Simeon Siegel

Simeon Siegel inquired about the expected revenue growth for the next fiscal year, asking for insights into units versus price, new versus reactivated customers, and the puts and takes on gross margins, including initial ticket pricing, promotions, tariffs, and fixed cost leverage.

Answer

Chairman and CEO John Idol stated that units are expected to be down next year, with inventory ending approximately flat, but emphasized driving full-price business. He highlighted rising brand awareness, consumer desirability, and three sequential quarters of online traffic improvement. Interim CFO Raj Mehta explained that Q3 gross margin was impacted by higher tariffs but underlying gross margin expanded due to better full-price sell-throughs. He anticipates offsetting most tariff impacts in FY2027 through sourcing efficiencies, targeted price increases, and continued higher full-price sell-throughs, leading to gross margin expansion.

Simeon Siegel inquired about the expected revenue growth for the next fiscal year, asking for insights into units versus price, new customers versus reactivating lapsed ones, and the outlook for gross margins, including initial ticket pricing, promotions, lingering effects of tariffs, and fixed cost leverage/deleverage.

Answer

Chairman and CEO John Idol expressed cautious optimism, citing tangible results like better full-price sell-throughs, higher AURs, and improved gross margins. He highlighted rising brand awareness and desirability driven by influencers and social media, particularly with Gen Z and younger millennials, and noted three sequential quarters of online traffic improvement. He confirmed units would be down next year, with inventory ending in a healthy position. CFO Raj Mehta detailed that Q3 saw a higher-than-anticipated tariff impact of 50 basis points due to better sales of new products, but underlying gross margin expanded by 70 basis points. He expects tariff mitigation efforts, sourcing efficiencies, and targeted price increases to drive gross margin expansion in fiscal 2027. John Idol also noted strong Jimmy Choo results, contributing to confidence in overall growth.

Simeon Siegel of BMO Capital Markets questioned the confidence in Michael Kors' revenue troughing given the lower margin guidance, asking for details on the drivers of margin degradation despite healthier full-price sell-throughs.

Answer

Chairman and CEO John Idol expressed optimism for revenue, citing a significant improvement in Michael Kors' retail performance in Q1, with comps moving from down 15% to nearly flat. He attributed this to the success of new product collections and the resonance of the 'Jet Set' storytelling. CFO and COO Tom Edwards explained that the gross margin guidance is lower primarily due to an estimated $60 million unmitigated impact from new tariffs in fiscal 2026. He noted that while the company aims to fully mitigate this over time through sourcing optimization and strategic pricing, the immediate priority is maintaining brand recovery momentum.

Simeon Siegel from BMO Capital Markets asked for clarity on the confidence in Michael Kors' revenue troughing, given the lower margin guidance, and questioned the drivers of the margin degradation despite healthier full-price sell-throughs.

Answer

Chairman & CEO John Idol expressed optimism in the revenue trajectory, citing a significant improvement in Michael Kors' retail comps in the current quarter, from down 15% to nearly flat, driven by new product lines and effective 'Jet Set' storytelling. He also noted that the negative impact from store and wholesale closures will soon be annualized. EVP, CFO & COO Thomas Edwards explained that the lower margin guidance is primarily due to an estimated $60 million unmitigated impact from new tariffs, which overlays previously expected improvements. He stated the company's goal is to fully mitigate this over time through sourcing optimization and strategic, careful price evaluations.

Simeon Siegel asked about the current competitive and promotional environment, wholesale channel performance, the gross margin outlook for Q4 and fiscal 2026, and the net debt forecast.

Answer

CEO John Idol stated the competitive environment is not more promotional, but consumers are more 'choiceful,' leading to pricing adjustments at Michael Kors to align with historical levels and improve full-price sell-through. He noted wholesale declines should moderate as partners respond positively to new strategies. CFO Tom Edwards explained that Q4 gross margin is expected to be flat due to offsetting factors but anticipates modest improvement in fiscal 2026. He projected year-end net debt at approximately $1.2 billion for fiscal 2025, decreasing by about $200 million in fiscal 2026.

Simeon Siegel asked about the average unit retail (AUR) versus unit dynamic across the brands during their inflections. He also inquired about Bracken Darrell's increased focus on Altra, its potential as a pillar brand, and its sizing potential.

Answer

CFO Paul Vogel noted that AUR is up moderately across Vans (particularly in the Americas), The North Face, and Timberland. CEO Bracken Darrell expressed strong excitement for Altra, highlighting its quiet momentum, controlled distribution, and billion-dollar-plus potential, expecting it to exceed $250 million in revenue this fiscal year.

Simeon Siegel with Guggenheim asked about the average unit retail (AUR) versus unit dynamic across VF Corporation's brands and inquired about the increased focus on Altra, its potential to become a pillar brand, and its long-term sizing potential.

Answer

CEO Bracken Darrell expressed strong enthusiasm for Altra, highlighting its quiet momentum, controlled distribution, and billion-dollar-plus potential. EVP and CFO Paul Vogel noted moderate AUR increases across all brands, including Vans, The North Face, and Timberland.

Simeon Siegel asked about the outlook for gross margin, its long-term structural potential, and sought clarification on the components of the reported $313 million in free cash flow, specifically if it included proceeds from the Supreme sale.

Answer

EVP and CFO Paul Vogel stated that while not providing full-year guidance, the company expects continued margin improvement in fiscal 2026 and remains on track to meet its medium-term goals. He clarified that the $313 million free cash flow figure does not include Supreme and that both operating and free cash flow are expected to increase year-over-year.

Simeon Siegel inquired about the company's fixed versus variable cost structure, the impact of ongoing deleverage, and the dynamic between average unit retail (AUR) and volume in the brand elevation strategy.

Answer

CEO Bracken Darrell deferred the detailed cost structure question to the upcoming Investor Day but noted positive momentum across the P&L. While not providing AUR vs. unit data, he confirmed the brand elevation strategy is on track. CFO Paul Vogel added that the company is seeing an encouraging increase in full-price selling.

Simeon Siegel asked Elliott Hill to elaborate on the specific products driving North America's significant revenue growth, which offset the ongoing classics reset. He also asked Matthew Friend about the structural impact of growing wholesale penetration on operating overhead and whether a portion of those savings could fund demand creation.

Answer

President and CEO, Elliott Hill, attributed North America's growth to strong performance in Running (market share gains), Global Football/Soccer, Training, SKIMS, and Basketball (GT Future, women's lines). He also noted sportswear diversification and strong Jordan sales (AJ4 Black Cat, AJ11 Gamma). EVP and CFO, Matthew Friend, confirmed that growth, especially wholesale, creates leverage on the cost structure, impacting supply chain and operating overhead. He stated a focus on prioritizing demand creation investment, aiming for around 10% of revenue, and tightly managing operating overhead costs.

Simeon Siegel asked Elliott Hill to identify the specific products driving North America's substantial revenue growth, which significantly offset the ongoing classics reset. He also asked Matt Friend about the trajectory of operating overhead, inquiring if the idea is to reallocate a portion of those savings to fund demand creation, a key competitive advantage for Nike.

Answer

Elliott Hill, President and CEO, Nike, attributed North America's growth to strong sell-through and market share gains in Running, growth in Global Football, Training, Skims, and Basketball (including Sabrina, A'ja, JAW, GT Future). He noted that while Sportswear isn't growing, it's being right-sized and diversified through "look of running" styles and women's footwear (Air Max Muse, Superfly). He also highlighted Jordan's strong performance, citing successful launches like the AJ4 Black Cat and AJ11 Gamma. Matthew Friend, EVP and CFO, Nike, clarified that Q2 North America growth included liquidation, while Q3 guidance reflects modest growth driven by full-price sales. He confirmed that growth, especially wholesale, creates leverage on the cost structure (supply chain, operating overhead). He stated that Nike prioritizes demand creation investment, aiming for around 10% of revenue, and will continue to tightly manage operating overhead to fund flexible, impactful brand marketing.

Simeon Siegel questioned how NIKE will balance marketing new products while clearing promotional items, and asked about the ideal long-term balance between operating overhead and demand creation spending.

Answer

CEO Elliott Hill explained that promotional and excess inventory is being moved out of primary retail channels and into NIKE's value and factory stores to make room for full-price innovation. CFO Matt Friend added that the company is tightly managing overhead while accelerating demand creation (up 8% in Q3). He stated the long-term plan is to continue this discipline, investing in sales, key cities, and innovation while managing overall expenses.

Simeon Siegel asked how NIKE plans to balance its brand storytelling for new products while simultaneously clearing promotional inventory, and also inquired about the ideal long-term balance between operating overhead and demand creation expenses.

Answer

President and CEO Elliott Hill explained the strategy involves segmenting inventory by moving excess and returned products to value channels like factory stores, thereby protecting the full-price presentation of new innovation in primary digital and retail channels. CFO Matt Friend added that the company is tightly managing overhead while accelerating demand creation investment, which grew 8% in Q3. He stated the focus is on investing in sales, key cities, and innovation while maintaining overall expense discipline.

Simeon Siegel requested color on the relative size of the core classic franchises being reset and asked about their margin profile compared to the rest of NIKE's product portfolio.

Answer

EVP & CFO Matthew Friend did not quantify the exact size but confirmed the portfolio had become too concentrated in these classics. He noted their reduction created a mid-single-digit revenue headwind in Q1, which is expected to continue. He affirmed these are high-margin products, especially via Digital, and managing them down is creating a temporary margin headwind as the portfolio is rebalanced.

Simeon Siegel of BMO Capital Markets inquired about the potential size of the revenue opportunity for the PINK brand and asked for details on the revenue and gross margin mix by brand embedded in the full-year guidance.

Answer

CEO Hillary Super described the revenue opportunity at PINK as 'very, very significant,' stating that its current top-line is over a billion dollars below its historical peak, with major runway in apparel, beauty, and accessories. CFO Scott Sekella noted that while Victoria's Secret and PINK have similar gross margin profiles, the Beauty division's margin is 'several points higher,' providing a positive mix benefit as it grows.

Simeon Siegel requested quantification of the top-line opportunity within the 'Path to Potential' strategy, clarification on whether growth is expected from recapturing lost revenue or a new business composition, and details on any regional or demographic divergences seen in early 2025.

Answer

CEO Hillary Super explained that while specific financial targets for the long-range plan will be shared later in the year, she sees a tremendous opportunity in PINK. The strategy involves defending market share in intimates while aggressively recapturing historical volume in lifestyle categories. CFO Scott Sekella added that in early 2025, warmer weather regions performed several points better than colder regions, indicating a weather-related impact on sales.

Simeon Siegel asked about the drivers behind the brand's sudden renewed resonance, questioning the interplay of product, marketing, and promotions, and inquired about the financial and productivity impacts of consolidating co-located Victoria's Secret and PINK stores.

Answer

CEO Hillary Super attributed the success to a purposeful strategy combining a 'sexy, glamorous, accessible luxury' product assortment with strong marketing and the fashion show. She noted that for stores, she is focused on ensuring brand promise and proper space allocation. CFO Tim Johnson added that store consolidations result in significant productivity and profit improvements, with square footage reductions of 25-35% leading to even larger gains in productivity and operational efficiency.

Simeon Siegel of BMO Capital Markets asked for a breakdown of the drivers behind the quarterly gross margin improvement, the outlook for buying and occupancy costs, the marketing spend associated with the returning Fashion Show, and management's confidence in sustaining the recent inflection in operating income growth.

Answer

CFO and Interim CEO, Timothy Johnson, detailed that Q2 gross margin benefited from lower product costs and favorable transportation, offset by higher promotions. He expects buying and occupancy dollars to be flat-to-down going forward. Marketing spend is expected to be down year-over-year, as the Fashion Show is less costly than last year's World Tour. Regarding operating income, Johnson confirmed the Q3 guidance implies continued year-over-year growth, but Q4 faces a tough comparison due to lapping an extra week. He believes the strong acceptance of new products is the key opportunity to drive profitability.

Simeon Siegel asked new CEO Daniel Heaf about his reasons for joining Bath & Body Works and his initial observations on opportunities. He also asked CFO Eva Boratto for more detail on the forward-looking sales guidance, specifically regarding 'current trends' and a loyalty accounting matter.

Answer

CEO Daniel Heaf stated he was attracted by the brand's purpose and strong business foundation, including its store footprint, loyalty program, and supply chain. He sees an opportunity to more consistently apply his consumer-centric growth philosophy. CFO Eva Boratto explained that Q1's strength was largely driven by the Disney collaboration, and the underlying business trend, which informs the Q2 outlook, was more in line with Q4's performance. She expressed confidence in the full-year forecast due to a strong pipeline of back-half innovation, including Halloween promotions and new collaborations.

Simeon Siegel asked about the marketing spend as a percentage of sales and the go-forward plan, as well as for key learnings from collaborations regarding their impact on new versus existing customers and purchase frequency.

Answer

CFO Eva Boratto specified that annual marketing spend is about 3.5% of sales, with Q3 seeing a 100 basis point year-over-year increase. CEO Gina Boswell detailed that collaborations drive core product growth, generate brand awareness, attract new customers, and enhance cultural relevancy, particularly with the 18-to-34-year-old demographic. She cited traffic as a key metric for measuring their success.

Simeon Siegel asked about the incrementality of new product categories, questioning if they are additive to revenue or simply reallocating existing customer spend, and requested a reconciliation for the free cash flow guidance after the capital expenditure reduction.

Answer

CEO Gina Boswell explained that new categories like men's, hair, laundry, and lip are meeting sales plans and performing well on key metrics including attracting new-to-brand customers, repeat purchases, and incrementality. CFO Eva Boratto clarified that the free cash flow guidance is maintained due to the CapEx reduction benefit, along with other moving parts in working capital and the impact of the Easton transaction.

Simeon Siegel from BMO Capital Markets inquired about the strategy for marketing spend and how the company measures the success of its campaigns. He also asked for the comparable sales growth needed to achieve ROD leverage.

Answer

CEO Richard Dickson explained that the company is achieving greater marketing effectiveness and efficiency, generating more relevance and revenue with lower spend through better creative and a social-first strategy. Success is measured by new customer acquisition and engagement. CFO Katrina O'Connell stated that due to significant store fleet optimization, the company will achieve ROD leverage for the full year with any positive sales growth.

Simeon Siegel of BMO Capital Markets asked about the strategy for marketing spend and how the success of campaigns is measured, and also inquired about the comparable sales growth needed for ROD to leverage.

Answer

CEO Richard Dickson explained that marketing is becoming more efficient, generating more relevance and revenue with less spend by focusing on strong creative and social media. Success is measured by new customer acquisition and overall performance. CFO Katrina O'Connell stated that following significant store closures, ROD will now leverage for the full year on any positive sales growth.

Simeon Siegel of BMO Capital Markets asked about the expected mix of average ticket versus transaction growth within the full-year guidance. He also requested quantification of the timing shift in corporate overhead expenses.

Answer

CFO Paula Oyibo explained that Q1's comp was driven by a 2.3% increase in average ticket and a 0.6% increase in transactions, but the company does not provide a forward-looking forecast for this split. Regarding expenses, she clarified that the shift was related to the pacing of planned investments for the year, which started slower in Q1 but are expected to ramp up in later quarters as planned.

Simeon Siegel inquired about the competitive and promotional landscape for the holiday season and asked for quantification of gross margin pressures in Q3 and Q4, as well as how the updated guidance impacts the long-term margin view from the recent Investor Day.

Answer

CEO Dave Kimbell stated that while the competitive environment remains intense, Ulta's promotional effectiveness improved in Q3. He anticipates continued promotional intensity for the holiday season but not significantly outside of normal expectations. CFO Paula Oyibo added that the full-year guidance was raised due to Q3 performance and expense discipline. She noted that Q4 gross margin will continue to delever from fixed costs and promotions, partially offset by lower transportation costs, and that the long-term margin outlook from Investor Day remains intact.

Simeon Siegel inquired about the competitive and promotional landscape for the holiday season, the key drivers of gross margin pressure, and how recent performance affects the long-term margin outlook provided at the October Investor Day.

Answer

CEO Dave Kimbell described the environment as intensely competitive but noted Ulta's adjustments are improving performance. He anticipates continued holiday promotional intensity. CFO Paula Oyibo added that the full-year margin guidance was raised due to Q3 results and expense discipline. For Q4, she expects gross margin deleverage from fixed costs and promotions, partially offset by lower transport costs, and noted the long-term margin view from Investor Day remains intact.

Simeon Siegel asked what comparable sales level is needed to leverage SG&A expenses. He also inquired about category opportunities and why the Children's business was not highlighted as a strength this quarter.

Answer

Group President and COO Michael Hartshorn explained that while they held EBIT margins flat on a flat comp in Q1, a 3% to 4% comp is generally needed to leverage expenses over a longer period. Executive James Conroy advised not to read into the lack of a callout for the Children's business, stating there was nothing notable to report on its performance this quarter.

Simeon Siegel from BMO Capital Markets asked what comparable sales level is needed to leverage SG&A expenses. He also inquired about category opportunities, specifically noting that Children's was not highlighted as a strength this quarter.

Answer

Group President and COO Michael Hartshorn indicated that while it can vary, a 3% to 4% comp is generally needed to leverage expenses over a longer term. Executive James Conroy added that there was nothing notable to call out regarding the Children's business and its absence from the commentary was not significant.

Simeon Siegel requested more detail on the brand strategy pivot, including the magnitude of the mix shift and customer reception, and asked if higher prices would eventually offset the initial margin pressure.

Answer

CEO Barbara Rentler emphasized that the initiative is a value and brand strategy, not an AUR strategy. She explained that the shift to more branded goods varies by category, with bolder moves in areas like ladies' apparel. The goal is to offer compelling value across a 'good, better, best' assortment rather than simply raising prices.

Simeon Siegel inquired about the potential size and EBIT margin for the Wholesale business, the forward-looking impact of carrier and delivery costs, and asked for elaboration on how reducing packages per order helps gross margin.

Answer

Executive Sheila Harrington expressed confidence in the Wholesale segment's profitability, driven by strategic partnerships and the introduction of new labels into new accounts. Co-President and COO Francis Conforti explained that reducing packages per order provides a meaningful improvement to delivery expenses and that while carrier costs are not currently a challenge, they are being monitored for the second half of the year.

Simeon Siegel asked about the long-term revenue potential for the Urban Outfitters brand and the ultimate long-term operating margin opportunity for the company, potentially beyond the stated 10% target.

Answer

CEO Richard Hayne stated that the Urban Outfitters brand can be a '$1 billion to $2 billion brand.' Co-President and COO Francis Conforti added that significant opportunity exists in Europe for both Urban Outfitters and Free People. Regarding margins, Conforti acknowledged the potential to exceed the 10% target long-term, noting that with Anthropologie and Free People in the mid-teens and Nuuly's potential, the combined opportunity is 'north of that number.'

Simeon Siegel of BMO Capital Markets asked if TJX can be "cost input-agnostic" and buy backwards for all products, or if there's a portion of buys where input costs do impact the price paid. He also requested quantification of the mark-to-market inventory adjustment's impact on gross margin.

Answer

CEO Ernie Herrman explained their process starts with the retail price at competitors to ensure a significant value gap. Their hand-to-mouth buying allows them to be educated on cost trends and adjust retails accordingly. CFO John Klinger clarified the mark-to-market adjustment: when TJX hedges foreign currency purchases, exchange rate movements cause a temporary gain or loss on the hedge, which is offset when the invoice is actually paid in a later quarter. He stated the Q1 variance was essentially this hedge impact.

Simeon Siegel inquired about the implied revenue deceleration in the second half of the year and the expected progression of gross margin, specifically the impact from the Pasewalk facility ramp.

Answer

CFO Ivica Krolo explained that the second half of the fiscal year is more heavily weighted towards the DTC channel, which has less forward visibility, prompting a prudent outlook. He also noted that Q3 is seasonally the slowest growth quarter. Regarding gross margin, Krolo stated the benefit from the Pasewalk facility's absorption is materializing ahead of schedule, now expected to be a 75 basis point tailwind for fiscal 2025.

Simeon Siegel from BMO Capital Markets asked for more quantitative details on the health of the B2B business, such as DSO trends and the mix of growth from new versus existing doors. He also requested a quantification of the drivers behind the Q1 gross margin change.

Answer

President Americas David Kahan reiterated that over 90% of wholesale growth comes from existing partners, indicating significant share gains. He emphasized that retail partners would take more product if available, but allocation is managed strictly. VP, Global Finance Alexander Hoff stated the 70 bps gross margin decline was almost entirely due to the 400 bps shift in channel mix toward B2B, with other factors like inflation and product mix being immaterial.

Simeon Siegel asked if financial restatements are complete, inquired about the promotional environment and BIRKENSTOCK's clearance strategy, and sought clarity on when the company will lap the margin drag from new production capacity.

Answer

CEO Oliver Reichert clarified a recent change was a reclassification of logistics costs, not a restatement. David Kahan, President of the Americas, noted the brand's high full-price realization (>90%) insulates it from the broader promotional environment. Alexander Hoff, VP of Global Finance, stated that fiscal 2024 was the peak year for margin pressure from capacity expansion, with better absorption expected in the back half of 2025 and full absorption by Q3 2026.

Simeon Siegel of BMO Capital Markets asked about the expected path to normalizing e-commerce revenue after reducing promotions and inquired about the projected savings from the restructuring plan and long-term SG&A management.

Answer

CEO Kevin Plank addressed e-commerce, stating the focus is on creating a brand-inspiring, story-driven platform rather than a purely transactional one, noting a double-digit increase in full-price sales mix. CFO David Bergman detailed the restructuring, projecting full-year run-rate savings to approach $75 million by the end of fiscal 2026, up from $35 million in savings realized in fiscal 2025. He added that while they aim for SG&A leverage, they will be mindful not to cut critical brand marketing investments.

Simeon Siegel asked about the strategy of balancing powerful brand storytelling with the 'achieve more by doing less' initiative, and for details on the remaining Direct-to-Consumer promotional pullback.

Answer

CEO Kevin Plank described the 'growth by constraint' model as a mindset shift focused on intentionality and empowering the team through a new operating model. CFO David Bergman added that while significant progress has been made in reducing e-commerce promotions in North America, there is still more work to do, and a similar focus is being applied to the APAC region.

Simeon Siegel of BMO Capital Markets asked about the early contributions of new executive Eric Liedtke, the long-term gross margin opportunity, and the reasons for the light profit outlook in the second half of the fiscal year.

Answer

CEO Kevin Plank explained that Eric Liedtke is refining brand strategy, the operating model, and go-to-market coordination, with a primary focus on making the company's marketing budget more impactful. CFO Dave Bergman stated that while there's no structural reason the company can't reach 50% gross margin long-term, the back half of the year faces headwinds from seasonal promotions and tougher comps. Bergman noted the significant profit differential between the first and second half is due to a roughly $40 million increase in marketing investments and the absence of a $27 million insurance recovery that benefited Q2.

Simeon Siegel of BMO Capital Markets asked for more details on the 25% SKU reduction plan, its impact on categories and pricing, and the company's approach to share buybacks.

Answer

CEO Kevin Plank described the SKU reduction as a strategic and surgical effort to simplify the business and ensure every product is special, with a focus on communicating performance benefits. CFO Dave Bergman added that the reduction targets "good" level products to allow for greater investment in "better" and "best" tiers, driving ASP growth. Regarding buybacks, Bergman confirmed the execution of $40 million under the new program but noted a prudent approach moving forward to maintain a strong cash position.

Simeon Siegel asked about the implications of total members declining faster than paid Connected Fitness subscribers, and requested quantification of the used equipment activation fee's impact on subscription revenue.

Answer

CEO Peter Stern responded that the company sees consistency in churn and rising NPS scores, giving them confidence in the value being delivered. CFO Liz Coddington clarified that the total member count is also impacted by the app subscriber base, which has seen a larger decline. She explained the used equipment activation fee has been a positive, adding upfront revenue and free cash flow, and has resulted in a 'slightly improved cohort of churn' among those subscribers. She also noted that subscription revenue includes other items like content licensing.

Simeon Siegel inquired about Peloton's strategy for balancing the path to revenue growth with ongoing profitability improvements and the potential timeline for this shift.

Answer

CEO Peter Stern stated that while it's too early to detail a growth timeline, the company is first focusing on "earning the right to grow" by rightsizing expenses, improving gross margins, and increasing the LTV to CAC ratio. CFO Liz Coddington added that the full-year adjusted EBITDA guidance was raised due to gross margin expansion and that the company is on track to exceed its $200 million cost savings target, with further opportunities for optimization.

Simeon Siegel inquired about the strategic priorities of incoming CEO Peter Stern, specifically how he will balance profitability and growth, and asked for details on the recent sequential increase in inventory.

Answer

Interim Co-CEO Karen Boone stated that Peter Stern was chosen for his track record in driving innovation and growth, and his compensation is designed to balance both goals. She expects a 'taking stock' period but believes he will return the company to growth from the stable base they've built. CFO Liz Coddington explained the modest inventory increase was a seasonal build-up for the holidays and that the company still expects a significant inventory tailwind for the full fiscal year.

Simeon Siegel questioned the significant 65% Black Card penetration, asking if it represents a new sustainable base, and sought clarity on the drivers of same-store sales growth, specifically the split between pricing and new membership volume.

Answer

CEO Colleen Keating attributed the Black Card strength to the narrowest-ever price gap with the classic tier and a successful 'first month free' promotion in March. CFO Jay Stasz confirmed the 5-6% comp guidance, noting Q1's growth was driven 74% by rate and 26% by volume. He expects a similar 70/30 split in Q2, moderating slightly after anniversarying the classic card price increase in June.

Simeon Siegel inquired about the embedded impact of the Classic Card price increase on the full-year guidance for comparable sales and revenue, trends in member churn following the hike, and the expected timing for Q1 equipment sales.

Answer

CFO Jay Stasz explained that the low-to-mid-single-digit comp lift from the price hike is embedded in guidance and will anniversary in June 2025. He noted that post-hike churn trends have been favorable, with attrition rates aligning year-over-year, suggesting some members are holding onto the grandfathered $10 price. CEO Colleen Keating added that Q1 equipment sales cadence should be consistent year-over-year, with re-equips spread more evenly through 2025.

Simeon Siegel inquired about the proportion of gross new members who are reactivated, the broader opportunity with lapsed members, and the response from both customers and franchisees to the recent Classic Card price increase, including its effect on Black Card adoption.

Answer

CEO Colleen Keating responded that while typically one-third of new joins are returning members, the rate was slightly higher in the recent quarter. She emphasized that the company is focused on enhancing the member experience to attract this group. Keating also noted the price increase was strategically timed and that franchisees are supportive, viewing it as accretive to AUVs, particularly for new clubs.

Dan, on for Simeon Siegel of BMO Capital Markets, asked for any high-level color on gross margin drivers excluding tariffs, where cost reductions would be realized, and the company's marketing strategy for the year.

Answer

CFO Dom Blosil declined to provide any forward-looking color on gross margin, reiterating the suspension of guidance. He confirmed that cost reductions are primarily focused on controllable SG&A expenses, though some medium-to-long-term supply chain mitigants could affect COGS. CEO Jeremy Andrus detailed the marketing strategy, explaining a shift away from top-of-funnel brand marketing towards sales activation activities with clear, near-term returns, such as in-store demos, retail associate training, and an increased number of Costco roadshows.

Simeon Siegel from BMO Capital Markets asked for the brand-level breakdown within the full-year revenue guidance, commentary on what might revitalize the broader intimates market, and the size and outlook for the international licensed business.

Answer

CFO Mike Mathias implied that Aerie's performance would be above the company average while AE's would be below, similar to the 2024 dynamic. He noted the international license business is stable at around $35 million in revenue. President Jen Foyle commented that in a declining intimates market, Aerie is focused on gaining market share, which it has successfully done in bras and undies.

Simeon Siegel asked about the company's current lead times, how much inventory was left open-to-buy for the holiday season, and the plan for year-end inventory levels.

Answer

President Jen Foyle described the supply chain as nimble, with strategically positioned new receipts arriving through December and available open-to-buy. CFO Mike Mathias added that the plan is for year-end inventory levels to be in line with sales growth, a strategy that will extend into the new year.

Simeon Siegel asked about customer perception of owned brands, the gross margin differential for these brands, and the company's long-term EBIT margin targets.

Answer

Co-CEO Michael Mente stated he does not believe customers are aware of which brands are company-owned, as they shop based on product merit. CFO Jesse Timmermans described the owned brand margin as 'meaningfully richer' than third-party brands and noted the differential has increased since 2019. For the long-term, Timmermans said the goal is to reach high single-digit and ultimately double-digit EBITDA margins.

Inquired about the drivers of Rack's growth, specifically new customers versus higher spend, the origin of these new customers (new to company vs. from Nordstrom banner), and the reason for the growth in receivables.

Answer

Executives responded that customer health metrics are strong, with growth in customer count and purchase trips. New Rack stores are the primary source of new customer acquisition, and these customers tend to migrate across both banners and channels over time. Regarding receivables growth, they stated that nothing in particular stood out.

Asked about the Q2 margin impact from the Anniversary Sale timing shift, future costs related to the new data storage approach, and the gross margin outlook for the full year.

Answer

The Anniversary Sale timing shift did not have a specific, material impact on Q2 gross margin, which was driven by strong regular price sales and lower shrink. Future tech costs are budgeted, though there will be an accelerated depreciation charge. The full-year guidance assumes slight gross margin expansion.

Asked about the margin profile difference between the Nordstrom and Rack banners and the resulting P&L impact of Rack's growth relative to the Nordstrom banner.

Answer

The company does not disclose margins by banner, but noted the difference is not as significant as one might think due to shared infrastructure like supply chain and technology. They view the business holistically, leveraging both banners to serve customers.

On behalf of Simeon Siegel, John Elias asked for clarification on the projected $4 million EBITDA improvement from the store fleet review, questioning if it simply reflects the elimination of losses or includes other benefits. He also inquired about the margin differential between top- and bottom-performing stores.

Answer

CFO Melissa Rasmussen confirmed that the $4 million EBITDA benefit directly equates to the losses from the closed stores, with $2-3 million expected to be realized in 2025 and the rest in 2026. She acknowledged a performance gap between stores but did not quantify the margin differential, stating the focus is on improving operating margins for the entire fleet.

Dan, on behalf of Simeon Siegel, asked how client reactivations are trending against expectations and inquired about the future opportunity in this area.

Answer

CEO Matt Baer noted continued strength in re-engagement, driven by an improved assortment, an enhanced client experience, and better AI-driven targeting. CFO David Aufderhaar provided a key metric, stating that re-engagements were up 17% year-over-year, marking the second consecutive quarter of year-over-year growth and a primary reason for beating active client expectations.