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 AE 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. The results actually realized may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

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

And now I will turn the call over to Jay.

Jay L. Schottenstein - Executive Chairman and Chief Executive Officer

Good afternoon. Thanks for joining us today. 2022 was a dynamic year with numerous external cross winds. As we lapped outstanding results in 2021, we faced a difficult macro-environment with rising inflation, higher interest rates continued supply chain disruption and a highly promotional retail environment. I am proud of how our team has executed throughout the year.

Early on, we took swift and aggressive actions to reduce inventory levels, cut expenses and capital spending. This contributed to a significant recovery in profitability and free cash flow during the second half of the year. We also posted our second highest revenue periods on record in both the fourth quarter at $1.5 billion and the year at $5 billion.

Our fourth quarter results exceeded expectations and adjusted operating income of $96 million was above last year. We strengthened our financial position and exchanged nearly all of our outstanding convertible debt to end the year with a healthier balance sheet and improved liquidity.

Moving to the American Eagle brand, I'm incredibly proud of the work that AE team has done over the last several years to improve profitability, rationalizing unproductive SKUs, and close low margin stores. As a proof point fourth quarter adjusted operating profit for AE was up 36% to 2019. Jen has made great strides to refresh the brand, reenergizing assortments to capitalize on trends, while delivering better profitability. AE is a strong and healthy brand. I'm encouraged by how customers are embracing new styles and I look-forward to our continued progress.

Aerie has demonstrated exciting multi-year growth, with fourth quarter revenue and adjusted operating income up over 70% in 2019. The rapid success of OFFLINE, our expansion into active wear underscores the strength of Aerie's powerful brand platform. We have significant potential as we reach more-and-more customers and I cannot be more excited about the future.

Our international business performed well in 2022. We will continue to fuel sales and profits, pursuing a multi year strategy to optimize key company-owned markets and expand our license business. In 2022 I was pleased to publish our first ESG report, highlighting over two decades of actions we have undertaken to build a better world. As noted in the report, we have made tremendous progress across our water goals and continue to reduce emissions. ESG responsibility is embedded in our brands and company culture and deeply intertwined with our corporate strategy.

As we grow our brands and market we will stay disciplined and focused on profitability. Inventory management remains a key focus and we will use the strength and agility of our supply chain to chase demand. Additionally, we have launched a formal program to further reduce expenses, gain efficiencies and prioritize high ROI projects. Given the highly volatile environment, we've been operating in over the past several years, now is the time to reset our business.

Last year we made good progress, yet opportunities remain as to strive to break out of the mid-single digit operating margin range. On Quiet platform, we continue to see interest from prospective customers, and we remain optimistic about the long-term opportunity. Yes, the demand has been pressured this past year.

As Michael will review, we are adjusting our go-forward plans to strengthen profitability. Although, the macro-environment remains uncertain we entered 2023 better positioned. I see no shortage of opportunities for this company. We will harness the power of our brands and industry-leading operating models to drive growth and find efficiencies in processes and capabilities. I am confident with focus and discipline, we can strengthened our bottom line. We are committed to returning cash to our shareholders and I'm very pleased to reinstate our quarterly dividend.

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

Jennifer Foyle - President, Executive Creative Director, AE & Aerie

Thanks, Jay, and good afternoon, everyone. Over the past few years, the dynamic macro has battle tested us in many ways. And 2022 was another roller-coaster of a year. In this environment American Eagle and Aerie displayed resilience maintaining their status as fan favorites within our core demographic. In a year where customers pulled back on discretionary spending we grew our loyalty customer file, further strengthening our relationship.

Even in a highly competitive promotional environment fourth quarter results exceeded our expectations. With inventory back at healthy levels we brought exciting new innovation to our customers, in stores and controlled markdowns, achieving our second highest fourth quarter AURs. This was down 7% to last year's record high, yet up over 20% across brands to 2019, highlighting our focus on controlling promotion and building brand equity.

Aerie reached a milestone at $1.5 billion in revenue in 2022 as new stores continued to expand awareness. Since 2019, revenue has nearly doubled with operating profit up close to a 150%. I am pleased with this accomplishment, especially given the unprecedented macro volatility. For the fourth quarter Aerie continued to see good growth yet came in below our expectations. Core apparel showed up well and we achieved our best sweater season in the brand's history while also continuing positive growth in fleece.

Our active wear extension OFFLINE by Aerie remained a standout performer, led by our leggings franchise. Leggings continue to be a powerful driver of new customer acquisition and we are seeing nice momentum across fashion and performance, style. Intimate was a bit softer-than expected. And as we look-forward to 2023, our plans include launching more newness in intimates to build greater awareness and engagement.

As we continue to scale Aerie we are leveraging creative marketing touchpoints to drive excitement. In the fourth quarter our Avant [Phonetic] Aerie holiday marketing campaign centered on gifting with a strong success. Additionally, this spring, we launched a new Find Your Wonder campaign with a throwback to Y2K fashion including real life and digital experiences.

Turning to American Eagle, demand in the fourth quarter exceeded our expectations as we evolved our assortment with engaging fashion trend. We are seeing a nice reception to new silhouettes such as wildlife and cargo, and renewed excitement in fleece and knit tops. I look forward to capitalizing on new fashion trend as we move through the year.

Over the past several years, we have been intently focused on improving the health of the AE brand, timing our assortments, pulling back on the value destructive promotions and selectively closing unproductive stores. These changes are driving better market. As we maintain our focus on profitability we are also actively exploring opportunities to drive growth. On that note, in January, we launched AE 24/7, a new men's sub-brand, focused on the fast-growing active wear category. Early reception to our limited initial assortment has been very encouraging and we look forward to scaling the collection later this year.

Last month, we also relaunched AE 77 as a premium sustainable capital within the AE brand. Introduced with limited denim choices for now the assortment spans both men's and women's and will be available predominantly online with brick-and-mortar presence in select stores. The reception has been very encouraging, and I look-forward to building on the early success. I'm pleased to note that AE customer file grew in the fourth quarter as we retained and reactivated more customers.

On the marketing front, we collaborated with the cast of The Summer I Turned Pretty a Gen Z favorite show launching a limited addition collection that fully sold out. Buzz around AE is continuing into spring. Last month, our newest denim silhouette Dreamy Drape went viral after an organic pose by Alex Farrow [Phonetic] one of TikTok fastest-growing implementers. We have also launched an exclusive spring collaboration with the Outer Banks Group, which is off to a good start drawing in new customers with great reception across social media. In fact a recent post by one of the stars on the show became our number-one Instagram posts of all-time.

Entering 2023, while the macro remains uncertain, emerging trends in casual wear continue to provide new avenues to drive growth across our brands. Innovation is our strength. We will lean into newness and continue to deliver excitement and high quality on-trend styles to our customers.

Thank you. As always to the AE and Aerie team for their tremendous efforts this past year. With every season we are making progress, and I remain very excited about what's to come. Thank you. And now I'll turn the call over to Michael.

Michael R. Rempell - Executive Vice President, Chief Operations Officer

Thanks, Jen, and good afternoon, everyone. As Jay noted the past few years have been extremely volatile for the retail industry, highlighted by shifting consumer spending and operational challenges. Navigating through this period has not been easy. Yet, I'm very proud of how we've responded with both agility and speed. We've added significantly to our capabilities and increased our use of new technologies, which are driving benefits to our operations and the customer experience.

As we continue to manage through a dynamic landscape we will lean into these capabilities as we strive for productivity improvement and even stronger profitability. Fourth quarter channel performance largely reflected the ongoing macro volatility. It's notable that customers are returning to in-person shopping. Store revenue was flat to last year and up 5% to 2019. Since taking responsibility for stores last fall I've had the opportunity to visit numerous locations and spend considerable time with our incredible store leadership.

We have a powerful fleet and truly a world-class field team and I've been very impressed with just how well we service the customer and leverage tools and technologies to drive store productivity. For example, this quarter I am pleased to note that we were tied for the number one specialty retailer for customer satisfaction in the ACSI customer satisfaction survey and actually had the largest year-to-year, improvement of any companies surveyed.

Our new point-of-sale system is providing a better shopping experience and reducing average checkout times by 50%. We expect this to drive improvement to sales per selling hour as we focus on further efficiency gains. I'm also very excited to share that we will start rolling out an innovative RFID and AI-based technology capability across our stores later this year. Our pilot test this holiday proved highly successful, providing visibility into inventory availability and placement at over 99% accuracy. I'm very enthused about the sales opportunities, inventory productivity improvements and labor efficiencies we can unlock moving forward.

As I indicated last quarter, we are also focused on updating and modernizing our most productive stores and relocating certain stores to ensure we are in the best locations. Last month, we consolidated our store footprint in Manhattan. We moved Aerie from Spring Street to the second floor of our AE Soho Broadway location and introduced our full offline collection to this market. We will also be testing a handful of off-mall locations, which are smaller, lower cost stores in emerging neighborhood outlets.

And this summer we are testing a new American Eagle store design, introducing a fresh and modern take on both the aesthetics and functionality to each store. As we introduce these changes we dissecting all facets of the store channel to optimize how we operate. As we sharpen our focus on-store productivity and profitability this is revealing further opportunities, particularly within our labor model. As a result of channel shift and unnatural build from COVID digital revenue was down 9% to 2021. Yet, revenue was up 19% compared to 2019.

Digital is a healthy channel representing 36% of total brand revenue and it continues to be highly profitable. This quarter, I'm happy to say we are hiring new talent to the team, welcoming David [Indecipherable] as our new Chief Digital Officer, David brings vast experience in building successful digital commerce and we're looking-forward to his contributions.

Now turning to the supply chain, after three years of unprecedented volatility in inflation on the inbound side, we are entering 2023 in a much more stable supply chain environment. Lead times are essentially backed to pre-pandemic levels and product costs have normalized. As we manage through an uncertain macro we are using this to our advantage, planning cautiously and chasing into demand. Aisles for the spring season are down to last year and a significant portion of our fall still remains open.

On the outbound side, our investment in Quiet platforms continues to provide much-needed capacity, flexibility and speed for our brands, combined with cost-savings. Digital delivery costs in the fourth quarter were down to last year. We are making progress in reducing fulfillment costs, and the number of shipments per order, which resulted in a lower delivery cost per order. As Jay noted, although Quiet third-party revenue has grown significantly to last year, acquiring new customers has been slower-than anticipated due to a tougher macro.

For 2023, we are focused on reducing expenses to better align with growth trends. We will streamline investments in the platform and look to leverage Quiet's capabilities to continue to drive benefits, both for our brands and for all of Quiet's third-party customers.

Thanks. And now I'm going to turn the call over to Mike.

Mike Mathias - Executive Vice President, Chief Financial Officer

Thanks, Michael. Good afternoon, everyone. As Jay mentioned, in response to changes in the environment, we took early and aggressive actions to reset our plans. We reduced inventory expenses and capital expenditures, which enabled us to deliver a meaningful improvement in profit and cash flow in the second-half of the year.

Margins rebounded and we generated adjusted operating income of $213 million in the second half compared to $56 million in the first half. We also returned to a positive free cash flow position and further strengthened our balance sheet. Full year consolidated revenue of $5 billion was second only to last year's record results and adjusted operating income was $269 million. Fourth quarter results exceeded our expectations, reflecting improved demand and stronger margins.

Consolidated revenue of $1.5 billion, declined 1% to last year's record result and included one point of growth from Quiet platforms. Brand revenue was down 2%, coming in ahead of our outlook for a mid-single digit decline. This included our second-highest holiday sales result in the history of the company with positive momentum continuing in January.

Compared to pre-pandemic fourth quarter 2019 consolidated revenue was up 14%. Adjusted operating income of $96 million reflected a 6.4% margin and was up 30 basis-points to last year and 60 basis points to 2019. Quiet platforms produced a $30 million loss, excluding a $4 million impairment and restructuring charge. Demand was lower than anticipated. As Michael reviewed with macro calendar continuing into this year, we've adjusted plans to reflect a more measured pace of growth for Quiet platforms and reset expenses, aimed at improving profitability this year.

The gross margin rate of 33.9% in the fourth quarter was ahead of our expected range of $32 to 33% due to stronger demand and lower markdowns versus plan, as we leveraged our healthy inventory position to control promotions. Compared to last year gross profit dollars increased 4% to $507 million with gross margin rate, up 150 basis-points.

Merchandise margins were higher, reflecting lower product and freight costs with a partial offset from higher markdowns. Lower compensation and delivery costs also had a positive impact on margins, offset by higher distribution and warehousing costs and higher rent. Quiet platforms had an 80 basis-point impact as that business continues to scale.

Despite a highly promotional operating environment markdown levels were significantly healthier relative to 2019, reflecting our multi-year focus on improving brand equity and driving profitable growth. SG&A dollars were approximately flat to last year in the fourth quarter, reflecting our ongoing focus on controlling expenses. As Jay noted, we're currently undertaking a company-wide assessment to look for additional savings and efficiencies across our entire cost structure strengthening our culture to focus on innovation and investment discipline. I'll report on progress over the course of the year.

Adjusted EPS was $0.37 per share, our diluted share count was $197 million, down from $203 million last year. Shifting to the brands, Aerie revenue increased 8%, driven by new stores. Comparable sales declined 2%, following a 17% increase last year. The adjusted operating margin of 12.2%, reflected a significant recovery from the fourth quarter of last year.

Aerie remains a strong multi-year growth and profit story. As we move past tough comparisons and new stores ramp-up along the maturity curve we anticipate comps returning to positive territory this year. American Eagle revenue declined 8% and comps were down 9%, following an 11% increase last year. Demand was ahead of our expectations and reflected a sequential improvement from the third quarter. I'm particularly pleased to see a significant improvement in the health of the brand since 2019.

While revenue was down 7% compared to the fourth quarter 2019 adjusted operating profit was up 36% over the same period and brand operating margin expanded 510 basis-points to 16%. Consolidated ending inventory cost was up 6% compared to last year with units up 12%. Inventories reflect current spring product and earlier-than-expected delivery as the supply chain continued to normalize. AE and Aerie inventory across the US and Canada is down to last year with the consolidated increase driven by expansion in Mexico, where we are experiencing growth well into the double digits.

We ended the quarter with $170 million in cash and total liquidity of $862 million. Capital expenditures totaled $61 million in the quarter and $260 million for the full year which is down significantly from our plan at the start of the year. As we focused on strengthening free cash flow and capitalized on the investments made over the past several years we reducing annual CapEx to the $150 million and to $190 million range in 2023.

We plan to open approximately 25 new Aerie stores next year with net closures at AE of approximately 25 stores. As I reflect on the fourth quarter performance despite operating in a highly dynamic environment I'm pleased by the multi year improvement in the health of our business. We continue to see opportunity to drive growth and profit improvement over the long-term.

Moving onto our outlook, as we enter 2023, as a team has discussed, our brands are strong and inventory is healthy. The global supply-chain environment continues to normalize, providing improved costs and greater agility. And we have a company-wide focus on expense reduction and operating leverage. That said, visibility into the macro and overall consumer spending behavior is still limited. As a result, we are taking a cautious view.

Regarding the current quarter while we've seen good trends in February with a favorable response to new merchandise the environment remains choppy. Additionally it's early in the quarter with our most important week still ahead. At this point our outlook for the first quarter is for revenue to be in the range of flat-to-up low-single digits and for operating income to be approximately flat to last year. For the year, our outlook reflects annual revenue growth in the range of flat-to-up low-single digits and operating income in the range of $270 million to $310 million,

With that, I'll open it up for questions.

Question & Answers

Questions and Answers:

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Operator

Thank you. [Operator Instructions] Thank you. And our first question is from Jay Sole with UBS. Please proceed with your question.

Jay Sole - UBS - Analyst

Great, thank you so much. Maybe just a two-part question. One just, first on Aerie, it sounds like there's a lot of exciting things happening just in terms of fashion. I mean - I think in the slide deck, they talked about you see it as a $2 billion brand. You talked about the long-term opportunity you continue to see with Aerie. And then maybe Mike, just on the guidance that you gave for first quarter. It sounds like February has started strong. You're looking for flat to low-single digit growth.

Jennifer Foyle - President, Executive Creative Director, AE & Aerie

Sure, hi Jay, how are you? As we - Mike mentioned that as we start to hurdle these new store openings, we feel like there's definitely some comp growth in these stores, because as you know, we go into a new market. We have to get the digital side of the business up and going and we're already seeing some new in results as the quarter - again starting in Q2 our quarters from a comp perspective, we've increasingly gotten better. So. I think it's proof of the pudding their that there is some upside as we hurdle these new-store openings and really like let those businesses mature. So we're excited about that.

Regarding just the product side, Jay. I mean, we could not be more excited. We have so many new categories, one being offline. This business is on fire. Let me just say that. Q4 delivered incredible results over last year. We've been hurdling an incredible launch year-over-year of the of the crossover flare. It's our first new incoming, and it's our best and nobody can compensate [Phonetic], because we own it, and it's ours.

The one thing. I want to say about Aerie and this is true, our customer awareness, so our customer awareness about this, it's up 25% year-over-year in Q4. That speaks volume. That means that the store openings are really starting to take hold. We're introducing the brand to new customers. Don't forget, we're still in expansion mode. We're about 500 stores right now. We're opening about 20 more this year. So all these new stores hopefully pay off as far as brand awareness.

From a product standpoint, we're all over it. We're excited about Offline. That is presenting growth for us. New businesses including fleece, which we've owned, but I really think we're dominating there from a competitive standpoint. And then for the future we're really going to double down in intimates. We feel like that's a category that we can hone in on, and really innovate. Our smoothies launch this year was incredible. In fact, some of those frames have really taken hold for us and we're really going to reinvent that business. So more to come.

As you know, we're never going to stop innovating this team. I can give you a little insight. Next year is Aerie's 10-year Aerie REAL anniversary. So everyone can be excited to see what's to come, because the creative team's not stopping.

Jay Sole - UBS - Analyst

Great. And then sorry. I think I got cut-off there. The second, my question, but just for Mike, just on the revenue, it sounds like for Q1, it sounds February's been good. You said choppy, you're looking for flat to up low-single digits. Can you just talk about your quarter-to-date trend so-far, is above or below that? And then secondly on gross margin, how we feel about gross margin in Q1 sort of up or down year-over-year.

Mike Mathias - Executive Vice President, Chief Financial Officer

Hi Jay, thanks. Yes, just to confirm the cadence of revenue that applies to our Q1 guidance. So coming out in December, since [Phonetic] ICR, we talked about quarter-to-date. At that point we were negative 3% brand revenue. But we didn't miss it in January. We saw some uptick in trend at that point. That continued through the rest of the month, netting us to a minus 2% brand outcome for the fourth quarter. And then that trend actually has continued through February.

So the combined January-February result here has had some consistency to it, which is giving us confidence in as flat to uplifting low-single digit guidance. And then for gross margin, yeah, we're looking for a range of similar to last year, or not range, but our guidance of similar to last year. Income on that flat to low-single digit revenue implies some gross margin improvement. I think we're still looking at some freight headwinds from last year that we recaptured. Obviously the air freight in Q4 and some other freight headwinds, we're expecting some of that to come through in the first quarter again.

So definitely some improvement, a bit of improvement assumed in our gross margin within that, similar to last year income guide.

Jay Sole - UBS - Analyst

Got it. Okay, that's very helpful. Thank you.

Operator

Your next question is from Matthew Boss with JPMorgan. Please proceed with your question.

Matthew Boss - JPMorgan - Analyst

Great. Thanks, Jen, maybe could you elaborate on early spring selling trends that you're seeing across categories. Maybe if we touched on both the American Eagle brand and also Aerie?

Jennifer Foyle - President, Executive Creative Director, AE & Aerie

Sure, hi Matt. How are you? As I mentioned on my last answer, it's nice to see comps in both brands were getting better quarter-over quarter starting in Q3. So I'm excited about that. Look it's early-on it's February, but I have to say that there's a lot of encouragement from the teams. AE, I'd like to reflect on American Eagle for a minute.

First of all. We've really assembled a world-class team here. I am very proud of the work they've done and we've been up to really rightsizing that business, and during these tough times, it allowed us to do so, while also protecting our bottom line, as you can see. But we've been up to building a profitable base, a healthy customer base. I think that's the most important thing I can articulate right now in the American Eagle side. We had a lot of customers in the past that only came to our brand once and they were promotional customers. We are up to getting the best customers in our brands.

So starting with American Eagle, I think we're really here. I think we've right sided the business and now we're looking for growth opportunities. So early-on Matt, we launched 24/7 and another new line 77. But let me take a step back to say that women's we're starting to see a nice turnaround here. I think we're getting into the right balance of the assortments and I just really want to highlight that. It is about the balance. Denim had been a little softer, but we saw there trends happening out there in other bottoms, and I think the teams did a nice job adjusting and really going after and we're starting to see some nice results there as well as just outfitting.

Now, we're seeing great tops come to life. Our tops business has turned around in women's which is so exciting to see. And then in men just going back to we're learning. Men's that customers a little slower to take-off, but I like some of the early reads in our new 24/7 athletic business as well as 77 is a little bit of a surprise this premium denim. We really worked on it. We wanted to protect that line, we believed in higher-priced business. We own denim, as a company and why not service our new customer and early reads have been spectacular.

So we have two new potential growth vehicles for the company as well as it's just nice to see women's that business round out Matt. And all I can say is, because of our test and scale in our new logistics platform and our ability to get goods here we're pretty pleased on how we can chase these goods and get back into the business on the American Eagle side.

And in Aerie, look, it's a little early to read swim, but we've seen some nice momentum starting in February, but coming out at the end of February some really nice results there. I can't even talk enough about the apparel side and what we're up to is really going after intimates for the future.

Matthew Boss - JPMorgan - Analyst

Great. And then maybe Mike, as we break down your full year operating margin guidance, could you just help bucket, the embedded assumption if we're thinking markdown rate versus IMU [Phonetic] recapture, maybe relative to just potential off that to consider on the expense front.

Mike Mathias - Executive Vice President, Chief Financial Officer

Sure, Matt. I think we're definitely assuming freight cost recapture. So we saw it in Q4. We'll start to see here in Q1. So our guide for the year includes the assumption that we know that product costs are improving. Speed and agility in the supply-chain is here now. We're back to chase mode. We're leaving significant open-to-buy. So that should allow us to - it will allow us to ensure inventory levels are appropriate for the full year.

So both freight cost recapture and then not repeating that charge we took in Q2 associated with cleaning up the first half inventory. The offset then would be some expense growth, some level of incentives assumption that we did not incur at all in 2022. And then just some typical annual wage cost that we're looking to offset. And some others just annual expense growth categories. That's what's embedded in our assumptions.

Matthew Boss - JPMorgan - Analyst

Great. Best of luck. Thanks. Thank you. And our next question is from Paul Lejuez with Citibank. Please proceed with your question.

Paul Lejuez - Citi - Analyst

Hey, thanks guys. I'm curious if you could talk about the performance of Aerie new stores from this most recent year, compare that to previous years, as what you're seeing in terms of the new store ramp? And then also curious if you could size for us the size of the Offline business, for then Aerie. And just what are you counting on that business to do in terms of growth for '23 versus the rest of that Aerie business. Thanks.

Jay L. Schottenstein - Executive Chairman and Chief Executive Officer

Yeah, well, I can start with the new store productivity. I think we're actually really pleased with new stores out of the gate. And I think we described it as they're achieving pro forma expectations, which ties to our typical guidance or communication around two to three year payback on those investments. And that's what we've seen out-of-the gates.

So I think really in the last, in the back half of the year recent quarter and what we're continuing to see here in the spring as we've described, and others are too, a return to stores. So. I think that's actually having a positive impact on the performance of these new stores. Store traffic is healthy in general. As we know - they are coming through stores a little a little more right now than digital. Digital traffic's under pressure, but stores are really healthy.

So it's contributing to that Aerie performance. Then Offline side of the business. Jen, why don't you take that piece of the question?

Jennifer Foyle - President, Executive Creative Director, AE & Aerie

Just about - sorry, I might have missed that. I fell off the line for a minute. So Offline, meaning are we encouraged by the early results. Absolutely.

Paul Lejuez - Citi - Analyst

Just the size of usage of the size of the business, size of the offline business contributing there.

Jennifer Foyle - President, Executive Creative Director, AE & Aerie

Let me just say, it feels like Aerie in early days, we are growing at a very rapid rate. We are learning about the business. We have some different store formats, so that we can really learn to leverage. It's interesting our new stores, we're feeling very encouraged by. But we still have a portion of the business inside of the Aerie, inside of select Aerie stores whether there's an offline store in the mall or not. We still are learning in the Aerie stores.

What that tells me is that as we build out Offline, we're looking and testing new businesses inside of the Aerie store because the only thing I can say is that, every day I get a letter from a customer asking why can't Aerie do this category or why do we have more in this intimates business or why or why. So I'm pretty excited about having a new business that we can really scale.

And I think if I look at the run rate, if it's not faster, it's equal to Aerie extreme quarter-over quarter, double-digit growth year-over-year prior to getting into the pandemic. And even during some of those years. I mean the pandemic years we still did great. Look the business is about 30% Aerie and more to come, but we are testing new categories every day.

And what's great about our offline business and the way we set it out, it's not only just lifestyle. They are really starting to trust us in the performance side of the business. So again, that really opens up new opportunities.

Michael R. Rempell - Executive Vice President, Chief Operations Officer

And Paul, this is Michael Rempell. I just wanted to stress what Jen said earlier. I think it's really important for the conversation, which is, we've seen sequential comp improvement in Aerie stores each quarter from second-quarter, and even here at the start of Q1. And what that really does is, it supports our hypothesis that we opened over 130 Aerie stores in the last two years. Those stores as they mature they're going to - they're going to start comping, they're going to start a multi year trajectory of comps, which is what all our data and all history tells us. And they're going to bring new customers into the brand and grow, not just the store comp, but also the digital comp.

So early signs. If you look at the last few quarters and you look at these stores as we're anniversarying them are very positive that what these stores are doing for the business is going to mirror history, which is going to give us multi years of growth and we got into the stores, obviously during COVID at a very advantageous time to get a long-term deals done for that brand. So. It's very encouraging what we're seeing right now in the Aerie business.

Paul Lejuez - Citi - Analyst

Thanks guys, good luck.

Michael R. Rempell - Executive Vice President, Chief Operations Officer

Thanks Paul.

Operator

Thank you. And our next question is from Adrienne Yih with Barclays. Please proceed with your question.

Adrienne Yih - Barclays - Analyst

Great, thank you. Nice end to the quarter, everybody. Jen, I'll start with you. So kind of in other kind of conversations there has been talk about the teen consumer, tight wallet there and a level of price sensitivity. It does not seem like that is necessarily impacting your customer. In fact you're pulling back on promos. So just wondering - I'm sure it's the product. So that's first and foremost, but what are you doing differently to engage and create that loyalty. And then how much higher are the AURs versus 2019. How much of that is promo versus initial retail? Thanks so much. And the stores look great, by the way.

Jennifer Foyle - President, Executive Creative Director, AE & Aerie

Thank you. Our AURs, our AURs are up on the year or the quarter, Mike can get a little bit more specific for you. But regarding what we are doing different. First of all, we've been highly focused on loyalty customers, our loyalty files up. But again, in total, but again, it's about the health of our files, right, because there are best spenders. They come back the most to our brands and we want more of those customers. So that's why we're just incredibly focused on our loyalty program. And we have some really great findings and how we can even build that program stronger and better.

Adrienne, I'd like to say that. First of all, as I mentioned in Aerie doesn't quit, like we've been going after that brand year-over-year inventing, reinventing newness and as I mentioned, as you can see that our customer base is growing at an incredible rate. In fact, I just looked at a chart I believe it's over $10 million [indecipherable] like quadrupling the base. It's incredible what we've done in Aerie, and it is about building that brand awareness as I mentioned and getting into new markets and learning about customers and building that community Adrienne like we do this grassroots in both brands.

And I'll get to AE in a minute. But we have ambassadors and those technicals and Sunny and the store team have done an amazing teams, using our associates to reach our customers. And Michael said it even best, right, like our store experience and our customer experience you heard those results. They are like no other. And that's a winning edge for us. And it's a place that we're not going to quit.

So that's the Aerie story. In AE as I mentioned, we are sort of reversing the brand, sort of pulling back to go-forward. We're seeing new opportunities now. And in doing so I'd like to say we kicked-off January with our new launch of AE 24/7. But let's not forget what we're up to. Okay. Some of the new stats are saying over the past two years more recently, so January into February we are seeing Gen Z take a greater hold-on the AE brand.

I'm saying this and. I mean, this. The Outer Banks, we just did a collab with Outer Banks. It's the number-one team show out there. The product sold out. We're do collabs. We are going to get this customer into our brand. And what we've been doing so great, Adrienne is they're living with us. They're staying with us. We've mastered that. Now what we're up to is getting this customer into American Eagle, seeing the new American Eagle, seeing all the work that we've done and the trends we're liking what we're seeing.

We just had a jeans that just went viral on TikTok with - I mean, the number-one TikToker are out there, Alex Farrow. Every girl watches her. And this jean is on fire. It reminds me of the old days of the crossover. Legging in Aerie we are chasing that jeans and you know what I love about it most, the most important thing is, if you can get organic winners into your brand, organic customers in organically, organic social media, all of that means more to our customers and what our brand stands for, which is 100. We're authentic. That's what we stand for. Aerie's REAL, AE's authentic and if we can get more of those customers and we can get that buzz, that's what we're doing.

So times of positive signs. We have collab [Phonetic], you're going to see left and right back-to-school. We have another great collab, we just have some really exciting things coming and we're going to now use this new base in AE to kind of launch ahead and move forward.

Adrienne Yih - Barclays - Analyst

That is super helpful. Go-ahead.

Mike Mathias - Executive Vice President, Chief Financial Officer

Adrian just to answer the second part of your question on AURs. AURs are still up over 20% to 2019. And we've talked about that being a combination of controlled promotions, more targeted promotions versus full box offers. Some structural changes in our loyalty program in terms of giving away free jeans. Historically that we eliminated during the pandemic which we don't plan on-going back to.

I think targeted increases in ticket, where we have not seeing price resistance, and where we can see the customers willing to pay for it. That's a continued strategy. We built up that brand equity through the pandemic and our plans are not give that back.

Adrienne Yih - Barclays - Analyst

Thank you very much. Super comprehensive and super helpful. Best of luck.

Mike Mathias - Executive Vice President, Chief Financial Officer

Thanks, Adrienne.

Operator

Thank you. And our next question is from Alex Straton with Morgan Stanley. Please proceed with your question.

Alexandra Straton - Morgan Stanley - Analyst

Great, thanks so much for taking my question. I know last year you guys had mentioned this path to kind of $6 billion sales and a low-teens EBIT margin. And obviously was very different from where you guys are landing this year, just given what's happened in the last year or so. So just taking a step back, are those numbers still in play at all or how should we think about those targets and the revenue and margin trajectory longer-term? Thanks.

Mike Mathias - Executive Vice President, Chief Financial Officer

Thanks, Alex. I think at some point will come back-out and talk about longer-term targets. We're obviously very focused on just navigating the current environment and our guide for '23 includes that. I think we've got the firepower in the company, across our brands to get to 6 billion over time. Again, we can discuss later. We will provide maybe more color when we think that's possible. And then double digit operating margins is still our goal. The guidance we just provided for this year is keeping us in that mid-single-digit range, call it, 6%, maybe 6% to 7%. But as Jay noted in our prepared remarks, and then in our - within in our press release, we're embarking on a project here this year to really unlock across our entire cost structure.

The opportunity for us to leverage that continued revenue growth in a different way than we've been able to in the last few years in our history. So more to come on that project. It's geared towards exactly that. Structural changes to our operating model that allow us to leverage revenue in a different way and path us toward that 10% or double-digit goal.

Alexandra Straton - Morgan Stanley - Analyst

Great, thanks so much.

Operator

[Operator Instructions]. Our next question is from Marni Shapiro with Retail Tracker. Please proceed with your question.

Marni Shapiro - The Retail Tracker - Analyst

Hey guys, congratulations on a great end to the year, and Jen that team. Whenever we're looking for that team.

Jennifer Foyle - President, Executive Creative Director, AE & Aerie

Marni, it's the best that we have - we just got a new delivery in.

Marni Shapiro - The Retail Tracker - Analyst

But Jay. I actually have a big-picture question for you, I completely understand the caution about '23. There are still some headwinds out there and comparing to 2022, it's not - which wasn't a normal year-by any stretch. And I appreciate, reviewing the costs for the company in 2023, but you did reinstate the dividend which suggests you and the Board have a level of confidence about the business. So I'm curious from your vantage point what are you seeing that's maybe not yet in the numbers that you can share with us.

Jay L. Schottenstein - Executive Chairman and Chief Executive Officer

We see like good momentum going the right way. As we've said, like last month was a good month. We feel very. - Even now we don't know what the future's going to look like. We are very optimistic. I mean was it was very interesting this past week, we had our international partners in. I got a call from our major partners and said, they had been coming for 10 years and this is the best I've seen the line look. So we're very optimistic.

I mean I think our Jen was saying, we developed the new-age 77. We're getting good traction on that. 24/7 we think can be very big.

Marni Shapiro - The Retail Tracker - Analyst

So it's mostly product base, which is really where you guys shine anyway.

Jay L. Schottenstein - Executive Chairman and Chief Executive Officer

It going to be product based, so product based product, and at the same time as Michael Rempell was saying and Mike Mathias was saying we see - we're looking at the real-estate strategy a little different. We looking at about how we take each market separate and where the best locations in those markets are and our goal is to make sure that we have stores in the best locations in those given markets.

Marni Shapiro - The Retail Tracker - Analyst

Makes a lot of sense. And then Jen, if. I could just ask one quick follow-up to the AE jeans situation. You've had some very big hits in the store that I've seen. And I'm curious is - has the market opens up enough that you can chase back into that in step product> I'm not calling out the product in the public forum for reason, but do you have that ability to now chase, what I am seeing selling out very quickly.

Jennifer Foyle - President, Executive Creative Director, AE & Aerie

Yes, absolutely, and we've really changed our testing process in American Eagle. So that we can be a little bit more nimble and we can be a little bit more flexible, not only with silhouette, but with wash. I've learned a lot in my couple of years in American Eagle, and it's not just about one thing in the jean. Sometimes it's about wash, sometimes it's about a new fit.

And that's where. I think we can really dominate because of the way we test and go-to-market. We are seeing a lot more agility there, Marni, to your point, I and we're seeing trends improve in denim, which is good news, at least in American Eagle. Albeit, we're offsetting it with newer ideas at this stage, and that was intentional. We sort of forecasted this. So we have other new ideas to help offset, but. I am looking-forward, jeans never go waste. That was the funniest commentary. I could actually quote, Roger Marks. Jeans and T-shirts in America ever go away.

It's just they soften and then we have to be prepared for the next trend. And I think this team did an outstanding job with the spring assortment, making sure that we're leveraging the new trends in bottoms, where we do an incredible job. And now as I mentioned, Marni, we have new tops and other things that are working, and that we can really trend and chase. So look, there's good news here. It's early-on. We like what we saw in February, but I also like our ability to react and what we're reacting to and the nimbleness.

So there's more to come here. And hopefully, you'll hear this enthusiasm with me at the Q1.

Marni Shapiro - The Retail Tracker - Analyst

Thank you so much guys.

Jay L. Schottenstein - Executive Chairman and Chief Executive Officer

Also Jen, like we have other businesses too that we're very excited on. We have our Todd Snyder business which is growing very strongly and I'm very excited about that. And we're excited about of the positive things going on.

Marni Shapiro - The Retail Tracker - Analyst

Thanks guys.

Operator

Thank you. Our next question is from Jonna Kim with TD Cowen. Please proceed with your question.

Jonna Kim - Cowen & Co. - Analyst

Thank you for taking my question. Just curious about the Quiet logistic platform and how you're thinking about long-term. You mentioned that even the revenue growth and profitability are revisiting that for '23. What's sort of your assumption there and how to sort of think about the long-term trajectory? And in terms of the Aerie comp growth, how should we think about the cadence as we start to lap the impact of new stores. Thank you very much.

Jay L. Schottenstein - Executive Chairman and Chief Executive Officer

Yeah, you talked about Quiet. It was a valuable acquisition. We need the capacity to be able to fulfill our orders for our brand and Quiet gave us the efficiencies and speed. And at the end of the day, we still believe. If you don't win it at the logistics, you're not going to win the model and specialty retail in order to compete against everybody. So we're still committed to that. You know, we want to get we want to get if we want to get like a better bottom-line there and Michael Rempell could talk that for a second.

Michael R. Rempell - Executive Vice President, Chief Operations Officer

Yeah, thanks Jay. I mean, you really can't separate the two. Issues. So one is Quiet provides tremendous support for our brands and our business. It gave us capacity like Jay mentioned, faster delivery times and of course we consistently reduced our delivery cost per order to customers over the last couple of years, which is pretty unique in retail. But like I said, the third party business, just hasn't ramped our expectations. It saw great growth. It grew almost 40%, but that was below what we expected and it did it at a margin that was below what we expected. So while we're not giving up on the business at all we still think it's going to be a very valuable business some day. We are resetting our plans and we're going to pull expense out of that business. We're going to. Eliminate unprofitable service lines in that business. And we're very committed to reducing the loss on a full-year basis.

So from a year-on year basis, it's going to go from something that was a headwind in 2022 to something that provides a benefit in '23. And again, overtime, we still believe this is going to be a successful and profitable business for us.

Was there a second part to the question?

Jonna Kim - Cowen & Co. - Analyst

Yeah, just on [indecipherable], yeah.

Jay L. Schottenstein - Executive Chairman and Chief Executive Officer

Yes. I think the minus 2% for fourth quarter, Jonna, I think we talked about the fact that all that non-comp, 150 stores that we've added over the last couple of years. The 60 we added this past year even more specifically as those anniversary that comp gap that, you do the math on Q4 is a 10 point gap with total revenue up eight, comp's minus two. That's going to close even further in the Q1 as we anniversary some of the Q1 openings last year.

So on a similar kind of total growth rate. We do expect Aerie comps to turn positive as early as this first-quarter and definitely positive for the year. And Michael described earlier how that ramped. It's going to impact the business as a whole. But from a GAAP perspective, just to kind of give you that specific metric, we use the comp the total growth versus comp gap will close and we'll be in positive range in '23 is our expectation.

Jonna Kim - Cowen & Co. - Analyst

Got it, thank you.

Operator

Thank you. Our next question is from Janet Joseph Kloppenburg with JJK Research. Please proceed with your question.

Janet Kloppenburg - JJK Research Associates - Analyst

Hi, everybody. And it's nice to see the improvement going on. I'll be quick. I wanted to ask, Jen what overview is on the intimates category? It seems to be softness across the industry, Jen. So maybe you could tell me what's going on there? And also on basic leggings black leggings, I'm starting to see a lot more promotions in the industry. And I'm wondering are customers gravitating more to fashion leggings. And just lastly for Mike, given your guidance for flattish revenues this year, for us up low-single. I think, should we expect inventory to track in line with that? Thank you.

Jennifer Foyle - President, Executive Creative Director, AE & Aerie

Yeah, hi, Janet. How are you?

Janet Kloppenburg - JJK Research Associates - Analyst

Good, thanks.

Jennifer Foyle - President, Executive Creative Director, AE & Aerie

Intimates, has been a little volatile, I will say. We're holding our own as far as market-share. But it has been a little up and down. With the launch of smoothies as I mentioned we're learning new things in the business that I think gives us the gateway into new ideas. And honestly, that's what we really need to do. I think the team is up for new challenges and new innovation in intimates. And it's something you're going to hear me talk a lot about in the future.

It has been a little bit interesting. It's the tale of two cities there. Sort of built a business that's happening again. But then it's really almost nothing. So and what we want to do is play in what is meant for Aerie, right what's right for our business and I think we've learned some things over the last year and. I think you'll see us start to pick-up momentum in some of these new ideas and really attack what we own and what I think we are famous for including products being one of the businesses that I would like to say we really - we're one of the first to really dominate in that business.

When it comes to black leggings, yeah, there are a lot of black leggings out there in the industry, you are right. And. I think we are starting to see more fashion. Interestingly, not just in black leggings or leggings, but in other parts of the Offline business. And I do want to congratulate the team Abbie and team for really going after some new ideas in that business. You'll start to see us really marketing to them and early reads, we're feeling really good about it. So again - and then how do we reinvent the black leggings?

We have new launches coming forward starting in Q3, a really exciting launch in Q4 that. I think will definitely separate us. From our competition and we're going to continue to build-on all the equity that we've built on in both brands. As far as building our AURs, building that quality and the customer's willing to pay. We're seeing that because they trust us. So I think that's when it comes to the lagging business that's what we have to just continue to work on. So and get that trust and hopefully, they'll grow with us the way they already have, those customers. So thanks Janet.

Mike Mathias - Executive Vice President, Chief Financial Officer

And again on inventory, by the time we get the end of the first quarter, as we talked about total inventory is projected to be down. As we sit today and actually, at the end-of-the 4th-quarter AE and Aerie, US and Canada. Inventory was down high-single-digits. We're expecting that to actually by the time we get into Q2 to be down even further, which really it should be right. We were against the elevated inventories last spring that we had to clean-up.

You'd expect us to be down pretty significantly on this guide of flat to low-single digit revenue increase. Then when you get to the back-half of the year knowing all the actions we took last year to write that inventory for the back-half, which drove the positive results we saw in Q3 and Q4 in general. And really just philosophically back to inventory growth being below sales growth expectation similar to below, and that's what we're planning as of now.

Judy Meehan - Senior Vice President, Corporate Communications and Investor Relations

Okay, we are running up on time now. So I'll turn it back over to Jay for some closing remarks.

Jay L. Schottenstein - Executive Chairman and Chief Executive Officer

Okay, entering 2023, we are in better position. Our brands and operations are healthy. Given macro uncertainties our outlook is cautious. We will stay disciplined on expenses and inventory. If demand is stronger, we will strive to deliver better results. Thank you for joining the call and look forward to updating you on our progress next quarter. Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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AMERICAN EAGLE OUTFITTERS INC

Q4 2022

Earnings Transcript

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