Good day, and welcome to the AEO Incorporated First Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Judy Meehan, Head of Investor Relations and Corporate Communications. Please go ahead, ma'am. 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 the first quarter investor presentation. I will now turn the call over to Jay. Thanks, Judy, and good afternoon, everyone. As described in our preliminary release earlier this month, we were disappointed with our first quarter performance. The margin impact, together with the $75 million inventory write-down, contributed to a $68 million adjusted operating loss for the quarter. At the brand level, American Eagle comps were down 2%, and Aerie comps declined 4%. While the broader macro environment and cold spring weather presented challenges, we did not execute to our potential. We had some product misses in our spring and summer floor sets. At Aerie, in particular, merchandise came in with higher design and transportation costs, and we were not able to realize pricing to support a healthy margin. Altogether, this resulted in higher than expected promotions and the inventory write-down we took on spring and summer merchandise. In reviewing this season, our execution needs to be better, and the entire team is hard at work to ensure that it is. We have been busy correcting and planning fall 2025 and spring 2026 seasons with all of our learnings top of mind. With the write-down behind us, we entered the second quarter with inventory for the season better aligned with recent sale trends. Additionally, we have implemented increased rigor into our buying process, which includes greater cross-functional partnership and oversight. We also remained focused on optimizing our operations, consistent with our long-term strategic framework. In the first quarter, we accelerated planned actions to further strengthen our supply chain network, which included closing two of our edge fulfillment centers. This was the majority of the $17 million Non-GAAP charge in the first quarter and is expected to generate annualized savings of approximately $5 million. We continue to take steps to mitigate the impact of tariffs, using all levers at our disposal as it makes sense for our business. Additionally, we are continuing on our strategic path to move business to ensure we are manufacturing with best-in-class partners in countries that make sense for us. Although we continue to face challenges and near-term uncertainties, I believe we are making progress. While annual guidance remains paused until we have greater visibility, I am confident that we will see improvement as the year progresses. This is further underscored by the meaningful opportunities we see to continue to amplify our brands, two of the most beloved brands in retail in American Eagle and Aerie, as well as our active sub-brand OFFLINE. The team is focused on fueling growth and reach, and we remain confident in the strategic initiatives we have laid out to drive this. Our capital allocation priorities balance investments to support our long-term growth agenda while making sure we return capital to shareholders. On that note, in the first quarter, this included the initiation of a $200 million accelerated share repurchase program, as well as $31 million in open market shares repurchases. Additionally, we paid out $22 million in cash dividends in the first quarter. Before I turn the call to Jen, I want to underscore that we are working with urgency to reignite our performance. We expect to be well-positioned heading into the important back-to-school season and are confident that results will follow. We've been through challenges in the past and always emerge stronger, and that is our goal. We are grateful for the continued commitment and support of our associates and partners as we work to capitalize on the meaningful shareholder value creation and opportunity in front of us. Now I will turn the call over to Jen. Thanks, and good afternoon, everyone. Clearly, this was a tough quarter. We had misses on the merchandising front and a handful of key categories. This was compounded by a cool spring and a slow start to the quarter in February. As the quarter progressed, we saw improvement and met our sales guidance. However, promotional activity was up, resulting in lower AURs. We also took an inventory write-down, altogether driving significant margin pressure. Reviewing our performance by brand, starting with Aerie, issues were concentrated in soft apparel, particularly in fleece tops and shorts, where some of our big fashion ideas for the season simply did not resonate with our customer. We also had higher product costs, and we were not able to realize the pricing to get an acceptable margin. We did see areas of strength, which we are leaning into as we move through the quarter and the balance of the year. In addition to certain fashion categories, we saw intimates improve sequentially as we gained share. Newness in fabrication and design, as well as refreshed marketing emphasizing our unique value offering, is resonating well. OFFLINE by Aerie demonstrated positive growth. This continues to be such an exciting opportunity for us. We are gaining market share, expanding customer awareness, and building a community around our truly unique take on activewear. Looking ahead, Aerie collections are more cohesive and balanced between basics and fashion items. Tariffs aside, product costs are favorable. Despite the near-term challenges, I'm excited as ever about Aerie and OFFLINE's long-term growth opportunities. We have a powerful and strong platform. We will continue to build upon. Our dedication to our customer is at the center of every decision we make, and we are committed to delighting them every day. Let's turn to American Eagle. Although disappointing in total, we saw nice improvement as spring breaks got underway during the MARPL period. As discussed last quarter, we experienced out-of-stocks in some core denim styles, which constrained our performance in this quarter. Overall, we saw weakness in shorts and pants. On the positive side, we are pleased to see comp growth in several areas in our women's business, in particular categories that have been a strategic focus around our social casual dressing initiative. At the same time, we continue to elevate our everyday casual offering. We achieved our best quarter ever in fleece. Additionally, we came back in stock in women's denim, and then we saw improvement. Although we continue to see pressure amend, two notable positives were tops in our activewear franchise 24/7. Looking ahead, I am confident we can build on these wins while addressing the opportunities that came to light over the past few months. Additionally, we have some very exciting campaigns planned for back to school, which we believe will elevate the brand and build greater customer engagement. Before I turn the call over to Mike, I want to reiterate my confidence in the long-term growth potential for American Eagle and Aerie. We have powerful brands, strengthened our selling channels, and a dedicated customer base that continues to grow with us. We are working with urgency to make the right improvements to realize our full potential. Thank you all. I'll turn the call over to Mike. Thanks, Jen. Good afternoon, everyone. Beginning with our first quarter review, as shared earlier this month, first quarter consolidated revenue of $1.1 billion declined 5% to last year. This included a one-point headwind from adverse currency and another point from moving our Hong Kong operations to a licensed model last year. Comparable sales decreased 3%. As Jen said, February is particularly difficult with some improvement in the March-April time period. Of note, traffic was up across brands and channels. Comp pressure came through lower AURs and conversion. Gross profit dollars were $322 million and included approximately $75 million in inventory write-downs on spring and summer goods, as previously disclosed. The gross margin was 29.6%. Our merchandise margin decreased 960 basis points, driven by a 680 basis point impact from inventory write-downs. In addition, higher in-season markdowns, higher product costs, and increased freight as we chased into goods pressured margins. Buying occupancy and warehousing expenses deleveraged 140 basis points, due largely to rent and delivery in light of the comp decline. SG&A dollars increased 2% as a result of higher advertising, where we made investments to support our brands with a partial offset from lower compensation. Appreciation was down year over year to $52 million, and we recorded an adjusted first quarter operating loss of $68 million. The adjusted loss per share was $0.29. Consolidated ending inventory costs was down 5% following the write-down, with units also down 5%. In the first quarter, as Jay noted, we continued to make long-term investments in our business while returning cash to shareholders. First quarter CapEx totaled $62 million. With the open market buybacks and the accelerated share repurchase program, our share count comes down to approximately $175 million moving forward, and we remain on track to complete the program in the second quarter. We ended the quarter with approximately $88 million in cash and investments and over $620 million of total liquidity, including our revolver. Now turning to our outlook, while we have paused four-year guidance until we have greater visibility, we wanted to share our expectations for the second quarter, as well as some incremental color on the actions we're taking to strengthen performance. Jen and team remain focused on improving product performance with fresh back-to-school merchandise hitting shelves in July. As mentioned, we've taken actions on inventory, including leaving fall and holiday season buys open to maintain flexibility in our merchandising strategy. As we continue to navigate tariffs, we're implementing various mitigation strategies, including partnering with our sourcing vendors to reduce costs. Additionally, we're further diversifying our supply chain and on track to reduce our sourcing exposure to China to under 10% this year, with fall and holiday season down to low single digits. We're pursuing efficiencies across capital spend with full-year CapEx now expected to be approximately $275 million as we recaden some investments over the coming years. As noted last quarter, we expect currency pressure to alleviate in the second half as we lap headwinds from last year. Altogether, this positions us to deliver improved growth, profitability, and cash flow as the year progresses. For the second quarter specifically, we expect the top line to trend similar to the first quarter, with revenue down 5% and comparable sales down approximately 3%. Operating income is expected to be in the range of $40-$45 million. We expect gross margin to be down to last year, driven primarily by higher in-season markdowns and BOW cost delivers on the comp decline. SG&A dollars are expected to be roughly flat, with DNA at approximately $54 million. The tax rate is expected to be approximately 25%, and the weighted average share count will be approximately 175 million. Overall, we are committed to re-accelerating performance from here and to taking the necessary actions to achieve that goal. We are better positioned entering the second quarter, and our teams are laser-focused on execution to strengthen our performance. With that, we'll open up for questions. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Matthew Boss with JPMorgan. Please go ahead. Great. Thanks. Jay, maybe larger picture, what's your view of the consumer today? How do you see this impacting the retail landscape into the back half of the year? Maybe across your brands, how much of the recent performance do you see as macro-driven, maybe relative to execution-related? How can you best respond? All right. With the macro situation, look, we're optimistic. We're hoping that this tax plan gets passed sooner than later. I think that'll give a lot of optimism, and it may even stimulate the economy as far as the second half goes. As far as the macro part, as far as the first half, I think in the beginning of the year, it did have a little influence on us between people worried about the immigration issue. They're worried about the government cuts. They're worried about tariffs. I think people are getting more settled down now on it, and it's not as prominent as it was before. Great. Maybe, Mike, on the second quarter operating income, I guess, could you help break down or break apart your embedded assumption for gross margin and just promotional activity needed and the timeline to return to a clean inventory position across brands? Yeah. I can hit the inventory piece first. We've been hard at work, really, to start to see this trend in the first half, then with the tariff news on April 2nd to really reset plans for the rest of the year, especially in the back half. The write-down, obviously, to get our total inventory right set for this entire first six months, spring and summer goods. So our inventory, we feel, is in a better place for the back half, very much in line with sales expectations. We'll talk about we're not providing full guidance or full-year guidance, but we'll talk about that more on the next call. For Q2 specifically, yeah, we are still embedding on what is a negative 3% comp expectation, similar to the first quarter at the moment. Down five total revenue with still some currency and other the currency, Hong Kong, point or two headwinds there continuing for the second quarter until we lap both those things starting in the third quarter. Still embedding some promotional activity that we believe we will probably need during the summer season here to get through the inventory and be clean going into the back to school season. With the down five total revenue pressure on the expenses and gross margin, rent and delivery specifically, I would expect to see deleverage on those lines again, similar to what we saw in the first quarter. Great. Best of luck. Thanks, guys. The next question will come from Jay Sole with UBS. Please go ahead. Great. Thank you so much. Jen, my question's for you. Let's talk about some of the merchandising issues. Do you feel like that maybe there was a little bit of a misread of where the consumer was going, or was it perhaps your identification of trends was good, but maybe competition had the trends a little bit better or sooner than you did? Secondly, how fast do you think you can get back on the trend where the merchandising is where you want it to be to perhaps drive stronger comp growth in the back to school and holiday seasons? Thank you. Sure. Yeah. To reiterate, we came off of a really solid Q4. We were expecting more as we moved into February, and obviously, that did not happen. I will tell you that these teams are working very swiftly to repair what our learnings are. And there is always green shoots, right? And we definitely had product issues across brands, but there were product categories that worked. So what the team's been up to since February is repairing and looking forward ahead. Of course, we needed to lean into moving our inventory, ensuring that we are clean. That is our approach. We want to be clean and mean for back to school. It is our Super Bowl season, and that is what we are working on. We have categories like OFFLINE. OFFLINE's been great. We had solid strength and growth there, and we are leaning into that category when we think about the Aerie brand. There are misses, but look, we're looking into back to school. I'm proud of what the team's working through. We have new members on the team too, and we have new talent. I think this team is a winning recipe, including moving some tenured teams into new businesses, i.e., direct. I'm really excited about what's to come, but we have work to do, that's for sure. Got it. Thank you so much. The next question will come from Dana Telsey with Telsey Advisory Group. Please go ahead. Hi. Good afternoon, everyone. As you think about capital allocation and the CapEx expenditure, I think came in a little bit, how are you thinking about your physical footprint? What's changing in openings and closings versus what you had previously expected? As you think about the merchandise assortment going into the back half of the year, category-wise, Jen, where do you expect to see the biggest improvement, and what will take a little bit longer in order to address? Thank you. I'll start with the product. Look, the good news is our seasonal products were tough, right? Shorts across all three brands were tough. Interestingly enough, denim's been very, very strong for us and giving us nice solid indications as we think about back to school. It's interesting how we've been able to lean into that category and make sure we're prepared for the back to school season, particularly, obviously, in AE. I mentioned OFFLINE. OFFLINE's been a strong category for us. We're winning in that area, and we're going to continue to lean into that category in Aerie. And look, intimates, we still have our—we have share. You have share. You know what's interesting as I think about all three brands is we're holding our market share, okay? And we're gaining in areas like, i.e., intimates, where that whole share has been down across the industry, and we're gaining share. Thinking about intimates for Aerie, we're excited about that category. Undies has been accelerating for us. Again, we're going to lean into these green shoots that we've been seeing, and we're prepared for back to school. On capital allocation and CapEx, Dana, yeah, we reduced the guidance for the year to $275 million in CapEx. We're really just recadencing projects. I think our initial guidance for the AE remodel program was around 100 locations. We're still going to do about 60-70 this year. Just recadencing them to preserve a little bit of cash in the environment and really reaction to our own business, but the tariff impact initially in April, we decided to recadence some capital projects to preserve some cash. Remodel program recadencing. Aerie stores, we're still looking about 30 openings. We also just recadence some technology spend as well on a multi-year basis. In the prepared remarks, we talked about the dividend in the first quarter and the ASR being completed here during the second quarter. Further outlook we'll provide later in terms of continued plans. We know the remodel program will continue into next year. Aerie openings will provide additional color as we get further into this year as well. Thank you. Thanks, Dana. The next question will come from Marni Shapiro with The Retail Tracker. Please go ahead. Thanks, guys. Can we just talk two things I want to confirm? I think you said denim is still doing well, and you had some sellouts. When you saw the weather break, did you also see denim pick up in denim shorts? Is denim doing well in men's and women's? I just have one quick follow-up on your marketing. Is that going to be weighted towards back to school and any change in the spend there? Sure. Let me just say in general for men's, we've seen some acceleration in all categories as we move into Q2. Really good news there. Shorts has still remained fairly tough for us across, again, all three brands. Hoping when the weather breaks, we're going to see some relief there, and we can then pulse on that. Denim and women's has been strong. Once we got back, and if you remember back in March, I quoted that we were out of stocks in February. When we got back into stocks, we saw the business and the momentum. Really good news there. It's really interesting in denim, and I think I've mentioned this on previous calls. We're seeing All Fits work for women's. It's great news for us. We have a strong hold in women's denim, and we've gained share. That's the good news. I want to reiterate our customer file. Our customer file in AE has grown high single digits, and Aerie, through this tough, challenging time, has grown mid-single digits. We know we have work to do on the product, and there were definitely some misses in Aerie. Late goods to the floor. I never like how that shows up, by the way, when you are airing goods. Oh, I never. I hate it. It ends up looking like what we all—we know how that looks. I know the teams, we go to—we see our misses. Starting in February, we have been reacting. Back to school campaigns start in July and move through the season. Fantastic. Just the marketing, will that be weighted towards back to school? Is that when we should start to see the new campaigns and change on AU spending? Yes. Absolutely. AE had a new floor set recently, and Aerie has a new floor set this week. Again, we want to continue to bring in the newness. That's so important for our customer. Our real marketing campaigns, you'll see more through July through the back to school season. Honestly, the new floor set that just went in is stunning and such a big change from what's been there. Congrats on that because it honestly looks fantastic. Yes. Thank you. Like I said, starting in February, we started to move fast. That is what we need to do. Thank you, guys. Thank you. The next question will come from Rick Patel with Raymond James. Please go ahead. Thank you. Good afternoon. Hoping you could talk about the outlook for promotions. You touched on growth improving as the year progresses. What does that embed in terms of promotions? Just bigger picture, how are you evaluating the potential to improve conversion with promotions versus protecting gross margins? Yeah. I think the outlook for the rest of this quarter, like I talked about, still assuming a little pressure on markdowns through promotions to get ourselves completely clean going into this back to school season, as Jen talked about. In the back half, we're still embedding a little more expectation around promotions into our gross margin expectations. Again, we haven't really guided the full year, and we'll provide more color on that in the third quarter. I will say, and we definitely look at our—we diagnosed our assortments and where we might have had opportunity in units and opening price points. The teams have been up to remixing starting in back to school and even the near end, as I just spoke about. Can you also unpack your outlook for SG&A? So it grew 2% in Q1. Two Qs planned flat. Just curious what you're pulling back on and how you're approaching the back half given expectations for better growth. Curious if you lean into that improvement or if you keep spending pretty tight here. Yeah. Again, I'll actually give a little color on the full year SG&A. Yes, we're assuming around—we're estimating or projecting about flat SG&A in the second quarter. That is true for the year too. As of right now, I'd expect SG&A to be relatively flat on the year, but where we're leaning into is customer-facing spend. To the earlier question, advertising will be up on the year. We have some exciting things coming for the kind of back-to-school season Jen will elaborate on later. There is some incremental spend in the third quarter. All other SG&A is down on the year, including compensation lines. Advertising is where we are increasing spend, and that is resulting in roughly a flattest outlook for the year. Thanks very much. The next question will come from Jonna Kim with TD Cowen. Please go ahead. Thank you for taking my question. Could you just provide more color on how the digital performed versus stores during the quarter and what you're seeing quarter to date there? As you think about sort of mitigating the tariff impact, how are you thinking about the pricing strategy as you flow through the goods at a higher price? Thank you very much. We definitely saw an uptick on the digital channel, and we leaned in there during the quarter. I will say it was a very interesting quarter. The traffic was very tumultuous, whether it was going to stores or digital. We navigated to the best of our ability, and we leaned into the digital channel for sure. We saw a nice uptick on the AE side, particularly. Again, we're going to continue to take those learnings and move forward. I think I missed your latter half of the promotional question. You phased out, so. Yeah. Just as you think about tariffs and mitigating that impact, how are you sort of using pricing as a lever there? How are you sort of balancing promotions and raising pricing in the current environment? Yeah. As Jay mentioned and as earlier, we definitely saw some impact of air and cost of goods, particularly in Aerie. When we looked forward and we, again, took our learnings, we're making sure that our cost of goods is in line, including the tariffs. I have to give a call out to the teams. We were well in front of the tariffs. We worked hard to make sure we were mitigating this risk between production, merchandising, planning. They did an outstanding job, and we feel like we're very well positioned for back to school and ready to compete. Thank you. The next question will come from Chris Nardone with Bank of America. Please go ahead. Pardon me, Mr. Nardone, your line is open. Chris, are you on mute? Oh, maybe I'm mute. We're going to move on. Our next question will come from Alex Straton with Morgan Stanley. Please go ahead. Perfect. Thanks so much. Maybe just on guidance, maybe what would give you confidence there to reinstate it? What are really the KPIs for the second quarter that you're watching to ensure that you're making progress from some of the first quarter missteps? Thanks so much. Yeah. On guidance, as we said, with the first quarter results, definitely some uncertainty still on the impact of tariffs for the rest of the year, focusing on getting ourselves right set into this back to school season. I'd imagine as we get to the second quarter call, we'll definitely be providing third quarter color. If we have a better sense of narrowing down that impact from tariffs to our gross margin, we get back to a full year number to include a fourth quarter expectation too. We'll talk about that on the second quarter call in a few months. As far as metrics go, I think there are things that we saw in the first quarter. Traffic was still relatively healthy in general. Customer counts still very healthy. AUR and conversion were the drivers of the negative comp. Those are definitely metrics we've got our eyes on here day to day between both channels. Jen and teams looking at the results every day across those metrics to see if there's adjustments that could be made promotionally, either across stores and digital. I'd say those are the metrics. Based on the driver of the negative comp that we saw in the first quarter, we have our eyes on those very closely. Great. Good luck. Thank you. Thank you. The next question will come from Chris Nardone with Bank of America. Please go ahead. Hi, guys. Do you hear me now? Yes. Yes. All right. Sorry about that. First, can you just help clarify how both brands are trending so far this quarter relative to the 2Q comp guide of down 3%? I might have missed it. I think we said it, so I think you missed it. But they're very similar. AE down 2 in the first quarter, Aerie down 4. Right now, they're trending very similar to that total guidance. Okay. And then just on margins, really quick, I think you alluded to product costs becoming a tailwind. Can you just elaborate and help quantify anything around this and how we should think about phasing in the tariff impact if it's really going to be more of a 3Q onward event or if you'll see some impact in the second quarter? Yeah. I think we talked about product costs being favorable pre any tariff impact. The tariffs, we've got the mitigated impact to this year, a couple million dollars in the second quarter, but the full year number is around $40 million, Chris. Again, a couple million dollars in the second quarter that's embedded in our current guidance. The rest of it, you could spread between Q3 and Q4. Understood. Thanks. Our final question will come from Simon Siegel with BMO Capital Markets. Please go ahead. Hey, good afternoon. This is Dan Anderson, and thanks for taking our question. Anything you could share in terms of how you're planning inventory for the remainder of the year and maybe what you're planning open to buy for the back half versus historical levels? Thanks. Yeah. As I said earlier, we're planning inventory commensurate with our sales expectations. Made a lot of adjustments through this first few months of the year to right-set things for the rest of the year. Feel very good about how we're positioned as of right now going into the back half. We do have about 30% of that open at the moment with calls coming over these next several months as we get into the around the June, July, and August period. We will be making very detailed and. Decisive. Decisive conversations together on placing those buys as we see the trend continue over these next several months, but that flexibility is key. Got it. Thanks very much. Thank you. Thanks. I think there's no one else left in queue, so that concludes our call for today. Thanks, everyone, for your participation. Thank you. Thanks, everyone. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.