American Eagle Outfitters, Inc. (AEO) Q4 2020 Earnings Call Transcript

American Eagle Outfitters, Inc.  (NYSE: AEO) Q4 2020 earnings call dated Mar. 03, 2021

Corporate Participants:

Judy Meehan — Vice President of Corporate Communications & Investor Relations

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Mike Mathias — Executive Vice President and Chief Financial Officer

Jennifer Foyle — Executive Vice President and Global Brand President – Aerie

Michael R. Rempell — Executive Vice President and Chief Operations Officer

Analysts:

Adrienne Yih — Barclays — Analyst

Matthew R. Boss — JP Morgan — Analyst

Oliver Chen — Cowen & Company — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Janet Kloppenburg — JJK Research Associates — Analyst

Simeon Siegel — BMO Capital Markets — Analyst

Marni Shapiro — The Retail Tracker — Analyst

Kate Fitzsimons — RBC Capital Markets — Analyst

Kelly Crago — Citigroup — Analyst

Presentation:

Operator

Greetings, and welcome to the American Eagle Outfitters Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions] It is now my pleasure to introduce your host, Judy Meehan. Thank you, Judy. You may begin.

Judy Meehan — Vice President of Corporate Communications & Investor Relations

Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer; and Mike Mathias, Chief Financial Officer. In addition, Jen Foyle, Chief Creative Officer for AEO, Inc. and Aerie Global Brand President; and Michael Rempell, Chief Operations Officer, will join us for Q&A.

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

Also, please note that during this call and in the accompanying press release, certain financial metrics are presented on both the 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’d like to turn the call over Jay.

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Thanks, Judy. And good afternoon everyone. I hope you and your families are safe and healthy. I’m extremely proud of our results in the fourth quarter and throughout 2020. COVID-19 severely tested us. Yet, our success is a testament to the power of our people, our brands and our operations. Early on, we took decisive action to protect our associates and customers, preserve cash and prepare for a new future. These actions enabled AEO to thrive and deliver positive results, while also developing our plan for consistent profit growth.

Looking back on 2020, after a difficult start with the abrupt closure of all stores, we saw a substantial improvement in each quarter. We ended the year on a very strong note. Fourth quarter adjusted operating profit grew 38% compared to 2019. This is a remarkable achievement in the face of a pandemic-related traffic pressures in stores. Cash flow was strong, and we ended the year with $850 million in cash and approximately $1.2 billion in total liquidity.

I’m very pleased that today, we announced the reinstatement of our quarterly cash dividend. We have a strong and long tradition of returning cash to shareholders and are very proud of this commitment. Last year, we also spent time preparing for a new future and developing our real power, real growth value creation plan. As you heard at our Investor Meeting in January, our strategy has centered on five key pillars, which we believe will support top tier financial results over the next few years. I will briefly discuss each of these now, as well as initial progress in each area.

Our first pillar is a Double Aerie to $2 billion in revenue by 2023. Aerie had an exceptional 2020. During the fourth quarter, revenue grew 25%, marking our 25th consecutive quarter of double-digit growth. Aerie’s adjusted operating profit grew an incredible 52% as merchandise margins expanded and it leveraged the expense base. Consistent with the trend throughout the year, Aerie’s momentum was broad-based across categories. This speaks to the incredible power of our lifestyle brand.

Activewear was a clear stand-out in the quarter and our highest growth category. In July, we consolidate our active assortment into a new sub-brand OFFLINE by Aerie as part of our strategy to maximize our potential in this exciting growth category. We have been extremely pleased with the customer response. In addition to OFFLINE strong growth, our data shows the sub-brand is attracting new customers to the Aerie brand. At the same time, Aerie’s core categories continue to perform. For example, intimates grew at a double-digit rate in the fourth quarter, led by bralettes and undies. We continue to be amazed with all Aerie as accomplished and see significant future runway.

Our second pillar is to ignite American Eagle for profit growth. As you heard a few weeks ago, the AE brand’s most meaningful opportunity is to drive stronger and more consistent profitability and cash flow. This was a clear focus in 2020. I’m pleased with the progress made over the course of the year. AE’s fourth quarter’s results sequentially improved from the third quarter. With continued pressure on stores, AE’s revenue declined 9%, yet digital grew 20% and overall adjusted operating profit increased 29%. We ran a very healthy business and that remains a major priority, as we look to the future.

Our leading jeans franchise was yet again a stand-out in the quarter. We gained share even as we meaningfully reduced holiday promotions and saw AUR growth. AE continues to introduce product-focused marketing campaign that showcase our relatable and positive spirit. Last week, we announced our Jeans Are Forever spring 2021 campaign, featuring stars of the hit Netflix show Outer Banks. We also launched a new innovative shopping experience, the partnership with Snapchat. We are really excited about this launch as we continued to introduce new ways to fuel customer engagement. Overall, I’m proud of the AE team’s execution and confident we will continue to see great progress in 2021.

Our third priority is to continue to invest in customer focus operations. The digital fulfillment capabilities we developed over the past year were critical during the holiday. Our digital channel revenue grew by $155 million during the fourth quarter, a growth rate of 35%. I’m really proud that we were able to handle the increases in site traffic and shipment volumes, while still maintaining excellent customer experience and service levels.

Our Regional Distribution Network also ensured we had inventory located at the right places at the right time. Despite industry cost increases, the team did a nice job mitigating delivery cost pressures. Our supply chain transformation initiative is a significant competitive advantage that will continue to drive efficiencies and support bottom line growth towards strengthening ROI discipline. This was a focus throughout the year and evident in our results.

During the fourth quarter, we drove meaningful gross and operating margin expansion and generated robust cash flow. This performance reflects strong inventory optimization and expense management, which will remain major priorities. In addition, we will continue to invest in our growth businesses, as I see more opportunity for AEO than ever before.

Finally, our fifth pillar is to embrace the power of our people, culture and purpose. At AEO, we are purpose-led company with enduring brands and inclusive and optimistic culture. There is a lot of great work going on across the company. In the coming months, we look forward to awarding our first REAL Change Scholarships for social justice. We also continue to focus on the environment across our operations. And we are thrilled with the customer response to our real good product lines.

In closing, although we still face an uncertain macroenvironment, we are entering 2021 with great momentum. I’m optimistic about the future. The promotional environment is more rational than we’ve seen in recent years. We have two of the most loved and in-demand brands in retail and favorable real estate environment, strong operational capabilities and improving competitive backdrop. A disruptive retail landscape has created many opportunities. We have the right strategy and leaders to capture sustainable, profitable market share gains in the future. I’m pleased to have Jen Foyle and Michael Rempell joining us today. During Q&A, they can provide further insights on our brands and channels.

Now, I’ll turn the call over to Mike Mathias to review the financial results.

Mike Mathias — Executive Vice President and Chief Financial Officer

Thanks, Jay. Good afternoon, everyone. I’m pleased to report that the fourth quarter and year were far better than expected at the onset of pandemic. We saw sequential improvement in each quarter ending on a positive note, with fourth quarter adjusted operating income up 38% to last year, driven by strong merchandise margins across brands and channels. Our performance really speaks to the quick action, vision and strong execution of our teams.

In the fourth quarter, total company revenue declined 2% with strong online sales mostly offsetting declines in stores. Digital revenue rose 35% with Aerie up 75% and AE up 20%. Online sales for the quarter and the year represented approximately 45% of our total mix, increasing significantly from 29% for the full year 2019. Digital KPIs were very strong with double-digit traffic growth, improved conversion and a high-single-digit increase in AUR.

Our focus on tightening assortment breadth and optimizing inventory levels enabled us to control promotions and drive greater full-price sell-through. Store channel revenue decreased 20%, reflecting mall traffic declines. As anticipated, store revenue declined across both brands as we lapped high volume seasonal store events like Black Friday and Super Saturday, which were meaningfully impacted by the pandemic.

We also dealt with the impact of store closures across Canada, California and other regions that reduced total selling days by 6% relative to last year’s fourth quarter. Continuing a trend throughout the year, these pressures were partly offset by strong conversion in AUR. By brand, Aerie continues to demonstrate strong momentum. Revenue increased 25% to $337 million in the fourth quarter. Comparable sales grew 29%, building on a 26% increase last year. With AE’s greater store penetration, the brand was more affected by the store channel headwinds. However, we were pleased to see improvements in the third quarter. Brand revenue declined 9% to $943 million. AE comparable sales declined 8%.

Total AEO gross profit dollars increased $32 million or 8% during the quarter, and gross margin expanded 300 basis points to 34%. Merchandise margins expanded significantly, reflecting the benefit from continued promotional discipline and our inventory optimization initiatives. Our product assortments were well received, which enabled higher full-price selling.

As Jay mentioned, rent leveraged as a result of negotiated savings and benefits from recent impairments. Offsetting this, we saw higher delivery, distribution and warehousing costs, as well as higher incentive compensation, yet the impact of delivery cost pressure was less significant than expected reflecting strong execution and efficiency benefits from new fulfillment capabilities.

SG&A expense increased 2% due to higher incentive compensation. This was better than our expectation due to our ongoing focus on expense management across labor and other store-related costs. In the absence of incentive compensation, SG&A would have declined 4%.

Adjusted operating income of $106 million increased 38% compared to last year. Adjusted operating margin of 8.2% expanded 240 basis points. Adjusted EPS was $0.39 per share in the quarter. Our diluted share count was 197 million and included 26 million shares of unrealized dilution associated with our convertible notes.

Now some detail on our brands. I’m really pleased to see both brands generate strong increases in operating income, which is a testament to our ROI mindset and strategic execution. American Eagle adjusted operating income increased 29% to $145 million despite the revenue decline. Adjusted brand operating margin improved 450 basis points to 15.4%, due to merchandise margin expansion and rent savings.

While we have made an incredible progress at American Eagle, I want to underscore that there is still meaningful opportunity for future profit improvement. Aerie adjusted operating income grew 52% to $48 million. Adjusted brand operating margin expanded 250 basis points to 14.3%, reflecting merchandise margin improvement and expense leverage from revenue growth. Corporate unallocated expense increased 28% to $87 million, primarily due to incentive compensation.

Ending inventory was down 9%. American Eagle inventory declined 21%, due to continued inventory optimization initiatives, as well as lower end-of-season clearance. Aerie’s inventory increased 10% to support demand growth. The clearance was lower to last year. We are very pleased with our inventory discipline during 2020, which is validated by long-held view that we can meet customer demand and deliver an exceptional experience, while generating higher returns on inventory investments. This work is ongoing, and I believe we will have a material impact on our profit improvement over the next several years.

Our balance sheet was an advantage during 2020 and continue to strengthen. During the fourth quarter, we generated $213 million in operating cash flow and ended the period with $850 million in cash and short-term investments. At year-end, our total available liquidity, including our undrawn revolver, was approximately $1.2 billion. Our only debt currently outstanding is our convertible note.

As Jay mentioned, we are pleased to reinstate our dividend and have also unsuspended our share repurchase program. In 2021, we expect capital expenditures of $250 million to $275 million, which is up from $128 million in 2020 and in line with the average annual target we shared at our Investor meeting.

We will continue to actively monitor our store fleet. We closed 57 total locations in 2020, including over 50 American Eagle stores. The sales and customer transfer rates from these locations will inform our decision-making around our 2021 lease expirations. The vast majority of our 2020 store renewals are for one year. So we have significant flexibility, including almost 450 leases expiring this year. We expect to continue to negotiate material rent savings and plan to open approximately 60 Aerie locations, including 25 to 30 OFFLINE stores, which will be a mix of stand-alone and Aerie side-by-sides. At our Investor Day in January, we laid out a path of $5.5 billion in revenue and a 10% operating margin by 2023.

Our back-half results increased our confidence in these goals, and we expect to make continued progress in the coming year. Looking ahead, we are pleased with how we started the year and expect our 2021 results to put us on a strong path towards 2023 targets. Yet the operating environment remains uncertain, so we are not providing annual guidance at this time. Regarding the first quarter, we expect revenue and operating income to exceed our results from the first quarter of both 2020 and 2019.

In closing, we began implementing our go-forward strategies to drive Aerie’s growth, optimize AE’s profitability, establish leading capabilities and continue to focus on investment returns. Our strong performance during the fourth quarter is a key proof point that validates our approach and strengthens our confidence in our future opportunity.

With that, we will open it up for questions.

Questions and Answers:

Operator

Thank you. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from Adrienne Yih with Barclays. Please proceed with your question.

Adrienne Yih — Barclays — Analyst

Good afternoon. Let me just say, well done on a really tough year and exiting on — with good momentum. So congrats. I guess, my first question is going to be on the commentary about could the quarter having sales higher than 2019, can you give us any color on February trend and then, the notion of, at the end of the quarter, being able to achieve that inventory, once stores would have been inventory access relative to the port congestion that is often talked about these days.

And then for Jen, can you talk about the Aerie side-by-side locations vis-a-vis the stand-alone? And how you’re thinking about the growth of the core business at the stand-alone locations and the impact on the side-by-side? Thank you very much.

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Thanks. Thank you, Adrienne, and thank you for the compliments on the quarter. I can take the first part of the question on quarter-to-date. We’re really pleased with how the quarter has started. And obviously, there’s a lot of noise out there with weather and you mentioned port congestions, which Michael maybe add some color to that part of the answer. But we are definitely pleased with what we’ve seen so far here in the last week or two, especially since the weather has broken. And we are all keeping tabs on just how much of a challenge February was in general in the amount of snowfall and in fact, even on the Southwest, Texas being shut down for a week or two. So I think we’re hopefully passed all of that, but as we sit here today and as we’re into early March, we’re seeing really good signs in terms of where we headed for the quarter, which really just reiterates while we gave the general guidance on what we’re expecting at a total quarter level against 2019 results both on the sales line and operating income line.

Adrienne Yih — Barclays — Analyst

[Speech Overlap] Go ahead. [Speech Overlap]

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Sorry, Adrienne, what was that [Speech Overlap].

Adrienne Yih — Barclays — Analyst

Sorry, I was just — the follow-on flow-through on that was just any color on the gross margin flow-through of those sales?

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Yeah, we’re still running. Our the formula [Phonetic] is intact. Our inventory is in great shape. We’re still — the merch margin improvement we’ve been talking about, we feel really good about that continuing in the first quarter, we are seeing that to date. So from a benefit to the P&L and where we’re seeing leverage both from a gross margin and operating rate perspective, we are continuing what we saw in the back half of the year in both third quarter and fourth quarter is our expectation.

Adrienne Yih — Barclays — Analyst

Great.

Jennifer Foyle — Executive Vice President and Global Brand President – Aerie

And then, Adrienne, regarding our store growth opportunity, right now, we’re about even, equal. We have 170 stand-alone stores and 178 side-by-sides, so almost 350 stores. And we’re approaching this mall-by-mall. In some cases, we’re exiting the side-by-side and opening up a stand-alone where we can have more square footage and get the true experience of Aerie. So again, this is mall-based depending on the mall and depending on the opportunity and the deal that comes before us.

So 50 Aerie stores are to open this year and then, we are going to open 30 OFFLINE stores this year. So we’re really excited about our growth opportunity. And as you know Adrienne, what we see is that beautiful halo effect. When we enter a new market, we just reap the benefit online as well. And we’re going to continue to use that approach as we approach every market.

Adrienne Yih — Barclays — Analyst

Great. That’s very helpful. Thank you.

Michael R. Rempell — Executive Vice President and Chief Operations Officer

Adrienne, it’s Michael. Just touching real quickly on your question about inventory. We did experience like you’re suggesting the congestion both at the US ports and the overseas ports, and that did cause us to delay our floor sets for both AE and Aerie from January into February. But I have to tell you our teams did a terrific job. They are very proactive, very aggressive in terms of quickly identifying the situation and moving up our handovers, adding additional carriers, calling on different ports. And we feel very good about our inventory flow now. So, while transit times are longer, it’s all accounted for — in our guidance and we don’t see an issue with — in the sales.

Adrienne Yih — Barclays — Analyst

Great. Thank you very much.

Michael R. Rempell — Executive Vice President and Chief Operations Officer

Sure.

Operator

Thank you. Our next question comes from Matthew Boss with JP Morgan. Please proceed with your question.

Matthew R. Boss — JP Morgan — Analyst

Great. Thanks and congrats on another nice quarter.

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Thanks, Matt.

Matthew R. Boss — JP Morgan — Analyst

Maybe first Jen at Aerie, how would you rank top areas of the assortment that you’re leaning into to drive continued momentum and new customer acquisition, more as we think about the other side of the pandemic and the market share opportunity that you see from here.

Jennifer Foyle — Executive Vice President and Global Brand President – Aerie

Yeah. First, I just — like the team, I mean, I think we really excelled during a very challenging year, not only did Aerie excelled, but we opened two new brands, one OFFLINE and then, the small brand unsubscribed which is a tiny concept, but certainly, we’ve seen great results on the OFFLINE — in the OFFLINE business and I think that will remain a killer category for us. And we’re going to continue to grow as I mentioned 30 stores this year. Various formats, we’re still testing and learning. But really, we’ve seen just unbelievable results there.

I have to say it was pretty impressive throughout this year. All categories really fired. We’re seeing nice results in intimates, and we continue to dominate in comfort intimates really what that generation wants today, but still pretty in feminine. And we’re going to continue to innovate in that category and dominate every category. Apparel had great results, tops and fleece. I just really would like to consider at the intimates lifestyle destination. So we are going to continue to grow. Our customer continues to ask for more. And speaking of customers, we did grow that base 16%. So, really nice uptick there considering when stores were closed. We were still able to leverage direct and that business to entertain new customers to our brand.

Matthew R. Boss — JP Morgan — Analyst

Great. And then just on gross margin, how best to think about merchandise margin opportunity this year? Meaning, can you build on the performance that we saw in 2020 as we think about costing IMU and inventory management or are there any structural impediments to gross margin exceeding 2019 levels as we think back to historical gross margins, which were even higher?

Mike Mathias — Executive Vice President and Chief Financial Officer

Thanks. Matt, it’s Mike. I think — I mean, we talked about in the Investor Day, we still see significant opportunity in our inventory optimization work and initiatives. I think what we, the benefits and the results we saw in the back half we’re very pleased with, but I mean I was just the starting point, I think we still have a lot of opportunity in the first half of the year here to those initiatives to benefit us. And we haven’t really tackled every category yet. I think we talked a lot about the AE brand in tops and refining SKU counts and choice counts. Jen and team are working on the some other fronts, bottoms being a category there’s opportunity in. So I think that’s — we still see runway in terms of merch margin expansion beyond what we achieved in 2020.

The gross margin side of thing is we don’t see any impediments to continuing — the benefit in 2021. There’s one piece to remind everybody about since you asked, which we did have that one-time benefit in Q2 of our license partner payments. That was about a $40 million benefit to the top line, $35 million plus or so to our gross margin line. So that’s a one-time sort of hurdle if we’re grounding ourselves in 2019. Just a reminder that’s out there, but nothing else. Everything else, we’re doing in terms of inventory optimization, inventory position to sales. The formula is still intact. Essentially, sales outpacing inventory and margin outpacing sales, that’s our goal.

Michael R. Rempell — Executive Vice President and Chief Operations Officer

Yeah. And Mike, I would just add on to that since he specifically asked. We do see markup as a benefit at least through back-to-school right now. So despite higher shipping costs, we feel very good about our ability to achieve higher markups through the first three quarters of the year.

Matthew R. Boss — JP Morgan — Analyst

Congrats again.

Mike Mathias — Executive Vice President and Chief Financial Officer

Thank you.

Michael R. Rempell — Executive Vice President and Chief Operations Officer

Thank you.

Operator

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

Oliver Chen — Cowen & Company — Analyst

Hi. Thank you very much. Great quarter. Looking ahead with inventory management and the opportunities you have there, what some of the lower hanging fruit, particularly as you think about localization and making sure the digital and physical inventory is where you want it? Would also love your takes on the AE tops, men’s and women’s and contrasting the opportunity between men’s and women’s and just where you are with your roadmap to continue to innovate there. Thank you.

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Okay. Oliver, I’ll take the first part of your question about inventory management. Obviously, we’ve talked extensively about our supply chain transformation, the nodes we set up and the potential that has, and what I would tell you is we’re very pleased with our results in fourth quarter. We did deleverage delivery expense, but we deleveraged less than we had expected to because we had that inventory closer to customers and because we had more consolidated digital shipments. And really like Mike was saying, we feel like we’re just scratching the surface. I mean, when you look under the covers of that strategy, there is a lot that we could do better and that’s where we’re going to do better in the coming year. So making sure we have better in-stocks by store, by size even though we’re doing it on less inventory making that inventory so much more productive and profitable. So we feel great about that.

We’re expanding our same day pilot that we did in fourth quarter to 50 markets over the next few months. And again, that’s another great opportunity for a business like ours that has strong digital channel, strong stores channel to leverage both to provide great experiences for customers. So there is a lot in our roadmap. Inventory productivity is top of mind. But there is a lot that we’re going to do also to dramatically improve the customer experience. And Jen, do you want to take the question on tops?

Jennifer Foyle — Executive Vice President and Global Brand President – Aerie

Yeah. Thanks, Oliver. How are you all of you, Oliver, by the way? Nice to hear from you. So tops, near and dear to my heart, Oliver. Let me just go back when I started in September, I want to first say that I’m just so impressed with the AE team and the talent that really revise on that team from design to merchandising full throttle, I really have been more than impressed in. Look, men’s was underway over a year and a half ago. We really buckled down there and really looked at, really getting back to key items and payments for items and we are just really seeing nice results from that hard work with the team.

Fast forward on the women’s and let me start with bottoms first because where there is a great bottom, there is always a great top, and we’ve really realigned the team. So we’re really thinking full outfitting. That’s one first shift that we’ve made that I think it’s really important and also brought in some new talent, a new woman to run merchandising who was thrilled with Rene branches. So really excited with that move. And with that, going back to denim back in September, we started to see a shift in bottoms, Oliver. We’re seeing looser fits more fashion. I would just say we’re getting into a little bit of a fashion cycle here, maybe a bigger fashion cycle. We got a nice job. That bottoms team, Oliver, really test and scale.

Denim just is a true machine, and I think we’re underway to really have a great balanced bottoms assortment. So that said, we’re going to have those tops. I really worked with the bottom, and really that’s how we’re going to look at it, Oliver. We’re really getting back to best practices in women’s deal. That would be key items again, just great quality. I’d like to say we’re headed into a fashion cycle Oliver, but that we’re not going to turn our back on the quality and the value price that we’re known for in American Eagle.

Oliver Chen — Cowen & Company — Analyst

Thank you so much, Jen. A follow-up on ESG. Eagle ranks really well on a lot of the Cowen [Phonetic] surveys for ESG, just would love your take on what’s important for investors to prioritize or know about in terms of what American Eagle is focused on with respect to ESG.

Michael R. Rempell — Executive Vice President and Chief Operations Officer

Yeah, Oliver, I mean — this is Michael. We put out very aggressive goals in terms of our carbon reduction in the coming years, and we feel like it’s important to be a leader, our associates care about it, our customers care about it and, and we’re going to achieve those goals. We recently launched a real good campaign with taking our iconic jeans and making sure that they were made in a much more sustainable way, and we’ve received great results. Customers really like the product. I know Jen is building on that concept, and our design teams are both inspired by, excited by designing and developing product in a more sustainable way. So for us, that’s the future, that’s the way — that’s what our customers expect, that’s what our associates expect, and we think it’s both going to be good for the environment and good for business.

Oliver Chen — Cowen & Company — Analyst

Thanks, Jen. Thanks, Michael. Best regards.

Michael R. Rempell — Executive Vice President and Chief Operations Officer

Thanks, Oliver. Take care.

Jennifer Foyle — Executive Vice President and Global Brand President – Aerie

Thank you, Oliver.

Operator

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

Dana Telsey — Telsey Advisory Group — Analyst

Good afternoon, everyone and nice to see the progress. You had mentioned about delivery costs being a little bit less than expected due to some new fulfillment initiatives. Can you expand on that, and how you’re planning on delivery going forward. And then on inventory levels, how are you planning them for Aerie and for American Eagle as we go through this first half of the year? And just any thoughts on the spring break? Jen, I’ve seen some of the new products you are having both on the jeans side and what you’re talking about the new styles and on the Aerie side, anything to highlight in particular that we should be watching for? Thank you.

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Sure, Dana. So I’ll talk about delivery cost first. Yeah, look, we did absorb cost increases as every retailer did last season, but we were able to offset some of the cost increases by shipping fewer shipments per order, by shipping closer to customer and by using some regional characters. So that strategy was very effective for us, and it’s been a maniacal focus of the team. We’ve hired a lot of new talent to supplement the great talent that we had on the our team, and they have a great roadmap this year to really look to offset delivery increases wherever possible. So it’s actually a big opportunity for us, as I think about the year. In the first quarter, it’s when we shut down our stores and we were shipping products from the stores and we are shipping products kind of all over the place as we are trying to liquidate. So that creates an opportunity for delivery.

In the second quarter, we absorbed much higher delivery costs as we had our highest rates actually of the year. And again, we were shipping individual units from stores all across the country. So that creates an opportunity for us. And like I said before, in the third and fourth quarter, we feel like although we’re extremely proud of the job that our team did with supply chain transformation and the job we did localizing inventory, we feel like it’s early days for that strategy. We feel like there is so much opportunity to leverage our stores more for curbside and same-day delivery to do a better job regionalizing the inventory and using local carriers to deliver the inventory and still shipping to customers in fewer packages. So delivery is a huge focus for the company. It’s obviously a growing expense, but we feel like we have a really good path to mitigate much of the increase and much of the deleverage going forward.

Mike Mathias — Executive Vice President and Chief Financial Officer

And Dana, I can take the inventory piece really quick just from the number side of it. At the end of the fourth quarter there, you saw the spread, we were down 9% on fourth quarter revenue down 2%. And then, each brand being really commensurate with the individual performance; AE down 21% inventory on down 9% sales; Aerie inventory up 10% on, call it, 25% to 30% growth. So first quarter, in the first half of the year, really, that spread really for the brands and definitely the total level is something we’re looking to maintain. And then, we’re refining our back half plans, really this is the time of year we’re looking at still at Q3 and still some time ahead of us for Q4, but we’re refining those as we speak.

Jennifer Foyle — Executive Vice President and Global Brand President – Aerie

And Dana, regarding spring break, look, I’m really excited, we have some tailwinds in our favor. Right now, the stimulus package, tax returns and the weather is starting to break. Without unveiling all of our secrets when the weather did break, we were seeing some nice results in key categories for us, swim and shorts are starting to open up. I’d like to say — in AE, we just launched our Outer Bank campaign, which is really a nod to all of our new fashion in our products and that really happened at the end of last week, and we’re seeing great results from that campaign. 3 million organic views, which is a big number for us, which is pretty impressive and some of the best Instagram likes ever, and we love the comments that we’re receiving and it’s pointing to that. These kids are ready to get out with their masks on so to speak, but they’re ready to get out. So look, we’re just entering our spring break time period, and I think we have all guns ready to fire.

Mike Mathias — Executive Vice President and Chief Financial Officer

Dana, one clarification. It’s Mike again. Just as I talk about inventory levels for this first half, we are looking at 2019 compares, just so you understand that both on the — not only revenue, but inventory as well. Obviously, our first — our 2020 inventory for Q1 and Q2 was probably not a good benchmark to look out with all the activity once the pandemic hit, so those are to 2019 inventory comparables.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you.

Operator

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

Janet Kloppenburg — JJK Research Associates — Analyst

Good evening, everyone, and congratulations on a great year and a lot of good change. First, Jen, if you could talk a little bit about this fashion shift, I’m hearing about it as well, and maybe how it pertains to change and any change in styling there, how you’re positioned. And if you’re starting to see a spend shift away from complete casual to a little bit more dress up and go out, love to hear about those trends.

And also for Jay and Mike, I’m wondering what you’re thinking about store productivity levels if you’re seeing them improve and what your threshold will be this year as the stores reopen and traffic returns. I’m just wondering where you will be satisfied as you’re looking for those levels to match fiscal ’19 or can you settle at a lower level because of rent abatements, etc.? And just lastly, should we expect digital growth to slow as store productivity rebounds. Thank you.

Jennifer Foyle — Executive Vice President and Global Brand President – Aerie

Thanks, Janet. With regarding trends, I mentioned it earlier in denim. We definitely are seeing a shift into looser denim for women’s and flares, and it’s really a fashion cycle. However, I think comfort will always be at the forefront of everything we do. Our jeans are the most comfortable jeans, and I think we really posted great results in our jeans businesses, both in men’s and women’s. So I think it speaks volume for this time period where everyone assume that we are only selling sweatpants. We really had a nice run in denim as well. So really pleased with the results there. And we’re going to continue to always have that innovation and that comfort in everything we do in bottoms as well as tops.

And when I think about that shift in bottoms, we really have to think about the rises, right? Rises are still high and what are the tops that worked with that and certainly, fashion tops are — we’re getting hints of it, and we’re seeing some nice results. Again, we’re always going to make sure that our assortments are balanced with our key items and the right fashion.

And then in Aerie, look, we — the stores were certainly aligned with the pandemic and what we’ve seen for lounge, but what really I’m excited for and I’ve been talking to the teams about this is balancing out both brands, right? And what are the foundations — what are the intimate second support some of these new trends that we’re seeing. I mentioned we have 178 side-by-side. So we’re going to be able to really — when you think about that, we’re going to leverage the Aerie brand and no pun intended, but support the AE brand with intimates in great fashion there too. So where I sit today, It’s great because I get to really try to maximize both brands — and both OFFLINE for both brands.

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Yeah, Janet. Yeah. So we are very optimistic. This was great news this past week about J&J. I’m very proud that on the J&J shot that the first dose was given in Columbus, Ohio at the Schottenstein center in the world for the first J&J shop. So we are very proud of that.

Janet Kloppenburg — JJK Research Associates — Analyst

Well, congratulations on that, you should be.

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Yeah. Thank you. Thank you. My feeling is that in the next 60 days, this country is now being vaccinated at a very rapid pace. And that will give people a lot of confidence to go out. We are already seeing people going out right now. People want to get out, They can’t wait to get out. And we’re very excited about the malls. I can tell you that in — that this is probably the best opportunity for us to pick up new locations that were being offered. It’s a new great locations at affordable rents for us. So we’re very optimistic. I believe that in the next few months, things will start getting back to normal. And then, I think going to next year, we’re going to see a boom in this country. It could be like roaring 20s. You’re going to see a lot of excitement. You’re going to see people getting out and look, and our challenge would be is to get people good enough experiences that they want to shop with us. At the same time, people getting more and more use of digital, it’s part of life today and in the last several years, if you look at the Ohio business, it keeps growing. It hasn’t gone down.

Janet Kloppenburg — JJK Research Associates — Analyst

Any kind of — yeah, yeah.

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

It goes without saying, but I think a change of trend to bottoms is great for the AE business. So anything that gives people a reason to go out and refresh their bottoms wardrobe, it should be really, really strong for the AE business, and I know Jen and Chad and their teams, they are all over it.

Janet Kloppenburg — JJK Research Associates — Analyst

Okay. And just lastly, any concerns around carbon pricing right now?

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

I mean, it’s definitely something that we’re watching. Like I said, we feel good about all the prices that we have locked in through back-to-school, but there is definitely raw material cost increases that we’re dealing with. We are trying to book early platform fabrics and yarns and fibers whenever we can. And there is some merchandising strategies that are helping us also. So Jen’s strategy of narrowing the assortment and being narrower and deeper actually gets rid of a lot of the fringe styles that cost more that had lower markups and that were less productive. So we’re watching cotton. We’re taking aggressive action to try to mitigate increases, but it’s definitely something we’re paying attention to.

Janet Kloppenburg — JJK Research Associates — Analyst

[Indecipherable].

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Simeon Siegel with BMO Capital Markets. Please proceed with your question.

Simeon Siegel — BMO Capital Markets — Analyst

Thanks. Good afternoon everyone and nice cap to the year. So obviously, great revenue growth for Aerie. Just a quick clarification, can you just speak to the sales to comp spread? I’m just trying to think through — I’m assuming I’m missing something, why is revenue growth lagging comps with the new stores?

And then similarly, I guess, Mike, can you help us understand Aerie impairment charges that are going on? What are those? How do you think about them go forward? And I just had a quick follow-up on international. Thank you.

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

You still have to remember one thing. We are still operating in most of our stores at a 50% capacity. In some states, we are operating at 25% capacity. There’s still a pandemic going on. Even though we’re optimistic and we’re excited and we’re seeing great progress, we’re still in the middle of the pandemic.

Mike Mathias — Executive Vice President and Chief Financial Officer

Yeah, for sure, Jay. That explains the spread, because I mean, total revenue is total revenues. We’re reporting [Indecipherable] external reported results, total revenue versus last year, versus the comp calc then excludes all the closure activity, right? So with California, Canada, so we’re pulling out — for comparability purposes, we’re pulling out this year and last year for total revenue. So in a lot of cases, you are reporting no revenue this year against revenue last year. That’s why the total revenue is a little lower than comp. If that helps, explain that definitely.

Simeon Siegel — BMO Capital Markets — Analyst

Definitely makes sense.

Mike Mathias — Executive Vice President and Chief Financial Officer

And then on the impairment — in the impairment front, if you think about most of the activity or the activity this year being in Q1 and then, what we just reported or disclosed here in Q4. Q1, we took care of really when you think about the mall-based stores, lower tiered stores, a lot of the stores that would be tied up and what we talked about in our closure activity in flexible lease term, short-term renewals. So a lot of the impairment had to do with that mall-based lower-tier group.

The Q4 here now almost, nine, 10 months later, we had some assumptions back in Q1 around tourist locations, flagships, some of the more urban locations that have not actually reopened or opened back up. So we came back around and really impairment calc being a bit of accounting exercise in the assumptions we are using. That was the change and that’s what we hit again this time around which for Aerie specifically, some of the locations that were part of that impairment were flagship and sort of urban tourist locations.3

Simeon Siegel — BMO Capital Markets — Analyst

Got it. Thank you. And then, you have a nice international license business. So how big — what’s the EBIT or EPS contribution this year and how do you think about that going forward? Thank you.

Mike Mathias — Executive Vice President and Chief Financial Officer

Yeah, for 2021, if you go back to ’19, EBIT bottom line contribution was in the probably low-double-digits, somewhere around that. Without that significant benefit in Q2, the international contribution from an EBIT perspective would have been in the low-double-digits. And I think, for 2021, looking to get back to those $19 [Phonetic] levels and even surpass that, I think as we said in the Investor Day, we’re not be all that bullish. We’re not counting on sort of big growth in international that we think that could be an opportunity and would likely being conservative around our targets. Short-term for 2021 kind of getting back to ’19 levels or just a little bit about beyond ’19 levels is what we believe is achievable and again, possibly conservative.

Simeon Siegel — BMO Capital Markets — Analyst

Great. Thanks and best of luck for the year.

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Yeah. I would say very conservative towards our international business.

Simeon Siegel — BMO Capital Markets — Analyst

Great. Thanks a lot. Best of luck for the year.

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Marni Shapiro with Retail Tracker. Please proceed with your question.

Marni Shapiro — The Retail Tracker — Analyst

Hi, guys. Congrats. And I guess, welcome back to North Carolina after 20-plus years. Wasn’t Dawson’s Creek that long ago?

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Background eventually.

Marni Shapiro — The Retail Tracker — Analyst

Still love that show. So Jay, I actually have a big-picture question for you. You guys have a very strong balance sheet now. You have a lot of growth ahead of you in Aerie and OFFLINE, which are on solid ground. And over the last couple of years, the company has invested in a lot of different things from Dormify, Urban Necessities to Todd Snyder. I guess, how are you thinking about those kinds of investments today where there are a lot of small cool companies that have had a tough go at it during the pandemic?

And I’m — I’ve been stocking Unsubscribed actually because of a friend of mine, and I’m just curious what you guys are doing with it. I know it’s tiny and meaningless. It’s curiosity because you guys dabbling a lot of these random things.

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

All right. I’ll answer the first part of the question, and I’ll let Jen answer the other question about what Unsubscribed, which is sort of baby. Well, first of all, it’s better to have a good cash in the bank than not have them cash. So we’re very happy that we’re sitting on a position that we’re sitting on. That’s number one.

Number two, if we see the opportunity for something that complements us, we are interested. But we had our Investor Day last month, we laid out our goals of doubling Aerie’s business. We see a big upside even in American Eagle business. We see that upside. We even have bizarre, at a point what we call it, our strategies are to make sure that we stay focused. And I think you can hear on this call the way that Jen answers the questions, the way that both Mike answer the questions is that they’re very focused on the initiatives that we’re doing. We believe that if we do what we have right now in our wheelhouse, we could create tremendous shareholder value. So that’s our major game plan. But the right opportunity came belong. We do have a very good balance sheet. We could take advantage of it, but it has to be something that makes it worthwhile for us and complements us, and it’s something that’s beneficial to us.

Marni Shapiro — The Retail Tracker — Analyst

And have the ones you’ve invested and been successful in your view, like Dormify or Urban Necessities have been successful?

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Well, yeah, Urban Necessities was a test store. Look, it showed us a lot of things. Whether we operate or not, we learned a lot of things from it. Dormify, we’re still working with. We have Todd Snyder that we think has good opportunity too. OFFLINE was something that we experimented on, and I think OFFLINE is going to be very big. I mean it’s a big upside for OFFLINE. And Unsubscribed, I’ll let Jen talk to that. But that’s an opportunity too because it’s been very well received. Jen?

Jennifer Foyle — Executive Vice President and Global Brand President – Aerie

Yes. We opened up during the pandemic. Our first store is in East Hampton. And we do open up another store in Westport at the end of this month. So we’re on track for that opening, slightly — a little tiny delayed, but we’re excited about that opening in Westport. What Unsubscribed was concepted, after all this fast retail and just really understanding this next generation, what they’re going to be craving, we felt like there was room for what we call slow retail, right, thoughtful retail, slow fashion, upcycled, recycled. Everything has a nod to whether it’s a third-party artisan or zip-in or you name it, we really try to make sure that everything in that store — and we’re not 100% there, but our plan is to get 100%, is green and organic and all the things that are happening right now.

And look, our results have been great. The product looks amazing. The team was just out there yesterday. We just received our new spring delivery. I just — it looks amazing. Dara and team were out there, working at the store. And the customer response has been amazing. So we’re really proud of that little concept. And look, we’ve leveraged the team to launch this brand. So right now, we’re — it’s not — and we don’t find it disruptive at all. In fact, it’s complementary because it’s a little higher end, and we can learn there and learn and test and scale for our other brands. [Technical Issues] But again, we’re going to really open up gracefully with that line. It’s definitely not the opportunity right now that we see in OFFLINE.

When I looked at the numbers year-to-date in OFFLINE, it’s spectacular. And I hear some other numbers in the business out there and some competitors, and have far surpassed that number already. So we know that this is a brand that really is going to resonate with the customer in the store. I can’t want to get those stores open and get back to normal business again, because I think the OFFLINE stores is special. So we’re just really excited about all the growth opportunities.

And Aerie, we’re on our path to $2 billion now. So we hit our $1 billion mark, and right on time. And now we’re looking for this next three years of growth. We have our eye on the prize on that $2 billion growth. And that team, Patty and team, they’re ready. So we’re going to remain humble along the way, but we’re pretty excited about these opportunities.

Marni Shapiro — The Retail Tracker — Analyst

That’s great. One quick follow-up. What’s the size of the OFFLINE stores?

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Also to add, like we’re going to have a special celebration this Friday with the Aerie team to celebrate that $1 billion mark.

Marni Shapiro — The Retail Tracker — Analyst

Oh, that’s awesome. What’s the size of the OFFLINE stores that you’re building on average?

Jennifer Foyle — Executive Vice President and Global Brand President – Aerie

So we’re still in the process of testing various formats. So we have — we’re about to open up a shop within shop on Greenwich Avenue. We have a side-by-side. So we’re actually still playing with the perfect square footage. But we’re in the zone of 2,500 square feet, I should say, 2,500 to 3,500.

Marni Shapiro — The Retail Tracker — Analyst

Brilliant. Best of luck guys. Thanks.

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Kate Fitzsimons with RBC Capital Markets. Please proceed with your question.

Kate Fitzsimons — RBC Capital Markets — Analyst

Congratulations on the results. I guess, Jay, or Jen, I guess, speaking about this fashion cycle that you see that we’re on the tip of, I mean, in your experience, what is the duration of some of these cycles when we are seeing the silhouette shift meaningfully?

And then, Jen, you obviously — you’re really excited about the OFFLINE opportunity within Aerie. You noted OFFLINE is bringing new customers into the brand. We often speak of Aerie cross-shopping with AE. What is the OFFLINE cross-shopping with Aerie? Are you seeing those customers go to AE? Any insight there would be helpful. Thank you.

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Yeah. So I’ll answer the first part for a second, and then I’ll let Jen answer the rest. The important thing is we see denim as strong as ever. Jen?

Jennifer Foyle — Executive Vice President and Global Brand President – Aerie

Yeah. I mean, I have to say, I think I’m aging myself when I say this, but — one of my first — well, when I was at the Gap, I saw this fashion denim cycle. So I definitely have been there and have experienced in that shift and that transition. So I’m pretty excited about what we’re about to face, and Michael said it really well. If we get into the back in denim cycle and where we sit from our market share, I feel like we have a lot of opportunity.

Look, I feel like the opportunity there, I don’t know, I keep on saying this. But I want to make sure I’m answering your question right, but we have — we are about to embark on a fashion cycle. But again, I think the brands that thrive and that have longevity also have a nod to timeless. And you see it, the fast fashion retailers come and go, but the ones that survive are the ones that balanced, and I keep on using that word today, but really have that assortment that’s well-oiled that we still have our key items and our focus and really able to leverage those items and drive our profits and our IMUs and our — and that’s important.

But again, it is about making sure we strike a balance. We’re a heritage brand. And I’m pretty excited because I feel like that’s part of the trend that’s happening right now. And what I saw for back-to-school is really exciting. Again, it’s not fast fashion. It’s just the right fashion.

Judy Meehan — Vice President of Corporate Communications & Investor Relations

Okay. I think, Paul, we have time for one more question.

Operator

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

Kelly Crago — Citigroup — Analyst

Thank you. This is Kelly Crago on for Paul. Just quick question on the 1Q guidance. Is there any way you could get a bit more granular when you think about what you expect sales in 1Q to be versus F ’19? Any way to quantify that? And then when you think about that on a brand level, do you expect American Eagle brand sales to be above 1Q ’19 as well as the Aerie’s?

Mike Mathias — Executive Vice President and Chief Financial Officer

So Kelly, thanks for the question. But yeah, we’re not really providing any more specific guidance than the general guidance at this point just because of continued uncertainty. We’re comfortable with what we said around at a total quarter level, exceeding revenue and bottom line, but no real more — no real granularity put beyond that at this point.

Kelly Crago — Citigroup — Analyst

Got it. Okay. And then just on SG&A, any high-level thoughts on where you think that shakes out this year versus F ’19? Anything to think about on a quarterly basis? What are some of the big buckets to think about as far as cost savings versus marketing? Any detail around that would be great. And then just lastly, on the gross margin strength in 4Q, was that mainly merchandise margin expansion or did you see some occupancy leverage in the fourth quarter as well? If so, can you quantify? And how should we think about that line item in F ’21? Thank you.

Mike Mathias — Executive Vice President and Chief Financial Officer

Yeah. So I’ll take the second question first. Gross margin in fourth quarter, significant occupancy leverage, yes. Now the combination of the impact from the impairment we took, but also rent reductions, rent negotiations, so it was both. So we saw significant leverage within our buying occupancy costs. But the bottom line or the drop to gross margin was largely from merchandise margin because we did — offsetting the rent leverage within buying occupancy was delivery and distribution cost headwinds.

So SG&A for ’21, again, I’ll give you a little bit of flavor against 2019. Right now — it’s been a moving target, as you can imagine, because as we talk about the full year being uncertain, there’s a lot of variable costs within SG&A. As we sit here now, we’re looking at it sort of in that mid- to high-single-digit growth, call it, against 2019. So implying kind of low-single-digit growth rate over a two-year period from ’19. But again, that’s — there’s two — couple of things to keep in mind when going back to 2019. We didn’t pay any cash incentives. So we — you can imagine we have a placeholder there in that growth rate I just gave you, which could move.

And then the other thing I would say is we have a pretty robust sort of rolling forecast approach to — that we’re implementing in terms of how we’re managing across the year. So as we look at revenue and we look at demand shifting and we see — we set our expectations from a top line perspective and inventory around that, we’re doing the same thing on the expense line. So advertising, store labor, other variable expenses could definitely move with that. So that’s kind of mid-single-digit, a little high — to higher range I’m giving you is based on current revenue expectations, but there’s a lot of moving parts and variability to that.

Kelly Crago — Citigroup — Analyst

Got it. Thank you so much.

Judy Meehan — Vice President of Corporate Communications & Investor Relations

Okay. All right. Thank you, everybody. That concludes our call today. Thanks for your participation. We’ll talk to you soon. Bye-bye.

Jay L. Schottenstein — Executive Chairman and Chief Executive Officer

Thank you, everyone. Stay safe.

Mike Mathias — Executive Vice President and Chief Financial Officer

Stay safe.

Michael R. Rempell — Executive Vice President and Chief Operations Officer

Stay safe.

Operator

[Operator Closing Remarks]