Detailed narrative
Aerie's Continued Momentum and Growth Drivers
Aerie and OFFLINE delivered another exceptional quarter with 25% total revenue growth and 19% comparable sales increase, reaching $536 million. This growth was broad-based across channels and categories, including core apparel, intimates, and activewear. Key drivers included consistent demand in teas, tanks, fleece, and bottoms, successful head-to-toe outfitting, and the continued strength of OFFLINE's cloud fleece franchise. The brand's customer base continues to expand, with brand awareness at 59%, and the team is focused on sustaining growth against strong comparisons.
American Eagle's Sequential Improvement and Ongoing Challenges
American Eagle showed sequential improvement from Q1, with total revenue growing 1% and comparable sales declining 1%. The men's business achieved its fourth consecutive quarter of positive comparable sales, driven by strength in all bottoms categories. In women's, customers responded well to new fashion fits in denim, such as wide leg, straight, and low rise, and the cargo trend. However, the brand is still working to rebalance inventory, particularly in older denim fits and seasonal items, which has led to markdown pressure.
Inventory Management and Markdown Impact
Consolidated inventory cost increased 14% year-over-year, with units up 9%. The company is actively rebalancing inventory between brands and categories for the remainder of the year. Markdown pressure, particularly in American Eagle's seasonal businesses (like shorts) and some fashion items, impacted merchandise margins in Q2 and is factored into the Q3 gross margin guidance. Aerie, in contrast, has effectively balanced promotions with newness.
Tariff Refund and Financial Performance
The second quarter results included a significant net tariff refund benefit of $179 million in gross profit and $161 million in operating profit. This benefit drove 1,300 basis points of gross margin expansion. SG&A dollars increased 19%, partly due to an $18 million incentive expense attributable to these tariff refunds, in addition to planned investments in advertising. The tariff rate assumption for the rest of the year reflects Section 301 tariffs implemented in late June, with potential for some increase in Q4.
Leadership Transition and Strategic Focus
Ravi Thanawala has stepped into the CFO role, bringing a focus on driving durable value creation through connecting brand growth with disciplined execution, stronger profitability, and thoughtful resource allocation. Mike Mathias, Strategic Adviser, presented the Q2 results and outlook. The company's strategic priorities include delivering best-in-class products, maintaining investment in conversion-driving marketing, focusing on inventory management, and improving margin health, while also investing for AEO's 50th anniversary in 2027.
Marketing Strategy Shift
American Eagle is shifting its marketing dollars from brand awareness and top-of-funnel consideration to conversion-driving tactics, particularly in digital performance marketing. This rebalancing is aimed at driving purchase consideration and is expected to contribute to sequential improvements in AE's performance. Aerie continues to leverage its community-building and advocacy programs, with double-digit spend per customer, to expand its customer base and engagement.