American Eagle Outfitters, Inc. (NYSE:AEO) Q1 2021 Earnings Conference Call May 26, 2021 4:30 PM ET

Company Participants

Judy Meehan - Investor Relations
Jay Schottenstein - Executive Chairman and Chief Executive Officer
Jen Foyle - President and Chief Creative Officer, Aerie
Michael Rempell - Chief Operating Officer
Mike Mathias - Chief Financial Officer

Conference Call Participants

Matthew Boss - JPMorgan
Jay Sole - UBS
Adrienne Yih - Barclays
Dana Telsey - Telsey Advisory Group
Janine Stichter - Jefferies
Oliver Chen - Cowen and Company
Paul Lejuez - Citi
Janet Kloppenburg - JJK Research Associates

Operator

Welcome to the American Eagle Outfitters First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Judy Meehan. You may begin.

Judy Meehan

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; Michael Rempell, Chief Operating Officer; and Mike Mathias, Chief Financial Officer.

Before we begin today’s call, I need to remind you that we will make certain forward-looking statements. These statements are based upon information that represents the company’s current expectations or beliefs. Results actually realized may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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 aeo-inc.com in the Investor Relations section. Here, you can also find the first quarter investor presentation. As a note, due to the significant impact COVID-19 had on fiscal 2020 financial results, our first quarter fiscal 2021 results are compared to the first quarter of fiscal 2019, which we believe is a more meaningful comparison.

And now, I will turn the call over to Jay.

Jay Schottenstein

Good afternoon and thanks for joining us today. I am extremely pleased with the pace of our business and the outstanding financial performance in the first quarter. Even as we compare to the pre-pandemic 2019, our results were truly remarkable and validate the strength of our value creation plan. We exceeded expectations in essentially all areas of the business, giving us a strong start to the year. We had a record first quarter revenue of over $1 billion, and the highest first quarter operating income in our history of $133 million, which was up 170% from 2019. Importantly, we saw strength across both the American Eagle and Aerie brands. We ran an extremely healthy business with margins hitting the highest levels in many years. The actions we took in 2020, including our strategic growth pillars combined with a favorable external environment, are having a very meaningful impact on our business.

Starting with our first pillar, accelerating Aerie to $2 billion, this quarter provided even more evidence that Aerie is the most exciting brand in retail today. On nearly 90% revenue growth, operating earnings rose well over 700%. Aerie is truly hitting its stride. We have increased digital penetration, expanded geographically, and pushed new and explosive categories like OFFLINE, leggings, and additional apparel items. As Jen will review, we continued to gain new customers at a fast clip for spending more on our brand. At this pace, we expect to hit our $2 billion target faster than expected, fueling significant earnings growth.

Second, reigniting AE. As I said back in January, American Eagle is a strong and highly profitable brand with significant opportunity for both growth and profit improvement. The first quarter demonstrated that potential. We are seeing a favorable response to our product and new marketing. While the Jeans category continues to dominate, across the brand, we’ve hit high margin rates with promotional well contained [ph]. I’m very proud of the great progress under Jen’s leadership. I know we are only at the beginning of realizing American Eagle’s full potential.

Next, customer-facing priorities delivered in the first quarter, fueled by our leading omni capabilities. Digital growth was terrific as momentum continued. We also saw an improvement in our store business as consumers are starting to get out more. Our loyalty re-launch was a homerun in producing a stronger customer experience, positive margin contribution, and higher ROI. The supply chain delivered great results even in the face of logistic headwinds. Deliveries were on time and we were able to successfully chase into top-performing items. The multiyear investment we have made in these areas continue to pay off. Our fifth pillar, to strengthen ROI discipline, is clearly evident in our results. First quarter growth in our profitability is a testament to incredible collaboration across teams. We are not taking our eye off the ball and remain focused on ensuring strong financial management as our top priority.

And lastly, ESG initiatives. I will highlight our environmental goals where we continue to make great progress. We are reducing widely [ph], utilizing more sustainable raw materials, and reducing energy to ultimately achieve carbon neutrality in our own facilities by 2030. We know sustainability is important to our customer, and it’s important to us to. Pointing on our commitment to social responsibility and I&D , this month, we awarded our first 15 Real Change scholarships for social justice. We are excited to support educational pursuits of our amazing associates who are actively driving antiracism, equality, and social.

Before I turn it to Jen, clearly 2021 is off to a great start. I am so proud of the excellent execution across all areas of the company. The past several months truly validates my belief that we have more opportunity than at any time in the past. We have two of the best brands in the industry with significant momentum, and we have the right teams and leadership in place to achieve our goals. The macro environment is favorable with pent-up demand and new trends that play to our strength. At this pace, we expect to achieve our 2023 goal of $550 million on operating income way ahead of schedule.

With that, I will turn the call over to Jen.

Jen Foyle

Thanks, Jay and good afternoon. I hope everyone is doing well. To say the least, we have had an incredible start to the year across both Aerie and American Eagle. There is clearly strong demand and momentum for our brands. Our strategies to expand into new categories, strengthen product and marketing, and fuel our brand platform are having a meaningful impact in our business. It’s truly gratifying to see strong sales and customer growth and a very high level of profit flow-through.

Let me begin with Aerie. I am thrilled by the incredible excitement and energy for Aerie and our merchandise collection. We continue to set records across the brand. Building on the momentum throughout last year, the first quarter accelerated. Sales rose an incredible 89% from 2019. The consistency we are experiencing is truly amazing. This was the 26th consecutive quarter of double-digit growth. As aerie.com becomes a go-to destination for our customers, the online business more than doubled posting a growth of 158%. Store revenue increased 36% with about one-third from new store opening.

Aerie’s active customer file expanded approximately 40% as we entered new markets and we increased engagement on social channels, including TikTok, where we saw tremendous response. With new customers attracted to our brand and demand for our merchandise accelerating, brand equity scores show growing awareness. Sales metrics were strong across the board and notably, our AURs were up 50%. High demand is driving greater pricing power. A significant reduction in promotions contributed to an over 700% increase in operating profit and a 23.5% operating margin. Across categories, we saw broad-based strength with all areas rising in the double digits. Intimates was terrific as was swimwear, where product innovation and newness are fueling demand.

Aerie’s signature leggings business is exceptional and continues to expand with the success of our new OFFLINE by Aerie activewear brand. Related categories such as fleece, tanks and sports bras are also tracking very well. Geographic expansion is a major priority and opportunity for Aerie. We opened 6 new stores in the quarter, including a new OFFLINE by Aerie store, bringing our running total of OFFLINE openings to 5 stores. We are very pleased with the early results, as Mike will review, we plan to continue our market expansion strategy.

Shifting gears now to American Eagle. As I said at our Investor Day in January, AE has a wonderful heritage defined by individuality, purpose and heart. Michael has been the harness, AE’s iconic image and update it for today’s youth. Harmonizing the old with the new, we want to leverage our dominance in jeans and focus on more outfitting. We are also optimizing our inventory for better margins.

I am so excited with the progress we have made in such a short period of time. We’ve achieved the best margin in many years, and customer demand is strengthening across all categories. This quarter, we saw a 39% increase in operating profit with operating margins rising to 20.8%. Our focus on inventory optimization and profit improvement drove merchandise margin expansion. We made better decisions around promotional activity and drove greater full-price selling. We are also pleased with the improvement in sales led by a 20% increase in the digital business. Customer engagement was up 2%, with new digital acquisitions up 17%. Demand across our jeans and bottoms business remains very strong. We continue to solidify our position as the number one brand within our demo and the number one women’s brand across all ages.

With the new denim cycle underway, we are innovating and investing to maintain our leadership position and to offer the absolute best to our customers. As silhouettes transition, I am excited for what’s in the pipeline. In the first quarter, I’m pleased to report that we had our best quarter ever in fleece and graphics. We plan to lean into this momentum in the back half of the year. As bottoms evolve, we have the opportunity to delight our customers with new styles across tops and greater outfitting. Just 6 months into rewriting our strategy, the success we’ve seen reinforces my excitement for our longer term opportunity. The team is energized and I can’t wait to share what’s in store for AE in the coming quarters.

Lastly, I can’t say enough about the great work our team continues to deliver. The dedication and drive of the Aerie team is simply amazing. They strive for greatness quarter after quarter. It’s been terrific to work with the AE team as well over the past several months. We have extraordinary talent, and I look forward to driving our vision together.

Thanks. And now, I will turn the call over to Michael.

Michael Rempell

Thanks, Jen and good afternoon everyone. I am really proud of how quickly and enthusiastically our teams embraced our real power, real growth value creation plan. The results out of the gate in 2021 are tremendous and they affirm that we are positioning our operations in the right way to fuel our next chapter of growth. At the heart of our operating strategy is a truly customer-centric focus. The investments we have made in our systems, our data analytics, omni-channel and supply chain are yielding results. I firmly believe that the strength of these capabilities and our ongoing investments are a unique competitive advantage. Today, I am going to talk about three important areas of our business: our selling channels; our customer focus; and our supply chain transformation.

Let me start with digital, which continues to post remarkable results. Our revenue rose 57% from 2019, producing incremental revenue of $150 million in the first quarter. Online traffic and transactions increased well into the double-digits. We achieved strong AURs and significantly higher margins, further fueling an already highly profitable channel. Digital penetration increased to 40% of total revenue, up from 30% in 2019. As customers continue to embrace online shopping, we are delivering an ever-improving experience. For example, we recently introduced a new TAB structure to provide greater ease of shopping across brands while enabling more immersive brand experiences. We also introduced more personalization and enhanced curbside and in-store pickup features, which yielded great results. We improved our mobile experience and redesigned our app, resulting in a 70% increase in revenue from Total Mobile.

Stores improved in the first quarter despite continued COVID-related traffic pressure. Fleet optimization work is underway and we are pleased with the initial transfer rates from recent store closures, which are running well ahead of our 40% goal. Proactive customer engagement has been a driving factor in retaining customers, transitioning them to nearby stores or online. Our customer base is extremely healthy and growing nearly 1 million new customers have been added since 2019. The average spend per customer is up in the double-digits with a greater number of customers shopping across those brands. This speaks to the quality of our engagement, our product, our marketing and technology enhancements.

The re-launch of our loyalty program last summer has been highly successful, not only in attracting new customers, but fueling more frequent engagement, more purchases and an improvement to margin. Across the board, our operational teams delivered exceptional results this quarter. As I’ve discussed before, we are highly focused on supply chain transformation aimed at improving inventory productivity, delivering efficiency and better and faster customer experience. This work is yielding results. For example, we reduced SKU counts across assortments to focus on the most productive styles, which resulted in faster turns and a meaningful increase in product margins in the first quarter. Our regional fulfillment nodes are resulting in better placed inventory, creating efficiencies and enabling faster service to both stores and to customers.

In the first quarter, we leveraged e-commerce delivery expense, had fewer shipments per order and delivered to customers 1.5 days faster than in the first quarter of 2019. Our supply chain team anticipated and successfully managed through shipping delays with very minimal disruption to our business. We also successfully executed chase strategy to replenish high-demand items and supported outperformance of Aerie OFFLINE, swimwear and a variety of fashion choices. This really speaks to the strength of our team, our capabilities and our vendor partnerships.

Now as I look ahead, we are staying in front of ongoing supply chain challenges, and we have continued to see favorability in our product costs for the remainder of the year. In light of our strengthened operations, focused on driving higher margins, inventory optimization as well as our well-positioned and growing brands, I am very confident that we are positioning AEO for continued success.

And with that, I am going to pass the call over to Mike.

Mike Mathias

Thanks, Michael. Good afternoon, everyone. I will start by saying we are obviously extremely pleased with the first quarter, during which we hit a number of all-time highs and milestones. Results were well ahead of our expectations across the board. Our strategies are clearly working and we are making great progress on our Real Power Real Growth plan.

This performance reflects a few major factors. Our brands are strong and our merchandises in demand, fueling very healthy sales and KPIs. Our inventory optimization initiatives are working, resulting in lower promotions and significant growth in our merchandise margin. Both of our selling channels are delivering positive results. And our investments in our supply chain capabilities are effectively supporting our growth. These factors, plus a favorable environment led to record first quarter performance, revenue of over $1 billion and operating income of $133 million marked all-time highs for the company. Demand for Aerie continues at a rapid pace, driving significantly higher sales, margins and profitability. American Eagle saw slight top line growth and experienced one of the brand’s highest merchandise margin rates on record with more runway ahead.

As Judy mentioned, I will review first quarter 2021 against the same period in 2019. Consolidated first quarter net revenue increased 17%. Across brands and channels, sales metrics were exceptionally strong, with our average unit retail up over 20%, fueling a healthy transaction value. Conversion rates across channels were also favorable. Digital revenue rose 57% with Aerie, up 158% and AE, up 20%. The strong growth reflects the benefits of our multiyear investments to capitalize on the customer migration to digital and omni-channel e-commerce.

Online sales for the quarter represented approximately 40% of our total mix, increasing significantly from 30% in the first quarter of 2019. Store revenue was flat, a nice improvement from the fourth quarter. Additionally, U.S. stores posted positive revenue in the quarter, with our stores in Canada affected more by lower traffic and store closures related to COVID-19.

At a brand level, AE revenue increased slightly to $728 million. Strong demand, lower promotions along with inventory optimization initiatives led to a record merchandise margin. AE’s operating profit jumped 39% to $151 million, and the operating margin expanded 570 basis points to 20.8%. These results are a clear proof point of the margin opportunity for AE, which we reviewed back in January. While the quarter showed great progress, the work continues. Jen reviewed the progress on the product side, and we still have opportunities to maximize inventory productivity. Aerie had another standout quarter with growth accelerating. Revenue increased 89% to $297 million. Operating income hit $70 million, rising over 700%. The operating margin expanded to 23.5% from 5.3% in 2019. As I’ve highlighted quite a few times now, Aerie is at an inflection point in its growth trajectory. We’ll continue to realize significant flow-through of incremental sales to the bottom line.

Total consolidated AEO gross profit dollars were up $111 million or 34% compared to the first quarter of 2019, and gross margin expanded 550 basis points to 42.2%. Merchandise margin expanded significantly reflecting continued promotional discipline and benefits from our inventory optimization initiatives. Our product assortments were well received, which enabled higher full-price selling. Rent dollars were lower and levered significantly as a result of negotiated savings, store closures and benefits from impairments. Offsetting this, we saw higher delivery, distribution and warehousing costs as well as higher incentive compensation. SG&A leveraged 40 basis points as a rate of sales. The dollar increase of $34 million from first quarter 2019 was due to compensation in line with our performance-based incentive program, an increase in corporate salaries and higher variable selling expenses, partly offset by lower travel expense.

Operating income of $133 million increased 170% compared to $49 million and adjusted operating income in the first quarter 2019. The operating margin at 12.9% expanded 730 basis points, marking a 14-year high for the company. Corporate unallocated expense increased 29% to $88 million, primarily due to incentive compensation. As a result of historically higher profit delivered this quarter, incentive accruals are higher than normal and up against the minimal accrual in 2019. Adjusted EPS was $0.48 per share in the quarter, marking a record first quarter outcome for us. Our diluted share count was 207 million, and included 34 million shares of unrealized dilution associated with our convertible notes.

Ending inventory was up 2% compared to the end of the first quarter of fiscal 2019. American Eagle inventory was down 15% due to continued inventory, optimization initiatives and a significantly reduced clearance level. Aerie’s inventory increased approximately 50% versus 2019, supporting the strong sales growth, new stores and product expansion, including OFFLINE by Aerie. Across brands, inventory is well positioned and below current demand levels. As Michael said, we are comfortable with our ability to receive goods to our supply chain and have successfully taped into strong items.

I am very pleased with our liquidity and the health of our balance sheet. We ended the quarter with $792 million in cash and short-term investments. Even excluding proceeds from the convertible bond issuance, our liquid cash balance is up $36 million versus 2019. Capital expenditures totaled $37 million in the quarter. For 2021, we continue to expect capital expenditures at $250 million to $275 million, in line with the average annual target we shared at our investor meeting. We expect us to be back half loaded given the timing of Aerie and OFFLINE new store openings.

Regarding our store fleet, we are pleased with the transfer rates of recently closed locations and continue to expect incremental closures this year. We have had productive negotiations with landlords who have continued to secure lower rents and build flexibility into the portfolio. The vast majority of our 2020 renewals were short term, resulting in almost 450 leases coming to term in 2021. This year, we plan to open approximately 60 Aerie stores and over 30 OFFLINE by Aerie stores, which will be a mix of standalone an Aerie side-by-side locations.

Now as we look ahead, we are encouraged by our continued trend early in the second quarter. Both brands continue on a healthy pace. There is still uncertainty ahead. But as we reflect on our 2023 targets provided back in January of $5.5 billion in revenue and $550 million in operating profit, we believe we are on pace to achieve the profit goals this year, obviously, well ahead of expectations. We are excited about this prospect and what it could imply for our future profitability as we continue to implement and execute on our long-term growth strategies.

As a reminder, our reported second quarter 2019 results included a $40 million benefit to revenue and $38 million benefit to operating profit from the termination of our licensing partnership with a third party operator in Japan. We are extremely pleased with the speed and success with which we are putting our Real Power Real Growth plan into action. As I said back in January, I believe we are heading to the most exciting period in our history. Our brands are stronger than ever, our business model is sound and our first quarter results bear testament to the quality of our strategy and strength of our execution.

With that, we will open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Matthew Boss with JPMorgan. Please proceed with your question.

Matthew Boss

Great. Thanks and congrats on the momentum. So, maybe to kick off, Jay, I guess help us to characterize the magnitude of business momentum, acceleration that you are seeing in the second quarter relative to the 17% growth in the first. But then I think larger picture, I don’t – I am just curious, your view, how sustainable in your opinion is this demand recovery for overall apparel? And just any thoughts then on the potential for a denim-led fashion cycle on top as we think forward?

Jay Schottenstein

Okay. And I think, first of all, we think it is still rolling and strong as it did in the first quarter. So, so far, in the month of May, we are very pleased. Look, I am really optimistic. I think our best days are ahead of us. I see great potential. I see great potential in American Eagle by itself. Aerie is on fire. Our goal was in by 2023 to be a $2 billion Aerie company, and then I think we’ll be there within the next 12 months. It’s very strong. OFFLINE is starting out great. We think OFFLINE has the potential to be like another Aerie. So, we are very optimistic. [indiscernible] everything is going on the right way. It’s not just one area of the business. It’s not just merchandise drives the business, you have to have strong logistics with it, you have to have strong sourcing. And in every area, it’s strong right now. We are adding more customers. Our loyalty program is getting bigger, and we are very excited. I mean, this is probably the greatest time in this company’s history.

Matthew Boss

Wow. And then just maybe a follow-up on the accelerated operating margin target commentary, to be clear and as we think about being ahead of the schedule, I am just kind of making sure as you talk about being ahead of schedule, you are also not citing the target as a ceiling. So, maybe what do you see as pie in the sky or any structural impediment as we look back, 2012 was 14% operating margin? Just kind of maybe any thoughts on where could you see operating margins for this company over time?

Mike Mathias

Thanks, Matt. It’s Mike. Look, I think we just gave guidance that we think we will hit $550 million this year that we put out just 4 months ago for the end of 2023. So, we couldn’t be more excited about that and then what that would mean in terms of probably re-rolling plans and talking to you at the end of this year about what the new targets for 2023 should be. And within that guidance, we are not talking about the revenue line of hitting the $5.5 billion for a reason. It’s not completely out of the realm of possibility, but we – I think things have really have to kick in the back half of the year to hit that number. So we are basically saying, we will be at 10% or a double-digit company this year, and there is a good chance that, that could be – we just hit almost 13% in the first quarter. Typically, the first and third quarters are a little higher operating margin because the second and fourth quarters are our sort of inventory end-of-season write-down periods. But not out of the realm of possibility, we could actually hit double digits every quarter this year, I think. So, we are basically saying that this year, double-digit, that 2023 goal also met with the $550 million target. And I guess the other thing I will say and I don’t know if anyone else is doing the same math we are doing here around Aerie flow-through. But if you go back to January, we talked about the Aerie target for 2023 implied about a 20% flow-through of Aerie revenues bottom line, I think you and others asked if that was conservative and you think it could be higher. We just generated over 40% flow-through in the first quarter, and I am not saying that’s going to happen every quarter. That’s something you should expect to happen every quarter. But the flow-through of Aerie and the impact to our operating margin, basically as we answered your question directly, I’m not really sure how high is high. So, I think those will be things we’ll address later in the year and we’ll come back around with targets. But we are going to be in the double-digits this year and I think it just means that as we re-roll 2023, 10% is going to be way too low. We will see what double-digit means and we’ll talk about that later.

Matthew Boss

Alright, great. Best of luck.

Operator

Thank you. [Operator Instructions] Our next question is from Jay Sole with UBS. Please proceed with your question.

Jay Sole

Great. Thank you so much. I guess if you could just elaborate a little bit and take us through some of the categories at Aerie maybe through the intimate apparel and then some of the other swim and more seasonal stuff, tell us how those did, that would be super helpful? Thank you.

Jen Foyle

Yes, hi, Jay. Look, I am sitting here looking at this incredible spreadsheet and looking at the numbers. And I have to proudly say that every category in Aerie delivered high double-digit comps, if not triple-digit comps. We are just seeing such great acceleration in this brand. I mean, think about it, we picked up $150 million essentially over the past looking at 20I [ph]. Just this incredible momentum and everything is green. I love when I see green, right. We are just – it’s incredible. And this team is just working so diligently. I wasn’t kidding when I said in my script that we continue to drive harder, faster, and smarter, and that’s what we can do to stay in our lane and look ahead. I do want to hit on swim, though. Who would have thought? I still don’t think we’re fully ready for spring break, and I have faith that next year, we are going to even have a better spring break because people will be vaccinated. And we sold swim like it was our best swim year ever. The margins were the highest ever. In fact, in all of our categories, margins were the highest ever, still outpacing our inventories in sales and swim just was exceptional. The team really delivered there. And I am proud to say 60% of that line is sustainable. So we will continue to grow that business in a greener way. And just it’s incredible what I am seeing and don’t forget about OFFLINE. That business, we only have a few stores out there, but the momentum that we are seeing. Again, we are in the triple-digit zone here, and there is so much more work to do. It’s an immature brand and we just see opportunity ahead of us.

Jay Sole

Got it. If I could just ask one more, Mike, you gave us a lot of great color on the year in terms of getting to your goals ahead of schedule. Is there any color you can give us on second quarter gross margin and SG&A, just to round out the guidance a little bit more to give people a feel for kind of what you are seeing in the near-term?

Mike Mathias

Sure. I think start with SG&A first. I think the growth in SG&A will be similar. We were about mid-teens in Q1. Obviously, sales trajectory, variable expenses, incentive compensation will probably be part of the story again. So, it will be similar from an SG&A growth perspective in the second quarter. On gross margin, the 42% plus that we hit in the first quarter, I think the improvement over ‘19 could be similar, but that would imply like a 39% plus something more in that range. Again, second quarter being the end of season come spring inventory write-down period for us. We will see how it progresses here into the quarter, the rest of the quarter. July is still a big month for us, but similar gross margin improvement, but the 42%, we are not expecting to hit that, probably something more in the high 30s.

Jay Sole

Got it. Okay. Thank you so much.

Mike Mathias

So, I think the flow-through to operating margin is driven when you think about – I think there is SG&A leverage implied there, significant gross margin improvement, I think the operating rate commentary we just gave earlier, we have our sights on double-digit again still.

Jay Sole

Understood. Thank you so much.

Operator

Thank you. Our next question comes from Adrienne Yih with Barclays. Please proceed with your question.

Adrienne Yih

Good afternoon. I have to add my congratulations. Jen, the stores, both concepts are great. So, Jen, I actually wanted to talk to you about this, also talked about now silhouette shifts going from being over little to little over big. We are seeing a lot of it. We knew that was happening right in ‘17, ‘18, ‘19, but it seems like it’s really coming into the mass adoption phase. How strong are you seeing that trend emerge now and what percent of the denim offering is currently in kind of wire leg and non-skinny bottoms? Thanks.

Jen Foyle

Hi, Adrienne. How are you? Look, I feel just incredibly excited about the denim opportunity. Back in September, we were seeing the shift wider, looser denim fits, more fashion accelerating. I would like to say, my timing was of the essence, because in September, we immediately shifted into these silhouettes. We have seen these bodies in both men’s and women’s. We can’t forget about men’s. Their active slim is doing great. But mostly, predominantly women’s were really seeing the shift. Again, we were able to react. This team has just an amazing, amazing test and scale strategy in denim. We just – the diligence there and our ability to respond and react to this trend is like no other. And we have been capturing it. The denim trends certainly exceeded expectations in Q1 because of this. And we are going to continue to drive that business as we look ahead. We have completely shifted our mix. We feel really great about it. Everything we are seeing on paper is telling us that back-to-school should be great and there will still be some tailwinds there with the new incentives for customer spend. So we are looking forward to back-to-school. Look, our mix, I am not going to share that secret. I can’t share that secret. I will tell you that it’s definitely penetrating higher than we have seen in years and we are pretty excited about it, Adrienne. So – and think about the opportunity in outfitting now, too and we are doing things that we have never done before, testing the outfit, testing what goes back to the denim. We are fitting with the tops. We are doing all the things that are right so that she can go out looking perfect. And that’s the work that’s underway right now. And I can tell you, I think it’s only going to continue. I am sitting in the office right now with an incredibly excited American Eagle team. I reviewed spring men’s and women’s assortments. And boy, we have got some great things in store. So, it’s up to us to continue to learn, remain humble and go for it when the timing is right.

Adrienne Yih

Excellent. And Mike, really quickly, just on inventory, what – just a clarification, the down 15% was what period of time? And it sounds like you are very comfortable with supply – that supply going into the back half of the year. You have managed through the supply chain disruptions quite nicely in the first half. What gives you the confidence that you will have visibility and access to all the inventory that you need from a case perspective if business were to be better?

Mike Mathias

Yes, thanks. I can hit the specifics on the inventory at the end of the quarter and Michael can take the second part. But – so yes, inventory was down 15% in the American Eagle brand at the end of the quarter, Then Aerie was up 50%, with the result being plus 6% in total. So I think that feels – and that’s versus 2019. So that’s – if that’s your question you’re asking. Everything we’re talking about here is against ‘19. 2020 not a whole lot of relevant compares to talk about anything. So, Eagle brand down 15% against 2019 on the flat revenue results, Aerie inventory up 50% against 2019 on the plus 89% revenue. And Mike?

Adrienne Yih

Yes. So clean.

Michael Rempell

Adrienne, I would just say on the inbound side, like I said before, our team is reacting very quickly, very aggressively. Worked with our factories and diversified our carriers. So while we do have longer inbound transit times, we have had fairly predictable inbound transit times. We see a very clean flow of product coming in for summer and back-to-school. And I expect the way we’re operating, the way we’re booking and with the agility that the team is executing with, we’re not anticipating delays to get – to be an issue for us at all. In fact, the ports have more or less cleared up and the flow of goods now is better than it’s been all year.

Adrienne Yih

Great to hear. Best of luck.

Michael Rempell

Okay, thank you.

Operator

Thank you. Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Dana Telsey

Hi, good afternoon and congratulations on the nice progress. One of the things that you had been talking about is SKU rationalization. Where are you in the SKU rationalization? And where do you see that developing? I think you had once mentioned that around 95% of revenues at AE comes from 40% of SKUs. How do you see that transitioning this year and the progress there? And then any further update on the logistical improvements with supply chain? And are you getting the inventory that you need when ordering for this upcoming back-to-school and holiday? Thank you.

Michael Rempell

Hi, Dana, thanks for the question. It’s Michael. So I’ll take that. First of all, on SKU rationalization is a great question. If you look at the first half of the year, what our team has really done brilliantly is reduce the number of customer choices we have in the business. So if you look at what’s happened within this inventory mix, what’s hidden is that we reduced customer choices about 25%, but yet bought the choices that we did buy 25% deeper, okay? And what that means is we cut out a hugely unproductive tail, of choices that had lower markups, lower maintained margins and funneled it into the items that Jen and the team were most passionate about, that we had the best costing on, that we knew we can maintain good in-stock levels on. And that’s part of what fueled our results in the first half, and we see a ton more opportunity to do this in the back half. And to tie it into your question about logistics, it’s really driven by the confidence we have in the new logistics capabilities that we built. So I’ve talked before about the fact that during 2020, we unveiled the new playbook for supply chain transformation. We opened these distribution nodes in the fourth quarter. We implemented new systems. We brought in new talent. And we positioned inventory closer to the customer. In doing that, we actually pulled 3 weeks of supply out of stores, and we’re able to maintain in-stock while really having a lot more flexibility with that inventory. So the inventory that we bought, we made way more productive. We’ve replenished stores much faster. We shipped to customers about 2 days faster. We reduced our delivery costs because our e-commerce shipments were coming from local markets, in some cases, using regional carriers. And in all cases, we reduced the number of shipments that we were sending for each order a customer place. So I know it’s a lot. I can go on all day about change on information, but the inventory – I guess the point is the inventory reduction and the changes we made to supply chain are structural, and their capabilities that we deployed last year that we expanded in the first quarter, we’re going to be able to build on throughout the year.

Dana Telsey

Thank you.

Operator

Thank you. Our next question is with Janine Stichter with Jefferies. Please proceed with your question.

Janine Stichter

Hi, congratulations and thanks for taking my question. I’d like to ask specifically about the American Eagle brand. I think in the outlook that you’ve given, you’re talking about Eagle revenues being flat with 2019. But now we’re starting to see the brand grow again. So just curious how you think about maybe the upside potential for the Eagle brand. And then I would also have a little bit more color on the quarter-to-date trend. I think you said that business has accelerated. So just kind of curious if you could opine on what might be driving that. It would seem that May results would be kind of the cleanest performance we can get without any sort of impact from stimulus. So just some thoughts on what you think is driving that acceleration? Thank you.

Jen Foyle

Sure. We set a plan back during our Investor Day and with AE, and I feel like it’s a really solid plan. I mean – and we are over-delivering to this plan, which is really nice to see. It was about bottom line growth in American Eagle and accelerating the Aerie brand. Now that said, it doesn’t mean that we’re not going to try to continue to grow AE. I love what I’m seeing. First of all, we’ve assembled a team. Much talent already existed here. And I’d like to say now we have some new additions, including a new head of design with the team that we are going to continue to innovate and develop the best product out there in the marketplace. And I can tell you right now, I said it on my last answer, I am seeing spring ‘22 as I sit here in this office and this team over-delivered to my expectations. So now it’s all about a measured approach with our inventory. Taking those incredible learnings that we’ve had from the pandemic, post-pandemic as we head into 2002 [ph] how are we going to be smarter with our inventory? We have such great learnings. And then how are we going to grow these categories that we potentially under-penetrated in a smart and thoughtful way while we, of course, at any time, maintain our margins that we’ve just developed that are incredible in today’s world. So that said, as I look ahead, we do have some nice improvements even as we look into May. Shorts and some other categories have improved. And we continue to work on our marketing strategies. We’re going to market better than ever. We had one of the best marketing strategies. Actually, we’ve had, in fact, the best, the Outer Banks campaign with American Eagle brought much brand awareness, incredible social awareness to our brand. I’d like to see what I’m seeing in retention. Customer spend is through the roof here. Our AURs are up. So this is what we have to think about for the future and continue to deliver that product that they want to see quality first, always and continue to look ahead in the future. So I’m excited about what I see.

Mike Mathias

Janine, the only thing I’ll add to that, Janine, is Matt asked about targets, and I talked about total company in Aerie. I think what you – like what Jen said in AE’s target need updated, too. So that’s something we’ll be talking about again later this year.

Janine Stichter

Thanks for the color.

Operator

Thank you. Our next question comes from Oliver Chen with Cowen and Company. Please proceed with your question.

Oliver Chen

Hi, thanks. You made a lot of great progress in supply chain optimization. Just would love your view on key catalysts there going forward. And then at the AE brand, would love to hear about the men’s product and what innovations ahead and where you would say it is relative to where you want to be at tops and bottoms. Thank you.

Michael Rempell

Alright. Hey, thanks, Oliver. As far as supply chain optimization, like I said, I really believe, although we have a great start and we’re delivering results, we’re really just scratching the surface on what the potential is. So making our inventory more productive, improving service to our customers and reducing the cost of doing business is something that, Jay, myself, our Head of Supply Chain, we’re extremely focused on. And we think there’s a lot more opportunity to expand the distribution presence, improve the systems we have. And we’re looking at some other pretty interesting capabilities that I can’t talk about now but perhaps on the next call that we think are going to add both scale and ultimately, cost savings to what we’re delivering in supply chain. So there is a lot more opportunity, I expect that we’re going to see continued improvement throughout the year. And the second part of the question was?

Jen Foyle

Hi, Oliver, how are you? Oliver, as I mentioned, we continue to outpace our best-evers in jeans. It’s incredible. Oliver, we’ve seen such an incredible business in men’s jeans as well as women. so really proud of that momentum. Look, our focus is on getting those outfits right. Fleece certainly had an incredible quarter. Graphic tees are really hitting resurgence and we’ve really focused on that for the go-forward deliveries and we keep on innovating there. We’re really – we’re taking that business to what I would say, more of a 3-dimensional business. RTs have been really outperforming incredibly well, and we’re focusing on new qualities there for the future. So I guess my point here is we still have some opportunity here, and we’re going to certainly deliver and again, pace our inventory so that we can outpace the sales with under pacing our inventories. And that’s where we’re going to continue to win with just this incredible business model that we’ve developed, so more to come here. I think you’re going to be really excited with what you see for back-to-school, and I hope our customer loves it as much as we do.

Michael Rempell

And Oliver, just to come back to that supply chain question one more time. One thing I wanted to mention that we haven’t talked much about, but I do think it’s a huge strategic lever for our business is we’re looking at returns and the opportunities around returns as actually, a big strategic opportunity for the company. So obviously, with digital sales increasing, many retailers are dealing with increased returns. Our challenge is how can we make that a great experience for the customer, how could we refund money quickly, how can we get that inventory returned quickly and back into the spot where we’re most likely to sell it? Our team on boarded a new partner to help us meet some of these challenges. We implemented some new technologies in the quarter. And we’re seeing both digital returns as a percent of sales go down as well as we’re getting that inventory back into a position where we can sell it much faster than ever in our history. And I think as the business grows, that’s going to be an increasingly big opportunity for us.

Oliver Chen

Very helpful. Jen, just a last question, body positivity and authenticity, you’ve been a real leader there. What do you think is next to stay innovative? And what do your customers want as you continue to evolve the strong sense of community across the banners?

Jen Foyle

Yes. I think in both brands, we have opportunity to continue to drive that side of our platforms, AE with individuality and Aerie being AerieREAL. I mean when we think of the term real, there’s endless opportunities. And Oliver, we’re really trying to stay ahead of the curve there because as you can see, competition is following close behind. And look, we were there first. So we owe it to our customers to continue to excite her in new ways from a marketing perspective. This last real campaign that we launched, Oliver, it was incredible, 8 billion impressions from our customers, from our community coming into our Aerie business, and no surprise that our customer acquisition was up 40%. So that’s how we have to stay ahead of our competition, right? We need to get new customers into our brand in Aerie. Retain customers in American Eagle is a huge strategy for us. As we get these new customers into Aerie, that’s how we’re accelerating this top line. And as Jay mentioned, we’re going to hit this $2 billion. If nothing else fails out there and that we can continue to deliver with what we’re doing earlier than said. I think it’s because we are attracting new customers, we’re going into new markets. We’re turning around with our platform, the platform that we own in Aerie and the platform that we’re certainly proud about. But we certainly have new ideas in store, Oliver. I can’t share, but we’re pretty excited about what we’re about to see here.

Oliver Chen

Thanks, Jen, thanks, Michael.

Jay Schottenstein

And Jen, if I can add one thing, it was only 3 months ago we had a celebration in January, celebrating our $1 billion mark in Aerie. And here, we’re talking about the next 12 months to be celebrating $2 billion mark, a major accomplishment.

Jen Foyle

And the new brand that we launched in the pandemic, I just – who would have thought? It just – it speaks volume that how this team is so dedicated to our platform, to a business that certainly is like no other. And I think there’s just so much in store. And let me just say, what I’m seeing in American Eagle, I’m starting to see that passion. The heritage come back to that brand and that just drive to deliver newness, uniqueness, quality, quality over quantity, the quality of the sales, the quality of our product. I think that’s where we’re going to win, Oliver.

Operator

Thank you. Our next question comes from Paul Lejuez with Citi. Please proceed with your question.

Paul Lejuez

Hey, thanks guys. I am curious how you are thinking about gaining share in denim, just to take advantage of the trend? And how do you think about share versus targeting margin improvement, both near-term but also second half and beyond? And then I think you said the AUR was up 50% at Aerie. How does that break down between lower markdowns versus mix? And just where are merch margins at Aerie now versus Eagle? Sorry if I missed that.

Jen Foyle

I don’t know if I caught all your questions. First of all, I mean, in both AE and Aerie, our promotional cadence was non-existent, I would like to say. We took the biggest risk ever in a time period where competition will be fierce, as you can see by the numbers out there. There are some tailwinds for all the brands out there, and that’s a great thing for the retail sector. I can only say that. We stand apart, though, I’d like to say, with the numbers that we just delivered. Look, it is about the mix. It’s about being smart about the way we mix the business. But the AURs up 50% certainly are impressive. And I’d like to add that in AE, our AURs were up 23%. As I think about denim and the future of denim, look, it’s our job to maintain our market share in denim. We talk about this daily. We want to be the go-to denim destination, not only in this country, but in the world, lots of opportunity out there. And as we deliver new fits and new categories in denim, they trust us, right? They come to us for our fits, for our quality, for our price value equation. So we’re not going to walk away from the market here overnight. It’s something that we continue to focus on, as I mentioned. Women’s, we are the number one in all ages. And in men’s, we sit number one in our age demo. So, opportunity there. That’s something that I am excited about. As we deliver some new washes that might be a little bit more long-term for an older customer, I think we’ll see new customer acquisitions there as well. So, pretty excited about that. And again, talking back to just the outfitting opportunity with this denim business on the rise, and we’re seeing this acceleration. Certainly, there’s opportunity in tops in both genders. So I hope that everyone’s going to be excited about what they see with these upcoming deliveries.

Michael Rempell

Right. And Paul, those things are not mutually exclusive to us. So we’re very confident that we can grow market share in jeans as well as grow margin in jeans. We believe we proved that in Q1. And look, it’s a great setup for the back half of the year, knowing how strong the denim trend is, the fact that we’re the number one denim retailer in America. It’s – we’re going to – Jen has a beautiful and the team has created a beautiful assortment. We’re going to sell a lot of jeans and we’re going to get paid for the product. So we feel like it’s a perfect setup for us to both gain share and grow margin.

Mike Mathias

And Paul, to add here, I don’t have in front of me the exact mix between – or the exact countries in AUR from mix and AUR, the AUR growth in both brands. When you look at 20% in AE and 50% in Aerie from – on a dollar basis that’s similar increases. So, both brands contributing significantly to total company merch margin expansion and gross margin expansion. I will say that the penetration of OFFLINE to Aerie is a nice add to AUR and margin mix. So as OFFLINE continues to penetrate higher, we’ll see continue to see benefits there. And I can say that actually merch margins are similar. Aerie in the first quarter is actually a little bit higher merch margin rate than AE.

Paul Lejuez

Thanks, guys. I appreciate it.

Judy Meehan

Thank you. Alex, we can take one more call. Alex?

Operator

Thank you. Our final question is from Janet Kloppenburg with JJK Research Associates. Please proceed with your question.

Janet Kloppenburg

Hi, good afternoon. Congrats on a great quarter. I wanted to ask about the cost structure, the lower win, how much more opportunity there is there and the favorable input costs. Others are seeing some pressure. So I’m just wondering to what extent those advantages exist for the remainder of the year. And for Jen, I was wondering if you could give us a glimpse that up OFFLINE and how it’s performing and whether you obviously, are performing well. But whether you think – it’s there is a big distinction between this performance within the Aerie store as approach to it as a standalone? Thanks so much.

Mike Mathias

Yes, I can start with the rent piece of it. The rent dollars were down in the quarter in the first quarter. We’re expecting – which meant significant leverage in our buying and occupancy costs and then a big piece of the expansion of gross margin was rent. We’re expecting the same thing to continue in the second quarter and quite frankly, all year with rent dollars for the year being lower than 2019. I think there’s still room. More to be had where we definitely – as we talked about evaluating the closures from this past year, we will be closing more stores. So as we look at this in the future, we do believe rent dollars will continue to be a tailwind for us and leverage of continuous contribution to gross margin opportunity.

Michael Rempell

And Janet, on the markup and the input costs, we do see higher input costs. But like I said, we have markup benefit in the first quarter, and we’re expecting market benefit all year. Our sourcing teams did a great job negotiating, we platformed fabrics and yarns very aggressively and very early. And the assortment strategies, like I was talking about, we just – again, we cut off a tail of inventory that was a lot less productive, had lower markups, had lower maintained margins, and we’re leaning into the stuff that has higher markups and margins. So that’s working in our favor. And finally, Aerie, just the growth of Aerie provides natural markup benefit for the business. So the more we get economies of scale in that business, the more we’re going to see markup benefit for the company. So I’m expecting benefit that’s able to overcome the raw material costs and the higher inbound freight costs all year.

Jen Foyle

Yes, hi, Janet. How are you?

Janet Kloppenburg

Hi. How are you?

Jen Foyle

I am doing well, Janet. So let me just say that we tested various store formats, and all of them exceeded our performance and our expectations. We’ve been in same malls as Aerie, OFFLINE and Aerie. It only allowed us to actually build a bigger, more robust assortment in Aerie, and really allowed us to leverage some of our tried and true businesses in Aerie, i.e., bras, undies, fleece, so we could actually add dimension there. And then with OFFLINE, in the same mall, we saw same comps in Aerie as we did on the average base. And then again, like I said, OFFLINE just exceeding our expectations. So we’re opening 60 stores this year combined, OFFLINE roughly 30. Some of those will be side-by-side, Janet. So obviously, we like what we’re seeing. The comps are incredible, and we’ve had some viral activity. I’m not sure if you saw that TikTok. I mean, it was amazing. We can’t keep that legging in stock, and we built that franchise business into other categories as well. And it’s just been a breakaway for Aerie this quarter, and we’re certainly going to accelerate that into the next. But our leggings are like no other. Honestly, the quality, price value equation and think about just this market cap opportunity in activewear. I think we launched it at the right time. We are ready to go, and now we’re going to continue to accelerate.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Jay Schottenstein for closing remarks.

Jay Schottenstein

Okay. Thank you, operator. I’d like to reiterate, we are really thrilled with the momentum we are seeing across our business. As Mike said, we’re on track to achieve our $550 million operating profit goal for the total company this year ahead of expectations. Coming off a record first quarter, demand for our brands remains very healthy with business accelerating quarter-to-date in the second quarter. Our Real Power Real Growth Value Creation Plan to improve profitability at AE on few areas expansion is driving results and we know we have the right strategy and as you can hear the passion and the people in place to win. Thank you for your support and your investment in AEO. I hope everyone stays healthy, and look forward to updating you on the strength of our business next quarter. Thank you.

Operator

This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.