American Eagle Outfitters F3Q07 (Qtr End 11/3/07) Earnings Call Transcript

American Eagle Outfitters (AEO)

F3Q07 Earnings Call

November 27, 2007 9:00 am ET

Executives

Judy Meehan - Vice President, Investor Relations

James V. O'Donnell - Chief Executive Officer, Director

Susan P. McGalla - President and Chief Merchandising Officer

Joan Hilson - Executive Vice President, Chief Financial Officer

Analysts

Jeff Black - Lehman Brothers

Todd Slater - Lazard Capital Markets

Michelle Clark - Morgan Stanley

Linda Tsai - MKM Partners

Lauren Cooks Levitan - Cowen and Company

David Glick - Buckingham Research Group

Lorraine Maikis - Merrill Lynch

Paul Lejuez - Credit Suisse

Janet Kloppenburg - JJK Research

Jennifer Black - Jennifer Black & Associates

Stephanie Wissink - Piper Jaffray

Analyst for John Morris - Wachovia Securities

Christine Chen - Needham & Co.

Presentation

Operator

Greetings, ladies and gentlemen, and welcome to the American Eagle Outfitters third quarter earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Ms. Judy Meehan, Vice President of Investor Relations. Thank you, Ms. Meehan. You may begin.

Judy Meehan

Good morning, everyone. Joining me today are Jim O’Donnell, Chief Executive Officer; Susan McGalla, President, Chief Merchandising Officer; and Joan Hilson, Executive Vice President and Chief Financial Officer, AE Brand. If you need a copy of our third quarter press release, it is available on our website, AE.com.

Before we begin, I need to remind everyone that during this conference call, members of management will make certain forward-looking statements based on information which represents the company’s current expectations or beliefs. The results actually realized may differ materially from those expectations or beliefs based on risk factors included in our quarterly and annual reports filed with the SEC.

Now, I will turn the call over to Jim.

James V. O'Donnell

Thanks, Judy. Good morning, everyone and thank you for joining us. Our third quarter was noteworthy on several fronts. We delivered strong operating margin while continuing to progress on our long-term growth plans. I am very proud of the American Eagle team. We navigated well through a challenging quarter and proved that our disciplines are in place to drive consistent results. Importantly, we also identified a number of opportunities for 2008.

Now, looking ahead, growth and profit expansion continue to be a major focus and priority for American Eagle Outfitters. We’ll achieve growth by building our portfolio of brands into market leading businesses, maintaining discipline in strategic real estate expansion, as well as creating world class e-commerce for our customers.

At the same time, we’re committed to delivering continued strong profit performance by applying our extremely high standards of operational excellence across all aspects of our business. The third quarter was an example of this, enabling us to deliver an operating margin of 20.3%, even though sales were below our original plan.

Over the past several years, we have built in significant cost improvements, processes, procedures, and technologies, which had and will continue to drive leading operating margins.

We are improving every aspect of our business, taking advantage of our scale as we grow while diligently ensuring that each growth initiative is backed by sound financial planning and a healthy return on investment.

Key operational initiatives underway include a global sourcing strategy which will support our brands over the long-term. It will enable us to deliver high quality merchandise in the most cost-effective and efficient manner. We are implementing new technologies and tools which enhance profitability and improve customer experience. Examples include product allocation tools and a new point of sale system currently rolling out across our chain.

These enhancements help us sell more product to more customers through faster check-out, real-time inventory visibility, and ready access to customer information across the enterprise.

As for growth opportunities, number one is maximizing the potential of the AE brand. We believe AE brand growth is at least a $1 billion opportunity over the next five years, and we’ll get there through a continued focus on dominating destination categories, as well as strategic new category expansion.

Aerie is also a powerful growth opportunity for us. By the end of 2007, we will have 39 Aerie standalones with over 70 openings slated for 2008. The stores are performing well, trending to over $400 in sales per square foot. This is a strong performance for a new brand. Ultimately, we see Aerie as a 500 store opportunity and a billion dollar business.

We continue to make forward strides with MARTIN + OSA, along the lines of assortment, styles, fit, and fabric. We can expect to see improved results in the spring, at which time we will assess the progress and make further refinements. We plan to open an additional 15 stores next year. Also in 2008, M+O will launch a best-in-class e-commerce website that’s been created specifically for this customer.

Establishing MARTIN + OSA as a national, multi-channel brand gives us a strong platform to generate awareness, stimulate trial, and build momentum in both the physical stores as well as the web.

Now, the next big idea, Concept 4; I’m confident Concept 4 will be a natural for American Eagle. In 2007, we completed a great deal of research and due diligence. The new concept will leverage AEO’s corporate strengths and resources and we’ll announce the brand details early next year.

Turning to AEO direct, our team is creating the best possible customer experience on AE.com as part of our truly multi-channel organization. AE.com is well over $200 million in annual sales today and contributing high profit margins. Our goal is to reach $500 million by 2010. Over the longer term, we also see meaningful growth from aerie.com and MARTIN + OSA and Concept 4.

Finally, beyond our U.S. growth, we’re evaluating plans to enter the global marketplace and I will be able to share more information as these plans progress.

Now, I’ll turn the call over to Susan.

Susan P. McGalla

Thanks, Jim and hi, everybody. The third quarter had several highlights that point to the strength of our brand and the success that lies ahead, yet at the same time there were challenges on a number of levels. We’ve identified the areas of opportunity, made changes where appropriate, and we are moving forward in the right direction.

Speaking for myself and other key leaders across the company, we’re more confident than ever about this corporation and its ability to deliver strong performance both in the near and long-term.

The AE brand continues to be our top priority as the engine of this company. The brand continued to inspire loyalty and maintained a strong emotional connection with our 15- to 25-year old customer.

Now, let me talk about the Q3 highlights. Denim as a destination AE category is a brand-defining part of our business. We continue to maintain and grow our market share by offering customers continuous newness in terms of style, fit, fashion and wash.

The latest NPD data shows that the AE brand continues to hold the number one denim market share position. In addition, we increased market share from 14% to 18% during back to school compared to last year. As a brand, we are all committed to maniacal focus, inspiration and execution around AE jeans.

Next, I am happy to talk about the AE men’s business. This continues to perform very well due to on-trend collections and powerful key items that the AE guy wants to buy and wear every day. The business is up in the high single digits overall in Q3 and we continue to gain market share in key destination categories.

Shorts were particularly strong in Q3, along with other emerging categories like sport shirts and graphics, which reinforce the importance of wear now during this time period. I’m extremely proud of our men’s team and their accomplishments.

Moving on to women’s, we continue to be a destination for our girls. However, there’s opportunity for us to do better. For example, knit is a large volume destination category that is crucial in driving the business. We simply will not rest until we own this category in women’s as we do in denim.

Over the past six months, we’ve hired new talent and reorganized our women’s business. We believe we are on track to deliver very strong spring and summer collections. We struck an important balance that hits the right mix of fashion essentials alongside with on-trend key items.

Further, we will continue to offer very high quality merchandise at affordable prices. This is how we define our value proposition for customers, which we believe is second-to-none in our sector.

On the marketing front, we are creating innovative new programs to surprise and delight our customers. 77E, AE’s entertainment channel, got off to a great start with our first original content series, It’s a Mall World. In addition to the positive feedback from customers, we saw increased traffic to our website. Next week, we launch the second original series from 77E. It’s holiday focused and it’s completely different from Mall World, and it’s also a lot of fun.

The holiday two assortment currently in stores has a strong emphasis on key items and gift-giving. We’ve introduced a new experience in gift cards. Customers can now select a gift card on which they can record a personal message. We are also offering mobile gift card checkouts in 50 of our busiest stores, and AE.com is now offering e-gift cards to create even more flexibility for our customers. E-gift cards can be ordered as late as 4:00 p.m. Eastern Time on Christmas Day and still reach the recipient before midnight.

Over Thanksgiving weekend, our AE holiday wishes promotion generated a lot of excitement and buzz. We gave away over 1 million prizes in our stores and on AE.com. Four new car winners scratched their winning cards right in our store and you can imagine the applause and cheering from customers and associates.

AEO direct sales increased 30% in the third quarter over last year. The site redesign that went live in Q3 is demonstrating significant results, making it easier for our customers to find and buy what they want in a way that’s extremely relevant to the way they like to shop.

We are very proud of the AE.com e-commerce experience. It’s a big part of our 360 degree customer focus and we are striving to be the leader in our space. If you go on AE.com today, you’ll see that we raised the bar even further with an online gift guide that allows customers to shop by outfit, price and most wished for items.

And now, moving on to the Aerie brand. We continue to gain experience getting faster, better and stronger with every floorset in every season. We are pleased with the new bra and undy fits that launched in Q3. At the end of October, we also launched Aerie Fit, our new fitness and workout line, and while still very early the initial customer response to Aerie Fit is quite positive.

And last week we launched Aerie Personal Care, which includes a complete collection of products for lips, body care, and home fragrance. We’re excited about the Aerie gifting opportunities this year and we will continue to deliver a uniquely feminine, fun, and compelling customer experience overall.

Now, let’s go to MARTIN + OSA. We’re making steady progress with the M+O brand and the team continues to gel. We’re encouraged about the potential for M+O, given the significant market opportunity with this 28- to 40-year old customer, and what we know is significant white space in the mall. Stay tuned for more information on developments in product design and assortment, marketing and e-commerce for M+O in the coming months.

Now, I would like to turn the call over to Joan.

Joan Hilson

Thanks, Susan. Even though sales came in below our original plans, we delivered a 20.3% operating margin for the third quarter. Key contributors were controlled expenses and disciplined inventory management, along with the technology and processes currently in place.

Now, let me take you through some of the key points of the quarter. Comparable store sales were up 2% versus a 13% increase for the same period last year. The AE brand comp performance was driven by an increase in traffic while maintaining a conversion rate consistent with last year.

With a lower average unit retail price, we achieved strong unit sales during the quarter. This enabled us to enter the fourth quarter with a balanced mix of holiday and clearance inventory. In fact, clearance inventory represents a lower percentage of our total inventory compared to last year.

Turning to gross margins, our rate of 47.4% was a decrease of 210 basis points. Within merchandise margins, we continued to benefit from sourcing initiatives that resulted in lower product and transportation costs. This benefit helped to lessen the impact of increased markdowns.

Also, buying, occupancy, and warehousing costs increased 110 basis points. This was primarily due to rent related to new stores. We are opening 60 new stores during the second half of the year versus 32 last year.

As it relates to selling, general and administrative expenses, it was a very well-managed quarter. We leveraged 110 basis points. Total dollars grew at a rate of 2%, compared to a 7% growth in sales. Total compensation, professional fees and supplies were lower as a percent of sales. On a rate basis, advertising increased due to a planned shift in timing of marketing events.

As relates to sales, essentially all other operating expenses were nearly flat to last year. This reflects our response to business performance during the quarter, while at the same time we invested in new concepts and opened 46 new stores.

We expect SG&A to leverage at a low-single digit comp in the fourth quarter, both the third and expected fourth quarter results reflect the strong and flexible expense management that is central to our business.

Now looking at our tax rate for the fourth quarter, we used a net operating loss carry-forward from Canadian operations to lower the effective tax rate to 37%. This compares to 38% last year.

Now let’s take a look at our balance sheet. Inventory excluding the direct business decreased 3% on a per square foot basis. This is lower than guidance provided on the second quarter call. It reflects changes to the timing of receipts and some planned reductions.

We entered the fourth quarter with a balanced mix of fresh inventory and looking ahead, we expect fourth quarter inventory at cost per foot to be down in the low single digits.

Moving on, we’ve repurchased 9.9 million shares year-to-date for a total investment of $265 million. We have approximately 20 million shares available under our current authorization.

We expect capital expenditures for the year to total approximately $250 million. Roughly one-half of this amount relates to new and remodeled stores. These stores deliver a strong ROI with payback periods within 12 and 16 months respectively.

As a result of these capital investments in our stores, we are on track to increase our growth square footage by 10% in fiscal 2007. That number is based on a total of 80 new and 53 remodeled stores. The capital plans for 2008 are expected to be in the range of $250 million to $275 million. This supports a minimum of 10% square footage growth through the opening of approximately 135 new and 50 remodeled stores. They are primarily AE and Aerie.

Our 2008 capital spend includes substantial and critical investments in supply chain, store technology and infrastructure to support AEO direct and new concept growth.

Regarding November, month-to-date comparable store sales are slightly positive. We were pleased with our Thanksgiving weekend, which was driven by positive in-store traffic. Keep in mind that it’s early in the holiday season. At this time, we’re providing fourth quarter earnings guidance of $0.67 to $0.70 per share. This compares to $0.66 per share last year.

Now as we look ahead towards 2008, we have a critical focus on expense and inventory management. On expenses, we expect to deliver greater flexibility and a lower annual leverage point. On inventory, we’re tightening our initial investments and very important, we’re utilizing our chase and trigger strategy to drive upside opportunities. Our most profitable quarters have been achieved under this operating model.

And lastly, to reiterate Jim’s comments, the operating disciplines, cost improvements, new technologies and processes which drove our leading operating margins remain intact and will support future results.

Now I would like to turn the call back over to Jim.

James V. O'Donnell

Thanks, Joan. While sales were below our plan for the quarter, I am very proud of the way the American Eagle team managed through this environment. We demonstrated flexibility in response to changing conditions. We are well-positioned for future growth and we are committed to delivering strong profit performance.

And now we’ll be happy to take a few questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jeff Black with Lehman Brothers. Please state your question.

Jeff Black - Lehman Brothers

Thanks. Good afternoon. I thought that was a very well-managed quarter, as you said. Turning to the IMU, can you tell us how much IMU benefited the third quarter and how much benefit you’re getting thus far this year? And really, can you just talk about what you are doing in terms of global sourcing and where we are on the IMU curve? It would seem we could see some more benefits from that in the coming years. Thanks.

Joan Hilson

Lower product costs really are what drove our IMU improvement up for the quarter and that was really driven by our sourcing strategy, which is around moving to new factories, as well as favorable transportation costs. So we continue to see modest IMU improvement go forward. That’s what we will build our operating models around but we will continue to drive for as much as we can in that area. We feel very good about the supply chain initiatives that Jim spoke about in his prepared remarks and those continue to be in the forefront and will continue to help us through 2008 and support our long-term growth.

Operator

Thank you. Our next question comes from Todd Slater with Lazard Capital Markets. Please state your question.

Todd Slater - Lazard Capital Markets

Thanks very much and good morning. Could you talk a little bit more about your international strategy, just in terms of what type of strategy you plan to use? Whether it’s going to be capital intensive build it yourself, or more of a capital light joint venture or license type of activity?

James V. O'Donnell

Sure. Right now, the model we’re looking at is to mitigate as much risk as possible. Therefore, we are looking more towards a joint venture with a partner or partners, depending on the destination country. Right at this particular time, we’ve had a number of conversations with specific people who have a real and genuine interest in partnering with American Eagle. They are very excited about the brand and what it could bring into their marketplaces.

And we are finalizing actually those conversations as well as the modeling of the financial venture and I’ll have more to say probably the early part of next year. But we’re moving along in a very concise and positive manner but also, we’re dotting the I’s and crossing the T’s.

International has a ring to it. We think we can participate in that arena but I am also being somewhat cautious.

Operator

Thank you. Our next question comes from Michelle Clark with Morgan Stanley. Please state your question.

Michelle Clark - Morgan Stanley

Thank you and good morning, everyone. First question is which merchandise categories in particular are you experiencing above planned levels of markdown? And then the second question, you mention being able to leverage SG&A off of a lower comp base in 2008. Can you give us a sense of what you expect the leverage point to be? Thank you.

Susan P. McGalla

Okay, Michelle. As it relates to merchandise categories that are experiencing above plan markdowns, first of all, the best thing I can tell you is that we are pleased. We are doing a lot of volume in the women’s business. We are very pleased with the gift-ability of the women’s assortment and the response we had to that over the Thanksgiving weekend, but we also take care of issues and we’ll make sure that we monitor and run the December business along the way that we like to run our business, which is strategically, according to the plan, and if we need to move through a few of the tops categories a little bit more aggressively, we will do that. But honestly, we have a good game plan for the month of December and we will manage that week to week, as is our discipline.

Joan Hilson

And with respect to the SG&A leverage for 2008, we, as you’ll recall, for 2007 our expense base was structured to leverage at a mid, and at some points in the year, a high single digit comp. We expect 2008 to fall below that level and we have deliberate expense initiatives in place to do that, largely around non-merchandise procurement activities; things like supplies, packaging, professional fees. And we are very aggressive about that and that is our strategy in terms of expense management for 2008.

Operator

Thank you. Our next question comes from Linda Tsai with MKM Partners. Please state your question.

Linda Tsai - MKM Partners

Yes, good morning. I was wondering, can you give an update on your tier product strategy as it relates to the current holiday selection? And maybe what areas you saw strength in over the weekend and perhaps where the greatest opportunities lay going forward?

And then just one quick follow-up; for the 135 new stores, can you give the breakout between AE and Aerie stores?

James V. O'Donnell

On the breakout, Aerie we right now plan to open a minimum of 70 stores; the American Eagle brand, approximately 45 to 50 stores; and MARTIN + OSA, as I stated earlier, 15 stores. And we’ll remodel 50 American Eagle stores in 2008.

Susan P. McGalla

And as it relates to our tier product strategy and how that is reflected in our holiday assortments, a couple of things. I’ll point you to examples. If you take a look at how we’re running our fleece business, the AE brand and being a destination for fleece continues to build and have momentum. And what we were able to do if you walked into our stores over the holiday weekend, we were entirely regular priced and what allows us to do that is our pricing from $29.50 and upwards reflecting value at every single one of those price levels.

And so you can see that in our destination categories as where we reflect a tiered assortment strategy, we don’t want to become a resorted brand. That’s very important. We’re very selective where we do it and it has been -- I gave you the example in fleece. As you can see what we’ve done in denim over the last several years, it is very, very largely successful for us.

Operator

Thank you. Our next question comes from Lauren Levitan with Cowen and Company. Please state your question.

Lauren Cooks Levitan - Cowen and Company

Thank you. Good morning. I was hoping you could give us some update on the impact of MARTIN + OSA on the EPS in the third quarter and if you are still expecting the same level of drag on earnings in Q4 and how you are thinking about that for ’08. Related to that, at the high-end of the guidance you would be below the long-term 15% EPS growth target that you’ve talked about on an annual basis. I’m curious if investment in MARTIN + OSA and in Concept 4 have any impact on that relative to your planning for ’08 and beyond. Thanks very much.

Joan Hilson

M+O for the quarter, the third quarter, was a $0.05 loss compared to a $0.04 loss last year. For the fourth quarter, we’re reiterating guidance on an annual basis of $0.15 to $0.17 loss, which would bring the fourth quarter to $0.05 to $0.07 loss.

As we look forward to 2008 for MARTIN + OSA, we expect the loss from MARTIN + OSA to be less than 2007 but given -- I encourage you to think about the investments and refinements that both Jim and Susan spoke of in their prepared remarks and we really are excited about that. We’re looking forward to the -- to seeing those results in the first quarter, at which point we can update you with a little more detail on what the M+O guidance will be in terms of performance for 2008.

James V. O'Donnell

On Concept 4 for 2008, it will be minimal.

Operator

Thank you. Our next question comes from David Glick with Buckingham Research Group. Please state your question.

David Glick - Buckingham Research Group

Good morning. Joan, I was wondering if you could give us a little more color on your Q4 guidance. Should we expect the same relationship to last year in gross margin and SG&A, kind of a continuation or carry-over of that relationship from Q3 into Q4? Is that the best way to think about it?

Joan Hilson

Thanks, David, for the question. Q4 guidance, it’s early in the quarter. That’s the first thing that I want to make sure that we put out there, and we have a lot of business ahead. With that in mind, the guidance reflects our current trend of the business. As we think about markdowns and SG&A cost, we are giving guidance based on performance from markdowns. Expense is positioned to leverage at a low single digit comp in the fourth quarter, so I think that’s how you should think about it as you look at your own models in the fourth quarter.

Operator

Thank you. Our next question comes from Lorraine Maikis with Merrill Lynch. Please state your question.

Lorraine Maikis - Merrill Lynch

Thank you. Good morning. You mentioned a change in the timing of receipt of inventory. Can you elaborate on why and by how much?

And then just a quick second question on the SG&A reduction; was the compensation decline store payroll hours or was that a lower bonus accrual? Thank you.

Joan Hilson

In terms of SG&A first, lower bonus is clearly a part of the leverage of SG&A but what we need to focus on here is the fact that expenses grew at 2% versus a 7% increase in sales, and that nearly all other, with the exception of advertising, expenses were nearly flat and that’s why we’re very pleased with the expense performance for the third quarter.

With respect to inventory, our inventory was down 3% on a cost-per-foot basis. Compared to our guidance, a large part of that is the timing of in-transit inventory, which as you know is a point in time inventory. We are also very pleased with the unit sell-through of our third quarter product, which really put our clearance inventory in a very strong position and kept our inventories fresh going into the fourth quarter. Those are the critical components that we’re looking at and we’re very pleased with how our inventory is positioned and the content of it as we head into the critical month of December.

Operator

Thank you. Our next question comes from Paul Lejuez with Credit Suisse. Please state your question.

Paul Lejuez - Credit Suisse

Hey, guys. Two questions; one, what are the -- maybe just give us a little more detail about the substantial and critical investments in the supply chain stores and infrastructure for direct. Did anything go wrong or have these investments always been expected to need to be made?

And second, just to piggy-back on Lorraine’s question on the bonus accrual, was there a one-time catch-up to that accrual? And what do we expect for the fourth quarter in terms of bonus?

Joan Hilson

Let me address the expense question. The bonus accrual is based on where we see our guidance for the year at this time, and so there is no one-time catch-up. It’s based on a pro rata portion of bonus through this point of the year.

Paul Lejuez - Credit Suisse

So was that [running] down all year?

Joan Hilson

Yes, it has been. And then with respect to the CapEx, Jim may want to offer some more color on the supply chain initiatives, but clearly as we look forward in our long range plan, our investments to support our new concept growth have been front of mind and clearly nothing has gone wrong in or caused us to elevate because of an issue. So Jim can provide a lot of color in terms of supply chain.

James V. O'Donnell

Basically, Paul, this is -- what we are realizing today were initiatives that were put in place over three years ago, where we made major investments and we had a conscious decision that in order to continue to be productive and fluid and meet the demands of the specialty apparel business, that we had to make some changes in our methodology as it related to supply chain, transportation, and also receipt flow into our distribution centers.

I am pleased to say that we’ve met our objectives, continue to meet them, we’re not finished yet. We are still immersed in this ongoing process of supply chain and also in updating our physical distribution centers and also our AE direct service to our consumer where we want to be considered one of the state-of-the-art businesses and we are moving and investing towards those ends.

Operator

Thank you. Our next question comes from Janet Kloppenburg with JJK Research. Please state your question.

Janet Kloppenburg - JJK Research

Good morning, everyone. Joan, I hate to beat this bonus question again, but just wondering if you would have experienced SG&A deleverage if the bonus outlook had not been reduced.

And Jim, if you could just talk a little bit about MARTIN + OSA and maybe point us to some parameters where we could feel more comfortable that the brand’s performances were improving.

And lastly, on the new concept, did you say that it would be -- that its loss would be negligible to earnings next year? Thank you.

Joan Hilson

Janet, with respect to the bonus, clearly our bonus model is set to -- we’re paid for performance and we had a 2% increase in overall expenses, so when I spoke about the details of the expense, we had a 2% increase in expenses on a 7% increase in sales. What that means is that we had very well-controlled expenses across the board and we were able to react to the business environment pretty much across every line item. They were virtually flat with the exception of marketing, which was a deliberate shift.

Our expenses are very well-controlled and we’re very proud of the teams and how we are able to continue on that discipline.

James V. O'Donnell

We’ll get the Concept 4 question out of the way, Janet. The Concept 4 will be minimal affect on earnings in 2008.

As it relates to MARTIN + OSA, I’ll have Susan address some of the specifics on the merchandise categories but we are, from an operating and also from a productivity improvement at MARTIN + OSA, we continue to make strides. I believe that the cost and the build-out of the stores, we have reduced that dramatically in a dollar-per-square foot basis without sacrificing any of the aesthetics. I believe that our expenses are becoming much more in line as it relates to store payroll and also, we’re not adding headcount into our headquarters operation. We think we have a good team there. They are well-positioned. They are gaining experience every day and they are affecting some major adjustments and some major changes in overall how we do business in MARTIN + OSA, from both an operating and from a merchandise and marketing point of view.

Susan, you may want to elaborate a little on some of the product improvements.

Susan P. McGalla

Sure. Hey there, Janet. If you come into the store for holiday, I think you’ll find that the merchandise is a very nice step forward, particularly in the women’s product where we really have talked about reinforcing femininity, outfitting, and the like and I think the men’s and women’s, it’s much better there today than it did a few months ago.

But turning our eyes to the spring and summer collections is where we feel we made a very, very informed decision as it relates to the repositioning of some of the details of what this brand is all about; 28- to 40-year old customer, a 34-year old target, which we again feel, and I mentioned in my comments earlier, is a very, very important opportunity and white space in the mall that exists out there today.

And I think that you will find the spring and summer collections have moved along in a much more major way to satisfying 100% of what MARTIN + OSA can be. And we’re very pleased about that and as Jim said, I couldn’t be more proud of how that team has come together and they are really working on bringing this brand to life.

Operator

Thank you. Our next question comes from Jennifer Black with Jennifer Black & Associates. Please state your question.

Jennifer Black - Jennifer Black & Associates

Good morning and I have a couple of questions. I wondered if you could talk about what percent of your business is accessories and what kind of opportunity you feel you have going forward. And then, you may have already spoken about this but I wondered when you are going to roll out your portable registers to all stores. And then, if we are going to see any changes in raw material costs. Thank you.

Susan P. McGalla

All right. As it relates to the percent of accessories, depending on the time of year, it fluctuates but it’s right around that 15% of the business. And as it relates to the opportunity, I think that if you go out and look at our accessories today, we have some highlights and what I consider to be some low lights. We have a few markdowns in that business but the areas, there are some things doing quite well for holiday that you’ll see out there, regular price really generating a lot of gift-ability and lifestyle extension around the AE brand, which is what we’re really excited about that accessories can do.

As we look forward to next spring and summer, particularly that summer collection, boy it looks much, much better. It looks very strong but what I will tell you is we need to continue to work on this assortment because what we have to decide to be a destination category in accessories is what we want to own as a brand. And that’s what we’re working on. We’ve brought in some new talent that has specific experience in the accessory world in both design and merchandising, which we think is going to be a big help for us as we move forward in an informed way, a much more informed way in this business.

James V. O'Donnell

As it relates to the point-of-sale rollout, naturally this time of the year we’ll not roll out any additional terminals based on not to disrupt our stores during the holiday season. We will pick back up very aggressively come January of ’08 and we will roll out as many stores as we can throughout the 2008 period with blackout dates for back-to-school and holiday. I would anticipate that at least half of the chain, if not greater than, will have the new point-of-sale systems installed by the end of 2008.

And we were cautious in 2007 on our rollout mainly because this is new technology, this is state-of-the-art, this is web-based. There aren’t too many systems that are out there that fall under that particular type of technology so we wanted to make sure that as we are embarking on a whole new horizon here that we move forward very cautiously but very expeditiously, and we feel good now that we are in a good place and we’ll be fairly aggressive in rolling them out in the balance of the chain in 2008 and into 2009.

Funny you should ask on raw materials because raw materials as a category has really been top of mind with us in our overall strategic plan for production and sourcing and we are focusing in very laser like on the entire raw materials area. We feel that there are opportunities there for us to continue to be in that arena and gain some cost effectiveness by being in front of some of the raw material issues, as well as Susan’s driving for more and different types of fabrication that will be more interesting and will hopefully be more enticing to our customer.

Operator

Thank you. Our next question comes from John Morris with Wachovia. Please state your question. Mr. Morris, your line is open. Our next question comes from Stephanie Wissink with Piper Jaffray. Please state your question.

Stephanie Wissink - Piper Jaffray

Good morning. This is Steph for Jeff Klinefelter. Just a couple of questions; Jim, for you first, if you could just talk about the productivity trends in your Canadian stores and if you are seeing any sales shift out of Canada into any U.S. metropolitan markets.

And then secondly, what you are learning from MARTIN + OSA in the process, as well as Aerie, as you consider the rollout of Concept 4. Thanks.

James V. O'Donnell

Great questions. As far as Canada, Canada has and continues to be very, very productive for us. We actually run a higher dollar per square foot in Canada than we do in the U.S. We are continuing to see that rate of growth in 2007 and we anticipate a very successful 2008.

We have really gained in market share in Canada since we introduced the brand there a number of years ago and we are very excited about our positioning there. We currently have about 75 stores. We’re going to be opening up a few Aerie stores up there. We opened our very first one up there about a month ago and it’s been very successful. So we see upside in Canada.

As far as the Canadian spend here in the United States, very little -- very little. And it’s not like Canadians are flocking to the U.S. to take advantage of the weak dollar versus the Canadian dollar, so I anticipate most of the shopping in Canada will probably be done in Canada.

As it relates to MARTIN + OSA and Concept 4, the investments that we are making, we have a very sound, definitive operating plan and financial plan for both of these enterprises and MARTIN + OSA is a business that’s up and running right now. It’s no longer a concept that’s a vision. We know what we have, we know where we want to go, and we are working diligently towards to achieve those ends.

As Susan stated earlier, we feel that spring and summer of 2008 will be a direct indicator as to the directional plan for M+O. Is it going to be the end all, is it the final day of M+O in spring and summer? No, no -- but we actually feel very strongly that it will be the first indication of where this brand is going to be positioned with this 28- to 40-year old consumer and we feel really good about it. We have the benefit of having seen the product and what it looks like and we’ve talked to enough people, whether they are external focus groups and even some people in our industry, and we feel good about it. We don’t want to be overly confident but we are staying the course.

As it relates to Concept 4, Concept 4 is being built to leverage to the maximum against the American Eagle brand and we feel that we can take advantage of some of the initiatives that we have in place that will support the new Concept 4. But Concept 4 is not going to be some version of the American Eagle. This is going to be unique and we feel it is going to be special and we are all very, very excited about it and I will be speaking to it very early next year and be giving specifics and additional color, and I’m looking forward to doing it.

Operator

Thank you. Our next question comes from John Morris with Wachovia. Please state your question.

Analyst for John Morris - Wachovia Securities

Good morning. Can you hear me?

Judy Meehan

Yeah, we hear you.

Analyst for John Morris - Wachovia Securities

Okay. This is Eddie for John. Sorry about the mishap earlier. Susan, can you talk about your position in knits so far in Q4? I know you mentioned delivering improvements for the spring and summer season but as I recall, I think there’s opportunity this year versus last year in sweaters.

Susan P. McGalla

Okay, I’m happy to talk about that. We actually had a very nice sweater year last year and we are up against those numbers. And I will tell you over the holiday weekend, again we were very pleased with how the women’s sweaters performed in terms of gift-ability and key item impact as you came into the brand.

As it relates to the positioning in knits, I think we are doing fine now. I think there are some areas that have taken a very, very nice step forward. What we are doing in the cami and tank business has been quite strong in Q3 and moving into Q4. We in a lot of ways want to own the first layer for our girl and are moving along nicely toward that goal, and it’s been a nice volume plus.

As it relates to the t-shirt side of the business, quite honestly we see a ton of opportunity there as we move into spring and summer and I think that the way we balance, and this will be the AE brand way of interpreting knits, is a balanced assortment. We want to have their favorite key item essentials -- that is the t-shirt that they grab for because they love it the most, it’s the softest and it holds up the best to the test of time, along with great interpretive fashion for the brand and that is what I feel our team has done such a good job with on the spring and summer collections.

Analyst for John Morris - Wachovia Securities

Okay, great. Thanks. Good luck for holiday.

Judy Meehan

We’ll take one more question.

Operator

Thank you. Our final question comes from Christine Chen with Needham & Company. Please state your question.

Christine Chen - Needham & Co.

Thank you. I’m wondering, in the malls where you have your Aerie standalone stores, has that had any impact on your core AE stores?

Susan P. McGalla

I’ll take that. First of all, when we open up an Aerie standalone, what we do is we have a strategic presentation and assortment adjustment that we do in the core AE brand. So the core AE brand stores will still represent Aerie because we certainly like the synergy between American Eagle and Aerie, but it is an edited assortment and I will tell you that just about in every case when we open a standalone brand, the incrementality of Aerie is there and the incrementality of both brands together is certainly there. So we are very pleased with our strategy and how it’s performing.

Judy Meehan

Okay, great. Thank you for listening and participating in the call today. Please remember we’ll be announcing November sales next Wednesday, December 5th, and we look forward to talking to you again soon. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today’s teleconference. Thank you all for your participation. All parties may disconnect now.

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