American Eagle (AEO) Q2 2026 Earnings Call Transcript

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DATE

Wednesday, Sept. 9, 2026 at 4:30 p.m. ET

CALL PARTICIPANTS

• Vice President of Corporate Communications - Alexis Tragos
• Executive Chairman and Chief Executive Officer - Jay Schottenstein
• President, Executive Creative Director for American Eagle and Aerie - Jen Foyle
• Chief Financial Officer - Ravi Thanawala
• Strategic Adviser - Mike Mathias

TAKEAWAYS

• Net Revenue -- $1.38 billion, up 8% driven by momentum in the Aerie brand.
• Consolidated Comparable Sales -- grew 6% overall.
• Aerie Total Revenue -- $536 million, up 25% reflecting broad-based demand across categories and channels.
• Aerie Comparable Sales -- increased 19%.
• American Eagle Total Revenue -- $806 million, up 1%.
• American Eagle Comparable Sales -- decreased 1%, representing a sequential improvement from the first quarter.
• Operating Profit -- $211 million, including a $161 million net benefit from tariff refunds.
• Operating Margin -- 15.3%, expanding from 8.0% in the prior-year period.
• Gross Profit -- $672 million, up 34% from $500 million.
• Gross Margin -- 48.7%, reflecting 1,300 basis points of expansion from tariff refunds.
• Merchandise Margin -- deleveraged 330 basis points, as margin improvements in Aerie were offset by markdowns at American Eagle.
• SG&A Expense -- $408 million, up 19% due to planned advertising investments and tariff-related incentive compensation.
• SG&A Rate -- 29.6%, representing a deleverage of 290 basis points.
• Diluted EPS -- $0.79, compared to $0.45 in the previous year.
• Consolidated Inventory Cost -- $818 million, up 14% at cost due to the impact of incremental tariffs.
• Consolidated Inventory Units -- up 9%.
• Capital Expenditures -- $66 million for the quarter, with a full-year target of $250 million to $260 million.
• Quarterly Dividend -- $21 million, paid at a rate of $0.125 per share.
• Total Liquidity -- $783 million, including the company's revolving credit facility.
• Q3 Comparable Sales Guidance -- projected growth in the mid- to high single digits.
• Q3 Operating Income Guidance -- $110 million to $115 million.
• Fiscal 2026 Operating Income Guidance -- $540 million to $550 million, inclusive of net tariff refund benefits.
• Aerie Brand Awareness -- 59%, representing a significant opportunity for customer base expansion.
• American Eagle Brand Awareness -- 76%, reflecting the brand's established market presence.
• Total Store Count -- 1,167 consolidated stores at the end of the second quarter.

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RISKS

• Foyle reported "a little pressure" on seasonal categories in the American Eagle brand, particularly within the shorts business, requiring inventory rightsizing.
• Mathias noted that "oil is over $100 a barrel again," which led the company to include potential freight and fuel surcharge impacts in its forward guidance.
• Mathias stated that "the increase in costs includes the impact of incremental tariffs this year," specifically referring to Section 301 tariffs implemented in June.

SUMMARY

American Eagle Outfitters, Inc. (NYSE:AEO) reported second quarter results driven by momentum in the Aerie brand and sequential performance improvement in the American Eagle brand. Management stated that the results reflected broad-based demand across apparel categories and channels. The company recorded a substantial financial benefit from International Emergency Economic Powers Act (IEEPA) tariff refunds, which impacted reported operating income and gross margins. Strategic focus for the second half of the year includes inventory rebalancing, product innovation in intimates, and shifting marketing investments toward conversion-driving tactics.

• Jen Foyle stated that Aerie is "comping the comp," sustaining growth against increasingly strong prior-year comparisons.
• Management is shifting marketing dollars from top-of-funnel brand awareness toward conversion-driving tactics to target customers during peak shopping rituals.
• American Eagle men's reported its fourth consecutive quarter of positive comparable sales, led by traction in the bottoms category.
• The company launched the Float bra collection in July, which Jen Foyle noted "complements our structured bra franchise" with a weightless feel.
• The company is making strategic investments in product and marketing as it builds toward the 50th anniversary of the American Eagle brand in 2027.
• Mike Mathias indicated that the company expects SG&A to leverage at a low to mid-single-digit level in fiscal 2027 as it laps elevated advertising spend.
• Management reported that American Eagle digital sales outperformed physical store performance, though stores showed improvement during peak back-to-school periods.

INDUSTRY GLOSSARY

• Aerie: A lifestyle brand offering intimates, apparel, activewear, and swim for women.
• OFFLINE by Aerie: A sub-brand of Aerie focused on activewear and accessories.
• IEEPA: The International Emergency Economic Powers Act, a federal law used to regulate international commerce and which provided the basis for the company's tariff refunds.
• Section 301 Tariffs: U.S. trade duties imposed on certain goods imported from China.
• AUR: Average Unit Retail, the average price at which an item is sold.
• UPT: Units Per Transaction, a metric measuring the average number of items purchased in a single transaction.
• AOV: Average Order Value, the average dollar amount spent each time a customer places an order.
• RushTok: A digital trend on the TikTok platform where users share experiences related to university sorority recruitment.
• Aerie Realmakers: The company's brand advocate and community program designed to foster authentic connections and social media engagement.

Full Conference Call Transcript

Operator: Good afternoon, everyone. Welcome to the AEO Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Alexis Tragos, Vice President of Corporate Communications. Please go ahead.

Alexis Tragos: 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; Ravi Thanawala, Chief Financial Officer; and Mike Mathias, Strategic Adviser. 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.

You can find our second quarter investor presentation on our corporate website at www.aeo-inc.com in the Investor Relations section. Now I'll turn the call over to Jay.

Jay Schottenstein: Thanks, Alexis, and good afternoon, everyone. The second quarter represented another important step forward for AEO. We built on the strength of our portfolio, making progress at American Eagle, while Aerie continued to deliver outstanding performance. The second quarter came in at the high end of our expectations, with revenue of $1.4 billion and comparable sales growth of 6%. Operating income of $211 million included a net tariff refund benefit of approximately $161 million. We remain focused on driving stronger profitability across the business and these results underscore the strength and relevance of our brands and the progress against our priorities. At Aerie, which includes OFFLINE, momentum continued.

Aerie delivered revenue of 25% total growth and comparable sales grew 19%, reflecting the broad-based demand across categories and channels. We remain confident in the long-term opportunity for Aerie and our ability to reach new customers. Turning to American Eagle. Total revenue grew 1% with comps declining 1%, an improvement from the first quarter. AE men's posted its fourth consecutive quarter of positive comps, signaling continued traction and relevance. We are moving in the right direction, yet there remains work to do. Our progress is fueled by our people. I'd like to extend my gratitude to our associates for their relentless dedication and commitment to our brands and customers.

Before I turn it over to Ravi, I want to take a moment to thank Mike for his many years of service to AEO. Mike has been and will continue to be a trusted partner to me and I'm grateful for his leadership, his commitment and the many contributions he has made to our business over the years. I'm also very pleased to welcome Ravi to the team. He brings comprehensive financial and operating expertise, a fresh perspective and a deep understanding of what drives long-term shareholder value.

As we look at the opportunities ahead, I'm excited about the breadth of our experience and judgment he brings to the team as we work together to make AE our stronger, more productive business over time. Now I'll turn the call over to Ravi.

Ravi Thanawala: Thank you, Jay. I'm excited to step into the CFO role. I've been at AEO for just a few weeks, so I'm spending a great deal of time listening, learning and getting to know the business and our teams. What attracted me to AEO was the strength of its brands, the connection to its customers and the opportunity I see to create meaningful long-term value for shareholders. I'll be focused on driving durable value creation by connecting brand growth with disciplined execution, stronger profitability and the thoughtful allocation of resources. Those are the areas where I'm spending time on with Jay and the leadership team as I get deeper into the business.

It's still early, and I want to be thoughtful about drawing conclusions. However, I'm excited by the opportunity I see at AEO and look forward to sharing more about my perspective and priorities over time. I also wanted to thank Mike and the entire finance team for the support they have given me through this transition. Mike has been extremely generous with his time and his knowledge of AEO, and I'm grateful to have the benefit of his experience and perspective. Given how recently I joined the company, Mike will be taking you through the details of the second quarter results and the outlook.

I have spent considerable time with Mike and the team reviewing the outlook and the assumptions supporting it. I'm comfortable with the company's expectations for the balance of the year. Now I'd like to turn the call over to Jen.

Jennifer Foyle: Thank you, Ravi, and good afternoon, everyone. Before I get into the brand details, I want to share my appreciation to our entire organization. Their passion for our brands, our products and our customers shows up every day, and I am proud of the work they are doing. Aerie and OFFLINE delivered another outstanding quarter with broad strength across the business and tremendous response from our customers. At American Eagle, we made progress during the first quarter with continued strength in men's. There's still work to do, yet I'm encouraged by the opportunity ahead. Turning first to Aerie and OFFLINE. We delivered another exceptional quarter. Comparable sales increased 19%, and total revenue grew 25% to $536 million.

What I'm most excited about is the breadth and quality of that growth. We saw strength across channels and categories with growth in core apparel, intimates and activewear. There was a consistent demand in Aerie apparel and tees, tanks, fleece and bottoms. Head-to-toe outfitting, curated monthly drops, sleep to street and wear now fabrications resonated with our customers, mix and match, summer brights, stripes and a little leopard all worked. We are also pleased with continued growth in OFFLINE's Cloud Fleece franchise, sports bras and incredibly strong results across bottoms. I love seeing this breadth because it tells us the customer's responding to the complete lifestyle offering, not just one category or one trend.

Our core intimates business also remained strong throughout the quarter. We continue to win with what Aerie has stood for from the beginning, real comfort. Customers responded to our focus on fabrication and the 20 years of Happy Booties anniversary campaign. In July, we also introduced our new Float bra collection designed for weightless feel. Float complements our structured bra franchise and gives customers a new way to experience Aerie's signature comfort. Our customer base continues to grow. We are expanding the Aerie community and deepening their engagement with us. Our Aerie Realmakers continue to be an important part of that connection.

Across the quarter, we nearly doubled the size of the Advocate program and found fresh new ways to bring new customers to the brand and engage them. As we move into the third quarter, we are doing something I love to see. We are comping the comp. We are sustaining growth against increasingly strong comparisons and seeing strength across categories while continuing to expand our customer base. So now turning to American Eagle. We are seeing steady traction as we actively work to refine our strategies. We delivered sequential improvement from the first quarter, yet there is opportunity to build on our progress and further accelerate our performance.

Men's continues to deliver as we posted our fourth consecutive quarter of positive comps. Growth was driven by strength across all bottoms categories with tops continuing to meet our expectations. This demonstrates that our focus and strategies to restore top line growth in the AE men's business is paying off. In women's, customers responded well to our focus on outfitting, particularly pairing tiny tops with oversized bottoms. We leaned into the cargo trend, and fashion bottoms performed positively. In women's denim, new fashion fits, including wide leg straight and low rise gained strong acceptance. And moving forward, we recognize where there is still opportunity to restore consistent growth across categories.

AE's brand awareness and cultural significance remains strong, and the active customer file continues to grow. Our marketing strategies are built on multiple touch points, tapping into differing interests, rituals and experiences. We have strategically invested in our presence at the mall as a place to shop, gather and connect, on campus with our sorority partners to own a stake in RushTok, and in sports on the biggest stage of the year with global brand ambassador, Lamine Yamal. We spent the last 4 quarters investing in brand awareness to drive purchase consideration, and now we are shifting our marketing dollars into conversion driving tactics.

Ultimately, this is about showing up for our customers during their biggest moments, building their wardrobes while building our community. And looking ahead to the second half of this year, our strategic priorities across AEO are clear: deliver best-in-class products, maintain our investment in marketing tactics that drive conversion, remain focused on our inventory management and improve margin health. We are also making strategic investments in product and marketing as we build towards AEO's 50th anniversary in 2027. We entered the third quarter with momentum in Aerie and OFFLINE, a game plan to make clear improvements in American Eagle and a highly engaged customer community across all brands. And I'm excited about what the brands can accomplish together.

Aerie's consistent growth, the opportunity we see in OFFLINE and American Eagle's deep customer relationships give us multiple ways to serve our customers across more categories, occasions and moments in their lives. Each brand has its own identity and distinct opportunities. Together, they give AEO springboard to grow. We have talented teams across our stores, distribution centers and corporate offices, bringing these brands to life every day, and I have tremendous confidence in what we can achieve together. Thank you all of our associates for all of your hard work. With that, I'll turn the call over to Mike.

Mike Mathias: Thanks, Jen, and good afternoon, everyone. Driven by strong momentum across Aerie, our second quarter revenue and operating income hit the top end of our guidance. As you heard from Jay and Jen, we're zeroed in on opportunities for the AE brand and are continuing to fuel Aerie's exceptional growth. I'm going to take you through the financial results, including the impact of the tariff refunds recognized in the quarter and then discuss our outlook for the balance of the year. All reported results include the impact of tariff refunds. Second quarter consolidated revenue of $1.4 billion increased 8% to last year with comparable sales growing 6%.

Aerie's strong business continued with total sales growing by 25% and comparable sales up 19% with growth across channels. AE total sales increased 1%, with comparable sales declining 1%. Gross profit dollars of $672 million rose 34% from last year and gross margin of 48.7% increased 980 basis points. Included in gross profit this year is a net benefit of $179 million related to tariff refunds, which drove 1,300 basis points of the gross margin expansion. Merchandise margin deleveraged 330 basis points with improvement in Aerie, offset by markdowns in AE, as we previously guided to for the second quarter.

SG&A dollars increased 19% and 290 basis points to a rate of 29.6%, inclusive of $18 million of incentive expense attributable to tariff refunds. The remaining increase is primarily a result of planned investments in advertising. Depreciation decreased slightly year-over-year at $52 million compared to $55 million last year. We recorded a second quarter operating profit of $211 million compared to $103 million last year. Included in operating profit this year is a net benefit of $161 million related to tariff refunds. Interest expense increased primarily due to the sale of tariff claims as discussed last quarter. Other income increased due to unrealized gain on equity method investments. The second quarter tax rate was approximately 25%, and EPS was $0.79.

Consolidated inventory cost was up 14% with units up 9%. The increase in costs includes the impact of incremental tariffs this year. Unit inventory plans will continue to be rebalanced between brands and categories for the remainder of the year. In the second quarter, as Jay noted, we continue to make long-term investments in our business while returning cash to shareholders. Second quarter CapEx totaled $66 million, and the company returned $21 million to shareholders during the quarter via the quarterly dividend. We ended the quarter with approximately $148 million in cash and investments and $783 million of total liquidity, including our revolver.

Before turning to our outlook, I want to note that Ravi has been engaged with the team in reviewing our plans and expectations for the balance of the year. The outlook I'll discuss today reflects the company's current expectations. For the third quarter, we expect comparable sales growth in the mid- to high single digits with Aerie and OFFLINE continuing in the high teens to 20% range and American Eagle approximately flat. Gross margin is expected to be similar to last year with full year gross margin up year-over-year. Operating income for the third quarter is expected to be in the range of $110 million to $115 million with SG&A expense up in the high single digits.

The tariff rate assumption for the rest of the year reflects the Section 301 tariffs implemented in late June. For the full year, we expect operating income in the range of $540 million to $550 million based on consolidated comparable sales growth in the mid-single digits. In closing, we're committed to building on the momentum in Aerie and OFFLINE, accelerating improvement at American Eagle and unlocking greater profitability across the business. With that, we'll open it up to questions.

Operator: [Operator Instructions] The first question is from Jay Sole with UBS.

Jay Sole: Great. Jen, I want to ask you about the women's denim business at American Eagle. Can you just maybe dive into that a little bit more? Tell us about how that business developed over the quarter, what you see happening in Q3 just from a sales standpoint and kind of what's driving that and the opportunity for continued progress from here. And then also maybe -- and second part to that question is you talked a little bit about third quarter. I think you said you've seen trends continue. If you can sort of clarify that a little bit, I mean, where do you see Aerie so far in Q3? And how is that factored into your guidance?

Same question for both brands.

Jennifer Foyle: Thanks. Look, we're seeing sequential improvement in denim. Sorry, I have a little bit of a cold, so just -- but we are seeing sequential improvement. As I mentioned in my last earnings call, we definitely need to pivot. We needed to pivot, and we pivoted quite nicely into the fits that were working 100%. Really, it was low rise that we really want to get into that business. And as you saw that, that was our marketing launch for back to school, so really excited about how we repositioned denim. What we are needing to work through right now is just some of the older fits and really just rebalancing our inventory.

It's as simple as that, and our numbers reflect the guide in AE. As we look to Aerie, I mean, we continue to launch new ideas in Aerie. All categories are working. All categories are firing. We can't ask for more. I mean these numbers -- we're proving -- I love what I said, right? We're proving we can comp the comp. And I think the team's really geared up for holiday. We're seeing nice continuation of the sales comp again reflected in the guide. And with all our new launches, we relaunched our booty campaign, our undies campaign. Intimates is gaining share. Our Float bra launch, we're going to really work on bra innovation.

That's a new playbook for us -- or we're going to reinvigorate it because we're excited about some new ideas in bras. I think we're really going to compete on that end with really launching ideas that I think our customers are going to really embrace, so some new ideas that are coming your way, and that will build into next year. And then, of course, apparel. Apparel has been really on fire. The numbers are incredible, and they like completing the outfit, right? We're building them from inside out, and that's what we do in Aerie, and OFFLINE certainly has seen incredible growth as well.

Operator: The next question is from Matthew Boss with JPMorgan.

Amanda Douglas: It's Amanda Douglas on for Matt. Jen, could you speak to the difference in merchandise margin performance within the quarter with improvement at Aerie offset by the American Eagle brand? And what are you specifically seeing on markdowns by brand entering back to school?

Jennifer Foyle: Sure. We've seen a little pressure, as Mike mentioned, on seasonal ideas in AE. So we continue to see a little of that pressure as we go into Q3, so we're working through that, again, rightsizing our inventory. And Aerie has been doing an outstanding job leveraging this customer base. That's growing our brand awareness. That's another thing that I didn't mention in my last answer, the brand awareness in Aerie. We're still only at 59%. Albeit it's growing, there's still a lot of opportunity for runway in Aerie. But pivoting back, like as we think about the promotional cadence, Aerie has done a really nice job balancing out their promotions, leveraging the newness.

They've been doing new drops, and we've been easily able to reconstruct the promotion activity between brands so that we're balancing this out.

Operator: The next question is from Kelly Crago with BMO Capital Markets.

Kelly Crago: So just wanted to dig in a little bit further on the third quarter comp guide up mid to high, if you could just break out expectations by brand. And any color again more explicitly about what you're seeing quarter-to-date at the 2 banners? I think then you're speaking to some maybe higher promos at Eagle than you were anticipating and how that might impact the margins in the third quarter.

Mike Mathias: Kelly, I can take that. I think Jen mentioned in her prior answer that the comp guidance by brand is in line with where we are quarter-to-date, so AE relatively flat, so some sequential improvement from what we just reported for Q2. Aerie in the high teens to 20%, again, similar to what we just reported in Q2. So the trend continues there. And also, as Jen said, I mean, comping the comp and actually maintaining comp trend against tougher compares, which is what the team has been going after. So we have a good proof point here quarter-to-date in Aerie on that front.

And then, yes, the merch margin performance in Q2 and some of the markdowns in AE that we guided to back in May, alongside our $45 million to $50 million guidance, those did come through kind of in line with expectations and then resulting in us hitting that high end of our op inc guide. And then for Q3, we do have -- as Jen said, we're definitely still looking to rebalance some inventory. We have some markdowns in the Q3 merch margin guide for AE, some potential markdowns as we go through that work, and that's covered in our gross margin guide of relatively flat for the third quarter.

And Aerie is continuing its nice performance there on the merch margin line, so again, a little bit of a mixed brand output where Aerie is maintaining strength in margin. AE's definitely getting back to some strength, but we do have a little bit of markdown coverage for some of this inventory work that still needs to be done.

Kelly Crago: Got it. And then just so I'm understanding with the tariff refund, I noticed you said something about -- I mean, like you're accruing some higher incentive comps here. Can you just kind of walk through how that plays out in the high single-digit SG&A guide, I think, is for 3Q? Apologies if I'm missing some of the details here. Is that like related to the higher incentive comp, marketing, anything else there? And then how does this sort of play in the fourth quarter as well? And that's all I got.

Mike Mathias: Sure. Yes, we did book in the second quarter against tariff refunds, some incentive comp commensurate with the refund in line with our full year income targets tied to those incentive plans. The accrual for the back half, third and fourth quarter, I think I've guided to it now back in March and then again in May that's more -- that elevated accrual is up against more because it's up against a lower-than-historical result last year. So this path we're on in terms of that accrual is kind of more average or more historical. The impact of -- there's no impact in the third and fourth quarter to anything tied to refunds.

So that was isolated against the refund benefit that we saw in the second quarter, any kind of incremental number. So the back half SG&A, we guided third quarter up high single. That includes, again, the impact of that more historical or average incentive accrual versus a lower accrual than history last year and with the rest of the line. Aerie advertising, relatively in line to -- as a rate of sale in the third quarter, some leverage in the fourth quarter. As we pass through -- look at SG&A on a go forward on a 12-month basis, advertising, we're lapping this elevated spend.

As of this quarter, as we look forward on a go-forward basis, advertising will be a leverage line item into 2027. And as we normally get past these next couple of quarters, with a bit of an apples-and-oranges incentive accrual impact, that will also be a leverage line item as we go into 2027. So as we look at a 12-month basis and for the full fiscal 2027 period, we're looking to be back to a position where we're leveraging SG&A at a minimum at a mid-single-digit comp but targeting a low to mid-single in total.

But again, the team and Ravi will provide more color on that go forward and specifically, when we give guidance for '27 in March as usual.

Operator: The next question is from Jon Keypour with Goldman Sachs.

Jonathan Keypour: I was -- you guys gave color about Eagle and mentioned that men sounded good across the board. Women's bottoms sounded good from what I heard. I'm just wondering what drove the negative comp. And then I have a follow-up.

Jennifer Foyle: Women's bottoms has made improvements. So while we still mix the business, actually, other bottoms, so that means pants, cargoes, for instance, have done very exceptionally well, but there's still some balance to do in denim. But we are excited about the momentum in denim and what we've seen headed into Q3, so we're excited about that.

Jonathan Keypour: Got it. And then you guys mentioned in your inventory comments some rebalancing going to take place and some continued promo activity extending into 3Q a little bit. I'm wondering, is that entirely overhang from the 1Q inventory in women's bottoms? Or was there also a little bit of overhang from 2Q that's moving now through 3Q?

Jennifer Foyle: It's primarily concentrated on some seasonal businesses, shorts being the #1. And there is some fashion that we need to ensure that we're clearing.

Operator: The next question is from Dana Telsey with Telsey Advisory Group.

Dana Telsey: As you think about the later back-to-school time period, any assessment of if that had any impact on sales in either of the businesses? And then as you think about stores versus online, how is the performance for each business, whether it's in the metrics, traffic conversion in stores versus online and how the remodels are performing?

Mike Mathias: Thanks, Dana. I think with us reporting today, we're through the full Labor Day period and Labor Day shift. So we have a good sense of kind of where we are quarter-to-date accounting for those shifts, and we'll pass really all the peak back-to-school periods, too, even though there were shifts within August and shifts here in early September. For the most part, we've got line of sight to those. So our -- again, the guidance by brand and in total, kind of mid-single-digit comp -- mid- to high single-digit comp for the quarter and the guidance by brand is commensurate with that quarter-to-date trend.

And at this point, we've seen, for the most part, any kind of impact from shifts. Stores versus online business, I'll start with Aerie. Aerie is positive across the board. I think I used the description last quarter that all the conditional formatting is green. That's still the case that we're seeing quarter-to-date, stores, digital traffic in both channels, AUR, UPT, AOV, customer counts, you name it, all going in the right direction with strength across channels, strength across categories, strength across metrics. AE at a flattish result with guidance. Stores are definitely on the low end -- lower side of that and digital is stronger.

So that's what we've kind of seen for a few quarters now, seeing that quarter-to-date here still in Q3. Stores have gotten better. So against the negative 1 comp in Q2, what we've seen quarter-to-date here in Q3 is stores coming back stronger. We always -- we tend to see that during these peak periods. We are a destination in the mall during back to school and holiday. We'll see how that plays out the rest of this quarter. So a little more rebalancing between channels versus what we saw in the second quarter but stores still on the lower side of the average.

Operator: The next question is from Jonna Kim with TD Cowen.

Jungwon Kim: Jen, just on the Aerie side for the holidays, I know you had very strong holiday last year with pajamas and other key items. How are you just thinking about the product assortment this year? And then especially on the Eagle side, is there anything that you're doing differently also around the holiday season?

Jennifer Foyle: Yes. In both brands, we're very excited about -- honestly, the brand health for both brands has been extremely positive. So let's start with that. So what we're working on in the American Eagle side is really converting those customers and entertaining them, and we're very focused on getting them to stores. This is when we really gear up. I do think long legs are going to build into the -- into Q3 and into Q4. So with AE, that should be hopefully positive and some optimism there. Again, still 8 weeks to go in this quarter, but we're not into full long legs yet either. So I think we have some opportunity there.

The key items that the teams have worked through, the new ideas, all of our fun ideas that we do during the holiday season in both brands, I think, we're really going to excite the customer there. Color, optimism, fun, Aerie is going to continue to do its drops as well as AE. All the newness drops have been working. It's new ways to reengage our customers and get them into the stores. And I think we have a lot brewing for the holiday season.

Jungwon Kim: Just one more follow-up, Jen, on the Aerie side. Any color on how intimates perform and how you feel about the assortment there?

Jennifer Foyle: Very nicely. We're exciting what we're seeing in intimates. There was some market share gain, and we're really focused on newness in bras as we move forward. Sports bras have been working well, other bras. But we really want to gain credit for all the innovation we do in our core bras, and I think there'll be a lot of work and some new innovation that you'll see on the go forward. Keeping in mind, as we head into Q4, we definitely dive into other categories as well. It's a gift-giving season, and I think Aerie does it best.

Operator: Next question is from Adrienne Yih with Barclays.

Angus Kelleher-Ferguson: This is Angus Kelleher on for Adrienne. Jen, you mentioned Aerie brand awareness is still around 59% despite the strong growth. What's the marketing plan to close that awareness gap and how much of the incremental ad spend in the back half is targeted at that versus performance/conversion marketing?

Jennifer Foyle: We're not going to really disclose our ad spend contribution. However, if I looked at AE's brand awareness, which is roughly 76%, look at that gap right there and think about the comps that Aerie is able to drive. So I'm pretty excited about the opportunity there. Our goal is to get it at least equal, if not exceed the brand awareness that we see in our portfolio. What I will say, the teams are up to everything.

I mean from in-store events to our double down on digital spend, which I think has been really optimized, connecting with our customers, building on our Aerie Realmakers, building on our advocacy program, everything has really begun -- we're firing on all cylinders, and the customer and the community is really responding. This is what -- where the magic happens in Aerie. This community that we're able to build and retain and ad, the spend, our spend is up per customer double digits, in line with these numbers that you're seeing. So I think the team -- it's our secret sauce, so we don't share that, but I think the team knows how to deliver on this.

Angus Kelleher-Ferguson: Great. Great. And then just a quick clarifier for Mike and Ravi. Buying and occupancy, or BOW, they leveraged about 150 basis points last quarter but were roughly flat this quarter. I'm curious if there's anything to call out there regarding distribution costs, occupancy or anything else like that. And is that leverage plan to come back in the back half?

Mike Mathias: Yes. I think for the second -- what you'd expect in the third and fourth quarter, to be similar to second quarter. First quarter, there was a little bit of shift between things with kind of the disposition or the wind down of our quiet third-party logistics business. So the BOW line, I'd expect from here to be -- to have similar results from a leverage perspective that we saw here in the second quarter. With more work to come, teams are constantly -- there's rent, delivery, distribution costs that are in that bucket of expenses.

There's cross-functional teams still in place working on all those line items that we've -- since our expense initiative a few years ago, and that's still in place.

Operator: The next question is from Rick Patel with Raymond James.

Rakesh Patel: Can you unpack your expectations for gross margins a little further? How do we think about the puts and takes in Q3? And if that differs from your Q4 plans. I know that inventory cleanup is ongoing, so curious if that's done within Q3 or if that's something that spills over into Q4.

Mike Mathias: Yes. I'll provide some additional detail there. So I think in general, we're looking for Aerie's continued strong performance, on the merch margin line to continue. AE, again, definite improvement from the first half of the year, some placeholder markdowns to cover us as we work through some of this inventory balancing. I just hit the BOW line item, similar expectations in the third and fourth quarter as the second quarter kind of been relatively in line to last year as a rate. I think the other moving parts, we do have some hedge in there, I'll call it, or the potential for some freight, fuel surcharge impacts. So we believe we're covered there.

We don't know for sure exactly where things are going. Oil is over $100 a barrel again, but we want to make sure we're covered there. Not surprised by anything. Nothing significant to date, but the potential for that to happen is covered. And then from a tariff impact perspective, Q3 will be kind of a negligible difference to last year, again, with these -- the kind of the rates in place just announced in June versus kind of a partial quarter impact last year, the dollar difference is pretty negligible in the third quarter. And then at that 12.5 rate for fourth quarter, up again, it kind of full IEEPA tariffs.

Could be a little upside but we're also -- we know that there's still kind of analysis and studies being done potential for some increase to those tariffs in the fourth quarter, some impact to the fourth quarter. If it doesn't happen, could be some upside there. So gross margin in general were -- all those ins and outs relatively flat for the third quarter, modest improvement in the fourth quarter in the guide.

Operator: The next question is from Alex Straton with Morgan Stanley.

Alexandra Straton: Perfect. Maybe for Ravi and Mike, if our math is right at refunds, it just looks like you're trimming the full year EBIT guidance just slightly compared to last quarter. So somewhat of a follow-up to the last question. I'm just trying to understand, is that just a higher incentive accrual? Or has your view on other pieces of SG&A or gross margin changed at all?

Mike Mathias: No, I mean, you're right, Alex. Math would say we are trimming the back half guide a bit from where we were back in May. I'd say the #1 driver of that, if you remember the color -- or expectation was AE to be up like low positive -- or low single-digit positive. We're giving flat guidance for the balance of the year, so that's a piece of it. A little bit of markdown placeholder as we've described alongside that reduction to revenue expectations.

Flip side of that, at least for the third quarter, Aerie at a high teen to 20 is ahead of where we thought, but the mix of that still taking a little bit off the income line based on the mix of that comp performance between brands. The SG&A line isn't much different. We talked kind of in line with sales mid- to high single, so a few million dollars there that we're still working on but not a big driver of the guidance trim. And in fourth quarter, it's similar. Essentially, we're guiding AE to flat.

Actually, fourth quarter, our prior guidance was AE still low single positive for the back half in total, which meant fourth quarter as well. AE is flat, and we're looking at Aerie kind of more in the high single to low double range, which is the same place we thought. So the trim in both quarters is really just AE brand flat expectation versus up low single and a little bit of markdown kind of placeholder against that. I mean in total, we are -- the third quarter guide implied similar income result to last year, so much improved from the first half of the year, with work to do.

Fourth quarter implies some operating rate improvement and kind of mid- to high single-digit income increase. So again, 12-month basis goes forward, making progress here in the back half even with a little bit of a reduction to guide and -- but positioned -- and positioning things, in general, across gross margin and SG&A plans to be back to revenue outpacing expense, op inc growth outpacing revenue growth and operating leverage again now that as we get into the back half into holiday and into next year, we're past tariff impact for the most part, even though there'll be some in and out there but mostly absorbed at this point.

SG&A structured to leverage, like I said, at a low to mid-single-digit level in the next year. So we're confident that as we get into the holiday period and then into next year that we'll be back to income outpacing revenue growth and some operating rate improvement on a 12-month forward go basis -- 12-month forward basis.

Alexandra Straton: That's super helpful. Maybe just on AE as a quick follow-up. After it gets to that maybe flat level in the back half, how do you think about the return to positive? And like what KPIs do you care most about as you're monitoring that trajectory?

Mike Mathias: I think traffic is a big one. I think Jen can weigh in here, too. But I think, look, you start with the mix of what -- of product strategies first. I think the team feels good about where things are going forward. We're going to build on the sequential improvement we've seen quarter-over-quarter here. We're given a flat guide based on quarter-to-date performance in Q3. We're playing that forward into holiday. I think the team hopes to exceed that expectation through the balance of this year. Plan's in place next year to comp negative results.

But being prudent about how we plan that and not -- this is -- this inventory work is making sure we're not getting ahead out of our skis in terms of inventory against the comp expectation for the first half next year, even though we're up against negative. So we want to make sure we're positioned to chase trend and not get too ahead of things there. So I think that the intention going forward is for AE on the metric side be driven by product strategies first.

I think the marketing rebalancing we've been talking about, we're first -- the third quarter here is our first path at rebalancing that spend toward what was kind of top-of-funnel consideration, brand awareness to definite conversion driving purchase behavior type spend on the digital marketing, performance marketing away from bigger campaigns and top of funnel, and we're seeing some traction there with the sequential improvement we've seen so far quarter-to-date. Teams are building upon that into holiday and into next year as well. So I think traffic against -- traffic in stores and conversion against that traffic are definite focuses alongside product strategies go forward.

Operator: The final question today will come from Marni Shapiro with The Retail Tracker.

Marni Shapiro: Congrats on Aerie. It's really stunning to see it in every single haul for back to school. So I wanted to actually talk a little bit about Aerie. You're focusing on the bras, and I love that, and I thought the Float was a great launch. I'm curious about also the show-off in that collection, which feels a little sexier than what I'm used to seeing from Aerie. I like it. And you also had a couple of sheer bras that were always towards the front of the store and seem to always be selling out. So I'm curious if this is a shift for Aerie and you think that there's room for you guys to compete there.

I think there is. And then I'm also curious if you're seeing that your customer is buying the matchback set, so the matching stripe bralette with the matching boyshort and then matching stripe sweatshirt to go with it. And is that helping to drive up basket, like you're fully outfitting her now?

Jennifer Foyle: Marni, I think you could have taken this call for me. All of the above, that was perfectly said. Really, all bras are working. And we're going to really look to build out each franchise and find new ways to navigate bras. That's what we're up to right now. We do see these sets selling. We love how they go back to the apparel. And you'll see more of each category and probably some naming and claiming down the road. We have some excitement as we head into the back half and we go into really spring and really into back to school with some even -- we have plans, let me just say, all the way through.

We're already planning how we're going to try to comp next back to school. We're going to do that with some of these ideas. Excited what the teams are delivering as far as innovation, novelty laces, new laces. They're doing an excellent job. And yes, this matchback is definitely an opportunity.

Marni Shapiro: And is the sexier look an intentional look? And is it something that you can carry over to Eagle without getting away from the core DNA of the brand?

Jennifer Foyle: Absolutely. But we have to do sexy in our way. I think we do it in a different way, and I think it's relevant. But I think there's ways to do it that can be cool and understandable for our customer base.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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