American Eagle Outfitters, Inc. (AEO) Earnings

Management highlights

- Portfolio Performance and Brand Strength * Management reports a solid start to the year, with AEO's brand portfolio demonstrating overall strength, led by exceptional growth from Aerie and Offline. * Aerie surpassed $2 billion in trailing 12-month revenue, marking a major milestone for the brand that was built internally from its launch. * Offline, AEO's activewear brand, continues to be a high-growth breakout; it is currently the number two legging brand in AEO's core consumer demographic. * American Eagle remains an iconic, resilient brand with a growing customer base of over 19 million customers, up 3% year-over-year, with demonstrated long-term relevance. - Operational and Strategic Initiatives * Aerie shifted away from brand-wide promotions to a disciplined, high-margin strategy focused on targeted promotions, consistent always-on pricing in key categories, and marketing investments, leading to higher average unit retail (AUR) and improved product margins. * Aerie's 100% Aerie Real marketing campaign, which commits to never using AI-generated bodies or airbrushed models, has deeply resonated with consumers, boosted brand awareness, and driven loyalty. The new Aerie Real Makers Influencer Program beat its 6-month growth target in just 3 weeks, significantly increasing repeat customer engagement. * The new West Coast Distribution Center in Phoenix went live in early May, completed in under one year, to optimize the distribution network, improve inventory placement, and expand customer delivery options. * For AE's underperforming women's bottoms category, the merchandising team is already adjusting assortments, refining bottoms architecture by optimizing popular silhouettes and fits, and scaling high-demand women's tops categories ahead of the critical back-to-school season. New talent has been added to women's merchandising and design teams to sharpen product strategy ahead of AE's 50th anniversary in 2027. * New digital and marketing initiatives for AE include the launch of an AE creator community and a dedicated TikTok shop, with upcoming high-profile partnerships with Bubble Skin Care and Prime Video's hit show *Off Campus* to drive brand engagement. * Marketing investment is being prioritized across the portfolio, with allocation aligned to highest return opportunities; capital expenditures for the full year remain on track at the previously guided range.

Guidance

- Second Quarter 2026 Guidance * Consolidated comparable sales growth is expected to land in the mid to high single digits. Aerie and Offline are expected to deliver comparable sales growth in the high teens to low 20s, while American Eagle is expected to be flat to down low single digits. * Operating income is expected between $45 million and $50 million, which includes a $20 million incremental tariff headwind versus the prior year. SG&A is expected to grow mid-teens, driven by planned advertising investments. 140 million in expected net tariff refunds is not included in guidance. - Full Year 2026 Guidance * Consolidated comparable sales growth is expected in the mid single digits, with full year operating profit projected between $390 million and $410 million. * Capital expenditures are maintained at the previously guided range of $250 million to $260 million. * Gross margin expansion is expected in the second half of the year, as the business laps the 2025 tariff and incremental advertising investment headwinds. Operating income is expected to grow faster than revenue in the second half, with approximately double-digit operating income growth projected on mid single-digit revenue growth. * American Eagle is guided to low single-digit comparable growth in the back half, with management targeting a return to positive comp growth, while Aerie is expected to moderate to high single-digit to low double-digit comparable growth from its first quarter high double-digit pace.

Segment performance

Consolidated first quarter 2026 total revenue was $1.2 billion, an increase of 10% year-over-year, with comparable sales growing 8%. Gross profit was $456 million, up 41% year-over-year, with a gross margin of 38.2%, an increase of 860 basis points. Operating income was $28 million, and diluted earnings per share was 14 cents. Ending inventory at cost was up 27% year-over-year, while inventory units increased just 5%. - Aerie (including Offline): Total segment sales were $481 million, growing 34% year-over-year, accounting for 40.1% of total consolidated revenue. Comparable sales grew 25% year-over-year, with growth across all channels. Aerie apparel comparable sales grew 45%, with broad strength across intimates, sleep, and apparel categories. - American Eagle (AE): Total segment sales declined 2% year-over-year, accounting for 59.9% of total consolidated revenue. Comparable sales also declined 2% year-over-year, with the decline driven by store performance (digital performance was flat). Men's delivered its third consecutive quarter of positive comparable sales growth, while women's tops (tees and fashion tops) remained strong. Women's bottoms (including denim) underperformed, driven by misaligned assortment and cold spring weather impacting seasonal category demand.

Risks & headwinds

- Continued macroeconomic uncertainty and a fluid, highly competitive retail landscape create headwinds for consumer demand and revenue performance. * A colder-than-expected spring negatively impacted demand for AE seasonal products, and unseasonable weather could continue to pressure near-term results. * Incremental import tariffs create direct cost headwinds; 150 to 200 basis points of gross margin headwind from tariffs is expected in the second quarter of 2026, with a 15% tariff rate planned for the balance of the year. Potential increases in ocean and air freight rates also pose margin pressure. * AE's women's bottoms assortment was insufficiently deep in high-demand silhouettes, resulting in underperformance that weighed on overall AE results in the quarter. * Sustaining Aerie's high rate of growth at its current $2 billion scale requires continued discipline, innovation, and execution in a competitive market.

Analyst Q&A

• Q: What is the root of AE's women's bottoms weakness, and can the category return to positive comp by back-to-school? /

  A: Weakness was concentrated in women's bottoms, even as women's tops posted strong results that could not offset the decline. The main issue was insufficient depth and penetration in tested, popular new silhouettes. The team has already pivoted, completed successful testing of corrected fits and rises for back-to-school (AE's key denim season), and recent results on corrected denim assortment already show positive momentum. The team is confident in an inflection for the category heading into Q3.

• Q: What is driving Aerie's strong growth – is it traffic, average order value (AOV), new customers, or existing customers? What is the new customer acquisition trend, and what's the market share opportunity? /

  A: All core metrics are positive: traffic, conversion, AUR, AOV, new customers, and retained customers all show growth. New customer acquisition is up roughly 1 million year-to-date, with high customer retention and stickiness driven by the brand's emotional connection and inclusive Aerie Real platform. The new Aerie Real Makers influencer program beat all 6-month targets in just 3 weeks, further boosting engagement. Management sees significant continued runway for market share growth across new and existing categories.

• Q: What are the puts and takes for gross margin in the second quarter and back half of 2026? /

  A: Q2 2026 faces 150-200 basis points of gross margin headwind from incremental tariffs, plus planned AE markdowns to clean inventory ahead of back-to-school. These are partially offset by operating expense leverage from stronger revenue. In the back half, the business laps 2025 tariff headwinds, creating a more apples-to-apples comparison. Some potential freight cost pressure offsets tariff-related favorability, leaving product margins expected to improve, with overall gross margin expansion expected for the second half.

• Q: How is marketing spend allocated across brands, and how will you sustain Aerie's strong comp growth? /

  A: Advertising spend is up across both brands, with Aerie's spend growing ahead of its 34% sales growth to fuel its current momentum. AE is also receiving incremental marketing investment to drive customer file growth and brand consideration. Starting in Q3 2026, total company marketing spend flattens, with a reallocation toward performance digital and influencer marketing (to drive conversion) after the first half's brand building campaigns. Aerie has delivered consistent growth for a decade, and the team focuses on continuous improvement to product, quality, and marketing to maintain momentum, with significant room for category expansion.