns this year and in the future. Yet, at this time, we remain cautious in our forward view, until we work through the macro environment. We are issuing second quarter earnings guidance of $0.19 to $0.21 per share, compared to EPS from continuing operation of $0.21 last year.

For the year, we are guiding to adjusted EPS of $1.42 to $1.45 per share compared to adjusted $1.39 last year. Our guidance is based on consolidated comparable sales of approximately flat for the second quarter and positive low single digits for the second half. Over the long-term, we remain committed to delivering our strategic planned financial targets of 7% to 9% top line CAGR, 12% to 15% EBIT CAGR and ROIC of 14% to 17%.

With that I will turn the call back over to Robert.

Robert L. Hanson - CEO: Thanks, Roger and Mary. As we manage through the short-term and focus on longer-term profitable growth, we are making good progress on our strategic initiatives. This year we are making investments aimed at fortifying our brands, processes and capabilities, driving growth in North America and laying the foundation for future transformational global growth. We expect these investments to generate returns on invested capital both in the near and longer-term.

I will highlight a few projects. Within fortify, we refined our product development calendar increasing our development cycles from 4 to 6 times annually enabling more responsive development. At the same time we removed anywhere from four to six weeks from our overall development timeline per cycle. We are holding more open to buy increasing to 20% styles that are truly open as we enter a season. We are flowing new fashion monthly with flows better aligned to holidays and shifting customer shopping patterns and we are more disciplined in platforming fabric and production capacity, resulting in our ability to fast track items where we have seen results as early as the current quarter.

As we continue to refine our process we are building the capability to compete more effectively against our current competitors including fast fashion retailers. We are building a rhythm of reading and reacting to selling trends that were better at exciting our customers and improving inventory turns. Our TradeStone PLM tool is now 100% live and we believe it to be industry leading. Also our new merchandize planning tools just went live and will be scaled throughout the year enabling us to buy, plan and allocate with greater precision based on localized demand.

Material benefits from these investments will be felt as we source and execute spring 2014. We're making a significant investment in upgrading technology and are progressing on the implementation of a fully integrated global enterprise system. Standardizing on Oracle systems will support us in providing a consisting customer experience everywhere we operate.

The flexibility inherent in the systems will allow us to move much faster to support the needs of the business. Additionally, our resources can be allocated towards developing new capabilities rather than maintaining the integration of legacy systems. Merchandizing and point-of-sale systems are on track for an August roll out in China and will begin installation in the U.S. next year.

Our Teradata CRM system upgrade will go live this quarter, building the foundation for a single view of our customer, providing the latest capability to support customer personalization. The IBM Sterling order management system will enable flexible fulfillment, which we are implementing this year. We will pilot a ship from store capability this summer with a broader rollout by year end.

We expect this initiative to enhance the customer experience and drive greater inventory utilization and be incremental to both sales and margins. With all of the IT investments, we are developing systems and capabilities that lay the foundation to scale globally. Our new distribution center project kicked off this quarter, in combination with our existing facilities this new $1 million square foot DC located in Hazleton, Pennsylvania will enable direct shipments to all U.S. direct customers in two days or less. With this DC, we will increase efficiencies and support future omni-channel expansion plans. Hazleton will begin operations supporting our direct channel by mid-2014.

The repositioning of our store fleet and new store growth are producing strong returns. First year openings produced a four-wall margin of 26% and a return on invested capital, exceeding 75% and a payback of six months.

While opening highly productive stores, we're closing stores with minimal contribution or losses. The combination of these efforts over time will lead to stronger store productivity and profitability. New mainline stores are opening in underpenetrated markets. For example, this year, we're opening three store locations in the Greater Miami Area including a high profile premium store with a smaller footprint on Lincoln Road, and we're relocating our Santa Monica store from a second tier location to a premium site.

We continue to see strong returns from our factory stores, with sales per square foot well over $600. We'll open another 30 stores this year and have assembled a merchandising, design, production and planning team, dedicated to our made for factory merchandise, which we expect to rise from 25% of the store currently to 60% by the fall season.

Our international business was accretive to the bottom line with franchise revenue increasing 26% to last year, while we are on schedule to take over the operations of our China store, this quarter, we've hired a highly experienced executive, Kitty Yung, to run the Asia Pacific region for us where she brings a wealth of brand development and store expansion experience. We are excited to have her onboard, building a roadmap for growth across the Asia Pacific market, where we continue to see strong customer demand and potential.

In fact, our licensed store in Japan continues to open extremely well. Assuming run rates based on a trailing 12 month result, our six stores in Japan would deliver $90 million in annual revenue, and I recently visited three stores in Kuwait where we do $40 million in revenue annually in these three stores alone. These examples provide evidence of the strength and growth potential for our brands on the global stage.

Lastly, we continue to build our capabilities and drive a high performance culture at American Eagle Outfitters. In addition to Kitty we've added experienced talent to a number of areas, including merchandizing, product development, sourcing and production, omni-channel commerce and financial planning. As we look ahead we have a lot to be confident about. We are fortifying our brands which are resonating on the global stage. Aerie continues to make steady progress and is earnings accretive. We have a robust online business, which is only getting stronger and is a launching pad to our global omni-channel customer experience. Our factory stores are providing new growth opportunity and strong returns.

Our business in Mexico is performing and represents a high-growth opportunity in an exciting untapped new market. Our stores outside of North America continue to gain momentum and we continue to make fundamental improvements in our processes and capabilities. We will stay humble and hungry and focus on driving profitable revenue growth and delivering top tier returns to our shareholders.

Thanks for listening and now we will take your questions.

Transcript Call Date 05/22/2013

Operator: Betty Chen, Wedbush Securities.

Betty Chen - Wedbush Morgan Securities: Robert and then I have a question for Roger as well. I think in the beginning the team obviously still managed quite well. But I thought in the beginning in your prepared remarks you thought that execution may not have been up to your historical standards. I was wondering, if you can clarify that a little bit? Then I think you have mentioned that the summer collection just dropped a week ago, along with some better weather in certain parts of the country. Can you give us a sense on some initial reaction to that and how is the team thinking about any potential pent-up demand that could help the second quarter? Then I have another question for Roger after that.

Robert L. Hanson - CEO: I think what we will do is I'm going to answer your question about execution and then we actually have Tana answer the question that you asked about product and then you can ask the follow-up question to Roger. So, in terms of execution, we just executed on all cylinders throughout 2012, as we entered what was a fairly volatile first quarter, again with unpredictable macroeconomic environment and really cold weather. In addition to that, we obviously transitioned to warmer weather looks (indiscernible), shorts, more bareless in women's dresses, skirts, sooner than the customer was willing to show up for obviously. In addition to that, we did have a few points of production fallout that we had to work hard to get back on top of. Because of the very competitive environment in the first quarter there was a really strong promotional cadence. I said consistently we will compete to make sure we maintain or grow our market share, and as we did in the first quarter that obviously turned our famous four categories faster so we have to respond to get back into inventory position in some of those categories more effectively during the quarter. I think the team did a great job of responding and as a result we have entered the second quarter balanced and in a good inventory position in a 95% in-stock position particularly in our core famous four categories. So, those are the kinds of things we have been thinking about.

Tana Ward - CMO, AEO Corporation: The summer did hit this weekend and I hope all of you have had a chance to actually see the floor set. We're very excited about how it looks. It's very early in the season. It's funny to be saying that, it's just time, but it is early in the summer season and we are seeing some very good indication. First, fashion is resonating on both men's and women's. Our current trends, the current trend's out in the marketplace really lean in to AEs strength and we're maximizing that. Some of our best sellers today are styles we reacted to in the month of March. Robert had referred to 40 choices in women's and we had some great selling in some of those early styles. Second, across all markets knits is continuing to gain moment. When I say knits, that means, bare, tees and graphics. We have some great early signs in this category. Third, in other seasonal categories, where markets have seen weather improve for more than a couple of days, we've seen some pops in the seasonal category. We're very excited about some of the early selling that we're seeing and we look forward to the rest of the season.

Robert L. Hanson - CEO: Betty, a quick follow-up for Roger?

Betty Chen - Wedbush Morgan Securities: Yes. I guess, in terms of the advisory role Roger, how should we think about that? Then my last question if I could squeeze it in is, the supply chain efficiency you mentioned in Q1. Should we expect some of that to continue through the year?

Roger S. Markfield - VC and Executive Creative Director: Betty, you know that I love this brand and I really do believe that the future of this brand is stronger than ever, as we enter the global stage and the results we're seeing are amazing and I will be available to Robert and team as requested.

Robert L. Hanson - CEO: Betty, just quickly, Fred's here and maybe later we can answer more questions on it, but he's led a really strong initiative to increase our cycles from 4 to 6, that's matched with differentiated supply process for core, core fashion and fashion which are enabling us to respond more effectively and increase our inventory turns and you'll see a linear improvement in that performance throughout the year. So we will come back a bit later.

Judy Meehan - IR: I'd like to remind everyone to just limit yourselves to one question so we can get as many people on the call as possible.

Operator: Tom Filandro, SIG.

Tom Filandro - Susquehanna Financial Group: I would also like to say congrats on managing in a very tough environment and Roger bittersweet you are a gem my friend. Robert, can you expand a little bit on this fast tracking comment of these 40 choices? Can you kind of give us an understanding of what, is that – how many choices do you typically see and how should we think about that kind of strategy impacting the financials go forward? Since I am only allowed to ask one, I will stop there.

Robert L. Hanson - CEO: Tom I am going to actually have Fred talk briefly about the improvements we've made in the overall process of moving some more cycle times and that's given us the opportunity to keep more customer choices open as we enter each season. Then Tom I can talk specifically about how we are testing and then fast tracking and reacting to selling. Fred?

Fredrick W. Grover - EVP, AEO Corporation: When we talk about fortify, I mean we have been working throughout the year with the entire team on what that means from our production cycles and specifically to your question we do want to leave opportunities open. We talk about fast tracking, that's something that comes available with in a design cycle that we potentially didn't have in the last, because we do talk about fast tracking versus chase. Chase is what we do and there is something already in the line doing well. We want to go after it more aggressively. Fast tracking is starting from scratch. We have a plan in place now where we can limit our time to market up anywhere from 45 to 60 days. This takes advantage of having these goods in place and using what we call air direct to ship product directly from the factory or forwarder to the stores. So, it cuts out a lot of the middlemen. There is an expense there, but the savings – this is a product that we feel good about, some of the products that have (with asset) and you save the mark downs.

Tana Ward - CMO, AEO Corporation: The only think that I would actually add to that just in addition, is that we have a testing process for our core. We have a testing process for our core fashion, and then we leave ourselves open to quickly react to trends within fashion that is not tested, new trends that hit the market that we quickly react to. So a lot of the 40 choices that Robert had referred to, really fall into all of those categories. So, we have some early great reads and we're able to move within 45 to 80 days is the fastest we've been leaving.

Fredrick W. Grover - EVP, AEO Corporation: Along with that too Tom, we have calendarized four total floor set extracts a year. This is something Roger instituted 20 years ago and it's back on track. That gives us amazing information, how that season's going to roll out and how we can fast track and/or chasing the product.

Operator: Brian Tunick, JPMorgan.

Brian Tunick - JPMorgan: Quick one for Mary and then one for Robert. Just Mary, just trying to understand your Q2 earnings guidance, I know in Q1 you said you had 240 basis points of product cost helps. So, just wondering is there any left here in Q2 in your earnings guidance and then maybe for Robert over the past few quarters anything you can tell us regarding whether the marketing or product changes, how they've affected really your customer, are you bringing a new customer, is she older, anything you can share regarding what is happening now in this new teen, fast fashion environment that you're after.

Mary M. Boland - EVP, CFO and CAO: If you look at our IMU for Q1, we saw an improvement of about – a little over 200 basis points, which a large majority of that was related to cotton. Expect Q2 to be something like 150 basis points, so we'll see that incremental cotton start to decline. Then as we go into the back half of the year, a lot of our work on supply chain efficiencies, will probably reflect an IMU improvement of around 50 basis points. So, it's going to tail off as the year goes on.

Robert L. Hanson - CEO: Brian, I think you know the teams have done a good job in executing as I've said, both on the product front and the marketing and customer experience standpoint. So, we have a number of examples of success. I think the returns we're getting, obviously the 24% growth in our direct business is an example of that. The momentum that we have behind the new stores we're opening with those kinds of returns that I mentioned during the call, a six month payback we're increasing in those stores in particular, our sales per square foot. We obviously had a really strong launch with marketing backed efforts in our Mexico store which is our first store in Mexico. Aerie obviously had a good quarter, 4% growth and earnings accretive, particularly in the direct business Aerie comp was off the charts, at about a 38% comp. So, we're feeling really good about the returns we're getting. I think the way we've been looking at it is our NPD data would say that against our direct competitive set that we have the highest levels of awareness connection and consideration. We have tried to balance bringing – we have got a really strong in the high share among our young teen customer, where our shares tend to run about 3 points higher and our famous four category has been young adults meaning in the early 20s. So we have focused on balancing the assortment a bit and we are seeing progress in getting that young 20s customer into our brand. But we also have in famous four categories very broad reach. We are trying to increase the reach and appeal of our brands as we expand the appeal and compete more and more on the global stage.

Operator: Lorraine Hutchinson, Banc of America Merrill Lynch.

Paul Alexander - Bank of America Merrill Lynch: It's Paul Alexander for Lorraine. Can you guys give us any color on the cadence of comps through first quarter and then can you tell us with regards to the second quarter comp guidance as flat? What does that reflect, whether you are – are you seeing flat now or are you anticipating improving weather or an easing comp comparison trajectory in that guidance?

Robert L. Hanson - CEO: Sure, Paul. I think I am just going to repeat with maybe one additional insight of what we have said in terms of our guidance. Obviously we are predicting a flattish comp for the second quarter. We did see a linear improvement in our performance at the beginning of April and that continues. We have a favorable view of the year and we are going to maintain, I would say, cautiously optimistic view of the year so that we can execute the strong profitability regardless of the competitive environment and customer environment that we face. That's where we are focused on executing and we will keep you posted as things move forward.

Operator: Oliver Chen, Citigroup.

Nancy Hilliker - Citi: This is (Nancy Hilliker) filling in for Oliver Chen. My question is actually I wanted to congratulate you on great inventory management this quarter. If you could give us a little bit more color on your plans for the rest of the year, I know you said down low-single digit, but it seems very impressive that you continue to manage it so well, and also if you could just give us a little bit more color on the AUR outlook and the dynamics traffic or AUR this past quarter?

Mary M. Boland - EVP, CFO and CAO: I'll take the first the two questions on inventory and AUR. So, regarding inventory, for Q2 we're looking at inventory cost to be down low-single digits and then flat to about flat in the second half of the year, and if you remember last year, it was the second half of last year, where the inventory principles were beginning to be deployed in the Company, and so, as we start to anniversary that here in the back half of the year, you won't see as significant of a decline in inventory as you saw last year, the back half of the year and then the first half of this year. In terms of AUR, we are, for Q2, assuming AUR being relatively flat and then a slight increase as we move into the second half of the year.

Operator: Janet Kloppenberg, JJK Research.

Janet Kloppenberg - JJK Research: For Tana and for Roger, I wondered if you could address the issue as to whether the balance of fashion and basics are now in place and if the 40 fast tracked items are now in the stores, which I expect should bode well for comps to improve, in the second quarter and secondly for Mary, could you give us some sort of indication on what we should expect for SG&A leverage or deleverage on a flat comp in the second quarter?

Tana Ward - CMO, AEO Corporation: So, I'll start and then Roger, if you'd like to add on, but, when it comes to fashion and core fashion in our core businesses, we remain constant in our strategy. We have a clear path and we absolutely feel like we have the right balance. There is opportunity in both men's and women's that I speak to. When it comes to core and core fashion and fashion in women, it's approximately 35% core, 40% core fashion and 25% of the fashion that we're fast tracking into our stores. The opportunity in women's is for us to continue to protect our core, to nail those big drivers within core fashion, at a great price and to continue to fast track into the fashion that you will see a fresh point of view every month, when you travel to our stores. In men's, core continues to be very strong and is approximately 40% to 45% of our business. We will continue to protect that market share. Where we have the opportunity and where we've seen current success is with our trend product. We continue to grow that contribution and are looking to grow it to at least 15% of our assortment, the remainder being the bulk of the business, which is core fashion.

Roger S. Markfield - VC and Executive Creative Director: I'll just add, I just signed off on the summer two set which is like a trend set (indiscernible) and that is the most powerful set that I have seen in a long time. I think you will enjoy it when you see it.

Mary M. Boland - EVP, CFO and CAO: Janet regarding your question on SG&A for the second quarter we expect SG&A dollars to be up in the mid-to high single digits and to deleverage roughly 80 basis points and there is two kind of simple reasons for that in Q2 in particular. Last year we had a number of open senior leadership positions in the Company in Q2 of last year, CFO, HR leader, no omni-channel leader, et cetera, et cetera. So we are kind of up against a lower compensation base versus last year. As we move forward look to see the SG&A to flatten out versus prior year and third order and declining year-over-year in the fourth quarter. We are still targeting and focused on achieving our 23% SG&A to revenue target, over the short term and the long term. But it's going to be a little bit up and down here quarter to quarter.

Operator: Adrienne Tennant, Janney Capital Markets.

Adrienne Tennant - Janney Capital Markets: My first question is, I was wondering Robert, if you can talk about or give us any color on the penetration of DTC any longer term goals you have for that piece of the business and any margin color around that? Then very quickly for Mary, can you just talk about whether we should be modeling any net benefit in either sales or EPS from the calendar shift into Q2 out of Q3?

Robert L. Hanson - CEO: Sure. I am going to let Fred add any commentary that he had like to as well because he has been instrumental in growing our direct to consumer business to the size that it is today. Look it's – as we have said we see this is a really big opportunity for us. When I started with the Company, we were penetrated about 12% of sales. We ended 2012 at about 14% of sales. We believe we can grow. I'd say the direct business anywhere between – growing to anywhere between 17% to 20% of sales, on our existing capability if you well, but obviously, just given where the shifting customer demand is going combined with our desire to reposition the distribution of our business to be more profitable, we'd love to get that penetration above 20% and it will obviously play a critical role on the business as we go to the global stage. As we said in the past it's a margin accretive business. It's among our most profitable business. It runs about 1,000 basis points higher than our mainline store business at the moment and our intention is to keep it in that framework. Fred, anything else you want to add?

Fredrick W. Grover - EVP, AEO Corporation: Well, I think we have a clear path on how we can get to 17% and the goal is 20%. If you look at our penetration today turnover is 15.3, of that 15% – if you just look at American Eagle 15% of the total business was direct, if you look at the Aerie 19% of that business. So, it's – we have a proven model. One of the most exciting things is what's happening with mobile, and there is going to be – we are really going to be leaning in to mobile. We see those sales up a 137% in the quarter, traffic up 47%. We have room to improve and make that better for our customer experience and the team is working on that today. So, that's extremely exciting. Then one other thing has been great for us is store-to-door. So, we continue to see improvements there. When we talk about that, 35% of our product and sales are coming from unique offerings in direct, a lot of that from extended sizes. We get great feedback on that, and the fact that you can be in a store and buy that product. We ship it to you for free and then jus the extensions of our famous four, that's why what we're about and then building on and distorting some key areas that you don't see, we don't have room for in the stores, like women's dresses, footwear and especially swimwear which has been a leading classification for us, both in American Eagle and especially at Aerie, so, very exciting.

Mary M. Boland - EVP, CFO and CAO: Quickly on the calendar shift, we'll lose May week one, but we pick up August week one, which is obviously a bigger, bigger week for us. So, kind of a net favorable impact in Q2 of roughly $30 million of revenue, but of course, we'll lose that in Q3, so just a shift between the two quarters.

Operator: Kimberly Greenberger, Morgan Stanley.

Kimberly Greenberger - Morgan Stanley: My questions are on the supply chain. I'm wondering if you can help us understand the percentage of inventory that you are now able to either fast track or chase, and I think you mentioned on the fast track product, 45 to 60 day lead times, could you just comment on the chase piece as well and in the balance of assortment, what are the lead times at this point?

Robert L. Hanson - CEO: Let me just give a broad overview and then if Tana or Fred or Jen want to add anything specific Kimberly, I will. As Tana laid out, if you look at the way that the assortment architecture is based, we typically have about, and this is for both men's and women's combined, about 30% of our customer choices in core, 45% in core fashion and 25% in fashion. We have a cycle time in total that for the total process that is usually in the nine to 10 months timeframe that as Tana mentioned we have increased our ability to fast track anywhere from 45 days to 90 days and with the work that Fred has done in putting the fortification process in place on our cycles we have increased from 4 to 6 for example per year. We have taken about six weeks out of the total cycle time and frankly we can really get at an idea that's trending in about four months. So I think that combined with the fact that we keep about 20% of our styles open going into each season just gives us the opportunity to respond to what the customer wants. What we want to be able to do is to compete against our core customer base – our competitive base as well as the fast fashion competitors on that 25% of customer choices that are truly fashion.

Fredrick W. Grover - EVP, AEO Corporation: I think the key to make that happen is what we have been doing with differentiated supply chains, being able to platform fabric as Robert mentioned earlier and really have production ready to go. So all of that has been what we've been working on. We will see the benefits of that this year, but really, power through for next year where we are up and running.

Operator: Marni Shapiro, The Retail Tracker.

Marni Shapiro - The Retail Tracker: If you can talk a little bit around Aerie and what’s been driving the sales there? I thought your beach set and the early set looked really fantastic. I was curious if you are finding success with the non-bras and panties business. I know you mentioned swim I am curious about some of the other businesses. If you guys, just one housekeeping, if you wouldn’t mind. Store openings and closings for the rest of year if you could just give us an update on that?

Jennifer Foyle - CMO, Aerie: Marni its Jen. We are excited about some of the business results we are seeing in Aerie, really to tick it off was we really focused on the direct business and really distorting that channel, so that we could build the brand awareness. The teams have done a great job focusing on our famous four categories; bras and undies, both categories are proven and we have been very successful in innovation there in conjunction with design. But probably the most exciting thing was our swim business this year and really kudos to the team here again, focusing on our bras, our famous four bras, the bras that are winning for us and actually introducing them into the swim line has been 100% successful. So, we see a future here in our seasonal businesses, really for spring it will be revolved around swim, and as we head into the Q3 and Q4 it will (sleep and dorm).

Tana Ward - CMO, AEO Corporation: On the store openings and closures here in North America looking to open about 50 AE stores, closed about 50 stores was between the AE brand and Aerie, and then looking to open about 63 international franchise stores.

Operator: Dorothy Lakner, Topeka Capital Markets.

Dorothy Lakner - Topeka Capital Markets: I want just to follow-up on Aerie for a second. I wondered if we could or if you could kind of go over where the fleet is positioned right now, where you stand in terms of shop-in-shops and where you look to be at the end of the year? Then secondly the AE brand, where do you think the biggest merchandize opportunities are in the second half of the year looking back at last year?

Robert L. Hanson - CEO: I'll take the fleet question and have Jen add anything that she'd like to and then Tana can take her question about the merchandise opportunities for the back half of the year. So, Dorothy, as we've said from the last 12 months or so, we really are looking at more strategically managing the distribution of the Aerie brand. We see the opportunity for success in the intimate space and we have started to gain some nice momentum with Aerie as I mentioned it had a four comp in the first quarter and more than doubled its profitability. So, we're excited about the momentum. That's driven by the great work that Jen has done with her partners in not only addressing the assortment she mentioned, obviously rooted in intimate bras and undies and then surrounded by fleet, lounge, swim, dorm, personal care and fragrance but also by focusing on side by side distribution, our direct channels and where we can 50 yard line location smaller stores, because of that and the fact that we have imperative close, the less profitable or loss generating stores, we're seeing some nice momentum being built and as a reminder, the greatest asset we had to leverage is the American Eagle Outfitters' customer who cross shops from American Eagle Outfitters to Aerie and buys a product from us, because if she does, she's worth five times the value of the average Aerie customer. Jen anything you want to add?

Jennifer Foyle - CMO, Aerie: No, you said it well Robert.

Robert L. Hanson - CEO: Tana?

Tana Ward - CMO, AEO Corporation: Yeah, so, with the creative team and the merchandising team together, we really have two main focusses for the remainder of this year, number one to protect and gain our market share in our famous four categories. I know you've heard them many times, but I'm going to state them again, denim, shorts, tees and color throughout our entire store. What does it mean to protecting gain, it means for us to have a diverse offering. We have as Robert stated, a broad reach in our famous four categories; constant innovation in our product, in-stock in stores at all times and a great value to our customer. Second, our strategy is to continue to play off our strength in our (indiscernible) product. Our customers are loving the emotional trends that we are offering them and they are willing to pay. We need to continue to maximize that the trends today are really leaning into AE's strength.

Operator: Dana Telsey, Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group: Can you talk a little bit as you think about seasonal transitions to how it's changing. How are you preparing for back to school, difference in what you prepared for spring? Also if you think of the upcoming holiday season how do you see the transitions change involve from a price point and how you are thinking about it in terms of margin (compression)?

Robert L. Hanson - CEO: Dana we will have both Tana and Jen answer the question. We will start with Tana. She can answer for American Eagle and then Jen can talk about Aerie around the transitions for both back to school and for holiday.

Tana Ward - CMO, AEO Corporation: So for back to school, back to school is another transitional time for us and we have many learnings from this last spring as well as last year. We are really set to win with all of our (great) offerings. We have the right balance with current trends that we have had in our robust testing process. We have great color, specific color fits and added details within our bottom. Second in our testing process we have actually had the entire back to school line out in our stores and already tested. We are really excited about the reads that we have. We feel that with our new launches – our new fit launches that we have updated core fits that are really the drivers of our business as well as new trend details that we have the right balance within our denim assortment. We are making great strides with our tops business and continue to see further opportunity. Like I said, earlier in the call, the trends today are really leaning into our strengths, trends like Bohemian and all of the easy dressing that you are seeing out in the markets. We continue to focus then on maximizing that opportunity.

Jennifer Foyle - CMO, Aerie: For Aerie, the one great thing about the intimates business is, it is seasonless and it runs about 65% at the total volume. So, bras and undies again we will be concentrated for all of our deliveries around the 65% to 60% soon. Thinking about what's working for us and how we're transitioning, we've launched some new categories, one being seamless in bras and undies. We've seen a great response to that category. Our bra launches, we still we continue. We have some great new ideas around innovation for both the July set and the August set, and they will be supported with the marketing that we think is new and fresh. Lastly, we'll have a transitional category that we think we will start to dominate in like we did in swim, which will be our sleep and dorm shops.

Operator: Lindsay Drucker Mann, Goldman Sachs.

Lindsay Drucker Mann - Goldman Sachs: I had a question on your revenue growth for the last couple of quarters, there's been a pretty big delta between your revenue percent change and then your comps and your store count, which I'm guessing is mostly franchise business and maybe the better mix towards outlet. Can you just talk about the driver of that and how we should think about it from a modeling perspective over the next few quarters and then also how we should think about the margin flow through of those increment sales?

Mary M. Boland - EVP, CFO and CAO: I think in general, if you look at our store openings this year, we're heavily biased towards factory stores, which was one of our strategic initiative. So, you'll continue to see that revenue growth come through, obviously not a comp growth this year, as well as our international business. So, you'll continue to see that spread as the year goes on.

Operator: Jennifer Davis, Lazard Capital Markets.

Jennifer Davis - Lazard Capital Markets: Robert, could you talk about your allocation process now? It seems to me like you have a huge opportunity to increase sales and margins just based on doing a better job of getting the right merchandise to the right store. Then I'm going to throw in one more. With the store to door capabilities coming online, will we start to see more of the online exclusive merchandise in stores? It seems to me that at least in some of the stores, you have the space to display some more of the dresses than other fashion pieces that are currently online only?

Robert L. Hanson - CEO: I'll take the question around allocation and then, I'm going to have Fred answer the question about store to door. This is just a big opportunity for most retailers in my opinion Jenifer. I think there are a few retailers, particularly on the global stage that have built extremely progressive planning and allocation processes that enable them to allocate based on localized demand. Our current processes and systems are not built that way. We have a fairly simple segmentation process where we have core – core fashion, fashion leaning stores and then we have the kind of balance of the chain and then we have more environment segments. We obviously have A through F rankings as well. What we'd like to be in the position to do and our merchandize planning buying and allocation capability that we just went live with and that we will be scaling for the balance of the year will truly enable us to read the results of the customer that's walking into the individual door. Over time will enable us to both be able to refine the initial presentation floor set and then make sure that we distort it how we own the inventory to be replenishing into sales based on true localized demand. We are not there but we will be scaling it throughout this year and as Fred mentioned I believe earlier we expect the results to be more fully realized from 2014 onwards. But it’s a very major focus for us because obviously it will have a huge impact on inventory utilization. Fred, do you want to talk about (indiscernible)?

Fredrick W. Grover - EVP, AEO Corporation: It's a good question. Roger would say if we had larger stores we would do different things. But Tana is working on a major project with (indiscernible) segmentation and how we could get things. The only thing that made sense like to us is into a group of stores but when we talk about store to door the capabilities there are amazing with what's happening with technology. We tested iPads in our stores which really brings to light some of this product that you are going to find only online. We have seen a direct correlation to the stores that have iPads with major increases and in being able to sell that product and we really feel that that's part of the future for us as to move forward with that, expect to roll that out to more stores. So that, yes the product is not in the store but you get a feel for it on the iPad. One of the things we have been experimenting with and that you will see it in some of our stores is we have been putting footwear as part of the presentation, some key looks in the stores and that is a product you can touch and feel. You can't buy it in the stores but you can quickly buy it online, again the iPad is the perfect tool to grow that sale.

Operator: Eric Beder, Brean Capital.

Eric Beder - Brean Murray, Carret & Co., LLC: You're doing a ton of things right now in terms of DCs, expansions, shifting the store base around. When should we – I know we're starting to see – we'll see fruits of this going forward. But when one should – like all of this start to come together and start to get you to your goals here? I mean there is a lot of pieces moving around here, when should we start to kind of see the full fruit of all these pieces cut together?

Robert L. Hanson - CEO: I think look, I want to give a tremendous amount of compliments to the team. It was satisfying for me to be able to share at the conclusion of our prepared remarks the level of progress that we've made across our strategic initiatives from fortify to growing North America to obviously transforming the Company to compete on a global stage. As we've discussed in the past, Eric, we hadn't invested in growth for the past number of years in the Company kind of maintaining our capital investment and I would say a maintenance level more than anything. So, as we have picked up the pace, we focus there predominantly on store remodels, stores expansions where we're trying to rebalance the fleet for profitability, both in North America, and as we expand on the global stage the growth obviously is there. We are obviously investing behind our direct-to-consumer business, both in technology as well as in the fulfillment capabilities, and we've obviously got to invest in a scalable infrastructure to take the Company to the global stage. What we have in place is a really strong project management team that's helping oversee all of these initiatives, so that we can execute with precision, which is why we were able to share the success we have had thus far with you and the progress we made in the first quarter. We should see the benefit of these – coming to the Company in a linear progressive way, but as we've all mentioned in various ways during the call, the material benefits will start in 2014 and then scale beyond that. The way we look at it is our fortifying grow initiatives, growing North America and fortifying our kind of core brand assets and capabilities. Those are really about between now and let's say the end of 2014 or early part of 2015, but the investments we're making across the Company will enable us to transform to be a global competitor both in omnichannel retailing as well as in international expansion, we haven't really committed material growth from those initiatives as we mentioned in our strategic plans we revealed last year, and so kind of from let's say early 2015 and beyond, but we're pacing this so that we can obviously win and be shareholder accretive and really deliver really strong return on invested capital both in the near and the longer term.

Judy Meehan - IR: So, that concludes our call today everyone, thank you very much, for your participation and continued interest in American Eagle Outfitters.

Operator: Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.