American Eagle's (AEO) CEO Jay Schottenstein on Q4 2017 Results - Earnings Call Transcript

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American Eagle Outfitters, Inc. (NYSE:AEO) Q4 2017 Results Earnings Conference Call March 8, 2018 9:00 AM ET

Executives

Judy Meehan - Vice President, IR

Jay Schottenstein - Chief Executive Officer

Chad Kessler - Global Brand President, AE Brand

Jen Foyle - Global Brand President, Aerie

Bob Madore - Chief Financial Officer

Analysts

Anna Andreeva - Oppenheimer

Shoshana Pollack - SunTrust Robinson Humphrey

Rebecca Duval - BlueFin Research Partners

Kate Fitzsimons - Royal Bank of Canada

Paul Lejuez - Citigroup

Susan Anderson - B. Riley

Tiffany Kanaga - Deutsche Bank

Omar Saad - Evercore ISI

Courtney Willson - Cowen & Company

Dana Telsey - Telsey Advisory Group

John Morris - BMO Capital Markets

Janine Stichter - Jefferies

Julie Kim - Nomura

Janet Kloppenburg - JJK Research

Operator

Greetings and welcome to the American Eagle Outfitters’ Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

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

Judy Meehan

Good morning, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Chief Executive Officer; Chad Kessler, Global Brand President of the AE Brand; Jen Foyle, Global Brand President of Aerie; and Bob Madore, Chief Financial Officer.

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

Also, please note that during this call and in the accompanying press release, certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted to the company’s website at www.ae.com in the Investor Relations section. Here, you can also find the fourth quarter investor presentation.

And now, I’d like to turn the call over to Jay.

Jay Schottenstein

Okay. Good morning, and thank you for joining us.

I’m pleased that we ended 2017 with strong momentum. The fourth quarter was our best of the year. Sales accelerated and fourth quarter comp sales increased 8%. Adjusted EPS grew 13% and was on the high end of our guidance. 2017 was our third straight year of positive same-store sales.

I’m proud of how quickly the teams made adjustments to the business after a challenging first half of the year. This resulted in a recovery of strong sales growth in the second half. American Eagle and Aerie both posted positive brick-and-mortar comps, capitalizing on improved mall trends.

We also demonstrated exceptional growth online. Our fourth quarter gross and operating margins continued on attractive consistent sequential improvement. And as Bob will discuss, we expect this positive trend to continue into the first quarter of 2018.

AEO is in excellent financial condition. We ended the year with $414 million in cash and no debt, reflecting confidence in our growth potential and strong free cash flow. Today, we announced a 10% increase in the cash dividend.

Our financial strength has enabled us to invest in our brands, talent and omni-channel capabilities. As a result, we are operating from a position of strength, and we continue to advance what I believe are the best specialty apparel brands in America.

The American Eagle brand has emerged as a true leader in specialty apparel with more growth ahead, not just in America but globally. This spring, we opened in India, and we will continue to grow our global footprint.

Getting AE jeans in the hands of more consumers is our goal. Aerie is one of the fastest-growing brands with a very exciting and long runway ahead. We’ll be accelerating our investments in Aerie to expand our market presence and fuel very strong customer demand.

We’re also investing in our selling channels. Digital sales rose over 20% in the fourth quarter, reaching record levels. This marked our 12th consecutive quarter, a double-digit growth. We achieved two of our highest volume sales days over the holidays with seamless execution. I’m proud to say that we operate one of the best e-commerce sites in retail at $1 billion in sales with strong profitability.

It is also encouraging to see better sales trends in the brick-and-mortar channel, and we are continuing to invest in our store fleet. It is becoming increasingly apparent that the best go-to-market strategy is the combination of digital and physical store experiences.

We will focus on optimizing our business market-by-market to ensure we have the right stores in the right location. For AE, we are working on updating our store design to strengthen the appeal and bring a more engaging customer experience.

Our pillars of growth are proven and firmly in place with center in driving market share and profit growth. They are, leverage our leading position in AE jeans and bottoms, increasing our customer reach, accelerate Aerie growth, strengthen customer experience engagement and deliver financial returns to create shareholder value.

I believe now is our time. We have never been stronger as an organization and never as well positioned for sustained success. American Eagle and Aerie are two great brands with two strong brand equity. Additionally, tax reform will provide incremental cash flow, enabling us to reinvest a portion to further growth and shareholder returns.

I’m incredibly proud of the entire American Eagle Outfitters team for the progress this company has made over the past few years in a midst of significant change. We have a very healthy business ready for growth. We intend to build on our momentum, and I look forward to continuing success in 2018.

And now I would turn the call over to Chad.

Chad Kessler

Thanks, Jay. Good morning, everyone.

I’m pleased to report that American Eagle brand sales accelerated in the fourth quarter, posting a 5% comp increase. It was great to see store traffic and comp store sales turn positive in the quarter, and this trend will continue.

Sales were driven by improved traffic and increased transaction. We also saw strong growth in our digital business. Expecting another promotional holiday season, we took a strong stand to gain market share, win the season and fuel momentum going into spring.

Although markdowns were up, we drove more customers to our brand and importantly generated higher merchandise margin dollars. We remain committed to strategically reducing our go-forward promotional poster. We are off to a good start with our initial spring deliveries.

The AE brand is firing on all cylinders. Our new loyalty program, AEO Connected, continues to attract new customers. In fact, today, our active customers are spending more money with American Eagle than ever before.

We successfully capitalize on our dominant in bottoms and jeans, posting positive comps across key categories for men’s and women’s. Women’s increase in low single digits and Men’s in a high single digits. Men’s tops strengthened, delivering a positive comp continuing the great progress made throughout the year.

One of the most important highlights for the American Eagle business continues to be bottoms. The fourth quarter represented our 18th consecutive quarter of record sales for both genders. Our customers recognize the consistent breadth of styles, quality and value we offer. We view bottoms as an important growth initiative from the AE business as well as powerful new customer acquisition tool.

Today, less than half of our customers buy jeans. For us, this indicates meaningful upside in the business. We will continue to raise the bar, driving greater and greater innovation and building stronger awareness around our jeans collection.

At over $3 billion in dollars in revenue, the American Eagle brand has a great success and now stands as the undisputed leader in our space. As we look to the next billion and beyond, momentum on our bottoms business and growth in loyalty members are key indicators that we are on a path for more market share gains.

We’ll continue building on our brand platform of youth empowerment with our new campaign AEME to create a deeper emotional connection with our customers. And, of course, we’re highly focused on delivering the most innovative, high-quality merchandise and creating the most seamless and best customer experience with our leading digital platform and updated store design.

To conclude my remarks, I’m so proud of the credible position the American Eagle brand holds today. This is our time. We hold leading market share positions across our most important categories. We are supported by the best creative teams. We have leading operational capabilities and financial strength. That’s giving us the ability to invest in and grow this amazing brand.

And now I’ll turn the call over to Jen.

Jen Foyle

Thanks, Chad, and good morning, everyone.

I’m thrilled to announce another outstanding quarter for Aerie. Sales strengthened and we achieved our best quarter yet. In the fourth quarter, we delivered an industry-leading comp increase of 34% following a 17% gain last year.

This marks the 15th consecutive quarter of positive comps, which is a testament to the power of our team as well as the uniqueness and relevancy of our brand platform. I’m extremely proud of the consistent growth we experienced throughout 2017. In fact, even a key milestone using $500 million of sales. the profits will grow.

Our next target of 1 billion is in place, and we can’t wait to get there. In the fourth quarter, we saw a terrific growth in both our brick-and-mortar stores and in our digital business. We strategically capitalized on the key holiday weeks with a powerful gifting strategy and distortions in the big product categories.

In addition to core increments, we saw excellent growth in our significant active line or signature active line as well as our leggings, fleece, swim and accessories. With bras and undies at the core of our brand DNA, we see potential to expand our offerings and more broadly address our lifestyle needs.

In today’s climate, areas truly resonating with young women and clearly evolving into a real and relevant lifestyle brand. Awareness is at an all-time high, and we are continuing to expand our reach. In 2017, we generated over 8.5 billion median impressions and a 28% increase in social media followers. And we consistently expanded our customer base at a double-digit pace throughout the year.

As we enter 2018, I’m very excited about what we have in the product pipeline. The creative team continues to push the innovation envelope, developing new ideas and fabrics, all anchored on quality and value. Within our broad category, 2018 will be about newness and innovation, and we will continue to look for opportunities across the assortment.

Another strategic focus in 2018 is to build synergies with Chad in the AE business as we work to strategically cross customers from AE only shoppers to become AE and Aerie shoppers. Today, only 50% of women who shop our AE brand shop Aerie. This represents a tremendous opportunity to introduce new customers to the Aerie brand.

Let me now briefly turn to our store opening initiatives. We have had an incredible opportunity to expand our brand presence across the country. Customers love our new store design, which debuted last fall in Miami. And recently, we opened in a mall location with terrific results so far.

Our current plan cost were 35 to 40 new Aerie store openings in 2018 with roughly 70% in underpenetrated markets. Everything we do, we do for our customers. They inspire us each and every day to remain real and relevant as we build a lifestyle brand designed for her.

Our new campaign and amazing role models, Aly Raisman, Yara Shahidi, Rachel Platten and Iskra Lawrence embody the very core of Aerie. They are strong, confident, empowered women who celebrate their real selves. No need for retouching these incredible and beautiful women.

We entered spring with tremendous momentum, and we feel great about our potential of the season and into the future. Thanks to my amazing team for your unwavering dedication to Aerie. We look forward to the many new opportunities 2018 brings.

And now I will turn this call over to Bob.

Bob Madore

Thanks, Jen, and good morning, everyone.

I’m pleased with the progress made throughout 2017 and ending the year with adjusted fourth quarter EPS growth of 13% compared to the prior year. As the team noted, fourth quarter sales accelerated, delivering our best quarter of the year.

Margins continue to demonstrate quarterly sequential improvement, which has been one of our objectives throughout the year. As I review the quarter and the year, my comments will focus on the adjustment financials, which exclude certain items as detailed in the press release and tabled on Pages four through nine of the investor presentation.

First, looking at the fourth quarter. Total revenue for the 14-weeks increased 12% to $1.23 billion compared to $1.1 billion for the 13-week period last year. Total revenue grew by $131 million, which included $43 million from the extra week.

Comparable sales for the 14-weeks increased 8%, following a slight increase in comps over the same 14-week period last year. The 8% increase was our strongest comp sales performance since the third quarter of fiscal 2015.

Additional sales information to be found on page 11 of the investor presentation. By brand, fourth quarter American Eagle comps were up 5% and Aerie comps increased 34%. Both stores and the digital business grew in the quarter with stores increasing in the low single-digits and digital sales growing over 20%. Digital penetration increased 340 basis points, expanding to just under 31% of revenue in the fourth quarter compared to 27% a year ago.

Regarding our quality of sale metrics on a consolidated basis. Traffic and transactions increased with store traffic posting a positive comp, outperforming the mall for both brands. Favorable product mix contributed to a low single-digit increase in the average unit retail price, while the average dollar sale was up slightly.

Gross profit dollars increased $37 million to $425 million, up 9% from $389 million last year. The gross margin declined 80 basis points to 34.6% of revenue compared to 35.4% last year, the lowest decline of the year. The decrease in margin reflected higher promotional activity. Additionally, increased shipping cost and higher compensation were offset by rent leverage.

SG&A expense of $264 million leveraged 60 basis points to 21.5% as a rate of revenue, driven by strong sales growth. Increased store salaries in support of the strong holiday season, incentive compensation and expenses related to the extra week in the fourth quarter drove the dollar increase from $242 million last year.

Depreciation and amortization remained flat at 3.6% as a rate of revenue with dollars increasing $44 million compared to $39 million last year. Adjusted operating income of $118 million rose 10% compared to $107 million last year, while deleveraging 20 basis points to 9.6% as a rate to revenue. Adjusted fourth quarter EPS of $0.44 increased 13% compared to adjusted EPS of $0.39 last year.

Now a few comments and highlights regarding our annual results. After a challenging first half of the year, business recovered in the second half, driven by better overall traffic trends and improved product assortments, particularly in men’s tops. Sales strengthened as the year progress and we saw improvement in both gross margin and operating margin.

Total revenue for the 53 weeks increased $186 million, or 5% to a record $3.8 billion compared to $3.6 billion for the 52 weeks last year. Consolidated comparable sales for 53 weeks increased 4% following a 3% increase last year.

AE Brand comp rose 2% and Aerie comps were up 27%. AE comps showed improvement each quarter this year, and Aerie continues to grow at a fast pace for this quarter marking 15 straight quarters of comp growth with the last 13 rising into double digits. Adjusted gross profit dollars increased slightly with a sharp decline in the first half, offset by growth in the second half.

For the year, we deleveraged 170 basis points to 36.2% as a rate to revenue due to higher promotional activity primarily. The digitally increased delivery to support strong digital business was offset partially by rent leverage. We successfully cut gross margin erosion for 270 basis points in the first quarter to only 80 basis points of decline in the fourth quarter.

Demonstrating good expense management, the SG&A leverage each quarter this year, the annual rate of 23.2%, reflects a 60-basis-point improvement. For the year, adjusted operating income of $325 million decreased 8% from $353 million last year, deleveraging 120 basis points to 8.6% as a rate to revenue.

In this fiscal year, we incurred total restructuring in related charges of $30 million or $0.11 per share, consisting primarily of charges corresponding to the closure or conversion of international owned and operated stores to license partnerships, home office restructuring activities and charges related to the planned exit of joint business venture. Adjusted EPS of $1.16 decreased 7% compared to adjusted EPS of $1.25 last year. For additional information, please refer to page 7 of the investor presentation.

As noted in our GAAP statements, our reported fourth quarter in fiscal year EPS of $0.52 and $1.13, respectively, included $0.08 benefit from the impact of U.S. tax legislation which is excluded from the adjusted earnings.

The benefit relates to a lower than U.S. corporate tax rate, a net benefit from the re-measurement of the deferred tax balances and a one-time transition tax on un-repatriated earnings of foreign subsidiaries. And a benefit related to the acceleration of certain deductions into fiscal 2017.

Now turning to the balance sheet starting with inventory. Total ending inventories across increased 11% to $398 million. Higher inventory reflects strategic investments in men’s and women’s bottoms, women’s tops and Aerie apparel to support strong sales trends and new stores.

Additionally as noted last quarter, a change of the use of clearance stores to liquidate inventory has increased on-hand inventory levels, which will continue until we anniversary this change in strategy in the third quarter of 2018.

Looking forward, we expect first quarter inventory to be up in a low double-digits with two percentage points to three percentage points, driven by our new clearing strategy. We ended the year with $414 million in cash and investments. As a result of strong free cash flow, cash increased $35 million compared to last year.

During 2017, we returned a total of $176 million to shareholders, paid dividends of $89 million and we repurchased 6 million shares for $88 million. Today, we also announced a 10% increase in our quarterly cash dividend, in part, reflecting strong cash flow, which will increase as a result of the new U.S. tax legislation.

Consistent with our guidance, capital expenditures totaled $169 million for the year. For 2018, we expect CapEx to be in the range of $180 million to $190 million. The increase is due to an acceleration of Aerie growth, store remodeling projects and the balance to support the digital business, omni-channel tools and general corporate maintenance.

2017 store activity can be found on Pages 15 through 17 of the investor presentation. Total gross square footage declined slightly in the year as we continue to close underperforming stores, including 25 AE stores and eight old format Aerie stores. We opened 15 AE stores, 15 Aerie standalone stores and 28 Aerie side-by-side stores in 2017.

Rightsizing our store fleet with the success of our digital business continues to be a high priority for our teams as we continue to use customer data analytics to help in our decision-making. Our plans to strategically expand in a new market has not changed.

In 2018, we’ll add 35 to 40 new Aerie stores, of which, 10 to 15 will be standalone stores with the balance to represent side-by-side Aerie locations. Additionally, we will open 15 to 20 AE stores, and we are currently planning to close five to 10 old format Aerie stores and 10 to 15 AE stores in 2018.

Now regarding our outlook. We’re off to a very positive start this season. In the first quarter, we expect earnings per share of $0.20 to $0.22 based on comp sales in the positive mid single-digits. The first quarter of EPS guidance compared to adjusted EPS of $0.16 last year and excludes the potential asset impairment or restructuring charges.

Our anticipated effective tax rate for the quarter and the year is in the mid-20s, yielding roughly $60 million of incremental cash flow and approximately $0.20 of EPS after making additional investments in our brands.

In closing, we remain focused on driving improvements across the business to produce better earnings growth flow through, while fueling growth in our brands. The future is right, as we look at opportunities ahead. Our goal is to deliver consistent online results, while creating sustained shareholder value.

And now, we’ll open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from the line of Anna Andreeva with Oppenheimer. Please proceed with your question.

Anna Andreeva

Two quick questions. Curious how we should think about gross margins within your guidance for 1Q? And maybe talk about the puts and takes on a gross margin line as we go through the year.

And then secondly, a follow up on the mid-single-digit comp guide. Is that the run rate in the business quarter to date? Thanks so much.

Jay Schottenstein

So looking forward this quarter, gross margin, you should be thinking on continuation of our sequential margin improvements that we experienced throughout 2017 continuing into the first quarter of this year and the remainder of the year. Really what’s driving that is we continue to manage our BOW expenses very well, our cost per shipment, our shipments per order.

The team did a phenomenal job managing that over the fourth quarter through holiday, and actually leveraging those expense line items during that period, which we had not experienced prior to Q4.

And continued improvement in the margin because of sourcing efficiencies, continuing to drive higher IMUs on right products and just managing our promotions better versus last year is really what’s going to drive that.

And then relative to our mid-single-digit comp guidance for the quarter, we’re actually experiencing a better trend of that as we began the quarter. But we’ve got a lot of business ahead of us, with spring break and Easter being big volume driving periods for us.

So the trend is slightly better than that currently, but we feel good about the guidance we gave before.

Operator

Our next question comes from the line of Pamela Quintiliano with SunTrust Robinson Humphrey. Please proceed with your question.

Shoshana Pollack

This is Shoshana Pollack on for Pam. Congrats on the quarter. Jay, on Aerie, where do you see the brands potential?

Jay Schottenstein

Can you speak up a little bit? We can’t hear you.

Jen Foyle

Can you speak up a little bit?

Jay Schottenstein

Can you speak up, please?

Shoshana Pollack

Jay, on Aerie, where do you see the brand potential over the longer term? It seems like it could surpass at least our initial expectations.

Jay Schottenstein

Well, it took us the last 7, 8 years to get to $500 million. I believe in the next two years, we can achieve over $1 billion. And when I look at Aerie, I look at the American Eagle and I see the progress that’s being made in Aerie. And with the experience we have, I think this could become in the next few years a $2 billion, $3 billion brand.

Operator

Our next question comes from the line of Rebecca Duval with BlueFin Research Partners. Please proceed with your question.

Rebecca Duval

Rob, if you could just talk to me a little bit about the clearance stores strategy? Last time I think on the Q3 call and at the conference, you talked about maybe increasing store count of those clearance stores to maybe 10 stores. Is that still the strategy this year? And where are you with that?

Bob Madore

We’re continuing with the clearance strategy. As you mentioned, we tested it in five initial stores. Those test results were very positive. And as a matter of fact, this fall, we’re going to expand the program to total of 11 stores.

The AUR that we realized in clearing or liquidating this inventory through our clearance outlets is significantly better than our previous liquidation periods, so very happy with the results of the test, and looking to expand it to 11 in the fall.

Operator

Our next question comes from the line of Brian Tunick with Royal Bank of Canada. Please proceed with your question.

Kate Fitzsimons

This is Kate on for Brian. Thank you for taking our questions. Bob, I just want to circle back to your earlier comments on gross margin. You called out sequential improvement. Does that mean that we should think about it being up year-on-year here in Q1? And just how should we think about markdowns flowing through there?

And then secondly, if you could embark on 2018, what’s just your overall view in terms of balancing market share gains with profitability? I understand you drove a lot of share gains this year, but maybe you were a bit more promotional know what you have wanted. This higher level views there. Thank you.

Bob Madore

So we’re going to continue with the sequential margin improvements. And as it relates to Q1, I think you should be thinking positive leverage on that margin rate. Not just improvement, but up versus same period the prior year.

And thinking about 2018, and Chad mentioned this in his prepared remarks, we’re going to be competitive in the marketplace all along. But as we look forward, we’re going to look to reduce our promotional stance as we continue throughout 2018.

Chad Kessler

And just add to Bob, we are very optimistic about 2018. We see a stronger economy. People have more money in their paychecks. We think 2018 should be a very good year.

Bob Madore

Well and it’s highlighted by the fact, Jay, that we are performing much better than the malls, which I think speaks to our product resonates with the consumer and the value proposition.

Jay Schottenstein

And also, it speaks the people to feel more confident.

Operator

Our next question comes from the line of Paul Lejuez with Citigroup. Please proceed with your question.

Paul Lejuez

What comp do you need to see EBIT margin expand or breakeven in 2018? Maybe talk about the store comp you need within that too to achieve margin expansion. Thanks.

Jay Schottenstein

Across the total company, we would see margin expansion with a low single-digit comp increase.

Operator

Our next question comes from the line of Susan Anderson with B. Riley. Please proceed with your question.

Susan Anderson

I was wondering if you could talk about the AUC expectation for first quarter and 2018 and maybe just can you expand a little bit, you mentioned just being more efficient within your sourcing to drive greater efficiency and IMUs?

And then one for Chad, I know you mentioned that about half the customers buy jeans in your stores. This may be back historically a long ways, but if you go back a couple of decades, I guess during periods of stronger jean trends and fashion cycles, has December been higher?

Jay Schottenstein

That goes way back. It’s because if we go back a couple of decades, we can sell our own jeans. So it’s a very small part of our sales.

Chad Kessler

And Susan, on your first question related to AUC expectations in Q1. As I mention on like-for-like product basis, we’re anticipating to continue to see low single-digit decreases and average unit cost in Q1. And current trends in sourcing are we are seeing some pressure in material components and labor.

But having said that, based upon our size, the size of the orders we place and the fact that there is more supply out there than demand, it’s the buyer’s market, and we’re actually leveraging a situation to continue to negotiate cost decreases.

Jay Schottenstein

I would say just in the terms of the jeans, Susan, this is Jay. We don’t - can’t look back that far, but the number of customers buying jeans is one of the levers we have to expand our denim business. We continue to see market share gains and comp improvements and see that business expand for us, and we continue - we expect it to continue to see that for the foreseeable future.

And we’ll be trying to get more customers in the jeans. We’ll be trying to get customers to buy more jeans. And we are working and testing and trying to figure out how to get non-denting buyers to buy jeans. So something we continue to work on to drive on in few of that business.

Chad Kessler

Yes, and I think that our goal is to be the authority in jeans in America. And we’re committed to it. We’re beefing up our organization. We are going to be the - when it comes to denim in America, American Eagle is going to be the authority.

Operator

Our next question comes from the line of Tiffany Kanaga with Deutsche Bank. Please proceed with your question.

Tiffany Kanaga

I wanted to follow-up on what Anna asked. We see many of your peers discuss potential growth margin expansion in 2018. When you talked about sequential improvements in the first quarter, does that also mean that you expect expansion year-over-year versus last year’s declines?

And then a follow-up, if you can dig into your inventory guidance, there’s the low double-digit expectation at the end of the quarter suggest that you’re planning accelerating sales as we head into summer? Thanks.

Jay Schottenstein

So on the gross margin expansion, you should be thinking about that both on the rate and a dollars increase basis. And related to your inventory guide of low double digits, a few things really, and I mentioned it in my prepared comments, we continue to invest in both the men’s and women’s bottoms business. Not just jeans but bottoms.

All six bottoms categories for us in Q4 were up. So shorts, jeans, pants, both men’s and women’s genders. And when I say up, up significantly. Those businesses are really on fire. In addition, we were very broken in women’s tops.

Last year, we continue to invest in tops and women’s tops inventory. Our men’s tops business has improved dramatically, and we’re going to fuel that trend. And lastly, with growth that we’re experiencing within the Aerie, a plus 34 comp for the brand this quarter alone, those are really fueling the main businesses.

The very last thing I’ll point out is today, we’re operating five clearance stores. We’re increasing it to 11, so more than doubling the store count. We’re going to have to have clearance inventory to fuel those stores and that’s also driving the increase. So that break down of the low double-digits is really comprised of those four to five elements.

Operator

Our next question comes from the line of Omar Saad with Evercore ISI. Please proceed with your question.

Omar Saad

I wanted to ask if you guys will be willing to give an update to your connected loyalty program you launched back on the fall? How that’s doing? What you’re learning from that? What sign-ups are like? And maybe also an update on the studio? I don’t know if you touched on that the Union Square store. What are you learning on that?

Jay Schottenstein

Sure. So the loyalty program, we continue to be happy with it. We’ve been signing up many new members and largely driving sign-up through stores, being a very effective channel to get the sign-ups. The program is off to a great start. We’re seeing great engagement in the program.

And as we go forward, we look to make the program even more engaging, adding non-dollar reward. Rewards are not just dollar-based and ways to keep the customer engaged and participating in the program and shopping in the store, spending more money and more frequently. So we’re happy with the start of the program.

Union Square has been a great learning experience for us. It’s really good opportunity for us to see the brand platform come to life as well as a lot of the new engagement tools and customer experiences we have in the story.

We’re learning quite a bit from what the customers responding to and things that the customers may be not as engaged as we thought. And we will be taking learnings from that store and opening a mall-based version later this spring. So more to come on that.

Operator

Our next question comes from the line of Oliver Chen with Cowen & Company. Please proceed with your question.

Courtney Willson

It’s Courtney Willson on for Oliver today. Thanks for taking our question. We just had the question on real estate. Can you remind us how many leases are expected to expire this year? And then regarding the increased CapEx for 2018 and with half going to store remodels, can you just brief us on whether remodels will consist of? Is it typical refreshes? Are you adding digital or omni-channel capabilities to those stores? Thank you.

Bob Madore

Yes. Sure, Courtney. So regarding real estate, we’ve got roughly 600 leases coming off for expiration over the course of the next three years. Looking to 2018 is the heaviest number of leases that come up for renewal at about approximately 350 of those 600.

And as I pointed out, we’ve been very successful negotiating lower rates as those expirations came off, and only negotiating short-term leases to the extent we have the ability to.

Regarding your second question on CapEx, remodels kind of take all shapes and sizes. Some are minor refreshes with new fixture packages, paint. Others are major remodels. We do have a number of American Eagles stores that date back to older concepts, which would warrant a complete remodel.

If we feel as though we are located in the right section of the mall or in some instances, we’ll relocate in that same mall to accommodate an Aerie side-by-side location or an adjacent location opens up, we’re able to add a side-by-side location that a lot of times, just so you don’t have a new Aerie concept, next to an old American Eagle concept that you would remodel the Aerie stores. So our models take roughly three different shapes and sizes, depending really on the circumstance.

Operator

Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Dana Telsey

As you think about the men’s business and the progress that you’ve seen on the men’s business, how do you see that moving forward? I mean, obviously, the bottoms business doing well, but the trajectory of improvement compared to last year is very impressive.

So what are you seeing there? And the cross learning’s with American League and Aerie in terms of getting more cost customers as it coming through marketing? Is it coming through in-store events? How do you see that developing to drive top line? Thank you.

Jay Schottenstein

So the Men’s business, honestly, it’s really exciting because we’re firing on all cylinders in the men’s business. Tops, bottoms across categories, I think we finally, we have new talents in the team, and I think we’re finally seeing that product and those merchandise strategies come into life. And we’re seeing really nice business across the whole men’s everywhere in men’s.

So I think we have a lot of opportunities throughout the year. We had a soft men’s business last year, and I think there’s a lot of opportunity to continue to show strong positive comps throughout the men’s business.

In terms of trying to leverage the Aerie and American Eagle customers to shop together. And we do target the same age range, but we have slightly different sort of emotional propositions from the two brands. So what we do is really in terms of the marketing team.

We really look at gaining customers into each brand and then trying to leverage them across the two brands, whether it’s in the shared digital platform, in the side-by-side stores or to shop and shops. So we’re really it’s an opportunity the marketing opportunity to get the customers highly engaged in both brands going forward.

Operator

Our next question comes from the line of John Morris with BMO Capital Markets. Please proceed with your question.

John Morris

Question for Jen. Another outstanding quarter for Aerie. So really nice acceleration on the tough comparison, as far as, you can tell, where - an update sort of overview here on where you’re acquiring of this customer from? Any change in the profile? And of that, I guess, 50% or so that don’t shop Aerie, what’s the opportunity there?

And maybe also just short of a follow-up there, Jen, and opportunity for us when come this spring. Are you kind of lapping the easier environment last year? Do you see more opportunity there? Thanks.

Jen Foyle

So really, first of all, it’s not only, it’s not every one thing. And when we think about how we acquired the customers, I mean, I think our platform is just resonating for the brand. If you think about just the recent launch of the role models and how they represent our brand and what they’re doing for the brand and impressions that we’re getting John. Of course we’re introducing new customers every day, just using those avenues and channels.

The 50% opportunity is huge, and Chad and I and the marketing team are thinking strategically on how to introduce the balance of the customers into Aerie, as Chad mentioned. And we’re thinking of new tactics, John. And every day, we’re coming up with new creative ideas to ensure that we’re sharing our brands with each others.

So it’s just - it’s not a scientific as I would like to say, it just really understanding the gap. We are getting new customers everyday and it’s interesting our age range is expanding. We’re introducing new young women into the brands with some of our new product launches, i.e. let’s start with [U Bra], which is amazing. And it’s a little bit more user inspired.

However, the moms are shopping with us. So we’re loving what’s happening there, and we’re seeing some ubiquity in our sales. And we’re going to continue to punch on that.

Listen, win is amazing for us. It’s been amazing for us, and we see that it just another cornerstone of our brand. And it’s definitely something that we continue to evolve and innovate. We are seeing nice business there, but we’re also launching other new categories.

And what’s really nice about what we’re doing and how we’re mixing the brand now today, John, is our AURs are at an all-time high. And so that’s been really helpful for us to make sure that we continue to be productive in our stores, and we’re seeing nice dollars per square foot growth as well because of that, John.

So the mix of our new businesses and then, of course, always remaining true to our core competency business, which is intimate. And I mentioned it in my opening remarks that you’re going to see some nice innovation in the bra category that we’re going to be introducing this year.

So we’re just really excited. And I will think today is International Women’s Day. And again, this is how we do it, John. We’re welcoming new women into our brand. Our campaign today just launched. So just go check it out. It’s really exciting. So, thank you.

Operator

Our next question comes from the line of Janine Stichter with Jefferies. Please proceed with your question.

Janine Stichter

I just want to get an update on the accessories category. I think it’s been kind of the one source of weakness for you, but are you now starting to see some improvement there? And then one more question for Jen. I just want to see if you could talk about the differences in trend you saw in the fourth quarter between the constructed and unconstructed bra business? And then a little bit more of how you’re thinking about the growth in that category going forward? Thank you.

Jay Schottenstein

So for accessories, it’s really been just the women’s accessories category that’s been - that had been challenging. The men’s accessories categories continue to have been stronger and have continued that momentum. And it is nice to say, a year ago, I sat here and said that I thought we’re working to get the men’s business figured out. And we did. And we have some nice momentum there.

And we are starting to see some nice green shoots in the women’s accessories business. We have some new talent in that area as well and starting to see a nice some improvement in the women’s accessories business. And I expect that will continue throughout the year. And that will be - to be a source of the strength by the end of this year.

Jen Foyle

And regarding bras, core bras have definitely turned around for us because of some these launches I have mentioned, and we’re exciting - we know we’re really excited about what we’re seeing there, but we still feel like lightly line is a big portion of our business and it’s where our customer response to. So we’re thinking the business that way.

And then secondly, on unconstructed bras, we launched that category in a big way. We feel like we own that category. And again, it really represents the Aerie lifestyle. So it would always be a big portion of our business. And we’re really excited about bralettes, the girls love them. It’s a fashion piece in their wardrobe and it’s something that will always carry.

So we love what we’re seeing and how we’re innovating both constructed and unconstructed on the go forward.

Operator

Our next question comes from the line of Simeon Siegel with Nomura. Please proceed with your question.

Julie Kim

This is Julie Kim on for Simeon. Thank you for taking our question. Could you just give color on the higher promotional activity in the quarter if that was concentrated in a specific brand or channel? And how the promotional environment looks in Q1 thus far? And additionally on margins, what you can do in terms of trying to reduce shipping cost and getting some leverage there? Thank you.

Jay Schottenstein

I think we actually - the higher markdowns we took in Q4 were not really specific - related to specific brand or channel. We took a specific stance that we were going to compete in Q4. It’s always a tricky quarter, because it’s the quarter where I think the mall the most promotional fighting for the dollars that can’t come in.

And look, we decided to get aggressive. We decided we want to gain share and we believe that in doing so, we could feel momentum that would carry into spring and we’re seeing that so far. So I think we had the right strategy.

We want to keep our customer excited and engaged all year round. We are confident and know we can do that in the first three quarters of the year with less promotional activity. And Q4 is just a highly promotional time period, and I think you really - just like any other brand, we have to play to win in that quarter. And that’s what we did. We played and we won.

So I felt good about the stance we took, and I feel good about the results that we’ve listed there.

Chad Kessler

And on your second question, things that we will do to continue to improve margins. We continue to invest in our omni-channel capabilities. Some of those investments include automation of our pick and pack processes in our distribution centers, sortation systems, things of that nature.

We also are right in the middle now with implementing some new shipping optimization software, which we believe will also drive further efficiencies. And with the current trends we’re experiencing with mall-based traffic within our own stores and positive comps in brick-and-mortar stores that will allow us to continue to leverage brands. So those are the three major things that will continue to drive those kind of results.

Operator

Our last question comes from the line of Janet Kloppenburg with JJK Research. Please proceed with your question.

Janet Kloppenburg

Just a couple of quick questions. Jen, was there particular categories or investments that you made in holiday that drove that acceleration? And for Chad, on the men’s side, do you think that there’s - and you don’t have to talk about them for competitive reasons, but are there trends that are working in the tops business that you think you can capitalize on as we go forward? And just lastly, your guidance on the first quarter, does that anticipate that brick-and-mortar traffic remains positive? Thank you.

Jen Foyle

We had a great Q4. And I would say the team did an amazing job. Should I say that we have made some changes too in the organization. Abby Vernon who’s running merchandising for the team now really took a lead in making sure that we just really represented gifting and we stood for it. And just made appropriate investment distortions in the categories that are working.

I mentioned, Janet, across-the-board, everything really worked in Q4. So it’s just really how we approach and distorted it. And I would say we really stood out in the mall. If you saw the windows and the marketing and what the marketing team did for us and really just got the brand out in such a fresh way. I really think that’s how we won, Janet.

Chad Kessler

And on the men’s side, Janet, as I was saying earlier, we’re really seeing success across-the-board and men’s. We’ve been saying for the last year that the bottoms business continued to be strong in men’s tops and we knew we had that customer. And we just needed to fix the product and get than the right stuff.

It feels like what we’re seeing is that we do have the right assortments now and we have that men’s customer coming in not only buying the bottom of the shopping whole lifestyle both across tops and accessories. So I’m excited as Bob mentioned earlier. We’re in chase mode now in men’s. And I think that’s going to be great through the rest of the year.

So I keep pushing the team. I see a lot of opportunity and a lot of opportunities for strong comps kind of across the whole men’s tops and accessories and bottoms. And then on the guidance, I’ll just say for Bob here.

The guidance in the first quarter does not rely upon brick-and-mortar capital wind remaining policy. As we’ve said, what we’re seeing so far and what I said in my remarks is we do continue to see positive store comps. So hopefully, that will continue and have a great quarter.

Judy Meehan

Okay, great. Thanks. That concludes our call today. Everybody have a great day. Thank you.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time.

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