American Eagle Outfitters - Earnings Call - Q2 2026
September 3, 2025
Transcript
Speaker 9
Welcome to the AEO Inc. second quarter twenty twenty-five earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then One on your telephone keypad. To withdraw your question, please press Star then Two. Please note, this event is being recorded. I would now like to turn the conference over to Judy Meean, Head of Investor Relations and Corporate Communications. Please go ahead.
Speaker 6
Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer, Jen Foyle, President, Executive Creative Director for American Eagle and Aerie, and Mike Mathias, Chief Financial Officer. Before we begin today's call, I need to remind you that we will make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results actually realized may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Additionally, please see the second quarter investor presentation in our corporate website at www.aeo-inc.com in the Investor Relations section. And now, I will turn the call over to Jay.
Speaker 4
Thanks, Judy, and good afternoon, everyone. Before we get into the quarterly results, I wanna step back and acknowledge the team's hard work and our conviction in our long-term plans. We had a good quarter, but more importantly, we continue to strengthen our brands, improve our runway for growth, and manage the business for higher profitability. The consumer backdrop is dynamic, yet we are focused on controlling all that is within our control, providing a leading customer experience while maintaining cost disciplines. I'm pleased to report on the encouraging early results of the actions we are taking to reignite performance. Last quarter, I spoke about a series of actions we were implementing, and I'm pleased that the team has moved with urgency to execute. Product initiatives across brands, exciting new marketing campaigns, and greater operational disciplines are all contributing to improved business results.
We have a lot of hard work ahead, yet we are excited about the progress so far. Total revenue of $1.28 billion was our second highest ever posted for the second quarter, marking meaningful improvement from the first quarter and validating the actions we have taken. Aerie saw a dramatic turn from the first quarter, delivering comp growth of 3%. American Eagle saw a nice improvement in key go forward categories, as Jen will review shortly. Second quarter traffic was positive across brands and channels, and I was pleased to see traffic momentum build throughout the second quarter, which continued into August. Following the first quarter inventory write-down, the team was focused on successfully managing through the season, delivering better sell-throughs with less promotions. We also managed the business with financial discipline, with SG&A down compared to last year.
Operating income improved 2% to $103 million, significantly exceeding our expectations. Diluted EPS increased 15% to last year. It was a solid quarter, and we are encouraged by the progress, yet our work is not complete. We are leaving no stone unturned. We are committed to growing our brands by putting our customers first and improving operational efficiencies. One component of this plan is to create greater efficiencies and speed across our supply chain. With respect to tariffs, we will begin to feel the impact in the second half, as Mike will review. We are using all levers to mitigate tariff increases. Early efforts have been successful. We have taken action to assure manufacturing options are in place in countries that make the most sense for our business moving forward. We have a highly seasoned sourcing team and strong partnerships with vendors.
We will leverage these relationships as we navigate through evolving trade dynamics. Turning to capital allocations, we continue to strike the right balance between investments to support our long-term growth agenda and returning capital to shareholders. Year to date, we have returned $276 million to shareholders through dividends and share repurchases. This includes the completion of our $200 million accelerated repurchase program earlier this year. The fall season is off to a good start, fueled by the strength of our product lines and the success of our recent marketing campaigns. The iconic fall denim campaign with Sydney Sweeney affirms we are the American jeans brand. We saw a record-breaking new customer acquisition and brand awareness, cutting across age, demographics, and genders. The most recent collaboration with True Colors by Travis Kelce has kept the momentum going.
We have seen periods of very strong demand from both campaigns, fueling positive traffic in August, which was up consistently throughout the month. I'll end with our commitment to building on this quarter's progress. We have enduring brands with significant potential for more growth.... I am confident we will realize our potential and drive sustainable, profitable growth for the long run and create greater value for our shareholders. Let me turn it over to Jen.
Speaker 0
Thank you, Jay, and good afternoon, everyone. We saw clear improvement in the business in the second quarter. Efforts to strengthen collections across brands, lean into bestsellers, and deliver higher margins are already having an impact. As we work through some of the challenges from the first quarter, we saw progressive improvements with the new deliveries, and I am encouraged that momentum strengthened into August with the arrival of our new back-to-school collections. So let me walk you through some of the new highlights. Starting with Aerie, we drove a nice rebound from the first quarter, delivering comp growth of 3% and achieving record second-quarter revenue. Performance was driven by positive demand across a number of major categories, including intimates, soft dressing, sleepwear, and our activewear collections at OFFLINE. While shorts were the most challenging seasonal category, we are focused on driving improvements here as well.
Among the highlights, intimates has been a key area of focus within our long-range plan, and we will recapture share in the return of this category to growth. We are pleased to see customers responding to new fits and fabrics in undies and bras and more regular fashion drops. For example, in July, we introduced the Parisian Romance fashion capsule, which embraced feminine touches like lace and chic combos of our most loved silhouettes. Our Aerie customers loved it, and it was the page-turner we needed to enter the fall season strong. Beyond intimates, OFFLINE continues to be a positive performer, and we remain excited about the growth potential as we continue to increase awareness and further expand our footprint. And now, turning to American Eagle, second-quarter comps declined, yet demand improved throughout the quarter, and I am confident that we are at an inflection point.
Although the second quarter was under pressure from early spring receipts and softer demand in shorts and bottoms, AE saw solid improvement in key go-forward categories. That was especially apparent as the quarter progressed, most notably in women's jeans and tops, as well as dresses, where we were focused on building franchise businesses like our new Sunchasers collection. Men's has also seen a nice trajectory in key classifications, including graphics, knit tops, and jeans, all positive in August. Back-to-school arrivals have been well received. New jean styles, along with a continued focus on great outfitting across genders, led the business. This year, we continued our long-standing partnership with The Summer I Turned Pretty, expanding the collection with new styles and three separate drops to coincide with the storyline.
In addition, as Jay mentioned, our exclusive product and marketing campaigns with Sydney Sweeney and Travis Kelce have created amazing energy and buzz. Over a year in the making, these two signature collaborations have generated a strong response, driven by limited edition merchandise, demonstrating the power of celebrity style and great product. Sweeney's signature jean sold out within a week, and some products within one day. Demand for her curated online shop of Syd's Picks has been very strong. Similarly, AE and True Colors by Travis Kelce has received tremendous engagement, fueling higher traffic and new customers. Product sell-throughs have been strong. Overall, we are very pleased with these campaigns. Since the launch, customer counts are up more than seven hundred thousand, and the campaigns combined have generated a staggering forty billion impressions.
As we look ahead, our plan to build on this momentum to further expand brand awareness, customer engagement, and retention, and ultimately strengthen the long-term brand loyalty. I am proud of our second-quarter accomplishments and the early third-quarter trends. Our work is continuing at full speed. We are heads down, focused on the future and improving all aspects of the business to deliver sustained growth. I wanted to thank the teams, and now we'll turn the call over to Mike.
Speaker 3
Thanks, and good afternoon, everyone. Let me echo Jay and Jen by saying we were very encouraged to see solid progress in the second quarter, with results coming in above the expectations that we set back in May. Stronger demand, coupled with lower-than-expected promotional activity and well-managed expenses, enabled us to stabilize margins and deliver operating income 2% above last year. Consolidated revenue of $1.28 billion declined 1% to last year. Comparable sales also decreased 1%. A lower average unit price was largely offset by growth in transactions, benefiting from positive traffic across selling channels. We saw demand pick up as the quarter progressed. July was our best month of the second quarter as we introduced our initial back-to-school product collections. And as Jay mentioned, we were pleased to see that improvement continue into August, consolidated comps turning positive.
Gross profit dollars of $500 million reflected a gross margin of 38.9%, compared to 38.6% last year. Following the first quarter inventory reset the quarter with lower promotions. This was partially offset by 20 basis points of deleverage of buying occupancy and warehousing as a result of the sales decline. BOW dollars were flat to last year. SG&A was better than expected, down 1% to $342 million and was flat as a rate to sales. Compensation costs were down as a result of recent expense restructuring initiatives, offset by investments in advertising. The balance of expense categories were flat, reflecting our ongoing cost management program. Operating income came in at $103 million, up 2% to last year. This reflected an operating margin of 8%, compared to 7.8% last year.
Consolidated ending inventory cost increased 8%, with units up 3%. The inventory cost increase is primarily due to the impact of tariffs. We're comfortable with inventory positioning for the quarter, which is aligned with our plans. Our capital allocation priorities remain unchanged and focused on investing in growth and returning cash to shareholders through dividends and share repurchases. Second quarter CapEx totaled $71 million, bringing year-to-date spend to $133 million. We continue to expect CapEx of approximately $275 million for the year. During the second quarter, we completed our $200 million accelerator repurchase program announced back in March. In total, year to date, we returned $231 million in buybacks. This reduced outstanding shares by 20 million, or approximately 10% of outstanding diluted shares.
Our balance sheet is solid, with ending cash of $127 million and total liquidity of approximately $400 million. As planned, we drew down $200 million from our revolver to support the buyback program and seasonal cash needs. By year-end, we expect to repay the majority of outstanding debt and begin rebuilding cash. We are continuing to prioritize investments in our digital channel, making foundational improvements to the shopping experience. We're also focused on optimizing our store fleet to ensure we are in the best location and to provide the best customer experience while pursuing additional growth opportunities. This year, we're on path to open approximately 30 Aerie and OFFLINE locations and remodel 40-50 AE stores for our modern store design. We now anticipate closing 35-40 American Eagle locations by year-end. Now, turning to our outlook.
The third quarter is off to a better start, with quarter-to-date consolidated comps up in the mid-single digits. This includes a positive turn in the business, as Jen noted, as well as a very strong Labor Day weekend. With more than half of our quarter yet to go, our outlook for the third quarter includes a low single-digit increase in comparable sales. Third quarter operating income is expected to be in the range of $95-$100 million, which includes approximately $20 million of incremental tariff costs. Buying, occupancy, and warehousing costs are expected to increase due to new store growth for Aerie and OFFLINE and increased digital penetration, resulting in slight deleverage. SG&A is expected to increase in the high single digits, driven primarily by investments in advertising.
The tax rate is estimated to be approximately 25%, and the weighted average share count will be roughly 172 million. For the fourth quarter, our outlook is for a low single-digit increase in comparable sales and operating profit in the range of $125-130 million. This includes approximately $40-50 million of tariff impact in the fourth quarter. SCNA is expected to be down slightly in the quarter. We're encouraged by the progress this quarter, demonstrating that our initiatives are working. While this is a positive step, our teams remain sharply focused on building upon profitable sales momentum, managing costs, and driving continued improvements across the organization to deliver higher profitability. Now, we can take your questions.
Speaker 9
We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing any keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. Your first question comes from Jay Sole with UBS. Please go ahead.
Speaker 10
Great. Thank you so much. I wanna ask about the Sydney Sweeney and the Travis Kelce campaigns. Obviously, I think, you know, Jen, I think you mentioned forty billion impressions, which is a huge number. The question is: Can you tell us more about how you keep the momentum going with these new customers that you've attracted? And can you tell us about what those consumers shop? Do they buy just the specific product associated with the celebrities, or did they shop across the store and buy tops as well as bottoms? Thank you.
Speaker 0
Sure, Jay. I wanted to introduce Craig Brommers because we had a feeling that there would be a lot of questions around this very exciting campaign. So, let me introduce the American Eagle CMO, Craig Brommers.
Speaker 3
Thanks, Jen. The American Eagle Sydney Sweeney campaign was intended to be a brand and business reset, and it has. Let me be very clear, Sydney Sweeney sells great jeans. She is a winner, and in just six weeks, the campaign has generated unprecedented new customer acquisition. To be clear, that consumer acquisition is coming from every single county in the US. This momentum is national, and it is pervasive. We've experienced denim sell-outs of items that Sydney has worn. We had strong, positive traffic throughout this quarter, and as Jen mentioned, a staggering 40 billion impressions. But a brand campaign is not to be judged in just one day, one week, or even one month. A brand campaign endures. We are off to a start beyond our wildest dreams.
As we've tracked consumer sentiment over the past six weeks, we've seen consideration and purchase intent meaningfully up, and now it's our opportunity to continue to convert this buzz into business and to convert these new customers into repeat customers. That's the work ahead.
Speaker 0
And to add on, Jay, what they are buying right now. I mean, you know, what's great is all brands are really seeing acceleration. As you know, we share a domain on the direct side of the business. So we're obviously driving traffic to our website. Labor Day was record-breaking. It was our best Labor Day in history, actually. We had a great weekend. But there's work to do in the quarter, of course. You heard that there's some sellouts we need to chase. But really across our key categories, we're seeing great success. Jeans, of course, we do it very well, and really proud of that assortment.
What I love about the jeans assortment is it's diversified, so we're gaining new customers, you know, with all different body types and age groups, and we're very excited, and we believe we're getting that market share that we deserve. In Aerie, intimates is back. That's so exciting to see, and we saw that acceleration in Q2, and really, it's continuing into Q3 with the launch of our Parisian Romance capsule that I mentioned, you know, in my talking points. And lastly, men's acceleration has been more than exciting. We've been really up to repairing the men's business, and we're seeing, you know, categories work. And again, in both men's and women's, what's nice is we're selling the outfit. We're selling tops as well.
Speaker 10
Maybe, Jen, if I can follow up on that. Obviously, you know, the marketing campaigns have been hugely successful, but you're talking about intimates at Aerie. You're talking about men's. Can you just remind us the transition of the products from where they were in the first half of the year to how the product assortment has evolved now for back to school and what you see toward holiday? How much of the improvement in the business is just because the assortment is better, it's more on trend, it's where you want it to be, versus kind of where you were in the first half? And try to separate it from all the hoopla and excitement around the marketing campaigns, if possible.
Speaker 0
Yeah. Great question, Jay. You know, where we started is, you know, Aerie had work to do. Our key competency business is fleece, I mean, in the apparel side, and we had work to do on the fleece side. What's nice is the team worked really hard, and we've seen really incredible results in fleece. So as you know, that's a seasonal business as we head into Q3 and build into Q4, but seeing nice upticks there. Intimates as well. Really started to see intimates turn on actually in Q1. We doubled down in Q2, and we've seen nice acceleration into Q3. So that's really basically the Aerie story. There were some seasonal products, in Aerie, shorts being one of them, which was the same for American Eagle and, you know, both in men's and women's.
Shorts was really the category that we needed to get moving, and as you know, we dominate in that category, and we really couldn't accelerate long bottoms, long legs in both men's and women's to compensate for the miss in shorts, but as the quarter progressed, we saw nice upticks in the AE business, and now we're back in business in Q3, we're very excited for, like I mentioned, not only our jeans business, but our tops business, sweaters, and fleece in both men's and women's, and again, they're seasonally appropriate, so that's what we've been up to.
Speaker 10
Got it. Thank you so much.
Speaker 9
The next question comes from Paul Lejuez with Citi. Please go ahead.
Speaker 1
Yeah, thanks, guys. Can you give a little bit more on the comp metrics, transaction ticket, maybe the components of ticket in terms of AUR and UPD? And then you gave a couple of tariff numbers. Just curious if those were gross or net, whatever they were, if you could provide the other number. And how much are you relying on the pricing to get to that net number? Thanks.
Speaker 3
Hey, Paul. Yeah, I can start. I can actually cover both questions. Metrics for the second quarter, AUR was down mid-single digits, so the, you know, the negative comp results, we had actually some healthy traffic, but, with the AUR down 5%, UPD didn't offset that completely. We were able to manage that well. Our AUR on the digital channels was actually flat, and that's where some of the really markdown savings and management promotions came through the quarter. Really flowing through the revenue beats pretty much all the way to the gross margin line. Basically, being able to manage markdowns pretty well through the second quarter there.
On tariffs, yeah, we're providing the guidance here for the third and fourth quarter, about $20 million of impact in Q3, $40-50 million in Q4. So they will pressure gross margin a bit, on the low single-digit revenue guide. The team has done a tremendous job there. Our unmitigated number was closer to $180 million versus the $70 million we're guiding to. So combination of rebalancing, country of origin, cost negotiations with our vendors, optimizing freight between air and ocean costs, some price, and then some pricing. So I'd say pricing is down the list. We're taking our shots there.
We have increased some tickets, just gives us some flexibility in promoting those items where we haven't seen really any customer resistance to some of those increases, but it's not really. It's not the largest mitigation strategy. So there's other components I just talked about, that the teams have done a great job for the mitigating the back half impact and the annual impact go forward.
Speaker 1
Yeah, just relative to that down to the single digit AUR in the second quarter, what are you expecting for the back half?
Speaker 3
Third quarter to date, we're actually up slightly. We're up low single digits on AUR. The combination of AUR and traffic was driving the mid-single-digit increase, you know, as of quarter to date through literally yesterday. We're expecting that same type of dynamic for the back half on the low single digit expectation.
Speaker 1
Thank you. Good luck.
Speaker 3
Thank you.
Speaker 9
The next question comes from Jonna Kim with TD Cowen. Please go ahead.
Speaker 0
Thank you for taking my question. You mentioned intimates improved during the quarter. Could you just remind us what percentage of sales intimates is now for, for Aerie? And could you just give us more color around the strategy to recapture share there?
Speaker 2
... and would love additional color around how the existing consumers performed. You mentioned nice customer new customer acquisition, but any color around the existing customer during the quarter would be helpful. Thank you.
Speaker 0
Sure. Intimates is roughly one-third of the business, and look, we felt like it's time for intimates to come back. There's been some trends out there where crops and baby tops, baby tees, and camis were working, and I think they actually took the place of, you know, a key category for us. So I think our timing was right on when we launched the Parisian collection with lace. You know, as we know, intimates is lace, and it works. So we're excited about just really doubling down on that business. We feel like it's time for Aerie 2.0. We just launched a campaign that really highlights bras. It just launched, highlights undies. It highlights our intimates categories.
It's pretty exciting, and again, there's not a lot of news there on the campaign, as we're only underway, but it really just leans into our customer, our girl, and letting her speak to our product, because our intimates are the softest, and they feel the best on your skin. So, we're really excited about talking about this whole new idea and leaning into a category that we haven't been up to for a while, and it's time. It's time for intimates to come back.
Speaker 14
This is Craig. I want to talk about the new customer acquisition. We decided to level up with talent this season, and we architected with intent. Both of these individuals are generational talents that are aspirational to both men and women, and as I just mentioned, we're seeing national swell in new customer acquisition in every single country, and we've just moved from one strength to the other. Sydney Sweeney has great jeans, was all about our best at category jeans, and as Jen mentioned, our Q3 is off to a significant start in terms of our denim penetration. But then last week, we bring Travis Kelce into the conversation, and Travis is at the intersection of fandom and fashion. Sports is driving culture in a way that it's never done before, and Travis is driving interest in fashion like never before.
The launch date was, and despite other news, we started working with Travis almost a year ago. Travis was the creative director of this campaign and of this collaboration. He was personally in our design offices, working with our designers. He personally picked out fabrics and trims. He personally identified the amazing athletes that helped tell this story, and this collaboration is off to an incredible start, just dominating our men's business over the course of the Labor Day weekend, building on the men's momentum that started in July. We could not be more excited about these back-to-back campaigns.
Speaker 2
Got it. Thank you.
Speaker 9
The next question comes from Janet Kloppenberg with JJK Research. Please go ahead.
Speaker 5
Hi, everybody, and I want to extend my congratulations. I'm particularly excited about the intimates business and also about the men's charms. On that note, is there any product category that's not working at Aerie right now, like the sportswear side of the business? Jen, maybe you could talk a little bit about that and about the intimates business and if you're thinking that it's gonna sustain these strong comps going forward, and then just lastly, on denim, are your ticket prices higher, or will they move higher as the quarter unfolds? Thank you.
Speaker 0
Yeah, I'll just start with denim. I mean, Mike alluded to it. You know, denim's our key category, so if you focus on the AE business, our AURs are nicely up, but I think we've done a great job just balancing out our price points. That's what we're up to. We have key price points in denim that we always learn from and build into, and that's what we did. You know, obviously, when the tariff hit, we had to think a little harder. So I think we're well-positioned in denim with good, better, best pricing, but really trying to elevate our customer and getting them to pay for the quality that we embed into our product. Going to intimates, you know, there's so much good news in intimates.
Undies, we picked up market share, a nice stack in market share, actually, and, as we know, that's a fire starter to our bundles in Aerie. So to see that business come back is really exciting. But bras, our core bras, again, we've, you know, we've held our share, and we're gaining some more share, and I think that that's our focus. You know, we really want to lean into these categories. It's a category, particularly in bras, that the customer comes back for, to try on, to get to our stores, to experience the brand. So honestly, you know, again, that's what the teams are up to. We're hopefully, we're gonna show up really unique. There's more ideas in the hopper.
Again, like I said, we're only up to Aerie 2.0, and these new learnings are gonna help us accelerate into 2026, particularly in intimates, as we're just seeing nice new wins there. Offline is-
Speaker 5
And the-
Speaker 0
Continuing.
Speaker 5
Yeah, offline is good, right. Yeah.
Speaker 0
It's-
Speaker 5
And what about the soft apparel is good?
Speaker 14
Yep, soft apparel, that's what we were leaning into. That's what our learning was from Q1. I think we went too fashion. There was too much fashion. We needed to balance out the price equation as well as what that customer expects from us. Now, we have sets. We have a set called the Jet Set. It's amazing. If you don't own it, get into it. It's your best travel set out there. And we have just core competency crew necks and fleece, and it's just really nicely working for us. So soft apparel is great. It really was shorts, and as you know, we even leaned into shorts into August. So if I was, you know, going to articulate a soft category across all three, you know, men's, women's, and Aerie, and OFFLINE, actually, all four, it would be shorts. They were soft.
Speaker 5
Okay, terrific, and with respect to pricing, Mike, will we start to see a broader range of select price increases as we go forward? Or is it over? Did you take them, and it's done?
Speaker 3
I'd expect that to be ongoing, Jan. I think as we look at our forward plans into the first half of next year, we're gonna continue kind of all levers of mitigation for tariffs. So pricing will be a component of that, but the optimizing country of origin, cost negotiations, you know, air, ocean freight optimization, and other expense line items through the, you know, that are embedded in our landed costs will be the bigger levers. Pricing will just be one tool in the kit.
Speaker 9
The next question comes from Alex Stratton with Morgan Stanley. Please go ahead.
Speaker 12
Perfect. Thanks so much, and congrats on a really nice quarter. I just had a couple questions here. Maybe first for Mike, just on the back half gross margin, what were your guiding to a decline for both the third quarter and the fourth quarter? Looks like fourth quarter decline is maybe two times worse or so than the third quarter. So can you just walk us through the gross margin pieces? Is that just tariff, or is there anything else in there? And then maybe separately, just on, you know, these recent campaign launches and some of the sales momentum that you've garnered on the back of them, do you have a sense for, like, how long top line momentum lasts after those? And do you have more sort of in the hopper following these pretty big two campaigns?
Thanks so much.
Speaker 3
I'll start with the gross margin question. Yeah, to your point, the fourth quarter impact is a little larger, definitely tied to that tariff, the tariff impact guidance. So $20 million for the third quarter, $40 million-$50 million for the fourth quarter. So you've got a little more pressure there from tariffs in the fourth quarter. And we do have some embedded promotions assumed. We've been managing that really well all the way through the second quarter. August markdowns came in ahead of where we planned them as well, so we're relieving that embedded in our assumptions, but the team's done a nice job of optimizing that, the promotional levels each week, especially digitally. So could be some upside to that assumption within the gross margin.
Then we do with the uptick here in the back half, this mid-single-digit trend. Digital is definitely a big driver of that. So you've got your, you know, distribution and the delivery cost, kind of, variability in that. So if the mix does lean heavier toward digital, we've got some variable expense, you know, in the BOW lines, in the expenses and gross margin. So at a low single-digit assumption, we'd have some BOW deleverage between that line and then sort of the full back half impact of the Aerie and Offline openings that are largely second quarter and third quarter weighted. So we'll have a little pressure.
So, it's equal parts, kind of, some expense deleverage on a low single-digit assumption and some in the tariff impact and some embedded promotions that we believe we can probably. We believe we have seen, actually, some optimization of that through the second quarter and through August, so some opportunity there still. On the sales momentum, Craig, I don't know if you wanna jump in on that one.
Speaker 14
Yeah. Thanks, Mike. I'll go ahead and talk about that. The new American Eagle story arc has just begun. We're excited to introduce new chapters in the future. As we've already publicly announced, there will be a second drop for the American Eagle True Colors by Travis Kelce collection. We've seen incredible interest on this first drop and expect even more in the second drop as the NFL season begins and Travis is front and center in the national conversation. Additionally, Sydney Sweeney has great jeans, is not going anywhere. Sydney will be part of our team as we get into the back half of the year, and we'll be introducing new elements of the campaign as we continue forward.
Speaker 9
Once again, if you have a question, please press Star, then One. The next question comes from Chris Nardone with Bank of America. Please go ahead.
Speaker 8
Thanks. Thanks, guys. Good afternoon. I just had a question on the tariff impact. It sounds like the $40 million-$50 million in 4Q, roughly 250-300 basis points. Is this a fair assumption as we think through the mitigated impact for the first half of next year? And then, Mike, nearer term, on your back half gross margin guidance, just to follow up on Alex's question, what are some of the positive offsets to drive some muted gross margin expansion, to absorb some of the tariffs? Thank you.
Speaker 3
Thanks, Chris. Yeah, I think if you play forward the tariff impact, talked about $180 million unmitigated, kind of, back half impact here, but the team has done a nice job knocking it down to this, sort of, $70 million-ish projection we have. If you start with all the country of origin remixing that's happened here in the back half, you know, China, where we know we had a higher penetration coming into the year, is mid-single digit now on a full year, but low single digit for the back half. Some other, you know, India is small for us, rebalancing some things out of Vietnam.
So if you start with just even the country of origin remix on an annualized basis next year, that number probably around the $250-$300 million number to start. So there's some benefits there initially, and you have you can continue to cost negotiations and all the other components I just talked about as far as levers. Latest projection as we're planning forward 2026 numbers now is somewhere in that $125-$150 range on a full year basis, with more work to do. And we are. We're uncovering every stone around all other embedded costs in our gross margin. There's still opportunity for delivery optimization. We've got a longer term supply chain network optimization plan in that we're in the middle of to optimize those expenses and gross margin.
We talked about or we updated our store closure number, if you noticed, in our prepared remarks to about 35-40 stores this year. That's kind of double where we've been in the last several years. So as we know that our digital penetration is picking up, we're gonna continue to rebalance our fixed versus variable expense base by really looking at you know rebalancing the store fleet, especially on the AE side. So closures with repositions while we're still opening Aerie and OFFLINE locations. So we're gonna look at every single line item like we have been for a few years, kind of on all of our expense management endeavors over the last two and a half years. We're gonna continue to do that to find offsets to this tariff impact through gross margin into next year.
Speaker 8
Got it. And then Jen or Mike, can you just talk a little bit about some of the progress you're seeing in the men's side of the business, given the campaigns, and whether you're seeing greater comp growth in your denim business versus the rest of the AE brand?
Speaker 0
Yes. I mean, denim's been certainly trending very nicely. You know, it's actually on par because it's such a big penetration to our business. So, we obviously love the results. Men's has been a journey for sure. The team's been. You know, we have first of all, we have a new merchant who's come in strong and has some great ideas. And, you know, starting in Q1, we really just took charge and really pivoted that business and said, "You know, we cannot, you know, we need to get this business back for obvious reasons." And, and it was our time, and I think they've done a nice job balancing out the fashion. So tops, graphics, polos, polo sweaters, and of course, our bottoms, mostly denim, have been significantly on an uptick.
So we're, you know, here to deliver more, and we know we are still owed more on the men's side of the business, to be perfectly frank. So, the team is looking at how fast we can grab that.
Speaker 9
The next question comes from Rakesh Patel with Raymond James. Please go ahead.
Speaker 13
Thank you. Good afternoon, and congrats on the strong execution. I had a question on the duration of the Sydney Sweeney and Travis Kelce campaigns. Are these a three-two initiative, or should we expect they'll run through the rest of the year? And just given the success that you're seeing, how should we think about what's embedded in your marketing spend for the back half of the year?
Speaker 14
I'll take the first part of that question. This is Craig again. The Sydney Sweeney Great Jeans campaign is here, and we'll continue with it through the remainder of the year. And again, we'll be introducing new elements along the way. Travis is just getting going. The traffic, the new customer acquisition, the sell-through is so incredibly strong, and we're excited to drop a second drop in the coming weeks, again, at the height of the NFL season. And so this is a moment to take big swings. And we have big talent. We have big amplification. The world is talking about us. We know that purchase intent is significantly and meaningfully up, and we'll be looking to convert this buzz into business all through the back half of the year.
Speaker 3
Yeah, I can add on just to-
Speaker 13
... question now.
Speaker 3
Nope, go ahead. Sorry.
Speaker 13
Go ahead.
Speaker 3
I was just gonna jump to the advertising expense question. So within SG&A, we high single digits expectation for SG&A growth in the third quarter, largely the advertising increase to support these campaigns. All the line items are up slightly, so leading to that high double digit result. But then for the fourth quarter, we're looking for more of a result similar to second quarter, meaning SG&A dollars being flat to actually slightly down. Advertising would still be up a bit, and we're gonna, you know, kind of manage that week to week. So I expect advertising to be up sort of low single digits. A large portion of this expense to support the campaigns is hitting the third quarter, even though we will continue some things into the fourth quarter.
And then the rest of SG&A outside of advertising is gonna be down slightly in fourth quarter. So yeah, the brunt of the advertising expense related to the, to everything Craig's outlining is in the third quarter.
Speaker 13
Got it. And then also had a quick question on inventory. Just curious, given the acceleration that you're seeing in the August comp, how we should think about inventory plans for three Q and four Q?
Speaker 3
Yes. So we're very pleased with our position coming into the second quarter, as we talked about. Our trend is up mid-single digits. Units were up 3%, cost up 8%. That differential of five points largely pretty much all based on or driven by the tariff impact. I would expect a similar dynamic, you know, through the quarter and during Q3. And then into Q4, we you know same idea that there's gonna be a tariff impact. Unit increase we think be more commensurate with our sales trend. We are chasing some things at the moment that may have an end-of-quarter impact, but anything we're chasing now is largely in jeans and has long life kind of non-markdown liable goods attached to them for the fourth quarter for holiday.
And a lot of things that will carry, especially the jeans assortment carrying through the first half of next year. So very pleased with where we sit with inventory, and we'll continue to manage alongside our revenue expectations, especially on the unit growth, knowing there's a tariff cost impact to the balance sheet dollars.
Speaker 0
Thanks very much.
Speaker 9
The next question comes from Corey Tarlowe with Jefferies. Please go ahead.
Speaker 7
Great. Thanks. Mike, I wanted to ask on SG&A. I noticed in a while that SG&A actually leveraged in the quarter on a negative comp, and we haven't seen that in quite some time. So could you maybe talk a little bit about in the quarter about some of the changes that you've made in the business from an SG&A perspective, and kind of what sticks, what comes out, and how to think about that going forward, and then maybe what the leverage point might be on comp to actually drive you know some leverage on SG&A? Thanks so much.
Speaker 3
Thanks for the question. I think, we've been talking about this for a good two, almost three years now around our expense management initiatives. You know, SG&A has been definitely benefited from work on those major lines that we always talk about. I mean, the biggest drivers of SG&A are store salaries, corporate compensation, advertising, and our services line. So, that's like 80% plus of your SG&A, incentives built into that compensation bucket. So we've been hard at work at that for a few years. You know, really, this full year is a result of that, even though there's some with advertising kind of being pulsed by quarter, you know, the full year is gonna be up in our projections here.
Basically, if you piece together the guidance, 1-2%, with advertising being the only thing actually up and everything else being kind of flat to down, so those efforts are in place forever. As we look forward to 2026, we'll just be back to what we've been continuing to talk about, which is that longer-term 3-5% revenue algorithm. We intend to keep SG&A flat or even leverage SG&A on that kind of revenue result. So, you know, a comp in that kind of low to mid-single digit range with total growth in that 3-5, we intend to leverage SG&A. That's our continued goal going forward.
Speaker 7
Got it. Super helpful. And then just a quick follow-up, if I could. I know that you talked about, in the release, lower compensation costs, so... And I think incentive comp might have come out initially. Does it come back? What does it look like this year, next year? Thanks so much.
Speaker 3
Yeah, we definitely... I mean, we did some restructuring things in the first quarter. We had some benefit in the second quarter around that. We'll continue to look at opportunities to, you know, optimize compensation in total across the P&L. Incentive comp is down this year, so we'll look for mitigation efforts if there's some sort of normalized number next year. But we'll talk about that when we get to 2026 guidance, when we actually set those incentives, annual incentive plans, provide more color at that point. At the end of the day, we're gonna look at SG&A as a total bucket, and, again, just to reiterate that goal, that on that 3%-5% revenue expectation on a longer term basis, our intent is to leverage SG&A at that level.
Speaker 7
Great. Thanks so much for all the color, and best of luck.
Speaker 3
Thanks.
Speaker 9
Our last question comes from Marni Shapiro with The Retail Tackle. Please go ahead.
Speaker 11
Hey, guys. Congratulations on the improvements, and the denim has just looked absolutely outstanding. So I'm curious on a couple of things. I just wanted to clarify, in the inventory increase, was any of that pull-forward inventory? I don't know if I missed that, but I just wanted to check on that. And then, Jen, can you talk a little bit just about in the product assortments, Travis Kelce has this, you know, full kind of assortment. Sydney Sweeney had her sold-out Butterfly Jean, and then I think Syd's Picks, I think that's what you titled it. Are you gonna do a real collection with her? And then kind of just thinking into next year, if it's not them, could these things continue with other people? Is this something that you would look to do again?
Speaker 3
I can hit the inventory quickly. So minor. There's a little bit of pull forward of inventory based on the timing of all the tariff intentions there in early August, but very minor in the grand scheme of our plus three units, plus eight cost.
Speaker 11
Excellent. Thanks.
Speaker 0
Early reads on Travis has been strong, as we mentioned, and the nice thing is we're selling really high price points. The customer is loving it, and it's the right price. So we love that, and as Craig mentioned, we have a second drop, and we'll see what's in store for the rest. Sydney Sweeney, again, really nice sell-through on the Butterfly Jean. The teams, you know, We have ideas cooking, let me just say that. And you know, just leaning into great jeans. That's really what I'll say for now. There's more to come. We're thinking about some exciting holiday campaigns and how we leverage the product within these campaigns.
Speaker 11
Okay, don't spill the tea then. Can I just ask you one quick follow-up on swimwear? Now that we're out of swim season, and it's been kind of an up-and-down category for you, have you hindsight 2025 and even 2024, and how are you thinking about it for spring of 2026?
Speaker 0
Let me just say, based on our shorts business, I'm glad we didn't over-pitch swim. We pitched it. We really did a great job pitching that business. We sold out of fashion. We planned it accordingly. We actually beat the plan. We didn't have a lot of clearance at the end of the season, so we're gonna take those lessons and apply them, you know, for future seasons. It is an up-and-down category, and we're gonna take those lessons that we've learned, again, over a few seasons now, a few spring seasons, and apply them on the go-forward. We have a new lens, our new merchant, who's in place, who's been with us for over six or eight months now. She's doing a great job, and she has some new ideas.
She brings some fresh perspectives for the business.
Speaker 11
Fantastic. Thanks, guys.
Speaker 0
Thanks, Marni. All right, everyone, thanks for your participation tonight, and have a great evening.
Speaker 9
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.