American Eagle Outfitters, Inc. Aktie

Good afternoon everyone. Welcome to the AEO Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Alexis Tragos, Vice President of Corporate Communications. Please go ahead.

Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer; Jen Foyle, President, Executive Creative Director for American Eagle and Aerie; Ravi Thanawala, Chief Financial Officer; and Mike Mathias, Strategic Adviser.

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. The 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. You can find our second quarter investor presentation on our corporate website at www.aeo-inc.com in the Investor Relations section.

Now I'll turn the call over to Jay.

Thanks, Alexis, and good afternoon, everyone. The second quarter represented another important step forward for AEO. We built on the strength of our portfolio, making progress at American Eagle while Aerie continues to deliver outstanding performance. The second quarter came in at the high end of our expectations, with revenue of $1.4 billion and comparable sales growth of 6%. Operating income of $211 million included a net tariff refund benefit of approximately $161 million.

We remain focused on driving stronger profitability across the business and these results underscore the strength and relevance of our brands and the progress against our priorities. At Aerie, which includes off-line, momentum continued. Aerie delivered revenue of 25% total growth and comparable sales grew 19%, reflecting the broad-based demand across categories and channels. We remain confident in the long-term opportunity for Aerie and our ability to reach new customers.

Turning to American Eagle. Total revenue grew 1% with comps declining 1%. The an improvement from the first quarter. AE men's posted its fourth consecutive quarter of positive comps, signaling continued traction and relevance. We are moving in the right direction, yet there remains work to do. Our progress is fueled by our people. I'd like to extend my gratitude to our associates for their relentless dedication and commitment to our brands and customers.

Before I turn it over to Ravi, I want to take a moment to thank Mike for his many years of service to AEO. Mike has been and will continue to be a trusted partner to me and I'm greater leadership his commitment in the many contributions he has made to our business over the years. I'm also very pleased to welcome Ravi to the team. He brings comprehensive financial and operating expertise a fresh perspective and a deep understanding of what drives long-term shareholder value. As we look at the opportunities ahead, I'm excited about the breadth of our experience and judgment he brings to the team as we work together to make AE a stronger, more productive business over time.

Now I'll turn the call over to Ravi.

Thank you, Jay. I'm excited to step into the CFO role. I've been at AEO for just a few weeks, so I'm spending a great deal of time listening, learning and getting to know the business and team. What I try to mean to AEO was the strength of the brands, the connection to its customers and the opportunity I see to create meaningful long-term value for shareholders. I'll be focused on driving durable value creation by connecting brand growth with disciplined execution, stronger profitability and the thoughtful allocation of resources. Those are the areas where I'm spending time on with Jay and the leadership team as I get deeper into the business.

It's still early, and I want to be thoughtful about drawing conclusions. However, I'm excited by the opportunity I see at AEO and look forward to sharing more about my perspective and priorities over time. I also wanted to thank Mike and the entire finance team for the support they have given me to redistribution. Mike has been extremely generous with his time and his knowledge of AEO, and I'm grateful to have the benefit of his experience and perspective. Given how recently I joined the company, Mike will be taking you through the details of the second quarter results and the outlook. I have spent considerable time with Mike and team reviewing the outlook and the assumptions supporting it. I'm comfortable with the company's expectations for the balance of the year.

Now I'd like to turn the call over to Jen.

Thank you, Ravi, and good afternoon, everyone. Before I get into the brand details, I want to share my appreciation to our entire organization. Their passion for our brands, our products and our customers shows every day, and I'm proud of the work they are doing. Aerie and OFFLINE delivered another outstanding quarter with broad strength across the business and tremendous response from our customers. At American Eagle, we made progress during the first quarter with continued strength in men's. There's still work to do, and I'm encouraged by the opportunity ahead.

Turning first to Aerie and OFFLINE. We delivered another exceptional quarter Comparable sales increased 19% and total revenue grew 25% to $536 million. What I'm most excited about is the breadth and quality of that growth. We saw strength across channels and categories with growth in core apparel, intimates and activewear. There was a consistent demand in aerie, apparel in teas, tanks, fleece and bottoms. Head-to-toe outfitting curated monthly drops, sleep to street and wear now fabrications resonated with our customers, mix and match, summer brights, strikes and a little leopard all words.

We are also pleased with continued growth in OFFLINE's cloud lease franchise, sports roads and incredibly strong results across bottoms. I love seeing this breadth because it tells us the customers responding to the complete lifestyle offering, not just one category or one trend. Our core intimates business also remained strong throughout the quarter. we continue to win with what Aerie has stood for from the beginning, Real Comfort. Customers responded to our focus on fabrication and the 20 years of Happy Body's anniversary campaign. In July, we also introduced our new float bra collection designed for waitless feel, Float complements our structured bra franchise and gives customers a new way to experience Aerie's signature comfort.

Our customer base continues to grow. We are expanding the Aerie community and deepening their engagement with us. Our Aerie real makers continue to be an important part of that connection. Across the quarter, we nearly doubled the size of the ADVOCATE program and found fresh new ways to bring new customers to the brand and engage them. As we move into the third quarter, we are doing something I love to see we are comping the comp. We are sustaining growth against increasingly strong comparisons and seeing strength across categories while continuing to expand our customer base.

So now turning to American Eagle. We are seeing steady traction as we actively work to refine our strategies. We delivered sequential improvement from the first quarter, yet there is opportunity to build on our progress and further accelerate our performance. Men's continues to deliver as we posted our fourth consecutive quarter of positive comps. Growth was driven by strength across all bottoms categories with tops continuing to meet our expectations. This demonstrates that our focus and strategies to restore top line growth in the AE men's business is paying off.

In women's, customers responded well to our focus on outfitting particularly pairing tiny tops with oversized bottoms. We leaned into the cargo trend and fashion bottoms performed positively. In women's denim, new fashion fits, including wide leg straight and low rise gained strong acceptance. And moving forward, we recognize where there is still opportunity to restore consistent growth across categories. AE's brand awareness and cultural significance remains strong. and the active customer file continues to grow.

Our marketing strategies are built on multiple touch points, tapping into differing interests, rituals and experiences. We have strategically invested in our presence at the mall as a place to shop, gather and connect on campus with our sorority partners to own a stake in Rush talk and in sports on the biggest stage of the year with global brand ambassador, Lamine Yamal. We spent the last 4 quarters investing in brand awareness to drive purchase consideration and now we are shifting our marketing dollars into conversion driving tactics. Ultimately, this is about showing up for our customers during their biggest moments, building their wardrobes while building our community.

And looking ahead to the second half of this year, our strategic priorities across AEO are clear: deliver best-in-class products, maintain our investment in marketing tactics that drive conversion remain focused on our inventory management and improved margin health. We are also making strategic investments in product and marketing as we build towards AEO's 50th anniversary in 2027. We entered the third quarter with momentum in Aerie and OFFLINE, a game plan to make clear improvements in American Eagle and a highly engaged customer community across all brands. And I'm excited about what the brands can accomplish together.

Aerie's consistent growth, the opportunity we see in off-line and American Eagle deep customer relationships give us multiple ways to serve our customers across more categories, occasions and moments in their lives. Each brand has its own identity and distinct opportunities. Together, they give AEO springboard to grow. We have talented teams across our stores, distribution centers and corporate offices bringing these brands to life every day, and I have tremendous confidence in what we can achieve together. Thank you, all of our associates for all of your hard work.

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

Thanks, Jen, and good afternoon, everyone. Driven by strong momentum across Aerie, our second quarter revenue and operating income hit the top end of our guidance. As you heard from Jay and Jen, we're zeroed in on opportunities for the AE brand. and are continuing to fuel Aerie's exceptional growth. I'm going to take you through the financial results, including the impact of the tariff refunds recognized in the quarter and then discuss our outlook for the balance of the year. Our reported results include the impact of tariff refunds.

Second quarter consolidated revenue of $1.4 billion increased 8% to last year with comparable sales growing 6%. Aerie's strong business continued with total sales growing by 25% and comparable sales up 19% with growth across [indiscernible]. A total sales increased 1%, with comparable sales declining 1%. Gross profit dollars of $672 million rose 34% from last year and gross margin of 48.7% increased 980 basis points. Included in gross profit this year is a net benefit of $179 million related to tariff refunds, which drove 1,300 basis points of the gross margin expansion. Merchandise margin deleveraged 330 basis points with improvement in Aerie, offset by markdowns in AE, as we previously guided to for the second quarter.

SG&A dollars increased 19% and 290 basis points to a rate of 29.6%, inclusive of $18 million of incentive expense attributable to tariff refunds. The remaining increase is primarily a result of planned investments in advertising. Depreciation decreased slightly year-over-year at $52 million compared to $55 million last year. We recorded a second quarter operating profit of $211 million compared to $103 million last year. Included in operating profit this year is a net benefit of $161 million related to tariff refunds.

Interest expense increased primarily due to the sale of tariff claims as discussed last quarter. Other income increased due to unrealized gain on equity method investments. The second quarter tax rate was approximately 25% and EPS was $0.79. Consolidated inventory cost was up 14% with units up 9%. The increase in costs includes the impact of incremental tariffs this year. Unit inventory plans will continue to be rebalanced between brands and categories for the remainder of the year.

In the second quarter, as Jay noted, we continue to make long-term investments in our business while returning cash to shareholders. Second quarter CapEx totaled $66 million, and the company returned $21 million to shareholders during the quarter via the quarterly dividend. We ended the quarter with approximately $148 million in cash and investments, and $783 million of total liquidity, including our revolver.

Before turning to our outlook, I want to note that Ravi has been engaged with the team reviewing our plans and expectations for the balance of the year. The outlook I'll discuss today reflects the company's current expectations. For the third quarter, we expect comparable sales growth in the mid- to high single digits with Aerie and OFFLINE continuing in the high teens to 20% range and American Eagle approximately flat.

Gross margin is expected to be similar to last year with full year gross margin up year-over-year. Operating income for the third quarter is expected to be in the range of $110 million to $115 million with SG&A expense up in the high single digits. The tariff rate assumption for the rest of the year reflects the Section 301 tariffs implemented in late June. For the full year, we expect operating income in the range of $540 million to $550 million based on consolidated comparable sales growth in the mid-single digits.

In closing, we're committed to building on the momentum in area offline, accelerating improvement at America Eagle and unlocking greater profitability across the business. With that, we'll open it up to questions.

[Operator Instructions] The first question is from Jay Sole with UBS.

Great. Jen, I want to ask you about the women's denim business at American Eagle. Can you just maybe dive into that a little bit more, tell us about how that business developed over the quarter? What you see happening in Q3 just from a sales standpoint and kind of what's driving that and the opportunity for continued progress from here? And then also maybe -- and second part to that question is you talked a little bit about third quarter. I think you said you've seen trends continue. If you can sort of clarify that a little bit. I mean, where do you see Aerie so far in Q3? And how is that factored into your guidance? Same question for both brands.

Look, we're seeing sequential improvement in denim. Sorry, I have a little bit of a cold. So just -- but we are seeing sequential improvement. As I mentioned in my last earnings call, we definitely need to pivot. We needed to pivot and we pivoted quite nicely into the fit that we're working 100%. Really, it was low rise that we really want to get into that business. And as you saw that, that was our marketing launch for back-to-school. So really excited about how we reposition denim.

What we are needing to work through right now is just some of the older fits and really just rebalancing our inventory. It's as simple as that. And our numbers reflect the guide in AE. As we look to Aerie, I mean we continue to launch new ideas in Aerie. All categories are working. All categories are firing. We can't ask for more. I mean these numbers -- we're proving, I love what I said, right? We're proving we can comp the comp. And I think the team is really geared up for holiday. We're seeing a nice continuation of the sales comp again reflected in the guide.

And with all our new launches, we relaunched our booty campaign, our Andes campaign, intimates is gaining share. Our float bra launch, we're going to really work on bra innovation. That's a new playbook for us or we're going to reinvigorate it because we're excited about some new ideas in broad. I think we're really going to compete on that end with really launching ideas that I think our customers are going to really embrace. So some new ideas that are coming your way and that will build into next year.

And then, of course, apparel. Apparel has been really on fire. The numbers are incredible and they like completing the output, right? We're building them from inside out, and that's what we do in Aerie, and off-line certainly has seen incredible growth as well.

The next question is from Matthew Boss with JPMorgan.

It's Amanda Douglas on for Matt. And could you speak to the difference in merchandise margin performance within the quarter with improvement at Aerie offset by the American Eagle brand? And what are you specifically seeing on markdowns by brand entering back to school?

Sure. We've seen a little pressure, as Mike mentioned, on seasonal ideas in AE. So we continue to see a little of that pressure as we go into Q3. So we're working through that, again, rightsizing our inventory. And Aerie has been doing an outstanding job leveraging this customer base. That's growing our brand awareness. That's another thing that I didn't mention in my last answer, the brand awareness in Aerie. We're feeling at 59%, albeit it's growing. There's still a lot of opportunity for runway and Aerie. But pivoting back like as we think about the promotional cadence, Aerie has done a really nice job balancing out their promotions, leveraging the newness, they've been doing new drops, and we've been easily able to reconstruct the promotion activity between brands so that we're balancing this out.

Next question is from Kelly Crago with BMO Capital Markets.

So just wanted to dig in a little bit further on the third quarter comp guide up mid to high. If you could just break out expectations by brand? And any color again more explicitly about what you're seeing quarter-to-date at the 2 bars. I think then you're speaking to some maybe higher promos at Eagle than you were anticipating and how that might impact the margins in the third quarter?

Kelly, I can take that Jen mentioned in our prior answer that comp guidance by brand is in line with where we are quarter-to-date. So AE relatively flat. So some sequential improvement from what we just reported for area in the high teens to 20%, again, similar to what we just reported in Q2. So the trend continues there. And also, as Jen said, I mean, comping the comp and actually maintaining comp trend against tougher compares, which is what the team has been going after. So we have a good proof point here quarter-to-date in are on that front.

And then, yes, the merch margin performance in Q2 and some of the markdowns in AE that we guided to back in May. -- alongside our $45 million to $50 million guidance. Those did come through kind of in line with expectations and resulting in us hitting that high end of our operating guide. And then for Q3, we do have -- as Jen said, we're still looking to rebalance some inventory. We have some markdowns in the Q3 merch margin guide for some potential markdowns as we go through that work, and that's covered in our gross margin guide of relatively flat for the third quarter, and Aerie is continuing its nice performance there on the merch margin line. So again, a little bit of a mixed brand outfit where Aerie is maintaining strength in margin definitely getting back to some strength, but we do have a little bit of markdown coverage for some of this inventory work that still needs to be done.

Got it. And then just -- just my understanding with the tariff refund, I noticed you said something about -- I mean, that you're accruing some higher incentive comps here. Can you just kind of walk through how that plays out in the high single-digit SG&A guide, I think is for 3Q apologies if I'm missing some of the details here, is that like related to the higher intensive comp marketing, anything else there? And then how does this sort of play in the fourth quarter as well? And that's all I got.

Sure. Yes, we did book in the second quarter against tariff refunds, some incentive comp commensurate with as the refund in line with our full year income targets tied to those incentive plans the accrual for the back half, third and fourth quarter, I think I've guided to it now back in March and then again in May that that's more -- that elevated accrual is up against more because it's up against a lower than historical result last year. So this paper on in terms of that accrual is kind of more average or more historical the impact of -- there's no impact in the third and fourth quarter to anything tied to refunds. So that was isolated against the refund benefit that we saw in the second quarter. Any kind of incremental number.

So the back half SG&A, we guided third quarter up high single. That includes, again, the impact of that more historical or average incentive accrual versus the lower accrual in history last year. And with the rest of the line advertising, relatively in line as a rate of sale in the third quarter, some leverage in the fourth quarter. As we pass through -- look at SG&A on a go forward on a 12-month basis, advertising, we're lapping this elevated spend as of this quarter, as we look forward on a go-forward basis, advertising will be a leverage line item into 2027. And as we normally get past the next couple of quarters, with a bit of an apples and oranges incentive accrual impact, that will also be a leverage line item as we go into 2027.

So as we look at a 12-month basis and for the full fiscal 2027 period, we're looking to be back to a position where we're leveraging SG&A at a minimum at a mid-single-digit comp, but targeting a low to mid-single in total. But again, the team and Ravi will provide more color on that go forward. And specifically, when we give guidance for '27 in March as usual.

The next question is from Jon Keypour with Goldman Sachs.

I was -- you guys gave color about Eagle and mentioned that men sounded good across the board. Women's bottoms sounded good from what I heard. I'm just wondering what drove the negative comp? And then I have a follow-up.

Women's bottoms has made improvements. So while we still mix the business, actually, other bottoms, so that means pants, cargoes, for instance, have done very exceptionally well, but there's still some balance to do in denim. But we are excited about the momentum in denim and what we've seen headed into Q3. So we're excited about that.

Got it. And then you guys mentioned in your inventory comments, some rebalancing going to take place and some continued promo activity extending into 3Q a little bit. I'm wondering, is that entirely overhang from the 1Q inventory in women's bottoms? Or was there also a little bit of overhang from 2Q that's moving now through 3Q?

It's primarily concentrated on some seasonal businesses, short being the #1. And there is some fashion that we need to ensure that we're clearing.

Next question is from Dana Telsey with Telsey Advisory Group.

As you think about the later back-to-school time period, any assessment of if that had any impact on sales in either of the businesses? And then as you think about stores versus online? How is the performance for each business, whether it's in the metrics, traffic conversion in stores versus online and how the remodels are performing?

Thanks, Dana. I think with us reporting today, we're through the full Labor Day period and Labor Day shift. So we have a good sense of kind of where we are quarter-to-date accounting for those shifts, and we'll pass really all the peak back-to-school periods to even that were shifts within August and shifts here in early September. For the most part, we've got line of sight to those. So our again, the guidance by brand and in total, kind of mid-single-digit comp -- mid- to high single-digit comp for the quarter and the guidance by brand is commensurate with that quarter-to-date trend. And at this point, we've seen, for the most part, any kind of impact from ships.

Stores versus online business. I'll start with Aerie. Aerie is positive across the board. I think I used the description last quarter that all the conditional formatting is green. That's still the case that we're no quarter-to-date, stores, digital traffic in both channels, AUR, UPT, AOV, customer talents, you name it, all going in the right direction with strength across channels, strength across categories, strength cost metrics. AE at a flattish result with guidance. Stores are definitely on the low end, lower side of that and digital is stronger. So that's what we've kind of seen for a few quarters now. Seeing that quarter-to-date here still in Q3.

Stores have gotten better. So against the negative on comp in Q2, what we've seen quarter-to-date here in Q3 is stores coming back stronger. We always -- we tend to see that don't speak period to be our destination in the mall going back to go on holiday. We'll see how that plays out the rest of this quarter. So a little more rebalancing between channels versus what we saw in the second quarter, but stores still on the lower side of the average.

The next question is from Joanna Kim with TD Cowen.

Jen, just on the Aerie side for the holidays, I know you had very strong holiday last year with pajamas and other key items. How are you just thinking about the product assortment this year? And then especially on the Eagle side, is there anything that you're doing differently also around the holiday season?

Yes. In both brands, we're very excited about. Obviously, the brand held for both brands has been extremely positive. So let's start with that. So what we're working on the American Eagle side is really converting those customers and entertaining them. and we're very focused on getting them to stores. This is when we really gear up. I do think long legs are going to build into the -- into Q3 and into Q4. So with AE, that should be hopefully positive and some optimism there. Again, still 8 weeks ago in this quarter, but we're not into full long length yet either. So I think we have some opportunity there.

The key items that the teams have worked through, the new ideas, all of our fund it is that we do during the holiday season in both brands, I think, really going to excite the customer there. Color, optimism, fun, Aerie is going to continue to do its drops as well as AE. All the newness tracks nitrate have been working. It's new ways to reengage our customers and get them into the stores. And I think we have a lot brewing for the holiday season.

Just one more follow-up, Jen, on the Aerie side. Any color on how intimates perform and how you feel about those sort there?

Very nicely. We're exciting what we're seeing in intimates. There was some market share gain. And we're really focused on newness and broad as we move forward. Sports broads have been working other bras. We really want to gain credit for all the innovation we do in our core bras. And I think there'll be a lot of work and some new innovation that you'll see on the go forward. Keeping in mind, as we had to keep you into Q4, we definitely dive into other categories as well. It's a gift-giving season, and I think Aerie does it best. .

Next question is from Adrienne Yih with Barclays.

This is Angus Kelleher on for Adrienne. Jen, you mentioned are brand awareness is still around 59% despite the strong growth. What's the marketing plan to close that awareness gap and how much of the incremental ad spend in the back half is targeted at that versus performance conversion marketing?

We're not going to really disclose our ad spend contribution. However, if I looked at AE's brand awareness, which is roughly 76% look at that cap rate there and think about the comp Aeries is able to drive. So I'm pretty excited about the opportunity there. Our goal is to get it at least equal, if not exceed, the brand awareness that we see in our portfolio. What I will say the teams are up to everything. I mean from in-store events to our double down on digital spend, which I think has been really optimized connecting with our customers, building on our Aerie real makers, building on our advocacy program, everything's really begun -- we're firing on all cylinders. And the customer and the community is really responding. This is what -- where the magic happens in Aerie. This community that we're able to build and retain and add the spend, our spend is up per customer. Double digits, in line with these numbers that you're seeing. So I think the team -- it's our secret to us, so we don't share that, but I think the team knows how to deliver on this.

Great . Great. And then just a quick clarifier for Mike and Ravi. Buying and occupancy or BOW, they leveraged about 150 basis points last quarter, but were roughly flat this quarter. I'm curious if there's anything to call out there regarding distribution costs, occupancy or anything else like that? And is that leverage plan to come back in the back half?

Yes. I think for the second -- what you'd expect in the third and fourth quarter to be similar to second quarter. First quarter, there was a little bit of shift between things with kind of the disposition or the wind down of our client third-party logistics business. So the BOW line, I'd expect from here to be to have similar results from a leverage perspective that we saw here in the second quarter. With more work to come, teams are constantly the rent delivery, distribution costs that are in that bucket of expenses. There's cross-functional teams still in place working on all those line items that we've -- since our expense initiative a few years ago, and that's still in place.

The next question is from Rick Patel with Raymond James.

Can you unpack your expectations for gross margins a little further? How do we think about the puts and takes in Q3? And if that differs from your Q4 plans. I know that inventory cleanup is ongoing. So curious if that's done within Q3, if that's something that spills over into Q4.

Yes. I'll provide some additional detail there. So I think in general, we're looking for areas continued strong performance on the merch margin line to continue. AE again, definite improvement from the first half of the year, some placeholder markdowns to cover us as we work through some of this inventory balancing. I just hit the BOW line item, similar expectations in the third and fourth quarter as the second quarter kind of been relatively in line with last year as a rate I think the other moving parts. We do have some hedge in there, I'll call it, or the potential for some freight fuel surcharge impacts. So we believe we're covered there. We don't know for sure exactly where things are going, oil is over $100 a barrel again, but we want to make sure we're covered there, not surprised by anything. Nothing significant to date, but the potential for that to happen is covered.

And then from a tariff impact perspective, Q3 will be kind of a negligible difference to last year, again, with these -- the kind of the rates in place just announced in June versus kind of a partial quarter impact last year, the dollar difference is pretty negligible in the third quarter. And then at that 12.5% rate for fourth quarter, up again, it kind of full EPA tariffs. Could be a little upside, but we're also -- we know that there's still kind of analysis and studies being done potential for some increase to those tariffs in the fourth quarter, some impact of the fourth quarter doesn't happen, could be some upside there. So gross margin in general were -- all those ins and outs relatively flat for the third quarter, modest improvement in the fourth quarter in the guidance.

The next question is from Alex Straton with Morgan Stanley.

Perfect. Maybe for Ravi and Mike, if our math is right, on it just looks like you're trimming the full year EBIT guidance just slightly compared to last quarter. So some of the follow-up to the last I'm just trying to understand, is that just higher incentive accrual? Or has your view on other pieces of SG&A or gross margin changed at all?

You're right math would say we are trimming the back half quite a bit from where we were back in May. I'd say the #1 driver of that. If you remember the color expectation was AE to be up like low positive or low single-digit positive or given flat guidance for the balance of the year. So that's a piece of it. A little bit of markdown placeholder as we've described, alongside that reduction to revenue expectations. Flip side of that, at least for the third quarter, Aerie at a high teen to [ 20 ] is ahead of where we thought, but the mix of that still taking a bit off the income line based on the mix of that comp performance between brands.

The SG&A line isn't much different. We talked kind of in line with sales mid- to high single. So a few million dollars there that we're still working on, but not a big driver of the guidance trim. And in fourth quarter, it's similar. Essentially, we're guiding AE to flex actually fourth quarter -- our prior guidance was AE is still low single positive for the back half in total, which meant fourth quarter as well. AE is flat, and we're looking at Aerie kind of more in the high single to low double range, which is the same place we thought. So the trend in both quarters is really the AE brand flat expectation versus up low single and a little bit of markdown kind of placeholder against that.

I mean in total, we are -- the third quarter guide implied similar income results to last year, so much improved from the first half of the year, with work to do fourth quarter implies some operating rate improvement and kind of mid- to high single-digit income increase. So again, a 12-month basis goes forward, making progress here in the back half even with a little bit of a reduction to guide and -- but positioned in positioning things in general across gross margin and SG&A plans to be back to revenue outpacing expense, opingrowth outpacing revenue growth and operating leverage again now that as we get into the back half into holiday and into next year, we're past tariff impact for the most part, even though there'll be some in and out there, but mostly absorbed at this point SG&A structure deleverage, like I said, at a low to mid-single-digit level in the next year. So we're confident that as we get into the holiday period and then into next year that we'll be back to income outpacing revenue growth and some operating rate improvement on a 12-month forward -- 12-month forward basis.

That's super helpful. Maybe just on AE as a quick follow-up. After it gets to that maybe flat level in the back half. How do you think about the return to positive? And like what KPIs do you care most about as you're remindering that trajectory? .

I think traffic is a big one. I think Jen can weigh in here, too. But I think, look, you start with the mix of what product strategy is first. I think the team feels good about where things are going forward order to build on the sequential improvement we've seen quarter-over-quarter here. we're given a flat guide based on quarter-to-date performance in Q3. We're playing that forward into holiday. I think the team hopes to exceed that expectation through the balance of this year, plans in place next year to comp negative results. But being prudent about how we plan that and not -- this is his inventory work is making sure we're not getting out of our skis in terms of inventory, again, the comp expectation for the first half next year, even though we're up against even though we're up against negative. So we want to make sure we're positioned to chase trend and not get too ahead of things there.

So I think I guess the intention going forward is for AE on the metric side, be driven by product strategy first. I think the marketing rebalancing we've been talking about were first -- the third quarter here is our first path that rebalancing that spend towards what was kind of top of funnel, consideration, brand awareness to definite conversion driving purchase behavior type spend on the digital marketing, performance marketing away from bigger campaigns and top of the funnel, and we're seeing some traction there with the sequential improvement we've seen so far quarter-to-date teams are building upon that into holiday and into next year as well. So I think the traffic against traffic in stores and conversion against that traffic are definite focuses alongside product strategies going forward.

The final question today will come from Marni Shapiro with the Retail Tracker.

Congrats on Aerie. It's really stunning to see it in every single hall for back to school. So I wanted to actually talk a little bit about Aerie. You're focusing on the bra brand, I love that, and I thought the float was great launch. I'm curious about also the show off and that collection, which feels a little sexier than I'm used to seeing from Aerie, I like it. And you also had a couple of sheer raws that were always towards the front of the store and seem to always be selling out. So I'm curious if this is a shift for Aerie and you think that there's room for you guys to compete there? I think there is. And then I'm also curious if you're seeing that your customer is buying the match backset the matching stripe bralette with the matching voice or and then matching stripe sweatshirt to go with it? And is that helping to drive up basket like you're fully outfitting her now?

Marni, I think you could have taken this call for me. All of the above, that was perfectly said. Really, all bras are working. And we're going to really look to build out each franchise and find new ways to navigate bras. That's what we're up to right now. We do see these set selling. We love how they go back to the apparel. And you'll see more of each category and probably some naming and claiming down the road. We have some excitement as we head into the back half and we go into really spring and really into back-to-school with some even we have plans. Let me just say all the way through. We're already planning how we're going to try to comp next back-to-school, and we're going to do that with some of these ideas. Excited what the teams are delivering as far as innovation novelty, leases, new leases, they're doing an excellent job. And yes, match back is definitely an opportunity.

And is the sexier look in intentional look? And is it something that you can carry over to Eagle without getting away from the core DNA of the brand?

Absolutely. But we have to do sexy in our way. I think we do it in a different way, and I think it's relevant. But I think there's ways to do it that can be cool and understandable for our customer base.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good afternoon, everyone. Welcome to AEO Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please -- please note this event is being recorded. I would now like to turn the conference over to [ Alexis ] Stragos, Vice President, Corporate Communications. Please go ahead.

Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer; Jen Foyle, President, Executive Creative Director for American Eagle 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. The 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. Note that included in our press release and during this call, certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at www.aeo-inc.com in the Investor Relations section. Here, you can also find our first quarter investor presentation. Now I'll turn the call over to Jay.

Thanks, Alexis, and good afternoon, everyone. This quarter reflected the strength of our portfolio, the power of Aerie and work underway at American Eagle. Overall, we are pleased with performance in the quarter. We delivered revenue of $1.2 billion, up 10% versus last year, with operating income of $28 million ahead of our guidance. Aerie continued to fuel exceptional growth and profitability across channels, surpassing $2 billion on a trailing 12-month basis. AE's performance in men's and women's tops continue their momentum, yet we have identified specific opportunities to better position women's bodies.

Over the past year, our teams have moved with urgency to strengthen the business and improve execution, and I am proud of the progress we have made. We are moving with purpose and with a firm understanding of where improvement is needed. We are extremely pleased with the continued momentum in Aerie and OFFLINE with revenue of $481 million, up 34% to last year. Demand remains strong across categories and channels, supported by compelling product collections, high customer engagement and continued expansion of brand awareness. Aerie's winning formula is its real connection with customers, product positioning and its leadership in everyday comfort.

OFFLINE also continues to be an important long-term growth opportunity as we build awareness and scale the Activewear brand across stores, digital and social. Together, Aerie and OFFLINE are powerful brands with growing recognition, a loyal customer community and significant runway ahead. American Eagle's results were mixed in the quarter. We had continued strength in men's delivering the third consecutive quarter of positive performance. We saw softer trends in women's bottoms, including denim along with pressure on seasonal categories during a colder spring. These are areas we understand well and we are actively addressing. While May started slowly for the AE brand, we're encouraged by the improvement in the business that we have seen over the last few weeks.

We remain highly confident in the relevance and resilience of the overall AE brand and in our ability to strengthen execution and drive better results moving forward. We must improve conversion, sharpen assortments, drive greater productivity in women's and build on the progress in men's. Marketing continues to be an important investment across the portfolio and a key driver of long-term brand health. Supporting both AE and Aerie through initiatives that deepen customer connection, expand our reach and keep our brands at the center of culture and conversation are positioning us well for the future.

This value is seen in strong engagement across the portfolio where our product and brand message continues to resonate with both new and existing customers. The attention around key campaigns, talent and customer activation only reinforces the power of our brands. We are leveraging our learnings as we activate go-forward plans and are working to recalibrate spending to maximize our efforts. We will continue investing behind our brands and capabilities where we see the strongest returns. We are excited about the opening of our West Coast distribution center in Phoenix, which went live in early May as we further optimize our distribution network, improve inventory placement and continue to give customers more ways to get what they want when they want it. I am especially proud of our innovation, passion and teamwork that enabled us to bring this facility online in under 1 year.

Every investment we make supports our long-term growth agenda and creates value for AEO. We're operating in a dynamic environment and the retail landscape remains highly fluid. This is why execution matters, and we understand the importance of staying disciplined and flexible. We remain fully prepared to utilize the many levers available to us within product, sourcing, marketing and operations to navigate headwinds as a result of macroeconomic uncertainty. Finally, I want to thank our associates across the company. We are proud of the work our teams have done to build a stronger and more agile operating foundation across the organization. Their commitment and dedication to AEO and our brands have been critical to the success and progress we are seeing. We all believe strongly in the opportunities that lay ahead. As America celebrates 250 years, we are incredibly proud of our permanent place in the fabric of American Style. We have powerful brands, a solid operating foundation and a clear pathway to drive profitable growth and deliver long-term value for shareholders. With that, I'll turn the call over to Jen.

Thank you, Jay, and good afternoon, everyone. Before I get into specifics, I want to acknowledge the incredible performance of the Aerie business and extend my appreciation to the entire team. Surpassing $2 billion in revenue reflects years of discipline, brand building, deep customer connection and consistent execution. Turning now to the quarter. We are thrilled by the excitement, energy and customer response to the Aerie and OFFLINE brands. Our results are a direct reflection of when great product, impactful marketing and aligned sales channels work together seamlessly. Aerie is firing on all cylinders, delivering repeatable growth by aligning seasonal trends with elevated brand visibility, perception and a more engaged customer base. Aerie saw broad-based strength across key categories, led by a 45% comp in Aerie apparel. A key driver of this success has been a head-to-toe approach across intimates, sleep and apparel. This cohesive strategy simplifies our customers outfit while increasing basket size and AOV.

Intimates delivered a standout quarter with high single-digit comps anchored by a record-setting performance in our undies business, where our leadership in cotton fabrication drove an exceptional customer response. Sleep also continues to scale rapidly, and we view this category as a long-term engine for top line growth. We successfully transitioned away from brand-wide promotions to more disciplined high-margin commercial strategies. This shift was fueled by 3 key levers: targeted promotions, always-on pricing in key categories and investments in marketing to acquire and retain high-value customers. This strategy has resulted in improved AURs and product margins. We drove elevated brand visibility through marketing investments, most notably our 100% Aerie Real campaign featuring Pamela Anderson. The campaign built on our Aerie Real mission to always put inclusivity and authenticity first. This next chapter reinforces Aerie's commitment to transparency and a promise to never use AI-generated bodies or people in our marketing.

The strong emotional connection we have built with our customer community is driving deeper resonance, relevance and loyalty. Additionally, our new Aerie Real makers influencer program blew past its 6-month target within weeks, significantly increasing repeat customer engagement. OFFLINE is continuing to prove to be the new breakout brand in our portfolio. We continue to build the OFFLINE community and customers are responding to new silhouettes, styles and fabrications. Matching sets and a strong color story through curated drops are driving excitement. OFFLINE is currently the #2 legging brand within our core demo and is well on its way to becoming its own Activewear brand. While we remain encouraged by the momentum at Aerie, we do recognize the environment remains competitive and sustaining growth at this scale requires continued discipline, innovation and execution. And I am confident that our team is ready and able to deliver in all those areas.

Now turning to American Eagle. I believe deeply in this brand and its potential. While results were more mixed, we are not satisfied with where the business performed this quarter, especially in women's. We know what needs to be corrected and the teams are aligned and activated to return AE to growth. Despite a slower start to the year with revenue down 2% to last year, AE's performance in men's alongside with women's keys and fashion tops continues to be highlights again this quarter. We have been dedicated to rebuilding the AE men's business, and our efforts have resulted in its third consecutive quarter of positive growth with growth across tops and bottoms.

This reflects the team's efforts to improve product assortments and generate a stronger customer response in key categories. Women's bottoms underperformed our expectations and was the primary driver of AE sales decline. Some of the challenges this quarter reflected the need to distort into specific styles and fits, coupled with a colder spring, which impacted demand in several seasonal wear now categories. That said, we are very focused on the areas within our control and where we need to improve execution and product productivity.

As merchants, we move quickly when we see opportunities and when we see misses, and we are already making adjustments. As we head into the crucial back-to-school season, we are refining our bottoms architecture, specifically optimizing key silhouettes and rises while leveraging our chase capabilities to inject fresh newness. At the same time, we are scaling high-demand categories within women's tops to fully maximize ongoing consumer momentum.

Looking ahead, we have strong product deliveries and newness on the way for the remainder of the year. I'm also incredibly excited about the new talent in women's merchandising and design as we stack our exceptional existing roster. Building strength across these critical creative and product roles will sharpen our edge as we prepare for AEO's 50th anniversary in 2027.

We continue to see strong customer engagement around the AE brand marketing initiatives and partnerships. The customer file is expanding and is larger than ever at more than 19 million customers, up 3% year-over-year. We saw moments of strong engagement through the quarter, and we absolutely believe there is a continued customer loyalty and love for this iconic brand, reinforcing that American Eagle remains top of mind with our core customers. More recently, we introduced our AE creator community and launched a dedicated TikTok shop, which is helping us engage customers in a more relevant and immediate way.

We also have a strong pipeline of launches and collaborations that continue to highlight AE, including already announced partnerships with bubbled Skincare and exclusive integration with Prime Videos hit show off-campus. Our strategic marketing investments have driven awareness and consideration, and now we're focused on conversion. As we transition into the summer season, we are encouraged by a recent acceleration in the trend of the business, and we are well positioned to capitalize on the quarter ahead of us. I firmly believe in the power of the AE brand, and our team is highly focused on executing with even greater clarity, speed and discipline. We are confident that we can capture demand and build momentum as we move throughout this year.

As I close, I want to echo what you heard from Jay. There is incredible work happening across this entire AEO organization. Building and growing brands in today's environment requires creativity, resilience, speed and constant evolution. I am so proud of the passion and commitment our people continue to pour into our brands every single day. I remain deeply confident in the long-term power of American Eagle, Aerie and OFFLINE. We are staying very close to our customers, moving quickly when we see opportunity and remaining disciplined in the areas where we need to improve. Together, we are actively working to drive healthy, more consistent performance at AEO over time. And with that, I'll turn the call over to Mike.

Thanks, Jen, and good afternoon, everyone. Our first quarter results reflect our continuous actions to strengthen our operational foundation and invest in our brand portfolio for long-term value creation. We delivered on our revenue and operating income expectations driven by the continued outstanding momentum at Aerie and OFFLINE. As Jay and Jen described, we're actioning on the opportunities for improvement within the AE brand performance. We're managing what is in our control with absolute focus and the business remains structurally resilient.

First quarter consolidated revenue of $1.2 billion increased 10% to last year with comparable sales growing 8%. Aerie's strong business continued with total sales growing by 34% and comparable sales up 25% with growth across channels. AE total sales declined 2% with comparable sales also declining 2%. AE brand digital performance was flat with the comp result driven by a decline in stores. Gross profit dollars of $456 million rose 41% from last year and gross margin of 38.2% increased 860 basis points. Merchandise margin improved 710 basis points, driven primarily by last year's inventory write-down.

Buying, occupancy and warehousing expenses leveraged 150 basis points due to positive sales and expense initiatives to control delivery and distribution costs, including benefits from winding down third-party fulfillment operations. SG&A dollars increased 11% as a result of planned investments in advertising. Interest expense increased due to a transaction agreement under which we sold a portion of our tariff claims and other income increased due to an unrealized gain on investments.

Depreciation was flat year-over-year at $51 million. We recorded a first quarter operating profit of $28 million. The first quarter tax rate was approximately 17% and EPS was $0.14. Consolidated ending inventory at cost was up 27% with units up 5%.

The increase in costs in relation to units reflects the impact of incremental tariffs this year and the comparison to the inventory write-down taken in Q1 of last year. In the first quarter, as Jay noted, we continue to make long-term investments in our business while returning cash to shareholders. First quarter CapEx totaled $61 million, and the company returned $74 million to shareholders during the quarter, $21 million via the quarterly dividend and $53 million via repurchasing 3 million shares. We ended the quarter with $103 million in cash and approximately $620 million of total liquidity, including our revolver.

Now turning to our outlook. For the second quarter, we expect comparable sales growth in the mid-to high single digits with Aerie and OFFLINE continuing in the high teens to low 20s and American Eagle in the flat to negative low single-digit range. Our operating income expectation is in the range of $45 million to $50 million, which includes a $20 million incremental tariff headwind versus last year and SG&A up in the mid-teens, driven primarily by continued investment in advertising, as previously discussed.

The tariff rate on imports is planned at 10% for the second quarter and the balance of the year is planned at 15%. We've applied for roughly $190 million in tariff refunds and anticipate a $140 million net cash benefit. However, it's not included in our guidance with a significant portion still outstanding. For the full year, we expect operating profit in the range of $390 million to $410 million based on consolidated comparable sales growth in the mid-single digits. In the second half of the year, we will cycle tariffs and investments in advertising, which began midyear 2025. We expect CapEx to remain in the range of $250 million to $260 million as previously guided.

To wrap up our prepared remarks, the year is off to a solid start with strength across the majority of our portfolio. The teams have taken actions to capture opportunities where we see them. We'll continue to manage with discipline, reallocating investment across the portfolio to create value. We'll continue to control what we can control in what is still a complicated and evolving macro environment. And with that, we'll open it up for questions.

[Operator Instructions] And the first question will come from Jay Sole with UBS.

Maybe I'd love to dig into the American Eagle women's business. Ken, you talked about how women's tees and fashion tops are good, but women's bottoms is weak. Can you just give us a little bit more color here? Like what were some of the styles that maybe you need to lean into a little bit more? And last year, when there were issues in the first half of the year, you corrected them real quick and back-to-school ended up being really strong. It sounded like you're saying you're refining your bottoms architecture for back-to-school. Do you think you can get that comp trend to inflect by the time we get to back-to-school. A little bit more color there would be super helpful.

Absolutely. Yes, we're really pleased with the fashion business. We've been really working hard in tops and tees and exceptional run rates there, but not enough to offset a highly focused and concentrated area that we need to turn around and engage in. And the team has already pivoted. In fact, more recently, we've seen some more positive results in the denim side of the business. And we are 100% focused there. We know where the problem is. We are going to pivot, and we've already done testing for back-to-school. We know what rises are working. We know what fits are working. And we're excited to enter into our Super Bowl, which is, as you know, Q3 is when we lead in denim, and it was just highly focused there. That's all I can say. And like I said, the more recent results are proving well for us and excited to see what's to come.

The next question will come from Marni Shapiro with The Retail Tracker.

Congratulations on Aerie stores look great. I was curious if we can dive in a little bit there. Is the traffic or the sales being driven by less shoppers, new shoppers? Or are people just buying more when they come into the store?

All of the above, Marni. It's really striking on all cords, honestly, we really hit a home run here. And I just want to give kudos to the team. Last year at this time, as you know, we really had to pivot and turn this business around. And certainly, we -- as we entered into Q3 and Q4, we really led the way here. This brand looks great, Marni. And the customer engagement is unbelievable. Our brand awareness is up over double digits. That was something that we spoke to on some prior calls. And just all product categories are working. It's just our head-to-toe outfitting. They're engaged in our outfitting. They know what -- we really are set up to win. I mean, I don't know if you've been to the store, but if you look at it, it's really a mix-and-match environment. It's like a candy shop. That's what I say every time I go into the store.

It's exciting to see, and we're just highly focused on those wins and how we're going to enter into back-to-school. And I'm really excited what I'm seeing. The marketing gets better with age. The team is -- they never cease to fail me. I mean, every time I look at what's coming next, I can't believe that it even looks better than the last. So -- our winning formula -- as you know, our winning formula is our customer base. They believe in our platform, Real. We launched 100% Real, and they love this campaign. We took a stance on AI, not air brushing our models or using AI to manipulate our imagery, and it is resonating. So I'm excited to see what's to come here. We have more categories coming your way, new categories. We're testing into a lot of new ideas. And yes, we're just going to keep this momentum going.

And Marni, just from a metric perspective, just to add on to what Jen said, it's traffic, it's conversion, it's AUR, it's AOV. It's existing customers, it's new customers. So all the above comments is -- all the metrics are green across the board on that front.

That's fantastic. Best luck. I'll leave it to somebody else. But Jen, the low-rise jp jeans that are in American Eagle right now with the orange flowers on them, you need like 1,300 more pair per store.

The next question will come from Matthew Boss with JPMorgan.

So at Aerie, Jen, could you speak to new customer acquisition that you're seeing with 3 consecutive comps now of double digits and just the opportunity that you see for incremental market share from here? And then, Mike, could you elaborate on the drivers of gross margin contraction in the second quarter if we're thinking about markdowns, freight and tariffs and just puts and takes to consider in the back half of the year?

I can start with that gross margin question, Matt. So for the second quarter, yes, I think when you think about the second quarter against last year, last year, we were a pretty healthy kind of good rate of history with the write-down and the kind of pull forward of markdowns that we executed in the first quarter last year. This year, with the tariff assumption we're using, it's somewhere between 150 basis points to 200 basis points of tariff impact in the quarter still for Q2 against no impact last year. And we are -- and the expenses and gross margin on the kind of mid-to high single-digit revenue guide, we do expect those BOW expenses and gross margin to leverage again in the second quarter. So that's a positive side. Tariffs again being a 150 to 200 basis point impact headwind. And then we are accounting for in the guide some expectation for some needed AE brand markdowns.

Just in short clearance inventory at the end of the quarter is in an optimal position as we head into that back-to-school Super Bowl period, as Jen likes to describe it. So those are your puts and takes in terms of gross margin, some headwind in tariffs, a little bit of markdown pressure in AE to get clean for back-to-school and then expense leverage to the good side.

And our new customer acquisition is up roughly $1 million, which is incredible. And the beauty of Aerie is, well we just mentioned it, not only is our new customer acquisitions up, our retained customers are up. They're staying with us. We remain very sticky. And again, it just goes back to our platform, just our emotional connection, it just drives -- it's unbelievable this community. And I didn't mention, but we have a new influencer program that actually hit it out of the ballpark. We beat our expectations 3 weeks in. And this is really hitting home with this community of ours. So we're just going to continue to build on that success.

And then, Matt, just to jump back in on the back half gross margin, just to give you some -- the flavor or some more detail to the guide. Starting with that mid-single-digit comp expectation across the portfolio. As you know, everybody knows we'll be lapping tariffs in the back half. So it becomes apples-to-apples, reason that 15% assumption for tariffs in the back half. And there's some favorability to like our original guide there, which we were thinking about IEEPA tariff rates still at the same time with our original guide back in March.

But we did have built in a little bit of expectation into our plans for some potential freight and ocean air freight rate pressure. So that's kind of a wash between the tariff assumptions and that placeholder for freight, and we'll see how that all pans out here as we pass towards the back half of the year. Product margin in total, we're expecting some benefit across the brands and across the portfolio. And at the end of -- so -- and BOW expense leverage and gross margin kind of relatively flat, maybe a bit of leverage.

So at the end of the gross margin in total, then we're expecting expansion. We're expecting improvement in the back half. And if you think about our full year guide then, kind of first half, back half, we're positioned at that mid-single digit to get back to operating rate improvement. So income growing ahead of revenue, improving operating rates, and that would be our expectation as we lap tariffs, lap the advertising investments, rebalance those investments, set up advertising to leverage then in the back half really on any revenue growth as the dollars are planned relatively flat. We'll get back to, again, implied in the guide is almost a double-digit income expectation for the back half on the mid-single-digit revenue.

The next question will come from Dana Telsey with Telsey Advisory Group.

As you think about your guide for the second quarter, do you expect a similar breakdown between the brands? Or with the second quarter, the beginning of back-to-school, should we expect to see any uptick in Aerie -- in American Eagle, I mean, Aerie 25%[indiscernible] . And then, Jen, as you think about the other product categories beyond bottoms at American Eagle, what are you seeing? And how do you see the women's business doing? And then just lastly, on [indiscernible] -- on store closures for American Eagle, where are you? And where are you in the refreshes? And how are they performing?

I can start, Dana. I'll start with actually the last part of that first, just I'll work backwards. The store closures, we're still expecting a net 20 to 25 -- around 25 closures in the AE brand for the year. On the opening side, about 40 Aerie and OFFLINE openings. And then the remodel program for AE, around 80 -- could be north of 80 projects there that's still being a refined number, but that will get us almost to the end of that maybe one more year of kind of remodel program for the AE brand on that front.

Your Q2 guide for sales, we talked about Aerie continuing this tremendous momentum at a high teen to 20% clip, which would be a tremendous outcome again, but I think could be some upside to that. We'll keep an eye on that. On the American Eagle brand, we said flat to down low single. And the guide is really pretty consistent with what we're seeing May to date. But as I think we said in our prepared remarks, the first couple of weeks of May were a little tougher, almost continuing a couple of tougher weeks in the back half of April, but these last 2 weeks of May have been really encouraging kind of week going into Memorial Day and now on the back end of Memorial Day being still consistent with the uptick in trend. So the mix of the brands is sort of flat to slightly down in AE and high teens to 20% in Aerie. That gets you to your mid-to-high single digits. Could be some play really in either brand in terms of how things continue in June and July.

Yes. And just branching off of what Mike just said, more recently, we've seen a turnaround in women's. We still have the rest of this quarter to go, but some near-term learnings that we're certainly applying for back-to-school. We did have other bottom categories that were highly successful. We just didn't have enough distortion in them. So you'll be seeing some of those other categories, not just denim, but newness in other categories as we -- and penetrated higher as we go into back-to-school.

And then, of course, we believe in our denim testing. We do it very well. And we think we have the right fits and silhouettes for back-to-school. You're going to see more excitement in denim, ranking some fashion silhouettes into our top 10. Really a lot of excitement there. So [ Marni, ] we have more excitement for you, but we're very excited about the denim assortment. Shorts have turned on for us. They were slow, definitely slow, but going into Memorial Day weekend, even with the colder climates, shorts had a huge turnaround for us. So look, we have weeks to go here. And then, of course, our big -- as I say, again, our Super Bowl is our back-to-school. And I think the teams are armed and ready. All of this fashion that's working, we've chased back into. We can execute very swiftly on cut and sew, T-shirts, Aerie knits and the team has done a great job getting us back into what's working.

The next question will come from Adrienne Yih with Barclays.

This is Angus on for Adrienne Yih. So you mentioned improving conversion as a key opportunity at AE. Can you just unpack where you're seeing the biggest gap today, whether that's stores versus digital? And what specific actions you're taking to close that gap near term? And then my follow-up is on inventory. Dollars are up meaningfully versus units. Can you help us understand how much of that is mix versus tariffs? I'm sure it's mostly tariffs, but just how comfortable you feel with inventory positioning into the back half?

Yes, sure. It was more -- I would say, we leaned into -- where we have some conversion opportunity were definitely stores. And again, like I said more recently, we've seen the digital channel really have an incredible uptick for the AE business. So what we've been doing is doing, again, testing by store grade, by group seeing the price value quality equation, where it's working for us, where we can compete. And we've had some really good results from some stores, and we applied them more recently, and we've seen some wins. So again, we continually look at -- for these golden nuggets to turn the business around. And I think we've seen some of that, these green shoots, and we're certainly going to apply those learnings.

And then on inventory, yes, we're in a good position at the end of the quarter. I'll start with the units up 5% in relation to our kind of 8% comp and 10% total revenue, up 27% in cost. And as I said on the -- in my prepared remarks there that the impact of tariffs, to your point, is the biggest impact differential between those units -- the units and cost dollars. And then with the write-down last year that we took, normalizing for those 2 things, our cost dollars would be up more in the high single-digit range. So a couple of reconciling items, take your 27 to -- up high single with units up 5%.

The next question will come from Jonna Kim with TD Cowen.

Just one on marketing. How are you allocating the marketing spend across Aerie and an Eagle? Just would love to break down there. And then just second question, and how are you thinking about comping the comp with just Aerie being so strong and posting really good results in the second half? What are key strategies around comping the comp there?

Of course. Look, this is what Aerie does best. I do want to remind you, we grew the business $1 billion in 5 years. I mean I think that's a record number. I'm certainly impressed with this team and how we continue to look at opportunities on how to comp our business. I can't -- I remember maybe 1, maybe 2 quarters where we saw some softness. This business has been unbelievable year-over-year, and we're constantly challenging ourselves.

You're only as good as yesterday, and that's how we think about the business every day. We have to have better product, better marketing, better campaigns, quality. That's what this whole company. I mean all of our brands, we continually focus on quality and how we can compete on our terms, and Aerie does it impeccably well. And we have some room to grow on the AE side, but I think the team has leaned in and the Aerie team feels very good about what we're going up against.

On the advertising front, spend is up across both brands. Aerie more commensurate with the sales increase. Those were -- the sales are up 30% and in our forward plans within our guidance, advertising is up in relation to that, a little ahead of sales to fuel, obviously, this pretty tremendous trend. So very good flow-through on that investment. As we've been talking about now for 3 quarters and into the second quarter, this incremental investment in AE that Jen highlighted the benefits of customer file consideration, potentially to spend.

The team is doing a lot of evaluation, surveys, et cetera, on the effectiveness of this, not just from a quantitative perspective every day, but what we think those metrics could lead to here for the rest of the summer, but especially in the back-to-school in the back half of the year in terms of customer file growth and that consideration score elevating with the marketing campaigns that we've been investing in.

The second quarter here is the last quarter of kind of incrementality on that spend. We get into the third, fourth quarter and total spend across the company is relatively flat for the back half. So on the sales guide, advertising is set up to leverage for the rest of the year. And we are rebalancing then a little bit between brands in the back half, but then definitely in terms of how we're spending the dollars. And Jen mentioned the shift to conversion. So a lot of what we've been doing is these bigger campaigns, the Sydney Sweeney campaign, the Stagecoach stuff in the first quarter with Ella Langley and Bailey Zimmerman. We have Lamine Yamal coming as well, as Jen talked about in her remarks.

And -- but the back half spend is more weighted toward digital media, performance marketing, influencer spend, more day-to-day traffic driving elements. So I think that's where the conversion will play in, too, because that traffic has a higher propensity to convert. So we are rebalancing kind of how those dollars will be spent in the third -- starting really in the third quarter which we feel to set us up for success and be able to hit the revenue expectations that we have for ourselves in the back half.

The next question will come from Rick Patel with Raymond James.

It looks like you're planning SG&A growth to be up high single digits for the year versus up mid-single digits 3 months ago. Can you unpack that for us? Is that all marketing? Or are there other factors at play? And then secondly, can you provide additional color on the marketing campaigns that you have planned into back-to-school and the potential for new brand ambassadors as we think about the back half?

Yes. Thanks, Rick. The SG&A result for the year, you've got the 11% increase in Q1. We're guiding mid-teens here for the second quarter. The whole first half is mostly really all driven for the most part by the incremental advertising investment, back half SG&A is really actually in line with sales. So as we talk about a mid-single-digit comp and kind of mid-to-high single-digit total revenue, then total SG&A is right now pretty much in line with revenue. We will leverage the advertising line as we anniversary that spend.

We have a couple -- a little bit of compensation that comes into play with a little lower than average incentive accruals last year. Nothing extraordinary, but then really the combination of those 2 factors has SG&A in the back half up again kind of commensurate with that revenue guide. More work happening there on all compensation lines, services, travel, usual suspects to find some more efficiencies in that number, but to hopefully exceed that guide, that work continues like it has been for the last 3 years. But it's a good position to be in at the moment.

And then yes, your total year between that the first half being up in the teens, back half being up more like in that commensurate with sales level, you get to, let's say, about a 10% kind of increase in SG&A in this guide. And then looking forward to next year, we'll talk about that later, but work continues on the expense lines. Advertising is not planned to be up in the first half. We're going to kind of manage the same way we're talking about here in the third and fourth quarter, and then we'll provide more color on next year much later this year.

Sure. So our more recent -- some of our initiatives that we're really excited about, one is our new influencer program in AE and Aerie. Both are exceeding expectations. And that's where we really win, right? We have our customers engaged, marketing our brand. And again, it's exceeding expectations. We've made a strategic hire there on the AE side. We're excited for her to join who's going to really take that program to the next level. So that's first. We just announced Lamine. So he's coming our way and welcome World Cup. So we're excited about launching him. He's been great, and he really suits our brand and loves our clothes. So Lamine near in.

And then we just had our partnership with Off Campus, the collab with Prime Video. As everyone knows, that show has been a hit. We've really been able to hit pop culture with these shows last year with The Summer I Turned Pretty, and you'll see more of that. So I can't really reveal our colors for back-to-school, but I do want to remind you that our prime focus every day is our product, and that's where we win. So we're up to some really good things on the product side for American Eagle, and I'm really excited to deliver. One of our newest deliveries actually just hit, and that's what I was referring to on -- that we had a pretty nice -- some nice results with that. So more to come.

The next question will come from Jon Keypour with Goldman Sachs.

I just had one around the macro. You guys mentioned, I think, a little bit of uncertainty there. I was just wondering what you're seeing in your consumer base. Any difference between how the consumer is behaving in Eagle versus in Aerie and OFFLINE. And then just if you could break down maybe AUR and volume between the Eagle and Aerie banners, please.

You want to talk about the AUR?

Yes, I can start with the AUR. I think AUR in the second quarter, Aerie was up. Jen talked about that in her remarks. Again, Aerie -- the metrics are positive across the board. So AUR up in Aerie, slightly down low single digit in AE. So for the company, we were up in total. And I think from a consumer perspective, I wouldn't say there's a lot of difference between the brands. Obviously, the engagement with Aerie and the traffic that we're driving in the Aerie brand, along with everything we said earlier on conversion, different customer cohorts all kind of performing for us, clicking on all cylinders.

Jen hit the positivity in the American Eagle customer file. So that's all going in the right direction. Again, we've seen, I think, some encouraging things here in the last couple of weeks of May versus how the quarter started. I think it feels like it's all coming together in terms of where we want things to head through the rest of the summer and in back-to-school and be ready to really capitalize on all the spend to move those metrics for the results that we're expecting from the brand in the back half.

Yes. About like Aerie -- about like the macroeconomics, one thing we're very proud, Aerie, we started that brand inside American Eagle around 2012, 2013. And in 7 years, we grew it to a $1 billion brand. In the last 5 years, we grew it to like a $2 billion brand. It's not a brand that we acquired. It's a brand that we created from start. And we're very proud of that -- because I don't know too many companies in such a short period, built a $2 billion a year brand.

So I give Jen, I give the team a lot of credit. American Eagle has been around -- this coming year in 2027, this will be our 50th year. So one thing we're proud about is if you went back 50 years ago and saw the different brands in the mall at that time and saw where we were positioned, just a couple of stores then and you go back and you say, who's around and who's not around, I think the majority of those brands aren't around, and we're stronger than ever. So we're very proud of that.

The last few weeks have been very encouraging. We're seeing increased traffic in the stores and American Eagle stores. We're seeing increased sales. We're very optimistic. There's -- we think the economy -- the U.S. economy is very strong, and we think it's only going to get better as time goes on. We think with gas prices, hopefully, will start settling down very shortly. And with the current affairs, hopefully, will come to some type of finish. Hopefully, it will be a very good finish for the world. And so we're very optimistic on that.

And we think American Eagle is positioned very well. We think we -- our brand offers great value to the consumer, great quality. And we're not seeing the impact of the economy as far as like a negative way. So we're optimistic. And I always said, I never ran this business quarter-to-quarter. I look at the year-end, and I think Jen said it the right way, our Super Bowl comes the third and the fourth quarter. That's where we really gear up, and that's where we always shine. And this team is going to shine.

The next question will come from Janine Stichter with BTIG.

Jen, I wanted to dig a little bit more into the bottom side of the business. I think in the past, you've talked about there being just less consensus around the silhouettes that consumers were wearing in bottoms and having to kind of diversify the assortment. Now it seems like we're kind of going the other direction. Just want to make sure I understand, is the issue now that you need to go deeper into -- there's more consensus you need to go deeper into certain key silhouettes and you just didn't have enough. And then I just wanted to clarify, you mentioned you sold a portion of the tariff claim. Have you said how much that was and what's left on that?

Sure. Exactly what you said. We just needed more distortion in some of our newer silhouettes that we were testing and some of them we owned, and we just could have had more. So that's what we're rightsizing for back-to-school. And Mike, I don't know.

Yes, on the tariff, so we filed $190 million worth of claims. We've gotten over $100 million back at the moment. We did sort of back at the beginning of the year -- not sort of -- at the beginning of the year, we sold about $70 million worth of claims for roughly $20 million. So our net number on the $190 million total filings will be around -- should be $140 million if we do get it all back. And again, we're a little over $100 million back so far, which our portion of that net is around $75 million. So that's a lot of numbers. $75 million, we've actually gotten the bank net of what we kind of owed the third party that we sold some claims off into. And then the $140 million would be if everything is refunded by the end of the second quarter here, that's how much cash we would receive.

And it hasn't been recognized, yet...

Right. So that will be -- so we did not -- yes, we did not guide...

We hasn't recognized it, yet.

Yes. Thanks, Jay. None of that is in our guidance. So the $45 million to $50 million does not include any benefit from that. That would all be an incremental outcome at the end of the quarter when we report.

The last question today will come from Tom Nikic with Needham.

Just wanted to ask, as we look out to the back half of this year, it sounds like you're addressing, I guess, some of the issues that are leading to the declines at the American Eagle brand in the first half. So should we assume that the American -- that embedded in your guidance is that the American Eagle brand gets back to positive comp growth in the back half and against tougher compares, we would get slower comp growth at Aerie relative to what we saw in the first half?

Yes. I'll let Mike answer some of this, but I would tell you this, I expect a positive comp growth. And so does this team. This team under Jen takes everything very seriously. They've been tearing everything apart for the last few months, figuring out how can we get better and stronger, where do we learn? Like Jen said, our third and fourth quarter is where we shine, and she's going to shine, and we expect it to shine in both Aerie and American Eagle, period.

And look, we'll reiterate again. It's very isolated to bottoms and women's bottoms. Men's bottoms was actually positive, jeans and men's was positive. So it's a very targeted area of opportunity, and the teams are all over to back up -- to reiterate Jen's description earlier. The specific brand assumptions for the back half, yes, we're expecting AE to be in the low single-digit range in that guide. If you listen to what Jay just said, he's expecting more than that. We all are. And then Aerie, yes, moderating to more of like a low double digit, maybe even high single to low double depending on the mix. And that would kind of get you to that mid-teen -- or I'm sorry, mid-single-digit total across the portfolio. That's what's assumed in our guide.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good afternoon, everyone. Welcome to the AEO, Inc. Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Judy Meehan, Head of Investor Relations and Corporate Communications. Please go ahead.

Good afternoon, everyone. Today, we issued our fourth quarter and fiscal year 2025 press release. Note that included in the release and during this call, certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at www.aeo-inc.com in the Investor Relations section. Here, you can also find our fourth quarter investor presentation.

During today's call, we will make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results actually relays 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.

Today, we have a change to our conference call format. Due to the passing of Jay's mother, he is unable to join the question-and-answer section of the call. We extend our deepest condolences to Jay and the Schottenstein family. Today's call will include Jay's overview and highlights, which were prerecorded. Joining me for the call are Jen Foyle, President, Executive Creative Director for American Eagle and Aerie and Mike Mathias, Chief Financial Officer.

And now we will begin the call.

Thanks to the hard work of the team, we made meaningful progress this year and delivered a strong fourth quarter. Following a tough start to the year, I'm extremely proud of how the team course corrected with a deliberate action plan that ignite growth, improved profitability and cash flow, fueling a strong finish to 2025. Initiatives across merchandising, operations and marketing, continue to strengthen our company and position our brands for long-term success. We remain committed to driving enduring profitable growth and strong cash flow for our shareholders.

Let me walk you through the highlights of the quarter, and Mike will go through the numbers in detail. We delivered double-digit sales growth in the fourth quarter ahead of plan. This represented an acceleration from the third quarter to produce our best quarter of the year. We also achieved record-breaking results through the Thanksgiving and holiday season, building on the approved trends that began last summer. Margin performance was solid and drove enhanced operating efficiencies.

We were thrilled to see the remarkable momentum at Aerie and OFFLINE, which delivered 23% comp growth. Robust demand was broad-based across categories and channels. By leveraging our stronger market position and heightened demand, we exited the quarter with record brand awareness. [indiscernible] acquisition was up in the double digits. With successful expansion underway across a number of categories, we see significant runway to continue to build are an off-line and capture new audiences in the years ahead.

I'm also pleased by the consistent and steady progress we've seen at American Eagle. Comps grew 2%, accelerating from the third quarter with growth across genders. Product initiatives are delivering more newness and fresh trends right collections. Following impactful partnerships with Cindy Sweeny and Travis Calci, Martha Stewart's, Holiday Campaign, reinforce AE's cross-generational pill as the ultimate gift-giving destination. Customer accounts and retention rates are proof points of success. This year, we look forward to creating more culture defining moments with newly announced partnerships with [ Lamanna ] Mill, LL Langley and [ Baileys Ziverman ] and more to come. In terms of the numbers, total revenue hit an all-time high for the fourth quarter, increasing 10% to $1.8 billion.

Overall comp sales grew 8%. Adjusted operating income of $180 million was up 27% from the $142 million last year. Notably, we achieved these results despite significant tariff pressure. Successful tariff mitigation efforts centered on cost savings, greater efficiencies and strategic management across our sourcing operations. Full year 2025 annual revenue reached a record $5.5 billion, up 3% to last year, and adjusted operating income was $328 million. We ended 2025 in a strong financial position with nearly $240 million in cash and no debt.

Our capital allocation strategy remains focused on investing in the business while returning cash to shareholders. We completed $256 million in share buybacks while paying $85 million in dividends last year.

Now looking ahead, we remain confident in our strategy and our ability to build on our second half. As part of the continued effort to drive efficiencies and prioritize initiatives with the highest impact and strongest returns, we made the decision to exit quite logistics during the quarter. This move keeps our focus and investment dollars on our core brands. As we exit the third-party business, we are left with a significantly enhanced logistics function, including much improved warehousing systems and technology, regionalized distribution capabilities, excellent speed to customer at a network that will support growth for several years.

We entered 2026 from a position of strength and positive sales trends continuing. We have significant opportunities ahead and our teams are energized and committed to executing on our plans. I am fully confident in our path forward and our strategy to drive long-term profitable growth and free cash generation, which in turn will create value for shareholders.

Good afternoon, everyone. I want to begin by underscoring how pleased I am with the fourth quarter performance. Our commitment to product leadership continues to be a key engine that's driving our business, and that's true across all brands. As I'll share, we saw a widespread improvement in the majority of our categories. There has been a clear acceleration in demand in certain segments as our customers respond to newness, color and trend-right fashion.

Compelling new collections in fleece, tees and knits, coupled with the growing accessories business within AE and Aerie are together supporting our layering and outfitting strategy. As you've heard, following the first quarter 2025, we initiated a number of process changes and the reorganization of the teams and talent. We began to see the results of this work mid-year. I'm proud of the quick execution, and we are excited to carry this momentum forward. I'm confident that we remain very well positioned for profitable growth in 2026 and beyond.

Now let's review our wins and opportunities by brand. Turning to Aerie first, where we have experienced strong acceleration in demand, strength has been broad-based across all categories, including intimate, soft dressing and OFFLINE activewear. Fresh flows of new and exciting collections, coupled with category expansions in areas like Sleepwear kept the customer engaged throughout the season. We grabbed our communities attention with must-have products and position them in the most relevant ways. Aerie apparel was strong across both tops and bottoms as a result of great fabrication, on-trend fun prints and winning color stories. I am particularly encouraged by the continued momentum in intimates recording some of our best ever results in the quarter with match back sets fueling demand.

OFFLINE had another incredible quarter with steady sales in active bottoms and double-digit growth in sports broad, tops and fashion bottoms. OFFLINE signature cloud fleece remains a customer favor, and we continue to have significant opportunities to leverage the success of this key franchise. Our focus on new fashion silhouettes and fresh color drops are also contributing to strong growth across categories. As we look to accelerate the OFFLINE business in 2026, we will be focused on expanding our footprint engaging more customers and delivering great product. OFFLINE'S brand awareness is rising and the brand has a long runway ahead. Our share is still small, but growing, and I'm confident that we have only just begun to scratch the surface of this brand's massive and long-term potential.

The powerful reacceleration of the Aerie brand coupled with the explosive trajectory of OFFLINE is cementing our position as a leader in the space. And with our brand positioning as relevant and strong as ever, we look to continue to expand our reach to more customers. New Aerie customers grew 14% and brand awareness climbed 12% year-over-year. We know these customers are sticky, and we are focused on maintaining this healthy and engaged customer base. As we kick off 2026, expect to see significant increase in buzz for Aerie as we launch a highly visible brand campaign, rooted in purpose and mission. And as you've heard, we're just getting started here, and I'm excited for what's ahead.

Now moving on to American Eagle, which achieved a solid 2% increase in the quarter. Positive results were driven by men's, women's tops and our signature AE genes across genders. The men's business continued to improve in the fourth quarter, delivering the third consecutive quarter of growth. Positive results were seen across nearly every category, with sweaters, shirts and tees and sweatshirts emerging as favorites and graphics leading the way as the hero. Our strategy to recapture the men's business is on track as we gain market share and expand our customer base. AE women's comp was flat in the quarter, strength in jeans and tops, including knits, sweaters and fleece was offset by a slower demand in dresses and non-denim bottoms. Driving ongoing progress is a top priority, and we are working to ensure that we have the best styles and quality together with more frequent flows to support growth. Work is underway, and we are focused on investing in depth of key items and size integrity to drive sales. We expect to see continued improvements as we move through 2026.

As Jay reviewed, AE brand marketing has been a clear strategic focus and is expanding brand awareness and driving purchase intent. In addition to talent-focused campaigns, we recently relaunched AE's creator community to bring together a network of passionate trend centers and brand advocates to drive revenue and digital content. And just last week, we announced our partnership with Stagecoach, joining country music's biggest stage and connecting with a new generation of artists and fans as we continue to show up at the intersection of golder and [ fashion. ] The intention behind these initiatives is to maintain and drive our industry-leading position.

Before turning the call over to Mike, I want to recognize the team for a strong finish to 2025 and their ability to drive improvement across multiple processes and to deliver results was impressive. We are incredibly optimistic about the profitable growth potential of our portfolio. We are moving forward decisively and we know that our brands are uniquely positioned to win, scale and deliver sustained long-term growth.

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

Thanks, Jen, and good afternoon, everyone. 2025 results reflect the actions we took to strengthen the fundamentals of the business, make operational improvements, introduce new compelling product collections and launch strategic marketing initiatives. These steps strengthened our foundation for long-term success and drove a sharp improvement in trends throughout the year across brands and channels, even as we navigated a dynamic retail industry and an unprecedented tariff backdrop. Our strong performance in the fourth quarter is a testament to the work with results coming in ahead of expectations across margins and profitability. In the quarter, consolidated revenue of $1.8 billion increased 10% to last year, fueled by comparable sales growth of 8% with Aerie up 23% and American Eagle up 2%. We saw across-the-board improvement in trends with an acceleration from the prior quarter. KPIs were favorable with growth in transactions across brands driven by higher traffic.

The average unit retail price was flat to last year. Gross profit dollars of $651 million increased 9%. Gross margin declined 30 basis points to 37% from 37.3% last year, which included net tariff pressure of approximately $50 million. On the positive side, the leverage from strong revenue growth, lower costs favorable currency and overall operational efficiencies partially offset tariffs and higher markdowns. Buying, occupancy and warehousing leveraged 50 basis points due to higher sales and a continued focus on operational improvements.

SG&A increased 4% to $418 million and as a rate leveraged 120 basis points to last year, driven by strong revenue growth. Planned investments in advertising were offset by our continued focus on disciplined cost management and lower incentives. Adjusted operating income of $180 million was above our recent guidance of $167 million to $170 million, driven largely by very robust sales and margins at Aerie and OFFLINE. The adjusted operating margin of 10.2% increased from 8.9% last year. During the quarter, we recognized restructuring charges totaling approximately $85 million, of which $13 million was cash, primarily related to severance. These charges relate to discontinuation of quiet platforms, third-party logistics, store impairments and a corporate restructuring. Net annual savings from these actions is estimated at about $20 million annually, with a portion of that expected to be realized in 2026.

We ended the year with a strong balance sheet with cash of $239 million after returning $341 million to shareholders. At year-end, total liquidity was approximately $930 million. Consolidated inventory cost was up 10% with units up 3%. Cost inventory reflects the impact of tariffs. Fourth quarter CapEx totaled $59 million, bringing year-to-date spend to just over $260 million. As we look ahead to next year, we expect similar levels of CapEx in the range of $250 million to $260 million, reflecting investments in technology upgrades, general corporate maintenance as well as 35 new Aerie, OFFLINE store openings and about 60 store remodels. In 2026, we expect to close another 25 to 30 lower productivity AE stores.

Turning to our 2026 outlook. The first quarter is off to a good start. Comp sales are positive across brands with notable strong performance continuing at Aerie and OFFLINE. For the first quarter, we expect comparable sales growth in the high single digits, with American comps in the positive low single digits and area OFFLINE comps in the double digits. Our operating income expectation is in the range of $20 million to $25 million, which includes tariff headwinds of approximately $30 million and incremental advertising investment, which will drive total SG&A expense up approximately 10% versus last year. For the full year, we expect operating profit in the range of $390 million to $410 million based on consolidated comparable sales growth in the mid-single digits.

Guidance reflects the incremental tariffs that were put in place in 2025, which primarily impacts the first half of the year. Our outlook does not incorporate developments related to the recent Supreme Court decisions and subsequent actions. Modeling purposes, please note that we expect approximately 80% of our annual operating profit to be generated in the second half of the year. This waiting reflects pressures from tariffs and incremental advertising spend, which will impact the first and second quarters. In the second half of the year, we will cycle tariffs and investments in advertising, which began midyear 2025.

To wrap it up, we ended the year on a strong note and remain confident in our forward trajectory. In 2026, we look forward to building on the significant progress we made last year to generate continued growth and enhanced value for our shareholders.

With that, we'll open up for questions.

[Operator Instructions] Our first question today comes from Paul Lejuez with Citi.

Two quick ones. Gross margin, can you talk about what you expect once you move past the first quarter where obviously you've got the comparisons. Maybe you could talk 2Q through 4Q. And then you mentioned increased markdowns again this quarter. I'm curious if you could talk more about which brand you saw the higher markdowns, maybe which category is needed to be promoted to drive sales, and how you think about the promotional outlook for the rest of the year.

Paul, on gross margin, yes, I think we know that last year was a little different with where we broke down inventory in the first quarter and pulled markdowns forward. So I think as we talked a little bit different points that if you really look at kind of 2024 gross margin cadence and then the impact of tariffs around that $30 million each quarter, we're looking at gross margin sort of in that mid- to high 30% range in the first quarter, a little lower than that in the second quarter. And actually, 24 less tariffs would get you pretty close to what we're expecting for the first half of the year. Second half then, we're looking to expand our gross margin performance, anniversarying tariffs as is. I mean we're guiding tariffs to essentially the same thing we've been talking about really the EPA impact of that $130 million plus per year. We'll know a lot more come May of really what that's going to look like by quarter. But if you start with that as what the worst case then we'd look to expand upon the gross margin results we just saw in the third and fourth quarter of this year at, call it, like a mid-single-digit comp results. We've got some early indications on costing for the third quarter time frame at this point. The team is doing a great job there. And controlling costs, all the other costs within gross margin, we've been very successful with that to date and expect to continue that. So we'd look to expand upon gross margin improvement on gross margin in the back half. At markdown front, I think you talked about in the January time frame after at ICR and after our holiday sales release around being well controlled across categories for the most part. We talked about bottoms in the jeans business and the jeans category being promoted a little deeper to compete. And that was having kind of a mix impact in the AE brand, where markdowns were up a bit in total. Aerie, on the other hand, the AUR was up in the quarter with it growth trajectory of the business, they've been able to really control or even reduce promotions a bit, AUR was up mid-single digits in the fourth quarter and markdowns are actually down favorable for Aerie. So the mix of the business is very favorable for us with really have a couple of bottoms categories, especially jeans being promoted a little deeper.

Should we expect that to continue, the markdowns to be higher at AE and lower at Aerie?

We -- it's Jen, by the way, Paul. We do expect some pressure in denim. And we feel good about our positioning, though, as we bring in other bottoms. That's what we're really excited about. So there's new bottoms that we've been testing, not only just in long legs, but skirts and shorts early reads have been positive. As you know, we have a huge spring break customer, and we're just on the cusp of this right now. In fact, we're in Miami right now, and we can see them coming into shops. So we're excited about the way we're positioning. And the beauty about these brands, Paul, is that we have a portfolio of brands, right? And we can pulse and throttle categories that we need to, but also get into new categories that are trending. So we feel really good about where we're headed as we get into peak spring break in all brands in some of the new categories that you'll see us introducing more and also just to lean on to Aerie, makes that that we've been pulling back on promotions. The they've been doing a nice job balancing out eating and pulling back promotions. And it's only just begun here in Aerie. We have a spring break again. I mentioned it already for the all brands. It's coming our way and swim early reads on swim have been strong, but that's a category that we're looking to build margin and not just unit-based promotions.

The next question comes from Jay Sole with UBS.

A few questions for me. Just number one, like how are you thinking about store openings this year? And sort of if you gave us comp sales guidance for the first quarter of the year, but how you think about total sales? And then the Middle East business, can you just give us an update on how you're thinking about that business given what's going on? And then can you also explain lastly, the impact of the quiet, the changes to the quiet logistics, what impact is that having on EBIT dollars? Those are my three questions, to start.

Sure, Jay. Store openings, we're looking at 35 to 40 openings for Aerie in OFFLINE this year. Just to reiterate, we're probably expecting somewhere in the 25 to 35 in terms of net closings for AE as we continue just to refine and optimize the AE store fleet so you can model that or assume those plans for the year. Total sales then, we do have total sales to comp actually would be pretty similar. So we gave high single-digit comp guidance for the first quarter. Total revenue will be similar to that. Just based on the fact that we do have a bit of a comp spread in our brand sales, but then with the disposition or the closing of quiet, you'll see a reduction in total revenue because of the third-party revenue. So the net-net is that comp result in total revenue should be similar. And yes, I mean, just to expand upon that guidance a bit. We -- high single-digit comp for the first quarter. We're looking at sort of mid- to high in the second quarter and then mid for the back half, so you get to kind of a mid- to high comp expectation for the full year then. And then again, with total revenue and comp being similar for the year. Middle East, our team is doing a nice job just connecting with our business partners there, really Alshaya in the Middle East and then our JV partner with Fox in Israel, definitely some disruption to the business -- their businesses at the moment. Our [indiscernible] stores are actually mostly open at this point after some initial disruption, but the stores in Israel are still closed

[Audio gap]

about a $60 million total number in our 2025 results, so that will wind down here at the beginning of the year and go to zero as we get end of the year here. And then we talked about the restructuring in total, which quite as a part of being around a $20 million benefit annually. Again, we're in a bit of a wind down mode but with the other kind of corporate restructuring and store impairments. We're expecting probably at least 50% of that, maybe a little more to benefit this year, but we'll provide some updated guidance with especially how cadence of the [indiscernible] business shutting down here in the next several months.

The next comes from Matthew Boss with JPMorgan.

Congrats on another nice quarter. So Jen, with Aerie comps up high teens in the back half of the year, could you break down the inflection in the business if -- maybe if we looked at it by customer file or key category performance? And then so far in the first quarter, have you seen any slowing relative to the low 20s comps that you saw in the fourth quarter?

Very similar, Matt. We're seeing nice momentum headed into Q1. And look, back in Q1 last year, we knew it was the time for all brands, not just Aerie for us to pivot, focus on our product, deliver and gain momentum going into the back half, which is typically our Super Bowl. We have all brands. It's our big quarter, Q3. And I think the team is really -- that's what we did, right? We focused on our product. So if you look at Aerie, Certainly, what was really exciting in area, not only new categories, i.e., sleep, which delivered a lot of growth for the brand. OFFLINE moving faster. Honestly, it's one of our fastest-growing brands in the total portfolio that I've seen in history. So OFFLINE is very exciting. And then, of course, AE. But going back to Aerie, the most important thing is that all categories really worked. And I think that's important as we look forward, Matt, because when you think about just the newer trends and trends are moving faster, I think Arian can throttle on either, let's just say that more hard lines become in whether it's suiting or more straight lines, what I can say, it's areas a softer business. We have all the layering pieces. We can support those businesses. And I think that's why we're expanding our offerings in Aerie that we can lean into other categories when trends change. And I think it's really working. And there's new things to come to. We have new businesses that we're developing, new ideas. The team is running very flexible. I mean, we're really trying to work on flexibility, newness, and I think that's what's winning, just delivering these new product offerings when it's not expected, seems to be really working for the Aerie brand. So more to come here, but we've seen nice momentum into Q1, and we're going to focus and continue to deliver.

That's great color. And then, Mike, on the expense side, with reinvestments, I think you cited marketing this year. How best to think about the leverage point in the business for SG&A? Or any changes relative to historical flow-through to consider?

Yes. We have another two quarters here, this intentional and strategic increase in elevation of our advertising spend. So you're going to -- you're going to see in the first quarter -- or first two quarters here, like over 50% increase in advertising dollars, which is, again, is intentional. So I think that's driving SG&A in the first half, up in the low double-digit range with all other expense categories being managed as we have successfully for a few years now, kind of low to mid-single digit and leveraging nicely on the sales expectations. So it's really advertising, driving the dollar increase and advertising is going to drive some deleverage in the first and second quarter. When we get to the at this point looking to at least our initial plans is for advertising dollars to be relatively flat, maybe a slight increase. So we plan to leverage advertising in the back half of the year, once we're anniversarying the elevated spend that started last year in the third quarter. And then the rest of the -- again, the rest of the SG&A lines being well controlled, may have a little bit of incentive comp increase compared to this year in both the third and fourth quarter, a little more in the fourth quarter. But we're looking to leverage SG&A though, across the back half even with that. So we'll get back into a cycle Matt, then starting in the back half of the year and 12 months into '27 that we want to leverage this expense based on a mid- to high single -- sorry, a low to mid-single-digit comp. The plans at the moment and the guidance we're providing, we're looking to expand upon some healthy operating rates in the back half once we anniversary tariffs and this elevated advertising spend, and we want to carry that into '27 on a 12-month basis going forward to get this operating rate back going back to the high single digits.

Mike, I think that's a great point, too. When you think about marketing and our strategy, really, it was about [indiscernible] for American Eagle for the American Eagle brand. And I'm sure you've seen many of the tactics that have gone viral out there for American Eagle. And then Aerie, it's really been awareness. And boy, has that strategy worked. We've grown our brand awareness over end points, it's huge. It's a huge number. I'm really proud of the team there. And now the teams are up because keep in mind, we share a platform. Now what we want to do is get that customer shopping back. Coming back to us. We want peak performance from these customers. We want them to come back through our doors or onto the site, and those are the tactics that we're working on.

It's great, Jen. We are 5% this year, Jen. Our teams work very closely on a week-to-week basis on -- there's a campaign pieces of it, and then there's the week-to-week spend on kind of digital media performance marketing that we're managing very closely. And our teams are doing it very well together and come to Jen and I on those fronts on kind of managing that week-to-week. We talked about that's kind of maintain that 5% spend into the sale increase, maintaining that. We think this elevated level to all the metrics Jen just said, moving in the right direction. We like what we're seeing, it's why we're continuing it. We think it's the right new baseline to run the company. We'll make some changes based on what we see rebalancing some of the spend between kind advertising strategies, maybe across tactics around talent versus media performance spend, just trying to find efficiencies in other line items like content creation. Are you looking at some plans into '27 around rebalancing some of those things, and we're continuing to manage it that way. But this kind of 5% new baseline is working for us.

The next question comes from Jonna Kim with TD Cowen.

As you think about American Eagle brand positioning, what are key opportunities that you see for improvement over time? And then could you just speak to the intimate business performance during the quarter and just quarter-to-date, what you're seeing there? And how do you think that business will evolve over time as well.

Yes. For American Eagle, Mike mentioned it, number one, Street -- our fleet rationalization. We're still working through some lower-tier stores that we need to optimize and actually give back to our best stores. So just so you know, our new model in the American Eagle brand are really resonating with the customer. We're seeing nice upticks versus the average base. And so we're working on the models where we can justify, and where it make sense depending on the mall. So excited about that. Our new SoHo store has been outperforming, and it's a great visualization to where we're headed for our entire portfolio of brands, but a great representation of the American Eagle brand. So number one, fleet optimization; number two, product, product, product focus on product we're focusing on new innovation, delivering new products, delivering excitement on top of our incredible marketing campaigns that again, we have relevant like we needed to get back on the map. That's what American Eagle is up to. We're a more mature brand, and we needed to turn heads. And certainly, the team really has stood out there, and I think some of these new campaigns and getting up the stuff on our marketing spend and competing because we were a little -- we underperformed there our competition. And I think yes, we're ready to compete a little bit more. We're building our new franchise businesses. We're excited about Men's. Men's has turned around, and now it's just Women's and really looking at install per square foot by store and making sure that we're really optimizing the women's business in our best stores and online. Let's talk about the direct business. Our direct business has been outperforming last year on the back half going into Q1. We're seeing really nice momentum on the direct business. It's in way of getting new acquired customers. And again, this is where we're working on how do we get them to repeat shop either on the site or going into stores. And that is a new I would say it's a new initiative for us. We're talking a little bit more about omni customer. I'm not a huge fan of the word omni, but there certainly is opportunity in this new world to understand where the customer is going to be leveraging some of our new capabilities and understand where they are and being there for the customer with what he or she wants. So most -- those are really our [indiscernible]. And again, like I said, product, we have new product categories. We have new talent that we're launching in American Eagle. We're excited about that. You've heard some of the -- you've seen it already. longly, [indiscernible] by the way, we just launched her. She's the #1 song in the U.S. right now, [indiscernible] Texas, sorry. So we're just excited about continuing to gain that relevancy in American Eagle. And keep in mind, it's our Americas 250th anniversary this year and next year's AE's 50th anniversary. So lots of excitement around American Eagle. On the intimates side, I think intimates is just getting going. We're leveraging undies to bundle and to get customers into our brand. We're considering it the lipstick of our brand. But also, we're launching new bra silhouette, bralettes are back and these layering pieces. So we have lots of categories now on the intimate side. Again, we can lean into and pulse depending on the trends and where the trends are going. But we're feeling good about again, they saw a great success in Q4, and we're continuing that momentum into Q1.

The next question comes from Dana Telsey with Telsey Advisory Group.

As you think about the advertising, which has been so successful. Obviously, Stagecoach now being the next thing. How do you think of it for the balance of the year? And how do you see lapping whether it's Sydney Sweeney or others? And then on the refreshes in stores, how many store refreshes are you doing? And what kind of productivity gains have you seen from these refreshes?

Sure. So I didn't mention this before, but also not only are we leveraging talent, more so on the AE side of the business. But in both brands, AE and Aerie, we're really leaning into our community and our customer base, and we're really -- I mean both brands right now are starting new tactics to gain new customers as far as -- well, there's some there -- I can't tell you. [indiscernible]. There's a this creator community that I think we are just encroaching on for both brands, it's real. And that is the difference, okay? So there's a lot of our competitions out there. They're getting -- they're finding tactics, but I think our tactics for our brands are about real and authentic and getting our community that believes in our brands to celebrate our brands, and that's -- and so these influencers that we're leveraging across all brands, I think we're going to really lean into both we're excited about it, and we're already starting to see some momentum gaining with this influencer program that we're starting. And again, it's more in 8. We own it, and we're excited about it. So the tactics are slightly different than some of what we see our competition doing.

On the store remodels, refreshes, Dana, we've got, as I said in prepared remarks, we'll do at least around 60, maybe a few more than that this year. We're, I think, in our third to fourth year of that program, where we still have about a 350 to 400 store in total. We're working towards probably about another year away from that. I think we'll get over the 300 mark close to that with these next 60. Again, the average age of the fleet before we started this was about 12 years. We were behind a little bit due to COVID in our intentions of refreshing the fleet. The stores we know we want to sign leases for the longer term. And I think once we'll get into a rhythm of keeping the average age more in that 6- to 7-year sweet spot, which we think is the right thing to do. So -- and then on a performance basis, we are seeing a copper sold or an increase in these stores that's above the chain average. So we like what we're seeing in terms of payback on that cash. It's a bit of a kind of maintenance as some payback by doing this. We have refined the cost of fees down from where we started in the first year. So we're kind of the elements of the store that you need to touch and the biggest bang for our buck is the average has come down on the spend since we started. So we're kind of maybe more than halfway through the program. We like what we're seeing in terms of performance and with the intent on an ongoing basis to kind of maintain the age of the fleet more in that 6-, 7-year range.

The next question comes from Janine Stitcher with BTIG

Just on the tariffs, can you remind us what you've done on pricing in response? Have you raised tickets all and any thoughts on pricing for the rest of the year?

Yes. I think we've talked about really business as usual. We approach kind of tickets and pricing, just like we always have, where we what's the right price value equation for the customer, where are we not seeing price resistance across items, some strategic intent of increasing tickets a bit, so we can kind of provide that right value equation from a promotion perspective to the customer. So no specific intent around tariff pass-through. It's really what we've been -- what we've always done from a pricing perspective and maintaining. Again, AUR for the fourth quarter was relatively flat, like down a little bit in AE and up in Aerie. From a margin perspective, it's not a bad place to be with some mix benefits in there, aside from the tariff impact. So we'll continue down that path with whether the opportunistic and kind of opportunities to raise tickets a bit. But just based on customer reaction, and what's right for the price value equation.

Great. And then maybe just back on quite logistics with the $20 million in annualized savings. Are you thinking about reinvesting any of that? Are there you potentially spend more, or is that flowing all the way through the bottom line?

No. I think now we're looking at reinvesting other than probably advertising. I mean, a lot of what we've been doing with the management of our expense base for several years was to find some funding to do what we're doing on the advertising line. And actually, if you we've been measuring that ourselves and just looking at our own sort of internal scorecard over the last several years. We've done a nice job at kind of reducing the rate of sale on the majority of the expense base, the bigger line items that we've the project we had a few years ago where we kind of addressed 85% of our overall OpEx base. We've been continued success there to kind of knock that down as a rate of sale, and we have sort of funding that back to advertising right now in total. Again, we anniversary that and start to leverage again starting in the back half of the year. So no reinvestment of those dollars specifically. It's sort of an ongoing program to improve our operating rate, short term here, we're investing some dollars back in advertising, for sure, at least 12 months, but nothing else specific from that savings that we're intending to do.

The next question comes from John Keypour with Goldman Sachs.

I just had a question about the low single-digit AE comp in 1Q. Just noticing that the if you go from 4Q '24 to 1Q '25, the sequential comparable gets points easier, but the low single digit sort of implies that on a 2-year stack basis, there's a slowdown. So just any commentary around that? And then I have a follow-up.

Yes. And Jon, I think if you look at the improvement to that point, I mean I think we've seen a 5-point improvement from time of the second quarter of last year through the fourth -- to this fourth quarter result of plus 2%. And the guidance we're providing now is based on what we've seen to date, we know there's been some weather disruptions, some serious storms and things like that in this February this year that we didn't really see that dramatically last year, especially the Northeast getting pounded a bit, and we have obviously our store base is a nice concentration in that area, but we're pleased to see the kind of trend continue from fourth quarter. That being said, Jen said at the spring break time is ahead of us short season is coming. The [ Markel ] time frame is more like 75% of our total first quarter. So we've got a long way to go. But the continuation of the trend we saw in -- the teams are working hard to capture these next 2 months, and we'll see how the quarter pans out, but it's the right place to be at the moment.

Got it. Okay. And then just in terms of the Aerie comp, which was very impressive, just any way that we can get a sense of buckets that contributed to that 23%. Like I guess, there was a different question to try to get at this, but you mentioned like 14% new customer addition. Just any ways we can piece together the building blocks to get to the 23%?

Yes. That was actually branded witness. I just wanted to let you know. We were roughly at 55% as we increase that, but we do have a new customer base to solidly growing our customer base. In Aerie, I have to say this. Literally, all categories worked, whether it was set dressing, fleece, knit, tees, sweater, sleep really was unbelievable and intimate and layering. We have this new layering business that we're pretty excited about, so far so good. And that continues into Q1. And again, we still have some categories that we actually lean on more as we head into the spring break time period. So strategically, we didn't pull swim in as hard as we used to in the past because we believe that there's a different strategy for slim, where we can lean on -- it's a great margin category. And I think that's what we're looking to do. And we're going to bring in newness monthly, more so than we did in the past [indiscernible]. So I think there's still more to come here because we still have some new category introductions or seasonal introductions that I think are still in play. Early reads on these seasonal categories, including in AE, are strong. Last year, if you remember, we had weather and shorts are really tough across the board. So that's a huge category for us. In Aerie, OFFLINE and in American Eagle. So there's still a lot of volume in front of us, and we're going to set ourselves up for success here.

The next question comes from Corey Tarlowe with Jefferies.

Yes. Mike, on tariff, could you remind us again what the impact is that you're expecting? And then I asked that in the name you guided with [ EPA ] in, how much upside is there to the current guide if that is struck down?

Yes. So just the quarterly impact of how we laid things out with [ EPA ] tariffs that were in place. So about a $30 million impact each of the first and second quarter. So kind of $60 million total for the spring season. We incurred $20 million of impact in Q3 of $25 million, but probably more like a $30 million, $35 million on a full quarter basis because of the timing of the effective the effective tariff rates last year. And then we incurred $50 million of impact this past fourth quarter. So that gets you to your $130 million plus number for -- on an annual basis. Obviously, we left that guidance or that the approach to guidance in place because to your second question, I don't think any of us know what's about to happen. We've got this 10% Section 122 in place, all indication is that's going to go to 15% based on kind of recent communication. We know there's things happening on the 301 front that this administration intends to do. So the impact to the total year, we believe the guidance we just gave should be the worst case, [indiscernible] wood. We didn't distinct ourselves in the entire industry with that comment. But there would be upside done some back of the envelope math on what it could look like based on the cadence of when we think the Section 122 tariffs expiring after 150 days and if 301 take effect, but it's all guesstimates at this point. So I think we'll know a lot more by the first quarter call at the end of May. I expect to provide a bit of upside to this guidance at that point, but better have to quantify that over the next couple of months once we actually know more than kind of put numbers out there we're not 100% sort of at the moment.

Got it. That's super helpful. And then just as a quick follow-up, it looks like there's no buyback embedded in the outlook. So I was just curious how you're thinking about that specifically.

Yes. We repurchased about 1 million shares there before the end of the year. Share count in our projection right now would be about $177 million versus -- for the year versus $176 million last year. We are going to look at -- again, we always talk about capital allocation being -- investing back in the business first. We're committed to our $0.50 per share dividend. And then looking at buybacks to offset dilution minimally. So the January buyback was Part of that, if you look at the full year last year, we returned, again, $341 million to shareholders, $85 million in dividends and over $250 million in share repurchases. So we'll continue to look at it, Corey. Minimally offset kind of iteration from internal grants in general. So we kind of prioritize that. Look at anything above beyond that as we kind of get into the year and see how cash flow is trending?

The next question comes from Marni Shapiro with the Retail Tracker.

Congratulations, and please extend my condolences today, Jay. Jen, the stores look fantastic. So I have a couple of quick questions for you. Following on the denim conversation, I'm curious if part of the denim is a shift in what's working in denim from higher rises to lower from very baggy to boot and the customer is a little slower to move. Or is it something else that you're thinking? And then on your collaborations, which have been incredibly successful, and I love the two new ones, are you thinking about expanding this into Aerie at all to do something there, along the similar vein, now that Aerie is kind of like, Aerie is back. So kind of thinking along the lines there in Aerie?

I like that Marni. First important Aerie has great things in store. But again, are has many different tactics, and I just mentioned, we do a little bit more grassroots the community, and it's just -- they vote for us, and it's a winning recipe. But I will say, Marni, we do have some fun things in store. And as you know, back in October, we leaned into not using AI on our models. And it's a nice uptick to where we were we launched Aerie Real, I think it's just -- it's a great -- it actually addresses the new generation. I'm quite excited about it, and we've only just begun here. So really, that's what up to Aerie. And again, Marni, with all these new customers, we've got to get them to come back more often. You can't imagine the dollars on the table, if we could just get them to come back one more time annually. So those will be some of our focuses. And can we go back to your first question? I'm sorry, I got so excited about Aerie for a minute.

I'm curious there are changes happening in denim rises [indiscernible] the bag you [indiscernible] going, giving way to a cleaner, a little more narrow boot cut. So is that kind of -- I thought there's a confusion with the customers right now because you're not the only ones talking about this, all my [indiscernible] are talking about this.

I think you're right. I think definitely, the rises are getting lower. You're seeing more mid drifts being shown. But I also think it is about these other bottoms, including shorts and other khaki, chino, utility, those ideas, I think, are here. And I think it is about pivoting into those. But you're right, definitely the lower rise is something that we are addressing. And we do have, and that is working for us. So now it's about just moving the business. This business has changed drastically, Marni. There's so many new fits to your point. We are seeing with L, we're seeing the boot work for us. For sure. That makes a lot of sense. So right now, we're in the process of our test and scale for back-to-school. So I'll learn more in a couple of weeks as far as -- and we have all these fits out there that we test and learn from, and where we want to place our bets. So there's more to come here, and the team is ready to execute.

Operator, we have time for one more question.

That question will be coming from Janet Kloppenburg with JJK Research Associates, Inc.

I was a little surprised to hear that denim bottoms, we're not performing. I don't know, maybe I'm misinterpreting it, Jen. Are they performing to your expectations and because you've made investments in other in other denim areas or maybe denim isn't where you think the brand should be right now. So...

No, no. Yes, denim is [indiscernible] of everything we do in American Eagle. Like we have maintained our market share, like our positioning everything we do. That is our core recipe for that business. And those men's and women's did come on the quarter. it was just, in some cases, what price are they willing to pay for some fashion. So that's some of the pressure that we saw, but if we learn that lesson, and we're trying to take that forward, particularly the most important quarter, obviously, is Q3 for this business. So implying learnings, but denim, it's at the core of everything we do. It's just -- it was more about leaning into some fit and work at success as we were hoping to and learning from that and the applying [indiscernible]

Okay, great. And then just for Mike, I think you said AUR was flat. Can you just talk a little bit more about the traffic and unit terms in the quarter? And what how we should think about that going forward?

Yes. Yes, Janet. So our overall company level was flat. AE was down slightly, kind of low single and area was up in the mid-single digits. So it kind of ties to the margin color we were providing earlier as well. And what Jen just mentioned about, we've been talking about gene specifically as being positive, but then a little pressure, a little kind of more promotional to drive those results. We're expecting something similar as we continue, like right now in the beginning of the first -- early in the year here. Again, the Aerie team on the current trajectory is being able to kind of manage intelligently and pull back and be more targeted and then AE is really still probably in the same game we just talked about. So we're expecting something similar in the short term, and we'll see how the rest of the season progresses.

The conference has now concluded. Thank you for attending today's presentation. You may all disconnect.

Welcome to the AEO Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Judy Meehan, Head of Investor Relations and Corporate Communications. Please go ahead.

Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer; Jen Foyle, President, Executive Creative Director for American Eagle 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.

The 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. Also, please note that during this call and in the accompanying press release, certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis.

Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at www.aeo-inc.com in the Investor Relations section. Here, you can also find our third quarter investor presentation. And now I'll turn the call over to Jay.

Thanks, Judy, and good afternoon. I hope everyone had an enjoyable Thanksgiving weekend. I'm extremely pleased with the trend change we've seen across brands, reflecting a number of decisive steps we've taken from merchandising to marketing to operations. These deliberate actions are having a positive impact on our near-term results and also serve us well for the long run. We delivered record revenue in the third quarter and very strong momentum has carried into the fourth quarter. We're seeing an encouraging response to the newness the teams are delivering with each new collection gaining steam, most notably, Aerie and Offline are generating exceptional growth across categories.

As discussed last quarter, we have made incremental investments in advertising, which is contributing to stronger demand while better positioning our business for enhanced long-term brand awareness and overall customer engagement. At the same time, we are focused on operational improvements and cost efficiencies to drive higher profitability in what continues to be a dynamic macro environment. Turning to the quarter. Total revenue increased 6% to $1.4 billion, a third quarter record.

Operating income of $113 million exceeded our guidance of $95 million to $100 million, fueled by higher-than-expected demand and well-controlled costs. As previously noted, our results also included about $20 million of net impact from tariffs. Diluted EPS for the quarter of $0.53 increased 10% compared to the adjusted EPS last year. The strong top line reflected a return to positive comps, which increased 4%. This was a meaningful acceleration from the 1% decrease last quarter. Improvement was made across both brands and channels, all posting positive comps.

Aerie's 11% comp in the third quarter was a real standout where strong demand was broad-based across all categories. Growth accelerated throughout the period, which has continued into the fourth quarter, where we are seeing exceptional demand so far. As we look to the future, we continue to see untapped opportunities within Aerie and Offline, which are rapidly emerging as important customer destinations. At just under $2 billion in revenue and less than 5% market share, this indicates a significant runway for future expansion, underscoring our ability to capture a much larger piece of the market as we execute our strategic initiatives.

American Eagle's comp growth of 1% marked a sequential improvement from last quarter. Strength in jeans, coupled with better results in men's were among the drivers. As Jen will review, AE's business strengthened with greater in-stocks in our strongest sellers and new product flows. Positive trends have continued so far in the fourth quarter, including a terrific Thanksgiving weekend. Beyond product, our results have benefited from the success of our recent marketing campaigns, which have driven engagement and attracted new customers.

We are encouraged by the impact of the campaigns and collaborations with Sydney Sweeney and Travis Kelce and now holiday gifting with Martha Stewart. We see measurable benefits, especially across our digital channels. Looking forward, we will build on this momentum with more exciting campaigns ahead. All in all, I'm very pleased with the progress and meaningful turnaround from the first half of this year. Now the holiday season is upon us, and the fourth quarter is off to an excellent start.

We are seeing a clear acceleration from the third quarter, including a record Thanksgiving weekend with strong performance across brands and channels. As a result, we are raising our fourth quarter outlook. We remain well positioned with exciting new collections centered on gift-giving and events planned throughout the season to continue to delight our customers. Before I turn it over to Jen, I want to take a moment to acknowledge our incredible team for all their hard work and tremendous dedication. Their efforts have fueled a meaningful trend change across our leading brands.

Great work continues, and I couldn't be more optimistic about the long-term outlook for our business. We look forward to driving more success as we head into 2026 and beyond, driving profitable growth and enhanced value for AEO. Let me turn it over to Jen.

Thank you, Jay, and good afternoon, everyone. I am very encouraged by the stronger performance across our brands, marking a significant turnaround from the first half of the year. This demonstrates the resilience and product leadership of our portfolio of iconic brands. The increasing customer demand, which has accelerated in the fourth quarter, is spanning new and existing customers, fueled by a well-coordinated effort across both merchandising and marketing. Compelling product collections, combined with higher engagement and expanding brand awareness are driving our performance.

And the teams are executing very well, leveraging our expertise in key categories and most importantly, by listening to our customers. Let me walk you through a few highlights in the third quarter, beginning with Aerie. The Aerie brand continues to exceed expectations. We achieved record revenue with the third quarter comps up 11%, fueled by strength across all categories, including intimates, apparel, sleep and Offline. Aerie and Offline's performance has been especially impressive with a meaningful acceleration in demand since the spring season.

In fact, comps have strengthened with each new delivery. The resurgence in intimates has been very encouraging with solid growth in both bras and undies. Greater depth and breadth of our signature fabrications, strength in new fashion across bralettes and bra tops and fun prints with matchbacks to apparel are just a few highlights fueling the brand's double-digit growth. Aerie apparel remained consistently strong, driven by bottoms, fleece, tees and sleep, which has emerged as a powerful growth category.

Offline by Aerie also continues to gain meaningful mind share as we expand awareness and move into newer markets. We remain highly focused on growing the Activewear segment. We are building on our signature fabrics and franchises such as our core leggings while also launching newness with updated fashion silhouettes. Needless to say, we are very excited about our future for both Aerie and Offline. We are well positioned for the remainder of the holiday season and continue to believe in the substantial long-term opportunities ahead.

Now moving to American Eagle, which posted a positive 1% third quarter comp, demonstrating a meaningful improvement from the spring season. Positive demand was fueled by trend right new fall collection combined with bold marketing and exciting product collaborations. Underpinned by our dominance in denim, our strategies to reset the brand and firmly position American Eagle at the center of culture are beginning to yield results.

The quarter marked an improvement in our men's business, where we saw nice wins across tops, sweaters, fleece, graphics and knits, all areas we have been working to recapture. Bottoms provided a stable foundation with jeans and non-denim pants trending positive. And favorable trends have continued into the fourth quarter, reflecting the positive reception of our new product. In women's, although we had a very good back-to-school season, the quarter in total was not as strong. Robust demand early in the period led to a number of out of stocks in some of our best-selling items.

Non-denim bottoms, shirts and dresses proved more challenging, while knit and fleece tops as well as jeans were positive highlights where we continue to see strong demand. And importantly, better in-stocks late in the quarter drove positive results, which have continued into the fourth quarter. AE is a true holiday destination with amazing gift-giving focus combined with fun fashion and party dressing. The response to date has been highly encouraging. Now shifting gears to marketing. This fall season, American Eagle launched its largest, most impactful advertising campaigns ever, which are delivering results.

By collaborating with high-profile partners who are defining culture, we are attracting more customers and have more eyes on the brand than ever before. Combined, the Sydney Sweeney and Travis Kelce partnerships have garnered more than 44 billion impressions. Total customer counts are up across brands and customer loyalty grew 4% in the quarter. AE is clearly building long-term awareness and desirability and has captured the attention of both new and existing customers.

Traffic has also increased consistently throughout the quarter, which is most evident within our digital selling channels that include both AE and Aerie. Although it's still early days of our renewed marketing strategy, we know that having the right talent amplifies our brand and product at key moments. We are very encouraged by our progress and expect to continue fueling brand excitement into 2026 and beyond.

Our recent holiday campaign with Martha Stewart is yet another example of how we are creating fun moments to delight our customers while reinforcing our position as the go-to gifting destination. The holiday season is in full swing. And as Jay mentioned, we are encouraged with the results so far. We are heads down and focused on the rest of the year to deliver long-term sales and bottom line growth. Thanks to our amazing teams, and thanks to all of you for your ongoing support. I wish everyone a happy and healthy holiday season. And with that, I'll turn the call over to Mike.

Thanks, and good afternoon, everyone. I'm pleased to see the steady progress throughout our business, which led to strong revenue and profit above our expectations in the third quarter. In addition to generating a meaningful top line improvement, we successfully controlled costs, created efficiencies, managed promotions and navigated through a highly dynamic sourcing environment, minimizing the impact of tariffs.

Consolidated revenue of $1.36 billion increased 6% to last year, fueled by comparable sales growth of 4%, with Aerie up 11% and AE up 1%. We saw growth in transactions across brands driven by higher traffic. The average unit retail price was flat to last year. Gross profit dollars of $552 million increased 5%, reflecting higher demand. The gross margin declined 40 basis points to 40.5% compared to 40.9% last year. Net tariff pressure was as expected at $20 million or 150 basis points.

Higher markdowns were largely offset by positive sales growth and lower non-tariff costs, including favorability in freight. Buying, occupancy and warehousing leveraged 20 basis points due to higher sales and a continued focus on operational improvements. For example, we drove lower cost per shipment within our direct business, which has been an area of ongoing focus. SG&A increased 10% due to investment in advertising as previously discussed.

With our focus on long-term brand benefits, the campaigns are already delivering results and helping to advance our goal of expanding our reach and generating growth across brands. The balance of expense is leveraged, reflecting our ongoing cost management program. Operating income of $113 million was above our guidance of $95 million to $100 million, driven by stronger-than-expected demand. The operating margin of 8.3% declined from an adjusted margin of 9.6% last year.

Consolidated ending inventory cost was up 11% with units up 8%. Inventory is balanced across brands, reflecting better in-stocks for American Eagle jeans, new store openings and the demand acceleration at Aerie and Offline. The increase in cost includes the impact of tariffs. Third quarter CapEx totaled $70 million, bringing year-to-date spend to $202 million. We continue to expect CapEx of approximately $275 million for the year. As a reminder, this includes a onetime spend of about $40 million to relocate our New York design center as we previously disclosed.

We're on track to open 22 Aerie and 26 Offline stores, which are coming out of the gate quite strong. We'll complete about 50 AE store remodels with full upgrades to our modern design. A few great examples of recent store upgrades are the Aventura Mall and Sawgrass Mills in Miami and our new SoHo location in New York City. All of these A+ stores are among our best, and we want to ensure the customer experience is unmatched.

The upgraded footprints have allowed us to showcase our signature brands, AE Aerie and Offline. We're utilizing new technologies to elevate the shopping journey and create a cohesive and modern retail experience. Overall, our remodeling program is generating comps nicely above the average. As we continue to position our fleet for profitable growth, we're also on track to close about 35 lower productivity AE stores. Our capital allocation priorities remain unchanged, and we're focused on prudently investing in growth to continue to build our brands while returning excess cash to shareholders through dividends and share repurchases.

As a reminder, during the first half of this year, share repurchases totaled $231 million and year-to-date dividend payments have totaled $64 million. We have a strong balance sheet and ended the period with cash of $113 million and total liquidity of approximately $560 million. Now turning to our outlook. The fourth quarter is off to an excellent start. As the team noted, we're encouraged by the broad-based strength across brands and channels with particular strength in Aerie and Offline.

Our inventory and product offerings are well positioned to deliver a successful holiday season, and we're all focused on achieving a strong fourth quarter result. Based on quarter-to-date sales trends and the recognition that we have important selling weeks still ahead, we are raising our fourth quarter operating income guidance to a range of $155 million to $160 million based on comp sales growth of 8% to 9% with similar growth in total revenue. Guidance includes approximately $50 million of incremental tariff costs.

Buying, occupancy and warehousing costs are expected to increase due to new store growth for Aerie and Offline and increased digital penetration. SG&A is expected to increase in the low to mid-single digits, driven by investments in advertising. Given the top line strength, we expect both BOW and SG&A to leverage in the fourth quarter. The tax rate is estimated to be approximately 28% and the weighted average share count will be roughly 173 million.

To wrap up our prepared remarks, clearly, we're very encouraged by the progress made across our brands. We're highly focused on delivering the remainder of the year, driving strong profit flow-through and sustaining this momentum into 2026. Now we'll open up the call for questions.

[Operator Instructions] The first question comes from Jay Sole with UBS.

My first question, I think, it's for Mike. You talked about the acceleration of fourth quarter to date, and you raised the guidance, the comp guidance, I think you said 8% to 9%. That's pretty significant from where you ended Q3. Can you just talk about where you're trending quarter-to-date to be able to guide to that level? And what's driving the acceleration.

And then maybe for Jen, you mentioned strength in denim. If you could elaborate a little bit if people aren't wearing skinny denim like they were, like what are the new silhouettes that are working? And how durable are those trends? Do you think the trends that you're seeing can last well into 2026 or beyond? And if you can help us on that, that would be great.

Yes. Thanks, Jay. I can talk you through the guidance. So the 8% to 9% comp increase includes a nice improvement or acceleration for both brands quarter-to-date from what we just reported in Q3. I would say if you want to break it down by brand, we'd be looking for the AE brand to be in the low to mid-single digits and Aerie in the high teens, mixing to that 8% to 9% comp.

And both brands are ahead of that quarter-to-date, but we know we've got some big weeks ahead of us, only about half the quarter in, but definitely pleased with how November turned out and where we are quarter-to-date through the Thanksgiving weekend.

Yes. And Denim has been very strong. In fact, particularly in women's, we saw acceleration throughout the quarter, getting into the back half of Q3 and into black. It's been our #1 Black Friday as far as denim is concerned. The jeans are certainly winning for us. And as you know, that's our key competency business.

Look, silhouettes are changing faster than ever. And I always reemphasize that our teams strategically do just extensive testing and scaling. And we did have some out of stocks, particularly in women's in Q3. Sydney Sweeney certainly accelerated some of that, and we needed to move swiftly to get back into business. And I like what we're seeing at the end of Q3 and headed into Q4 with the denim business. So we're excited.

And the next question comes from Matthew Boss with JPMorgan.

Congrats on the improvement. So Jen, at Aerie, maybe if we could dig a little deeper. Could you speak to the drivers of the same-store sales improvement over the past two straight quarters? And with that, I guess maybe could you break into customer acquisition trends that you're seeing and initiatives in place to sustain double-digit comp growth in your view?

Yes. It's certainly exciting to see Aerie back on track. Coming off of Q1, we definitely needed to pivot as a team, and we really hunkered down and really thought about our strategy and what we needed to get back to win, not only coming from our core competency businesses, which all accelerated and have been accelerating starting in Q3 into Q4, but also there's new businesses in town.

Sleep is doing quite well for us, and it's proving to be a year-round business for us. So a new category there. So obviously, we have Offline too, which is our secondary business coming off of Aerie and that business has proven where you're hearing some decel in the athletic apparel areas. We're holding our own and our leggings are still tried and true and winning for us. The customer acquisition has been strong.

Our customers are spending more. We're seeing even so. So coming off of Q3, as we head into Q4, they're actually -- our acquisition has been accelerating. Last week was an incredible week for Aerie, where we saw a huge amount of customer acquisition. So we are taking advantage of our traffic. We're winning our customers. I think we're showing up really proudly. We launched our new 100% real campaign, which is tied to our core competency of how we launch this business, what our platform is.

And it's talking to our community, it's speaking towards-- it's playing off of no air brushing our models. And now we've leveraged some of that into the AI world and thinking about how we approach that differently. So Aerie does things differently. We always think into the white space that sometimes can be scary, but we're so proud of what we do in this brand. And I think the team is doing an incredible job leveraging our community, amplifying marketing, but also it's 100% about our product. What we do every day is about our product and winning our customer.

That's great. And then Mike, could you speak to expectations for markdown in the fourth quarter relative to the third quarter just overall health of your inventory? And how best to think about gross margin levers remaining into next year?

I can start with inventory, Matt. I mean we're very pleased and comfortable with the plus 11 in total dollars, plus 8 in units, is positioned well to continue to fuel this Aerie and Offline trend. We definitely, as Jen talked about in her remarks, kind of resetting some denim inventory to make sure we're continuing to be in stock and don't miss a sale within the AE jeans category. And again, that plus 11% cost includes the impact of tariffs along with just supporting those businesses.

On the markdown front, look, we competed in the third quarter. Markdowns are up a little bit in terms of the total impact to the quarter. We expect Q4 to be similar. We're just be ready to compete in these big days. We competed over the weekend. This November trend that we've seen or the quarter-to-date trend includes a little uptick in markdowns to compete. But definitely winning in terms of the top line growth and the overall margin dollar growth attached to that. And it is in a couple of places.

I mean, Aerie is similar markdown rate to last year. So we're driving this trend on markdown rates similar to history. We're not driving it through promotion. And then it really is competing in jeans more than anything from a category perspective that's adding to the markdowns a bit. But we're -- we think that's the right strategy from here. Gross margin then in total, really pleased with the third quarter results.

We talked -- we disclosed or we hit the $20 million guidance roughly on the tariff impact. That's about 150 basis points. But as you can see, gross margin only deleveraged by 40 baiss points on four comp. So the team is doing a great job, not only just mitigating tariffs on the front end, but then finding kind of opportunities and efficiencies on other non-tariff impacted line items within our costs. We highlighted freight but there's more work than just on the freight line.

So Q4 is similar. I mean, we're guiding to a $50 million impact and kind of the net absolute value or the net impact of that -- absolute impact of that would be about 300 basis points. But we're obviously not guiding gross margin down that much. So we expect to see the same opportunities in terms of offsets and other line items.

And then just on an 8% to 9% comp, obviously, we're leveraging a lot of expense lines that are up in gross margin, including and BOW, so including rent, digital delivery, distribution costs, compensation up there as well. But other cost line items within our product costs are being leveraged, too. So we continue to expect to do that going forward.

And the next question comes from Paul Lejuez with Citi.

This is Kelly on for Paul. I guess first question for you guys. Just could you talk about why -- given you've had these very splashy and high-profile marketing campaigns that were more kind of -- more based on American Eagle marketing campaigns, like why you didn't see that accrue more to AE versus what you're seeing in Aerie, where it seems like you're benefiting a lot from whether that's the product assortment or maybe some of the marketing campaigns.

Just help us kind of understand what's happening there. And then just secondly, on the tariff impact, I think you said $50 million impact in the fourth quarter. Is that the right net tariff impact that we should be thinking about for the first half of '26?

Sure. As a company, we're leaning into advertising, we need to compete. When we see what our competition is doing, there was definitely opportunity for us to lean in. And certainly, Sydney Sweeney and Travis, I mean, with the 44 billion impressions, really it was something that we did not expect. And certainly, I mentioned some of the out-of-stocks in women's particularly, but men's certainly turned around in the mid-single-digit comp zone.

And that was really -- we are so pleased to see that. And I just wanted to say sometimes there's a halo effect in marketing, right? So as we saw -- as we got into -- as denim, we got our stock in stocks back to more normalized levels towards the end of the quarter. We saw acceleration, particularly in women's and into black. As I mentioned, it was an incredible week for us, Thanksgiving week and Friday was amazing. So we're seeing the results now.

And look, this is important for our future. We need to remain strong and competitive, and we need to amplify our product. The teams have been working tirelessly on this price value equation that I think American Eagle does better than anyone, and we're leaning in, and this marketing will certainly amplify.

Jen, I'd like to also add -- we've also seen a significant increase in our loyalty members, too. We saw over 1 million more loyalty members join us in these past few months. And as Jen said, you don't see it right away. As you also pointed out that it's interesting with Sydney Sweeney, the jeans that we have made specifically for Sydney Sweeney, they sold out like within 2 days. They boomed right out right away.

Then I can take the tariff question. I think maybe the best way to provide some color is just to give the quarterly impact. So we'd expect to go forward, if tariffs hold as is in terms of the impact, we'll see how that continues to progress, about a $25 million to $30 million impact in each of the first and second quarter. So call it, somewhere between 200, maybe 200 to 225 basis points of impact in Q1, same impact in Q2, $40 million to $60 million, call it, in the first half.

Next Q3 on the $20 million we just incurred in Q3, we expect Q3 on a full basis to be about a $35 million to $40 million, so call it, $15 million to $20 million impact incrementally next year. And then with the anniversary roughly the $50 million that we're guiding to this fourth quarter. So it's about a 200 to 225 basis point impact on a full year basis. And -- but again, with continued offsets in work, we'd expect the gross margin to not be impacted to that level just like we've seen here in Q3 and Q4.

And Mike, there may be like as Supreme Court ruling coming on shortly, too. It may have changed everything right away.

So the assumption then would be that you would be taking some like-for-like pricing into next year?

Yes. I think, I mean, on the pricing front, we definitely do not have a specific strategy to pass through the impact of tariffs to our customers. We continue to take shots where we know we can, where we're making price moves that we still fit within our price value equation that the customer expects, and we don't see any resistance to those price changes from the customer. And just ticket changes that allow us to create a little more room on the promotional front, too, to make some decisions within our lease lines. So we'll continue to do that.

I think we're seeing success doing or approaching it that way in the back half right now. We'll continue to do that in next year.

And the next question comes from Jungwon Kim with TD Cowen.

You mentioned strong customer acquisition across both brands. Maybe you can give us a little bit more detail around who those customers are and if you're gaining more higher income cohorts. Just curious on who you are gaining share from as you acquire new customers? And then another question, just a follow-up to that is, what are your strategies around retaining those customers you gained in the last 2 quarters?

Look, both brands have -- our customer file is stronger than ever. And -- we certainly have seen acceleration, as I mentioned, going into even leaving Q3 -- exiting Q3 and going into Q4 with some really high -- it's really high-end problems here that we're seeing. Look, it's what we do every day. Our teams need to certainly focus on the retention. And we've been all year long, that's what we've been up to. Our retention is not even -- we're winning on retention. We are winning on customer acquisition. The teams have strategies.

Those I tend to not share publicly, but the strategies are already paying off. You can see it in the news that we're just reporting today. We're getting talent. We're working on our influencer programs, but we're also working on our communities. And that is the most important thing. We have powerful brand platforms that we stand for something, and it wears the test of time. And when that works and we have the great product attached to it, we can win and show up in a new way. And the teams have very many strategies, whether it's upper funnel, getting out there and bringing in new customers or working on our performance marketing spend and our influencer strategies.

So it's not only -- it's never about one part of the strategy. It's about getting the product right first and making sure that our tactics will amplify that strategy. Certainly, Sydney -- an example, Sydney and Travis, but even the more recent Martha, I mean, that is talent, that's upper funnel. That is us getting our brands out there in new ways. But if you lean into Aerie and how they're working, their marketing strategy, they're leveraging our community in a new way and showing up with how do we go from not air brushing our models I just mentioned into what does AI mean to such a pure brand as Aerie with such an amazing platform.

So it is about -- we have two different brands. We have a portfolio of brands in the same token that we leverage our brands. Certainly, we share a platform, but it is about making sure that we play up each brand DNA in the right way, and it's working. That strategy is working. I can just -- I can say that now, and there's work to do always. As we look ahead, we have exciting collaborations, new talent and just new ideas. We're constantly thinking of new ideas.

The next question comes from Rick Patel with Raymond James.

I wanted to double-click on your expectations for AUR in Q4. As we think about the company remaining competitive with promotions, but also factoring in some product and perhaps some pricing wins, where do you see AUR landing in the fourth quarter? And then second, what are your expectations for where inventory will end the year, both in terms of dollars and units?

Hey, Rick, yes, the AUR for the third quarter was relatively flat even with a bit of a markdown increase, just the mix of the businesses between the brands, category mix, our AUR was relatively flat at the company level. We're expecting a similar thing in Q4. November to date here, we saw it play out that way. Aerie is actually driving these comps on some uptick in AUR. We know we're spending a little more markdowns in the jeans category in AEs to drive the business. So the mix for the quarter, we'd expect right now to be similar around a relatively flat AUR for the fourth quarter. And I think it's the way we really expect to plan the business go forward.

Great. Any thoughts on inventory?

Q4, we're not providing specific guidance, but at the end of the day here with the uptick in the trend exceeding plans, we're definitely in chase mode here, which is a good thing when we make -- we have -- we see a lot of profit flow-through when we're doing that, especially on the Aerie side of the house.

So we expect inventory in line with sales. We're guiding to the plus 8% to 9% comp. And as of now, I'd expect similar kind of inventory in line with sales or at least units in line with the sales growth, knowing there will be a tariff impact ongoing. But we're not providing specific guidance at this point, but that's what we'd expect to see.

And the next question comes from Chris Nardone with Bank of America.

So first, can you just refresh us on how we should think about plans for both the Eagle and Aerie store fleets heading into next year? And if the recent results of both businesses has changed how you're thinking about that versus maybe 90 days ago?

Yes, Chris, I think for the AE brand, we talked about closing roughly 35 stores at the end of this year. We're looking forward into plans next year, and I expect that to slow down as we've largely closed, I think, over the last 3, 4 years, kind of the lower productivity stores in the fleet in the mainline AE fleet. So 35 at the end of this year here in January, maybe something lower than that, I would expect next year.

On the Aerie and OFFLINE growth front, we talked about 22 Aerie, 26 OFFLINE openings this year in 2025. We're looking at a similar 40 to 50 store count at the moment, probably similar weighting offline, a little more -- a little higher count in OFFLINE than in Aerie. But we are looking at this tremendous growth, and we'll -- if we did anything, we'd maybe accelerate some openings on the Aerie and OFFLINE side, but those plans are still in work. Right now, a similar 40 to 50 count is what's in the plan.

Okay. Got it. And then just a quick follow-up. I think you alluded Aerie comps are running above the high teens for the quarter, quarter-to-date. And if AUR is roughly flattish, can you just unpack a little bit further? It sounds like you're seeing inflections across the product suite, but are there particular channels, whether that's digital versus retail or certain categories where you're seeing the biggest inflection? We're just trying to understand a little bit better what has changed so drastically over the last 6 months.

Yes. Look, correct. The guidance we're giving at the 8% to 9% comp, I'll just reiterate, American Eagle low to mid-single expectations, Aerie high teens. Both brands are running ahead of that trend November to date or through the Thanksgiving weekend. Digital ahead of stores. And I think the marketing campaigns that Jen and Jay are talking about, the traffic we're seeing digitally off of those campaigns is significant, and that's where we're seeing a lot of the gains from those efforts and from the effectiveness of those campaigns.

So digital was -- both channels were positive in Q3, but digital was on the high end or the high single-digit level for Q3. And we'd expect for Q4 at a plus 8% to 9%, same kind of outcome that digital would really outpace stores, and we've seen that through November and especially over the holiday weekend here where both channels were positive, and we're happy with the success in both channels, but digital is where we're seeing the outpaced growth at the moment.

And in Aerie specifically, I mean, as I mentioned before, men's, we saw an incredible turnaround. And Aerie specifically, all categories are working. Look, the team -- when you have to pivot coming off of Q1, we focused on our product and winning that customer back and ensuring that we could get that momentum that we deserve again. This brand is incredible. And I did want to say, I need to remind everyone on this call that Aerie's brand awareness is only at 55% to 60%.

So when I think about our opportunity as we build into 2026, we have an incredible runway in front of us. So we're pulling in product as we speak. We're chasing and the team is working fast and furiously so that we can continue this momentum into next year.

And also, Jen, I think our merchandise is better, too, which help.

I'd like to say that, yes.

And the next question comes from Alex Straton with Morgan Stanley.

Congrats on a nice quarter. On these big campaigns that you guys have pursued, can you just give us some context on where you think you'll end the year on marketing expense as a percentage of sales versus typical? Like are you investing more than history? And then as we think about next year, should that line item continue to move higher? Or how do you think about kind of that flywheel between the marketing investment and growth?

For this year, yes, we're -- I mean, obviously, we made a significant investment in Q3. Q4 is up as well within our guidance, not anywhere near the increase on a percentage basis that Q3 was. Really pleased with the SG&A leverage we'll see in Q4 off of this comp guide. Advertising is still deleveraging a bit, but we're leveraging all other expense categories as intended pretty significantly in the fourth quarter. For the year, we're going to wind up somewhere in the mid-4s as a percentage.

And historically, we've been more in the -- I think last year, for example, around 4%. So we're definitely resetting a baseline for advertising spend at the moment. It's working. We're continuing to monitor it. Jen and I and our teams are working very closely and cross-functionally on really on a week-to-week basis, how we're pulsing the spend in advertising on top of the campaigns that are obviously planned well ahead of time.

I'd expect -- we expect in our initial plans here for next year is to continue this in the first half, possibly passing more toward a 5% type of rate to reset ourselves and then leverage all our expense lines, funnel some expense or some investment toward advertising and anniversary this come next year around this time in the third quarter. I think that 5% is a good sweet spot that we'd like to maintain over time. So as we're kind of resetting the baseline, we're pathing towards 5%, like the top line growth we're seeing from it. Again, just to reiterate, anniversary it come next year and start to just maintain that type of rate, and we'll evaluate things from there.

And Mike, and trips in the bank, too. We're not saying we have more trips in the bank.

Yes. More to come. We'll talk -- we have some things on our fourth quarter call in March probably to talk about more exciting things to come.

That's great. Maybe one follow-up for you, Mike. Just kind of zooming out here. I know there's been some wrenches in your medium-term outlook since you provided it a couple of years ago. But maybe as we move into the final year of that plan and excluding some of the noncontrollable headwinds like tariffs, can you just like, big picture, talk about where you've made the most progress versus that plan and where there's still more work to be done in this final year here?

Yes. I'll start on the top line. I know we obviously had a few missteps here in the first half of the year in the first quarter, but the net result of this year with this guide is actually going to wind up kind of in that low to mid-single or within the algorithm we've talked about wanting to achieve every year. So we'll be at a kind of low single-digit trajectory on the full year with this back half being kind of the mid- to high single-digit range.

So I think that's the continued focus. I'd also say we made a lot of headway in just the culture change around expenses in total. So we continue to control costs across the P&L. I think the leverage that we're seeing here in BOW, this back half of the year and then SG&A in this fourth quarter is a testament to that. Even with the significant increase in advertising this year that you just asked about and I just provided the calendar on all the other SG&A line items are leveraging in this year.

And SG&A in total will be relatively flat on the year at the kind of the low single-digit total year outcome. So I think that's a big change for us over the last several years. It's been a massive focus to have a different mentality around controlling expense. It's allowing us to funnel some of these dollars toward advertising. And so we'll continue to do that. And yes, to your point, the tariff headwind is something we can't control. But I mean, our goal is still this 10% aspiration. Tariffs are going to set that back a little bit. But we're going to continue down the path that we're on, on controlling all other costs, investing some dollars in advertising, fueling Aerie and OFFLINE, hitting that kind of low single plus trajectory in AE and passing back toward that 10% that is still our ultimate goal.

Yes. And Mike, as a general thing, this team after the first quarter, and Jen couldn't emphasize it enough, really took a hard look at everything. We went through all the different areas of the business, every single area, every opportunity the merchandise to the operations, looking where -- what's important, what's not important to the company. The dedication of the associates have been amazing in the last few months, and I'm so proud of this team because that first quarter, we got kicked very hard and nobody quit. Nobody cried about it. Nobody quit.

Everybody went to figure out how can we do things better, transformational, looking for where the real opportunities are, looking for where we should go in the future, where the opportunities are and what's it going to take to be the best. And one thing I'm very proud of, if you go into our stores, we have the best-looking stores, the best maintained stores in the mall. If you walk in the mall, our stores look the best. If you go look at our new stores, you go to down to SoHo and you look at our new store we just opened in SoHo, you go to Aventura down in Miami, you'll be very impressed by the stores.

They're very, very impressive stores. They're very functional stores. And so I think that we're very excited. I know what we have planned for marketing next year. I know where the merchants are focused. I know the excitement that everybody has in this company, and it's going to be great.

And the next question comes from Janet Kloppenburg with JJK Research Associates.

Congratulations. And I agree the stores look terrific. Aerie in particular, but American Eagle as well. I just wanted to ask about -- I think you had to chase product earlier in the year as well, Jen. And I'm wondering what's going on there and if that situation is resolved now with the comps being as healthy as they are.

And then for Mike, on a 4% comp, you weren't able -- did you leverage buying an occupancy? I think you may have. And what is the target point on that? And in terms of price increases, are they all behind you now? Have you taken them all? Or are there more to come?

Yes, for sure. Thanks, by the way, Janet. We -- it's -- primarily, it's been in women's denim, to be frank. We've been sort of in chase mode since Q1. And quite frankly, we haven't been able to keep up with the demands. And as you know, we have a huge short business, and that business never really turned on. We expect shorts to turn on as we enter Q2, back half of Q1 into Q2, and that never happened.

So then we continue to see this demand in long legs, and we really couldn't keep up with that demand. So moving into Q3, we felt like we were in a better position, but we wanted to be prudent as well with our inventories. As you know, denim is probably our higher cost of goods as well, but it's our biggest business. So it's always an art, managing that business. And with the launch of the Sydney Sweeney and actually Travis, we couldn't really keep up with that demand.

The teams worked swiftly. We were definitely in the right businesses. We definitely had the right silhouette and the right investment in silhouettes, which led to some of that out of stock, good news there. Bad news, we needed a little bit more inventory to carry and to get that business -- to get women's in total because of the penetration of denim. So good news is certainly in the back half of Q3, we saw nice levels of inventory getting back into our key silhouettes.

The top 5 jeans, just to give you some perspective, we planned at -- this is just top 5 jeans styles in women's. We planned up 25% they were up 50% on demand. So we had a lot of work to do. We feel better as we head into Q4. And nodding to what Mike mentioned, we're going to look at denim a little bit differently so that we're maintaining that business while we grow new categories.

And Janet, on BOW, yes, we did leverage BOW by 20 basis points in the third quarter on the 4 comp. And then that's a good target for us that low to mid-single-digit result to leverage expense really across the board other than this advertising reset we're talking about. And then the fourth quarter on the 8% to 9% comp, we obviously definitely expect to leverage BOW at that kind of result as well. And SG&A will leverage significantly on that kind of result for the fourth quarter.

Okay. And then just on pricing?

Yes. We talked about a little earlier. We're not -- I mean the AUR is flat for Q3. We're expecting similar AUR in Q4. We're not pathing through the impact of tariffs to the consumer purposely. We are taking our shots on price moves where, as Jen has said, keeping -- maintaining that price value equation that our customer expects and making sure we're not impacting conversion and give ourselves a little room on the promotional side when we do that as well. So we'll continue to kind of optimize that, take our shots, but net AUR similar to last year is the intent.

And the next question comes from Janine Stichter with BTIG.

Congrats on the great quarter. With this quarter-to-date acceleration, it sounds like a lot of it's been driven by traffic and new customer acquisition. Just wondering what you're seeing on conversion, particularly with some of the product improvements you've made. And then maybe if you can just share your thoughts on the Gen Z consumer. We've certainly heard a lot about that consumer potentially being pressured and pulling back, but it doesn't seem like you're seeing that at all in your business. So I would just love to hear your thoughts on kind of where the consumer is and how they're spending?

Yes. I think on the metric side of things, traffic was definitely a driver in Q3. We continue to see that here in the fourth quarter through November. With AUR flat, it's been a mix of sort of traffic and then ADS or the UPT, part of the ADS equation, AUR flat, some uptick in UPTs and then traffic with conversion being relatively flat with AUR being relatively flat. That's sort of your mix of metrics that we saw in the third quarter and early days here in Q4, obviously, a big traffic uptick that we've capitalized on through November and through Thanksgiving, and we'll see how that continues to play out.

But with AUR relatively flat, we would assume a similar kind of mix of metrics, traffic being a driver, ADS being a driver with AUR flat, conversion relatively flat, and we'll see how it pans out through December.

Yes, we're not feeling that -- we're entertaining Gen Z in all of our brands. So even when you look at Martha Stewart, that might be a question mark, right, why Martha Stewart, but Martha Stewart resonates with Gen Z. That's a perfect example of what we're up to. We're seeing momentum in all age groups. We do have still some opportunity on the lower age scale in AE women's in particular, and we're up to invigorating some product to entertain that age bracket. But honestly, we're not seeing it. And also, this is a critical time to for gift giving, too. So we see mom and dad out there purchasing as well.

Okay. We have time for one more question.

And the last question comes from Corey Tarlowe with Jefferies.

Mike, I just wanted to ask on SG&A for Q3 and Q4 and just kind of how to think about it next year from a dollar perspective. Is there anything that either comes in or goes out, whether it's marketing? I think you talked -- maybe you talked about incentive comp in prior years, how to think about that just structurally, understanding on a rate basis, obviously, with Q4 sales being so strong, there's going to be a bit of a delta there, but curious what you could unpack for us.

Sure. Yes. I think, as I said, we'd expect to see some continued investment in advertising through the first half of next year, incremental to where we've been intention to pass toward, call it, that 5% rate annually. So we'll anniversary things in the back half that we're doing currently. Incentive comp is a bit of a TBD. We're still setting plans for 2026. Those annual plans are based on our EBIT target is the success metric. So we'll probably -- we'll give more color in March around 2026 SG&A and how we think that will pan out by quarter with advertising and possibly a bit of more incentive comp in the mix, but more to come in March.

Great. And then just a quick follow-up on Aerie. The momentum has been very, very strong. Curious what you think is specifically working there versus the competition when you either walk the mall or view kind of the competitive set, how you think about your market share gains and the opportunity there?

Yes. I did mention the brand awareness still is -- we have opportunity there. We're still only at 55% to 60%. So as we gain and look towards the future, we have a lot of opportunity there. It's never about one thing. Certainly, we doubled down on the product, the design team and merchant teams really came together and thought about our future strategies and where we were seeing some losses and how we recalibrated all of our categories.

And the team did an excellent job from launching new ideas to rebuilding old franchises, i.e., undies. Undies is a fire starter for any order, any basket. And our undies tables have never looked better. So it's all about the product. But strategically, we built into promotions that makes sense, but we pulled back in other areas where it doesn't make sense. And then you layer on this great marketing campaign that we've had in Aerie, which it's been really resonating, 100% real. It's what we're all about.

And the team has doubled down and our influencer campaign, getting our clothes on our influencers has been a real win. And there's more to come. We have so many great new ideas, innovations for the future. The team is 100% locked and loaded on thinking about each category, new fabrications, new ideas, new launches. newness in general has been a win for Aerie with our new drops, and that's been really working. So we have a lot in store for 2026. But in the meantime, we're pulling goods in for -- to pull out Q4. We're excited about what's happening right now.

Welcome to the AEO Inc. Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Judy Meehan, Head of Investor Relations and Corporate Communications. Please go ahead.

Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer; Jen Foyle, President, Executive Creative Director for American Eagle 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. The 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, please see the second quarter investor presentation on our corporate website at www.aeo-inc.com in the Investor Relations section. And now I will turn the call over to Jay.

Thanks, Judy, and good afternoon, everyone. Before we get into the quarterly results, I want to step back and acknowledge the team's hard work and our conviction in our long-term plans. We had a good quarter. But more importantly, we continue to strengthen our brands, improve our runway for growth and manage the business for higher profitability. The consumer backdrop is dynamic yet we are focused on controlling all that is within our control, providing a leading customer experience while maintaining cost disciplines. I'm pleased to report on the encouraging early results the actions we are taking to reignite performance. Last quarter, I spoke about a series of actions we were implementing, and I'm pleased that the team has moved with urgency to execute.

Product initiatives across brands, exciting new marketing campaigns and greater operational disciplines are all contributing to improved business results. We have a lot of hard work ahead yet we are excited about the progress so far. Total revenue of $1.28 billion was our second highest ever posted for the second quarter, marking a meaningful improvement from the first quarter and validating the actions we have taken. Aerie saw a dramatic turn from the first quarter, delivering comp growth of 3%. American Eagle saw a nice improvement in key go-forward categories as Jen will review shortly. Second quarter traffic was positive across brands and channels. And I was pleased to see traffic momentum built throughout the second quarter has continued into August. Following the first quarter inventory write-down, the team was focused on successfully managing through the season, delivering better sell-throughs with less promotions.

We also managed the business with financial discipline, with SG&A down compared to last year. Operating income improved 2% to $103 million, significantly exceeding our expectations. Diluted EPS increased 15% to last year. It was a solid quarter, and we are encouraged by the progress, yet our work is not complete. We are leaving no stone unturned. We are committed to growing our brands by putting our customers first and improving operational efficiencies. One component of this plan is to create greater efficiencies and speed across our supply chain. With respect to tariffs, we will begin to feel the impact in the second half, as Mike will review. We are using all levers to mitigate tariff increases. Early efforts have been successful. We have taken action to assure manufacturing options are in place in countries that make the most sense for our business moving forward. We have a highly seasoned sourcing team and strong partnerships with vendors. We will leverage these relationships as we navigate through the evolving trade dynamics.

Turning to capital allocations. We continue to strike the right balance between investments to support our long-term growth agenda and returning capital to shareholders. Year-to-date, we have returned $276 million to shareholders through dividends and share repurchases. This includes the completion of our $200 million accelerated repurchase program earlier this year. The fall season is off to a good start, fueled by the strength of our product lines and the success of our recent marketing campaigns. The iconic fall denim campaign with Sydney Sweeney affirms we are the American jeans brand. We saw a record-breaking new customer acquisition and brand awareness, cutting across age demographics and genders. The most recent collaboration with Tru Kolors by Travis Kelce has kept the momentum going. We have seen periods of very strong demand from both campaigns fueling positive traffic in August, which was up consistently throughout the month.

I'll end with our commitment to building on this quarter's progress. We have enduring brands with significant potential for more growth. I am confident we will realize our potential and drive sustainable, profitable growth for the long run and create greater value for our shareholders. Let me turn it over to Jen.

Thank you, Jay, and good afternoon, everyone. We saw a clear improvement in the business in the second quarter. Efforts to strengthen collections across brands, lean into best sellers and deliver higher margins are already having an impact. As we work through some of the challenges from the first quarter, we saw progressive improvements with the new deliveries, and I am encouraged that momentum strengthened into August with the arrival of our new back-to-school collections. So let me walk you through some of the new highlights. Starting with Aerie, we drove a nice rebound from the first quarter, delivering comp growth of 3% and achieving record second quarter revenue. Performance was driven by positive demand across a number of major categories, including intimates, soft dressing, sleepwear and our activewear collections at offline. While shorts were the most challenging seasonal category, we are focused on driving improvements here as well.

Among the highlights, intimates has been a key area of focus within our long-range plan, and we will recapture share in the return of this category to growth. We are pleased to see customers responding to new fits and fabrics in undies and bras and more regular fashion drops. For example, in July, we introduced the Parisian Romance fashion capsule, which embraced feminine touches like lace and sheet combos of our most loved silhouettes. Our Aerie customers loved it and it was the page turner we needed to enter the fall season strong. Beyond intimates off-line continues to be a positive performer and we remain excited about the growth potential as we continue to increase awareness and further expand our footprint.

And now turning to American Eagle. Second quarter comps declined yet demand improved throughout the quarter, and I am confident that we are at an inflection point. Although the second quarter was under pressure from early spring receipts and softer demand in shorts and bottoms, AE saw solid improvement in key go-forward categories. That was especially apparent as the quarter progressed. Most notably in women's jeans and tops as well as dresses where we were focused on building franchise businesses like our new Sunchaser's collection. Men's has also seen a nice trajectory in key classifications, including graphics, knit tops and jeans, all positive in August. Back-to-school arrivals have been well received. New jean styles, along with a continued focus on great outfitting across genders led the business.

This year, we continued our long-standing partnership with The Summer I Turned Pretty, expanding the collection with new styles and 3 separate drops to coincide with the storyline. In addition, as Jay mentioned, our exclusive product and marketing campaigns with Sydney Sweeney and Travis Kelce have created amazing energy and buzz. Over a year in the making, these 2 signature collaborations have generated a strong response driven by limited edition merchandise demonstrating the power of celebrity style and great product. Sweeny Signature jeans sold out within a week and some products within 1 day. Demand for her curated online shop of Syd's Picks has been very strong.

Similarly, AE and Tru Kolors by Travis Kelce has received tremendous engagement, fueling higher traffic and new customers. Product sell-throughs have been strong. Overall, we are very pleased with these campaigns. Since the launch, customer counts are up more than 700,000 and the campaigns combined have generated a staggering 40 billion impressions. As we look ahead, our plan to build on this momentum to further expand brand awareness, customer engagement and retention and ultimately strengthen the long-term brand loyalty. I am proud of our second quarter accomplishments and the early third quarter trends. Our work is continuing at full speed. We are heads down focused on the future and improving all aspects of the business to deliver sustained growth. I wanted to thank the teams and now we'll turn the call over to Mike.

Thanks, and good afternoon, everyone. Let me echo Jay and Jen by saying we were very encouraged to see solid progress in the second quarter with results coming in above the expectations that we set back in May. Stronger demand coupled with lower-than-expected promotional activity and well-managed expenses enabled us to stabilize margins and deliver operating income 2% above last year. Consolidated revenue of $1.28 billion declined 1% to last year. Comparable sales also decreased 1%. A lower average unit price was largely offset by growth in transactions, benefiting from positive traffic across selling channels. We saw demand pick up as the quarter progressed. July was our best month of the second quarter as we introduced our initial back-to-school product collections. And as Jay mentioned, we are pleased to see that improvement continue into August consolidated comps turning positive. Gross profit dollars of $500 million reflected a gross margin of 38.9% compared to 38.6% last year.

Following the first quarter inventory [Audio Gap] a quarter with lower promotions. This was partially offset by 20 basis points of deleverage on buying occupancy and warehousing as a result of the sales decline. BOW dollars were flat to last year. SG&A was better than expected, down 1% to $342 million and was flat as a rate to sales. Compensation costs were down as a result of recent expense restructuring initiatives, offset by investments in advertising. The balance of expense categories were flat, reflecting our ongoing cost management program. Operating income came in at $103 million, up 2% to last year. This reflected an operating margin of 8% compared to 7.8% last year. Consolidated ending inventory cost increased 8% with units up 3%. The inventory cost increase is primarily due to the impact of tariffs. We're comfortable with inventory positioning for the quarter, which is aligned with our plans. Our capital allocation priorities remain unchanged and focused on investing in growth and returning cash to shareholders through dividends and share repurchases.

Second quarter CapEx totaled $71 million, bringing year-to-date spend to $133 million. We continue to expect CapEx of approximately $275 million for the year. During the second quarter, we completed our $200 million accelerated repurchase program announced back in March. In total, year-to-date, we returned $231 million in buybacks. This reduced outstanding shares by $20 million or approximately 10% of outstanding diluted shares. Our balance sheet is solid with ending cash of $127 million and total liquidity of approximately $400 million. As planned, we drew down $200 million from our revolver to support the buyback program and seasonal cash needs. By year-end, we expect to repay the majority of outstanding debt and begin rebuilding cash.

We are continuing to prioritize investments in our digital channel, making foundational improvements to the shopping experience. We're also focused on optimizing our store fleet to ensure we are in the best locations to provide the best customer experience while pursuing additional growth opportunities. This year, we're on path to open approximately 30 Aerie and offline locations and remodel 40 to 50 AE stores for a modern store design. We now anticipate closing 35 to 40 American Eagle locations by year-end.

Now turning to our outlook. The third quarter is off to a better start with quarter-to-date consolidated comps up in the mid-single digits. This includes a positive turn in the business as Jen noted as well as a very strong Labor Day weekend. With more than half of our quarter yet to go, our outlook for the third quarter includes a low single-digit increase in comparable sales. Third quarter operating income is expected to be in the range of $95 million to $100 million, which includes approximately $20 million of incremental tariff costs. Buying, occupancy and warehousing costs are expected to increase due to new store growth for Aerie and offline and increased digital penetration resulting in slight deleverage. SG&A is expected to be increased in the high single digits, driven primarily by investments in advertising.

The tax rate is estimated to be approximately 25% and the weighted average share count will be roughly 172 million. For the fourth quarter, our outlook is for a low single-digit increase in comparable sales and operating profit in the range of $125 million to $130 million. This includes approximately $40 million to $50 million of tariff impact in the fourth quarter. SG&A is expected to be down slightly in the quarter. We're encouraged by the progress this quarter, demonstrating that our initiatives are working. While this is a positive step, our teams remained sharply focused on building upon profitable sales momentum, managing costs and driving continued improvements across the organization to deliver higher profitability.

Now we can take your questions.

[Operator Instructions] Your first question comes from Jay Sole with UBS.

I want to ask about the Sydney Sweeney and the Travis Kelce campaigns. Obviously, I think, Jen, I think you mentioned 40 billion impressions, which is a huge number. The question is, can you tell us more about how you keep the momentum going with these new customers that you've attracted? And can you tell us about what those consumers shop? Do they buy just the specific product associated with the celebrities or did they shop across the store and buy tops as well as bottoms?

Sure, Jay. I wanted to introduce Craig Brommers because we had a feeling that there would be a lot of questions around this very exciting campaign. So let me introduce the American Eagle, CMO, Craig Brommers.

The American Eagle Sydney Sweeney campaign was intended to be a brand and business reset, and it has. Let me be very clear, Sydney Sweeny sells great jeans. She is a winner and in just 6 weeks, the campaign has generated unprecedented new customer acquisition. To be clear, that consumer acquisition is coming from every single county in the U.S. This momentum is national, and it is pervasive. We've experienced denim sellouts of items that Sydney has worn. We have strong positive traffic throughout this quarter and as Jen mentioned, a staggering 40 billion impressions. But a brand campaign is not to be judged in just 1 day, 1 week or even 1 month, a brand campaign endures. We are off to a start beyond our wildest dreams. As we track consumer sentiment over the past 6 weeks, we've seen consideration and purchase intent meaningfully up and now it's our opportunity to continue to convert this buzz into business and to convert these new customers into repeat customers. That's the work of the work ahead.

And to add on, Jay, what they are buying right now. I mean what's great is all brands are really seeing acceleration. As you know, we share a domain on the direct side of the business. So we're obviously driving traffic to our website. Labor Day was record breaking. It was our best Labor Day in history actually. We had a great weekend. But there's work to do in the quarter, of course, you heard that there's some sellouts we need to chase. But really across our key categories, we're seeing great success. Jeans of course, we do it very well and really proud of that assortment. What I love about the jeans assortment is it's diversified.

So we're gaining new customers with all different body types and age groups, and we're very excited, and we believe we're getting that market share that we deserve. In Aerie intimates is back. It's so exciting to see, and we saw that acceleration in Q2 and really, it's continuing into Q3 with the launch of our Parisian sheet capsule that I mentioned in my talking points. And lastly, men's acceleration has been more than exciting. We've been really up to repairing the men's business, and we're seeing categories work. And again, in both men's and women's, what's nice is we're selling the outfit. We're selling tops as well.

Maybe, Jen, if I can follow up on that. Obviously, the marketing campaigns have been hugely successful, but you're talking about intimates at Aerie and you're talking about men's. Can you just remind us the transition of the products from where they were in the first half of the year to how the product assortment has evolved now for back-to-school and what you see toward holiday? How much of the improvement in the business is just because the assortment is better, it's more on trend. It's where you want it to be versus kind of where you were in the first half and try to separate it from all the coupon excitement around the marketing campaigns if possible.

Yes. Great question, Jay. Where we started is Aerie had work to do. Our key competency business is fleece, I mean, in the apparel side, and we had work to do on the fleece side. What's nice is the team worked really hard, and we've seen really incredible results in fleece. So as you know, that's a seasonal business as we head into Q3 and build into Q4, but seeing nice uptick there, intimates as well. We started to see intimates turn on actually in Q1. We doubled down in Q2, and we've seen nice acceleration into Q3. That's really basically the Aerie story. There were some seasonal products in Aerie, shorts being one of them, which was the same for American Eagle and both in both men's and women's. Shorts was really the category that we needed to get moving. And as you know, we dominate in that category.

And we really couldn't accelerate long bottoms, long legs in both men's and women's to compensate for the miss in shorts. But as the quarter progressed, we saw nice upticks in the AE business, and now we're back in business in Q3. We're very excited for like I mentioned, not only our jeans business, but our tops business, sweaters and fleece in both men's and women's. And again, they're seasonally appropriate. So that's what we've been up to.

The next question comes from Paul Lejuez with Citi.

Can you give a little bit more on the comp metrics, transaction ticket, maybe the components of ticket in terms of AUR and UPT. And then you gave a couple of tariff numbers. Just curious if those were gross or net, whatever they were, if you could provide the other number. And how much are you relying on pricing to get to that net number?

Paul, yes, I can start -- I can actually cover both questions. Metrics for the second quarter, AUR was down mid-single digits. So the negative 1 results, we had actually had some healthy traffic, but with the AUR down 5%, UPD didn't offset that completely. We were able to manage that well. Our AUR on our digital channels was actually flat. And that's where some of the really markdown savings and management promotions came through the quarter, really flowing through the revenue beats pretty much all the way to the gross margin line to be able to manage markdowns pretty well through the second quarter there.

On tariffs, yes, we're providing the guidance here for the third and fourth quarter, about $20 million of impact in Q3, $40 million to $50 million in Q4. So that will pressure gross margin a bit on the low single-digit revenue guide. The team has done a tremendous job there. Our unmitigated number was closer to $180 million versus the $70 million we're guiding to. So a combination of rebalancing country of origin, cost negotiations with our vendors, optimizing freight between air and ocean costs, some -- and then some pricing. So I'd say pricing is down the list. We're taking our shots there. We have increased some tickets, just gives us some flexibility in promoting those items where we haven't seen really any customer resistance to some of those increases, but it's not -- it's not the largest mitigation strategy. There's other components I just talked about that the teams have done a great job for mitigating the back half impact and the annual impact go forward.

I guess just relative to that down mid-single-digit AUR in the second quarter, what are you expecting for the backhalf?

Third quarter to date, we're actually up slightly. We're up low single digits on AUR. The combination of AUR and traffic was driving the mid-single-digit increase as of quarter-to-date through literally yesterday. We're expecting that same type of dynamic for the back half on the low single-digit expectation.

The next question comes from Jungwon Kim with TD Cowen.

You mentioned intimate improved during the quarter. Could you just remind us what percentage of sales intimates is now for Aerie? And could you just give us more color around the strategy to recapture share there. And would love additional color around how the existing consumers perform. You mentioned a nice customer -- new customer acquisition, but any color around the existing customer during the quarter would be helpful.

Sure. Intimates is roughly 1/3 of the business. And Look, we felt like it's time for intimates to come back. There's been some trends out there where crop and baby tops, baby tees and cammies were working, and I think they actually took the place of a key category for us. So I think our timing was right on when we launched the Parisian collection with lace. As we know, intimates is lace and it works. So we're excited about just really double downing on that business. We feel like it's time for Aerie 2.0. We just launched a campaign that really highlights bras. It just launched, highlights undies, it highlights our intimates categories. It's pretty exciting. And again, there's not a lot of news there on the campaign as we're only underway, but it really just leans into our customer and letting her speak to our product because our intimates are the softest and they feel the best on your skin. So we're really excited about talking about this whole new idea and leaning into a category that we haven't been up to for a while, and it's time. It's time for intimates to come back.

This is Craig. I want to talk about the new customer acquisition. We decided to level up with talent this season, and we architected with intent. Both of these individuals are generational talents that are aspirational to both men and women. And as I just mentioned, we're seeing a national swell in new customer acquisition in every single county. And we've just moved from one strength to the other. Sydney Sweeney has great jeans with all about our best at category jeans. And as Jen mentioned, our Q3 is off to a significant start in terms of our denim penetration. Within last week, we bring Travis Kelce into the conversation, and Travis is at the intersection of fandom and fashion. Sports is driving culture in a way that it has never done before. And Travis is driving interest in fashion like never before.

The launch date was the launch date was the launch date. And despite other news, we started working with Travis almost a year ago. Travis was the Creative Director of this campaign and of this collaboration. He was personally in our design offices, working with our designers. He personally picked up fabulous events. He personally identified the amazing athletes that help tell this story. And this collaboration is off to an incredible start, just dominating our men's business over the course of the Labor Day weekend, building on the men's momentum that started in July. We could not be more excited about these back-to-back campaigns.

The next question comes from Janet Kloppenburg with JJK Research.

Hi, everybody, and I want to extend my congratulations. I'm particularly excited about the intimates business and also about the men's churn. On that note, is there any product category that's not working at Aerie right now, like the sportswear side of the business. Jen, maybe you could talk a little bit about that and about the intimates business and if you're thinking that it's going to sustain these strong comps going forward? And then just lastly, on denim, are your ticket prices higher? Or will they move higher as the quarter unfolds.

Yes, I'll just start with denim. I mean, Mike alluded to it, denim is our key category. So if you focus on the AE business, our AURs are nicely up, but I think we've done a great job just balancing out our price points. That's what we're up to. We have key price points in denim that we always learn from and build into. And that's what we did, obviously, when the tariffs hit, we had to think a little harder. So I think we're well positioned in denim with good, better, best pricing, but really trying to elevate our customer and getting them to pay for the quality that we embed into our product.

Going to intimates, there's so much good news in intimates. Undies, we picked up market share, a nice stack in market share actually. And as we know, that's a fire starter to our bundles in Aerie, so to see that business come back is really exciting. But bras, our core bras, again, we've held our share, and we're gaining some more share. And I think that that's our focus. We really want to lean into these categories. It's a category, particularly in bras that the customer comes back for to try on to get to our stores to experience the brand. So honestly, again, that's what the teams are up to. Hopefully, we're going to show up really unique. There's more ideas in the hopper. Like I said, we're only up to Aerie 2.0, and these new learnings are going to help us accelerate into 2026, particularly in intimates as we're just seeing nice new wins there. Off-line is continuing...

Yes, offline is good, right. Yes. And what about the soft apparel, is it good?

Yes. Soft apparel, that's what we were leaning into. That's what our learning was from Q1. I think we went to fashion, there was too much fashion. We needed to balance out the price equation as well as what that customer expects from us. Now we have sets. We have a set called the Jet set. It's amazing. If you don't own it, get into it, it's your best travel set out there. And we have just core competency, crew necks and fleece and it's just really nicely working for us. So soft apparel is great. It really was shorts. And as you know, we even lean into shorts into August. So if I was going to articulate a soft category across all 3 men's, women's and Aerie and off-line actually, all 4, it would be shorts. They were soft.

Okay. Terrific. And with respect to pricing, Mike, will we start to see a broader range of select price increases as we go forward? Or is it over? Did you take them and it's done?

I'd expect that to be ongoing, Jen, I think as we look at our forward plans into the first half of next year, we're going to continue kind of all levers of mitigation for tariffs. So pricing will be a component of that, but kind of optimizing country of origin, cost negotiations, air ocean freight optimization and other expense line items through the -- that embedded in our landed cost will be the bigger levers, pricing will just be one tool in the kit.

The next question comes from Alex Straton with Morgan Stanley.

Congrats on a really nice quarter. I just had a couple of questions here. Maybe first for Mike, just on the back half gross margin where you're guiding to a decline for both the third quarter and the fourth quarter. It looks like fourth quarter decline is maybe 2x worse or so than the third quarter. So can you just walk us through the gross margin pieces? Is that just tariff? Or is there anything else in there? And then maybe separately, just on these recent campaign launches and some of the sales momentum that you've garnered on the back of them. Do you have a sense for how long top line momentum lasts after those? And do you have more sort of in the hopper following these pretty big 2 campaigns?

So I'll start with the gross margin question. Yes, to your point, the fourth quarter impact is a little larger, definitely tied to the tariff impact guidance. So $20 million for the third quarter $40 million to $50 million for the fourth quarter. So you've got a little more pressure there from tariffs in the fourth quarter. And we do have some embedded promotions assumed. We've been managing that really well all the way through the second quarter. August markdowns came in ahead of where we planned them as well. So we're leaving that embedded in our assumptions, but the team has done a nice job of optimizing that -- the promotional levels each week, especially digitally. So could be some upside to that assumption within the gross margin.

And then we do with the uptick here in the back half, this mid-single-digit trend, digital is definitely a big driver of that. So you've got your distribution and delivery costs kind of variability in that. So if the mix does lean heavier toward digital, we've got some variable expense in the BOW lines in the expenses and gross margin. So with a low single-digit assumption, we have some BOW deleverage between that line and then sort of the full back half impact of the Aerie and offline openings that are largely second quarter and third quarter weighted. So we'll have a little pressure. So it's equal parts, kind of some expense deleverage on a low single-digit assumption and the tariff impact and some embedded promotions that we believe we can probably -- we believe we have seen actually some optimization of that through the second quarter and through August. So some opportunity there still. On the sales momentum, Craig, I don't know if you want to jump in on that one.

Yes. Thanks, Mike. I'll go ahead and talk about that. The new American Eagle history has just begun. We're excited to introduce new chapters in the future. As we've already publicly announced, there will be a second drop for the American Eagle Tru Kolors by Travis Kelce collection. We've seen incredible interest on this first drop, can expect even more in the second drop as the NFL season begins and Travis is front and center in the national conversation. Additionally, Sydney Sweeney has great jeans, is not going anywhere. Sydney will be part of our team as we get into the back half of the year, and we'll be introducing new elements of the campaign as we continue forward.

[Operator Instructions] The next question comes from Chris Nardone with Bank of America.

Thanks, guys. Good afternoon. I just had a question on the tariff impact. It sounds like the $40 million to $50 million in 4Q is roughly 250 to 300 bps. Is this a fair assumption as we think through the mitigated impact for the first half of next year? And then, Mike, nearer term, on your back half gross margin guidance, just a follow-up on Alex's question. What are some of the positive offsets to drive some muted gross margin expansion to absorb some of the tariffs?

Thanks, Chris. Yes, I think if you play forward the tariff impact, I talked about $180 million unmitigated kind of back half impact here, but the team has done a nice job knocking it down to this sort of $70 million-ish projection we have. If you start with all the country of origin remixing that's happened here in the back half, China, where we know we were -- had a higher penetration coming into the year is mid-single digit now on a full year, but low single digit for the back half. Some other -- India is small for us, rebalancing some things out of Vietnam. So if you start with just even the country of origin remix on an annualized basis next year, that number probably around the $250 million to $300 million number to start. So there's some benefits there initially.

And you have continued cost negotiations and all the other components I just talked about as far as levers. So we -- latest projection as we're playing forward '26 numbers now is somewhere in that $125 million to $150 million range on a full year basis with more work to do. And we are. We're uncovering every stone around all other embedded costs in our gross margin. There's still opportunity for delivery optimization. We've got a longer-term supply chain network optimization plan and that we're in the middle of to optimize those expenses and gross margin. We talked about or we updated our store closure number, if you noticed in our prepared remarks, to about 35 to 40 stores this year. That's kind of double where we've been in the last several years.

So as we know that our digital penetration is picking up, we're going to continue to rebalance our fixed versus variable expense base by really looking at rebalancing the store fleet, especially on the AE side, so closures with repositions while we're still opening Aerie and offline locations. So we're going to look at every single line item like we have been for a few years kind of on all of our expense management endeavors over the last 2.5 years. We're going to continue to do that to find offsets to this tariff impact through gross margin into next year.

Got it. And then Jen or Mike, can you just talk a little bit about some of the progress you're seeing in the men's side of the business given the campaigns and whether you're seeing greater comp growth in your denim business versus the rest of the AE brand?

Yes. I mean denim has been certainly trending very nicely. It's actually on par because it's such a big penetration to our business, so we obviously love the results. Men's has been a journey for sure. The team has been -- we have -- first of all, we have a new merchant who's come in strong and has some great ideas. And starting in Q1, we really just took charge and really pivoted that business and said, we cannot -- we need to get this business back for obvious reasons. And it was our time. And I think they've done a nice job balancing out the fashion. So tops, graphics, polos, polo sweaters and of course, our bottoms, mostly denim have been significantly on an uptick. So we're here to deliver more, and we know we are still owed more on the men's side of the business, to be perfectly frank. So the team is looking at how fast we can grab that.

The next question comes from Rakesh Patel with Raymond James.

Congrats on the strong execution. I had a question on the duration of the Sydney Sweeny and Travis Kelce campaigns. Are these a 3Q initiative? Or should we expect to run through the rest of the year? And just given the success that you're seeing, how should we think about what's embedded in your marketing spend for the back half of the year?

I'll take the first part of that question. This is Craig again. The Sydney Sweeney Great Jeans campaign is here, and we'll continue with it through the remainder of the year. And again, we'll be introducing new elements along the way. Travis is just getting going. The first week has just been astounding. The traffic, the new customer acquisition, the sell-through is so incredibly strong, and we're excited to drop a second drop in the coming weeks, again, at a height of the NFL season. And so this is a moment to take big swings. And we have big talent, we have big amplification. The world is talking about it. We know that purchase intent is significantly and meaningfully up, and we'll be looking to convert this buzz into business all through the back half of the year.

Yes, I can add on to -- I was just going to address your average advertising expense question. So within SG&A, we -- high single-digit expectation for SG&A growth in the third quarter, largely the advertising increase to support these campaigns. All the line items are up slightly, leading to that high single-digit results. But then for the fourth quarter, we're looking for more of a result similar to the second quarter, meaning SG&A dollars being flat to actually slightly down. Advertising would still be up a bit, and we're going to kind of manage that week to week. So I expect advertising to be up sort of low single digits. A large portion of this expense to support the campaign is hitting the third quarter, even though we will continue some things into the fourth quarter. And then the rest of SG&A outside of advertising is going to be down slightly in the fourth quarter. So yes, the brunt of the advertising expense related to everything Craig is outlining is in the third quarter.

Got it. And then also I had a quick question on inventory. Just curious, given the acceleration that you're seeing in the August comp, how we should think about inventory plans for 3Q and 4Q?

Yes. So we're very pleased with our position coming into the second quarter, as we talked about. Our trend is up mid-single digits. Units were up 3%, costs up 8%. That differential of 5 points pretty much all based on -- driven by the tariff impact. I would expect a similar dynamic through the quarter during Q3 and then into Q4, we -- same idea that there's going to be a tariff impact, unit increase, we think be more commensurate with our sales trend. We are chasing some things at the moment that may have an end-of-quarter impact. But anything we're chasing now is largely in jeans and has long life kind of non-markdown liable goods attached to them for the fourth quarter for holiday and a lot of things don't carry, especially the jeans assortment carrying through the first half of next year. So very pleased with where we sit with inventory, and we'll continue to manage alongside our revenue expectations, especially on the units growth, knowing there's a tariff cost impact to the balance sheet dollars.

Next question comes from Corey Tarlowe with Jefferies.

Great. Mike, I wanted to ask on SG&A. I noticed in a while that SG&A actually leveraged in the quarter on a negative comp. And we haven't seen that in quite some time. So could you maybe talk a little bit about in the quarter about some of the changes that you've made in the business from an SG&A perspective and kind of what sticks, what comes out and then -- and how to think about that going forward? And then maybe what the leverage point might be on comp to actually drive some leverage on SG&A?

Thanks for the question. I think we've been talking about this for a good 2 -- almost 3 years now around our expense management initiatives. SG&A has definitely benefited from work on those major lines that we always talk about. I mean the biggest drivers of SG&A are store salaries, corporate compensation, advertising and our services line. So that's like 80% plus of your SG&A incentives built into that compensation bucket. So we've been hard at work at that for a few years. The second -- really this full year as a result of that, even though there's some -- with advertising kind of being pulsed by quarter.

The full year is going to be up in our projections here basically you piece together the guidance, 1% to 2% with advertising being the only thing actually up and everything else being kind of flat to down. So those efforts are in place forever. As we look forward to '26, we'll just be back to what we've been continuing to talk about, which is that longer-term 3% to 5% revenue algorithm. We intend to keep SG&A flat or even leverage SG&A on that kind of revenue result. So a comp in that kind of low to mid-single-digit range with total growth in that 3% to 5%, we intend to leverage SG&A. That's our continued goal go forward.

Got it. Super helpful. And then just a quick follow-up, if I could. I know that you talked about in the release lower compensation costs. So and I think incentive comp might have come out initially. Does it come back? What does it look like this year, next year?

Yes. We definitely -- I mean we did some restructuring things in the first quarter. We had some benefit in the second quarter around that. We'll continue to look at opportunities to optimize compensation in total across the P&L. Incentive comp is down this year. So we'll look for mitigation efforts if there's some sort of normalized number next year. But we'll talk about that when we get to '26 guidance when we actually set those incentives -- annual incentive plans, provide more color at that point. At the end of the day, we're going to look at SG&A as a total bucket. And again, just reiterate that goal that on that 3% to 5% revenue expectation on a longer-term basis, our intent is to leverage SG&A at that level.

Our last question comes from Marni Shapiro with The Retail Tracker.

Congratulations on the improvements and the denim has just looked absolutely outstanding. So I'm curious on a couple of things. I just wanted to clarify in the inventory increase. Was any of that pull-forward inventory? I don't know if I missed that, but I just wanted to check on that. And then Jen, can you talk a little bit just about in the product assortments, Travis Kelce has this full kind of assortment, Sydney Sweeney had her sold out butterfly jean. And then I think Syd's picks, I think that's what you titled it. Are you going to do a real collection with her? And then kind of just thinking into next year, if it's not them, could these things continue with other people is something that you would look to do again?

I can take the inventory quickly. So minor, there's a little bit of pull forward of inventory based on the timing of all the tariffs intentions there in early August, but very minor in the grand scheme of our plus 3 units, plus 8 cost.

Early reads on Travis has been strong, as we mentioned. And the nice thing is we're selling at really high price points. The customer is loving it and it's right price. So we love that. And as Craig mentioned, we have a second drop and we'll see what's in store for the rest. Sydney Sweeney, again, really nice sell through on the butterfly jean. The team have -- we have ideas cooking. Let me just say that, and just moving into great jeans, that's really what I'll say for now. There's more to come. We're thinking about some exciting holiday campaigns and how we leverage the product within these campaigns.

Okay. Don't spill the tea then. Can I just ask you one quick follow-up on swimwear. Now that we're out of swim season, and it's been kind of an up and down category for you. Have you hindsighted '25 and even '24? And how are you thinking about it for spring of '26?

Well, let me just say, based on our short business, I'm glad we didn't overpitched swim. So we really did a great job pitching that business. We sold out of fashion. We planned it accordingly. We actually beat the plan. We didn't have a lot of clearance at the end of the season. So we're going to take those lessons and apply them for future seasons. It is an up-and-down category, and we're going to take those lessons that we've learned, again, over a few seasons now, a few spring seasons and apply them on the go forward. We have a new lens, our new merchant who's in place who's been with us for over 6 to 8 months now. She's doing a great job, and she has some new ideas. She brings some fresh perspectives for the business.

Thanks, Marni. All right, everyone, thanks for your participation tonight, and have a great evening.

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