Mar 4, 2015
Executives
Judy Meehan - VP, IR Jay Schottenstein - Interim CEO Roger Markfield - Executive Creative Director Mary Boland - Chief Administrative Officer and CFO Simon Nankervis - EVP, Global Commercial Business Michael Rempell - COO Jen Foyle - Global Brand President, Aerie Chad Kessler - Global Brand President, AE Brands
Analysts
Adrienne Tennant - Janney Montgomery Scott Simeon Siegel - Nomura Securities Thomas Filandro - Susquehanna Financial Group Randy Konik - Jefferies LLC Janet Lan - Oppenheimer & Co. John Morris - BMO Capital Markets Rick Patel - Stephens Inc.
Dana Telsey - Telsey Advisory Group Paul Alexander - BB&T Capital Markets Lindsay Drucker Mann - Goldman Sachs Jennifer Davis - Wells Fargo Securities Susan Anderson - FBR Capital Markets Janet Kloppenburg - JJK Research Richard Jaffe - Stifel Nicolaus Oliver Chen - Cowen and Company
Operator
Greetings, and welcome to the American Eagle Outfitters Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder this conference is being recorded.
It is now my pleasure to introduce your host, Judy Meehan, Vice President of Investor Relations for American Eagle Outfitters. Thank you, please begin.
Judy Meehan
Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Interim Chief Executive Officer; Roger Markfield, Creative Director; and Mary Boland, Chief Financial and Administrative Officer.
Also joining us for Q&A today are Simon Nankervis, EVP of Global Commercial Business; Michael Rempell, Chief Operating Officer; Jen Foyle, Global Brand President of Aerie and Chad Kessler, Global Brand President of AE Brand. 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.
Our comments today will focus on results from continuing operations and include non-GAAP adjustments. Please refer to the tables attached to the press release.
We also have posted a financial supplement on our website. And now I'll turn the call over to Jay.
Jay Schottenstein
Okay. Thank you, Judy, and good afternoon.
What a difference a year makes. As I said on this conference call one year ago, we had significant opportunities across many areas of the organization.
This included higher quality merchandize that was more complimentary to our lifestyle brand and more innovative and fun customer experience and greater team alignment. I'm pleased to report that we made good progress over the past 14 months.
The work that began at the outset of 2014 is beginning to deliver results and fueled a stronger second half of the year with momentum continuing as we enter 2015. Now looking back at 2014, the year end aggregate was challenging.
Total sales declined 1% and EPS of $0.63 was down 15%. Yet it was two different - two very different halves.
Our initiatives led to a recovery in the second half of the year following the weak start. As we expected the first half was extremely difficult with financial performance below our targets and historical norms.
Merchandize assortments were noteworthy needed to be, sales and margins were pressured as a result. I'm pleased with how quickly our team responded to drive improvements for the merchandize assortments and marketing efforts.
We cut planned expenses and demonstrated better inventory control. Our business began to stabilize by mid-year with financial improvements in the third and fourth quarters.
Now, a few fourth quarter highlights. The team executed very well particularly given the challenges within our sector.
Net revenue increased 3%, EPS of $0.36 increased 33% driven by significant reduction of markdowns. We successfully reduced promotions and saw sequential progress with sales showing positive in the post holiday period.
AE saw improvement across the assortment driven by innovation, quality and better style. Aerie had a solid year from start to finish.
They delivered greater assortment debt, new product lines and a multi campaign that truly resonated with our customers. From the financial standpoint, consolidated inventories were well managed during the period and expenses were controlled.
We ended the year in excellent financial condition, with $411 million in cash and no debt. We invested $245 million into the business and paid out $97 million in dividends to our shareholders.
As we move ahead we are encouraged by the early momentum we are experiencing. Yet we also remain vigilant on our priorities.
Roger will review our merchandizing strategies in a moment which are critical to maintaining momentum and achieving a recovery in markets. In 2015, we'll continue to focus on the following.
One, growing our digital business and enhancing our customer experience. This year we will launch a complete redesign of our digital site.
This will optimize our mobile capabilities and improve the shopping experience. Later in the year we will open a localized site in the U.K.
to be followed by a roll-out of other EU countries. Additionally, we will expand online product lines for both AE and Aerie to build upon and compliment our best sellers.
Next, we will continue to advance omni-channel capabilities. This year we will add reserve online and work to maximize our existing tools including buying online, ship from store, and store to door.
Our goal is to drive better inventory utilization and customer satisfaction. This year we will roll-out the new point of sales system across the U.S.
store plan enabling mobile checkout, enhance customer security and provide a work force management tool. We continue to improve the profitability of our stores, and rationalize the U.S.
fleet. We have flexibility with our portfolio of stores with nearly 358 AE stores with leases expiring in next two years.
And we will continue to expand our global presence, primarily through new license stores, combined with select company own margins. We will work on maximizing productivity and profitability on these newer markets.
Before I turn it over to Roger, I like to thank our entire organization for their hard work and commitment in 2014. I'm extremely proud of the progress we have made and I'm encouraged by the strength so far this spring.
We remain focused on the future potential to deliver profit improvement and returns to our shareholders. Now I'll turn the call over to Roger.
Roger Markfield
Thanks Jay. Good morning everyone.
As Jay said, we've made great progress across the organization. Our vision and priorities entering the year with right areas of focus and we are beginning to deliver positive sales and improved margins.
Our fourth quarter results were fueled by better comparable sales and a successful reduction in markdowns and promotional activity. The period marked a continuation of sequential quarterly sales gains experienced throughout the year as we drove continuous improvements through our merchandize assortments.
We saw sales accelerate in January, due impart from positive response for the spring transition line. The positive comparable sales have continued into the spring season.
I'm extremely pleased by the team's execution particularly in the light of unprecedented competitive pressures we are seeing strong sell-through rates and are chasing best sellers. Inventories are lighter than we'd like, due to the delayed receipts from the port, which we expect to be fully resolved in the second quarter.
In the fourth quarter we delivered 400 basis points of merchandized expansion. More compelling merchandise combined with more relevant brand marketing enabled us to successfully reduce store-wide promotions.
We did not anniversary 35 days of these events from last year driving a much healthier business. We saw a solid growth from digital sales across brands.
And as Jay mentioned, we have exciting new advancements planned across digital and omni creating greater choices and a better brand experience for our customers. Consolidated sales metrics reflected a healthier business with increases in average in retail price, units per transaction and transaction value.
Our assortments are better quality, more trend right, and consistent with DNA of our brands. During the quarter, greater innovation and attention to detail drove the best performance in our signature categories including men's and women's knit tops, women denims, sweaters, and accessories as well as men's pants.
Aerie had an outstanding quarter completing a breakout year. Comps increased 13% and margins strengthened.
While we saw a good strength across the business, some of the best categories were intimates, PJ's and soft bottoms. An innovation in accessories such as blanket scarves, all of which were and played into Aerie's emphasis on gifting.
Looking forward, we have just begun to scratch the surface of what we can achieve. Our margins remained the low historical levels and we have plenty of opportunity to deliver stronger sales, productivity and margin gains.
Now I want to review our key areas of emphasis as we move into 2015. Product, people, process and presentation.
Starting with product, we will continue to differentiate our merchandise assortments, leveraging our competitive strength and sector-leading denim and bottoms businesses. Driving sales and tops is a very meaningful opportunity and for the first time in a long time, we are seeing positive reads in top categories.
This is an early, yet very encouraging sign. The team will continue to ensure we deliver great quality in fashion.
In the competitive landscape, we need to up our game by using innovative fabrics, washes, great styling and product details. Next people, I was thrilled to announce the promotions of Chad Kessler and Jennifer Foyle to Global Brand President's to AE and Aerie.
Chad has been instrumental in leading the improvements within the AE brand assortments, driving better sales and markdown rate and Jen has had a strong and consistent performance posting positive comps in each quarter of the year and steadily improving profitability. Under the new structure, the teams are aligned the right way creating a singular brand and customer experience.
Chad and Jen are the right leaders to take us into the future. They are with me here today and you will be hearing a lot more from them in the future.
Now process. Early last year, we worked to strengthen our process including our production calendar and testing capabilities.
We are currently testing new fashion items and denim fabrics for the upcoming back-to-school season. From our Don't Ask Why fashion capsules, we have successfully adopted new key items into the mainline business.
We built a good chase process to quickly replenish, strong sellers, and flow more newness to the floor. We continue to present 10 new floor sets a year, with updated key items and fresh marketing.
Lastly presentation. As a lifestyle brand, we must tell a strong story.
That connects to each new merchandise flow with consistency across digital and stores. We need to ensure an emotional connection to our customers.
I think we made good progress in 2014 and expect to get even better in 2015. I look at spring right now and I see the right trends, a strong point of view with well-curated outfits around themes that tie perfectly into our lifestyle all in a more fun and exciting store environment.
To wrap it up, we made great strides in 2014 and I am very optimistic about our future. Our AE brand is extremely well positioned and operating from position of strength against its competitive set.
Aerie has tremendous runway ahead, as a truly different and real intimates brand. I would like to end by thanking the entire team of AEO.
Everyone came together to end 2014 on a very positive note. We will all continue to work hard to see that momentum carry into the future.
Thanks, and now I'll turn the call over to Mary.
Mary Boland
Thanks Roger. Despite the very competitive holiday season, we're extremely with our fourth quarter performance as sales were above our expectations.
We effectively reduced markdowns and controlled expenses. This led to adjusted year-over-year earnings growth of 33%.
Now looking at the details of the quarter, total net revenue increased 3% to $1.07 billion from $1.04 billion last year. Consolidated comparable sales were flat.
By brand, AE comps were down 1% and Aerie increased 13%. On a consolidated basis, the number of transactions decreased due to decline in traffic.
However, the average transaction value increased in the high single-digits. This was driven by a mid-single digit increase in the average unit retail and a low single-digit increase in units per transaction.
Additional sales information can be found on Page 10, of the presentation. Total gross profit increased 13% and as a rate to revenue rose 320 basis points to 35.1%.
The margin improvement was driven primarily by reduced markdowns. This was partially offset by 90 basis points of rent-to-leverage combined with higher delivery costs due to an increase in direct orders including orders filled through buy online, ship from store.
SG&A expense of $227 million increased 5% and de-leveraged 50 basis points to 21.2%. The dollar increase was driven by planned investments in marketing and incentive compensation, as well as new international store openings.
Through good expense management including reductions in overhead and other expenses, we were able to significantly mitigate the impact of these investments. Depreciation and amortization increased to $37 million de-leveraging 50 basis points, due to omni-channel and IT investments, new factory and international stores and the new fulfillment center.
Operating income grew 31% to $112 million and the operating margin expanded 230 basis points to 10.5% as a rate to revenue. EPS of $0.36 increased 33% from adjusted EPS of $0.27 last year.
Now I'd like to spend a few minutes reviewing 2014. The year was a tale of two very different halves.
The first half was weak with comparable sales down 9% and EPS of $0.05 down 82% from the prior year. We were pleased to see that improvements made throughout the year led to better financial results on the second half, when we saw a comparable sales declined 2% and EPS of $0.58, an increase of 26% from last year.
Now getting back to looking at the year end total. Revenue decreased 1% to $3.3 billion.
AE brand comps decreased 6% and Aerie comps increased 6%. Gross profit increased 1% to $1.15 billion and the gross margin increased 60 basis points to 35.2% primarily due to lower markdowns, which were offset by 140 basis points of the leverage of rent on negative comparable sales and higher delivery costs.
Selling, general, and administrative expense increased 2% de-leveraging 70 basis points as relate to revenue. The increase resulted primarily from planned strategic investments and advertising and incentive cost, which were partially offset by reductions in corporate overhead and variable expenses.
Operating income increased 11% to $207 million and adjusted EPS of $0.63 decreased 15% from last year. For additional information, please refer to Page 6.
During the period we took a $0.04 charge related to lease obligations in connection to the exit of the 77 kids business in 2012. The charge was net of proceeds provided by the purchaser and MC obligations related to the discontinuation of this business.
Now turning to the balance sheet, starting with inventory which can be found on Page 11 of the presentation, we ended the quarter with inventory at cost per foot down 5%. We currently expect first quarter ending inventory at costs per foot to be down in the low single-digit.
We ended the fourth quarter with $411 million in cash and investments, compared to $429 million last year. Capital expenditures totaled $245 million for the year above earlier expectations due in impart to implemental strategic omni-channel investments including retail fulfillment in the Hazleton DC, as well as the pilot of our Oracle point of sale system.
We expect CapEx to be approximately $150 million in 2015. This includes the chain-wide roll-out of the point of sale system, and supporting technologies, the completion of our new fulfillment center, and new and remodeled store investments.
2014 store openings were focused on new factory stores, Aerie side-by-sides, under penetrated markets and international locations. We also prioritized international license stores ending the year with 99 locations across 16 countries.
As we look to rationalize the domestic fleet, we closed 70 stores including 49 AE and 21 Aerie standalone locations. In 2015, we plan 20 to 25 targeted openings and we’ll close another 70 stores.
Additional store information can be found on Pages 14 through 16. Now, regarding our first quarter outlook, based on a positive mid-single digit increase in comparable sales, we expect first quarter EPS of $0.09 to $0.12, which includes about $0.02 per share of negative impact from the port slowdown.
The guidance compares the EPS of $0.02 last year and excludes potential impairment and restructuring charges. Regarding the year, it’s important to note that we have meaningful opportunity in the first half of the year as we anniversary a very weak period and low-single digit operating margins.
While we see potential in all quarters, certainly the growth in the back half of the year will be a bit more muted due to the recovery we saw in the back half of 2014. For the year overall, we are targeting a further reduction in markdowns fueled by product improvements and better inventory utilization.
We continue to drive lower fixed SG&A expense dollars through reduced overhead, including salaries, professional services, and other expenses. Any increase in variable SG&A would lead to strong sales and relative incentive cost.
As Jay and Roger said, we’ll stay focused on our priorities and look forward to delivering better results. Thanks.
And now we'll take your questions.
Operator
[Operator Instructions] Our first question today is coming from Adrienne Tennant from Janney Capital Markets. Please proceed with your question.
Adrienne Tennant
Hi, everybody. First, kudos to the entire team for returning positive comps, and spring looks great at both brands.
And then secondly, congrats Chad and Jennifer on your promotions, well-deserved. Roger, you were only the first people I think last year to be optimistic about incremental trends in 2015.
Can you expand upon the comment you were saying about knit tops, when was the last time we had a strong knit tops cycle. And then secondarily, when do you expect to be fully in stock ahead of spring break with your inventory due to the port delays?
Thank you.
Roger Markfield
Thanks for all your compliments.
Adrienne Tennant
You're welcome, you deserve them.
Roger Markfield
We're happy how good the stores look for everyone, but most important for our customers, which is really obvious. Out top business in the women's side of the business has been good for years.
I think that Chad and team has just been terrific with the design organization in getting it right, we hit the trend, we know where the trend is moving and our concept team has never been working better in alignment with the design organization. So, we think that this trend for us will continue, we're really delighted.
Adrienne Tennant
Great. And in stock?
Roger Markfield
In stock, well we think, goods are flowing very well right now. Probably take us another three to four weeks to get our inventories to the level that we need them.
If you look at it from your perspective, returning our inventory is over ten times year at this point in time, which is quite fast but the sell-throughs are great.
Operator
Thank you. Our next question today is coming from Simeon Siegel from Nomura Securities.
Please proceed with your question.
Simeon Siegel
Thanks. Good morning guys and congrats on a results.
Can you talk about your longer-term store targets, between full price factory, maybe domestic and international? And then, just great results on the gross margin.
Mary, can you quantify the ongoing markdown improvement opportunity you see longer-term? Thanks
Simon Nankervis
It's Simon, Simeon. In relation to full products versus factory, we can fairly clear over the last few weeks, we got a very strong approach to complete rationalization.
I don't think we have a fixed number in mind but we definitely have a perspective that we do need to see rationalization of our domestic fleet. We still continue to see improvement in our factory stores.
They’re still delivering returns above the balance of chain but we have seen a shift in traffic patterns over the last quarter in particular in our main line business which is positive. In relation to domestic versus international, we really only started to scratch the surface internationally.
We've got 99 stores that are licensed today, we only have a very small owned and operated fleet outside of the U.S. We will continue to invest in that businesses as the rights of return continue to provide incentives for investment.
But our focus is still on continuing to develop the licensed fleet in that business. And then, as our opportunities to invest and expand in owned and operated markets occur and arise, we’ll then look to those investments at the same time.
Mary Boland
And regarding the markdown improvement, we expect to see good markdown improvement certainly in the first half of the year, as we anniversary a bit of a week first half of the year, last year. And as I think about how that all flow through to gross margin, we expect to see higher gross margin as the year plays out.
We're not providing annual guidance at this point but with the improvement in markdowns certainly in the first half of the year, we'll see an improvement there.
Operator
Thank you. Our next question today is coming from Thomas Filandro from Susquehanna Financial Group.
Please proceed with your question.
Thomas Filandro
Hi. Thanks.
Nice job across the board in the execution as well, and congratulations as well to Chad and Jen. A question for Jay first.
Obviously, you've elevated here, or Chad and Jen have been elevated. That's great news, but like what's the latest update on the CEO search?
And then, again, separately for Jay, can you tell us where you're spending the bulk of your time to drive the strategic changes in the business? I'm going to slip in one quick one, Roger, you mentioned the Don't Ask Why assortment, can you help us understand how you're leveraging that assortment?
Thank you very much.
Jay Schottenstein
First of all as far as CEO's search, the search continues and since we have something to announce, we will make the announcement. The bulk of the time, this past year we knew we had a merchandised problem.
We knew we had a work through to the first and second quarter and with Roger and the team, we put a lot of emphasis to make sure we start making the product the way that we will be very proud of it. And I'm very proud what the team has done and where they're going and the merchandise I see coming for the - for this coming year, I'm very excited about.
And now we see opportunities in certain of our expense areas to get under control, to do a better job that and there is a lot of opportunities. So the good news is, there is lot to do which means a lot of opportunity.
And the team is very focused, we have a great team. I feel very good about all the key officers of the company and they keep me busy.
Roger Markfield
Tom thanks. I'm going to let Chad answer the Don't Ask Why question.
Chad Kessler
Tom thanks, and just I’d like to take a moment to thank the whole AE team that I work with, I appreciate people's comment on Jen and my recent promotions, but the turnaround in 2014 that we saw wouldn't have been possible without the team that was already in place, when I arrived. Don't Ask Why is a terrific testing lab for us for the brand.
We really have an opportunity through our partnership and partners in Italy and the trend team here to really find new fabrics, new washes, new fits, and get them testing in our most trend forward stores at a very quick rate. And then we’re able to take those sales and create those styles in overseas and Asia in more cost effectively and supply them to the entire fleet.
And we are finding that as we find best sellers in Don't Ask Why we are really able to leverage those to grow the whole tops businesses specially. And I think really a key part of how we've turned the tops business around.
Operator
Thank you. Our next question today is coming from Randy Konik from Jefferies.
Please proceed with your question.
Randy Konik
Great. Thanks a lot.
Just a couple quick ones. So Mary, the guidance on the mid single-digit comp for the first quarter, is that -- you noted in the fourth quarter average transaction value drove the results.
So has traffic turned up in the first quarter thus far? And do you think that is a sustainable inflection point?
I guess, second for Roger, you noted some opportunities on the supply chain and improvement in speed. Can you give us some specific examples on what you've been doing there to improve chase?
And then lastly, as it relates to the commentary around international strategy, a great job of keeping your capital light with a licensing model, and you talked about some owned opportunities. How do you think about keeping that capital light versus capital intensive model long-term on the international side?
And what international markets of the 16 countries are showing the most promise from a demand standpoint for the brand right now? Thanks a lot.
Mary Boland
Real quickly on traffic. Yes we did see traffic start to improve especially in January and then in February, February has been little bit challenged with weather so a little tough call a trend, yes we’ve seen improvement.
And chase strategy?
Michael Rempell
And on chase, Randy this is Michael. Like Chad said, we have a number of ways that we have been able to drive that capability.
Don't Ask Why has been one of the key drivers. Like Roger indicated in his prepared remarks, we also really got our testing process back on track.
So, we are out far ahead of where we need to be in terms of looking at washes, fabrics, fits, silhouette, and styles. And we have been able to leverage that effectively.
We’re leaving open to buy like we haven't in the past. We have platform fabrics and trends that are vendors.
We have capacity available for us and we built processes and systems to use quick approvals to get goods in, in as little as 30 to 45 days. So it’s been very effective for us here in back half of the year, we plan to build on it in 2015.
Simon Nankervis
And Randy it's Simon. In relation to the international strategy, at the moment we have 16 licensed countries and five countries that we are going to operate.
We saw - we opened Thailand and Indonesia in Q4 last year, we signed Chile and Peru, which will open shortly. We have a number of other countries under negotiation for licensing.
So our focus is definitely to continue on developing the licensed business. In relation to the balance between our own operated and those license stores, it goes back to what I was saying earlier.
As we see the profitability of those countries and the return on investment in our own markets improve, we will continue to focus and expand in those markets, where it is appropriate. So there is big focus this year especially in Western Europe and the U.K.
on developing our international digital capabilities which we received during global in the next couple of years.
Randy Konik
Can you hear me?
Mary Boland
Yes Randy.
Randy Konik
Just wanted to ask another follow-up. Of all the international markets, just from a demand standpoint, where are you seeing the most demand for the AE brand right now?
I'm just curious. Thanks.
Simon Nankervis
I think it's pretty even across the globe. I think it really depends on the penetration we have in each country.
So it is sort of hard to say which one but I can say that generally we have got equal demand in all markets and we have seen positive momentum in sales over the last year as we become more penetrated.
Operator
Thank you. Our next question today is coming from Anna Andreeva from Oppenheimer.
Please proceed with your question.
Janet Lan
It's Janet Lan on for Anna. Congratulations on a great quarter.
We just had a couple quick questions. First, on the mid single-digit comp guide, is that what you're currently running?
And then, with the big improvement in the women's business, congratulations on all the progress there. What are the plans to improve men's?
Mary Boland
In terms of the net single digit comp that’s our guidance for Q1 so that’s what we expect to run for the quarter.
Jay Schottenstein
In terms of the trends of the business we did see coming out of Q4 that’s a women’s business was a bit stronger with a positive comp and men’s trailing slightly. In spring right now the business is running much closely together with both looking positive.
We’re seeing strong momentum in the men’s bottom’s business and similar increase in men’s tops that we’re experiencing in women’s so it’s looking strong for men’s as well.
Operator
Thank you. Our next question today is coming from John Morris from BMO Capital Markets.
Please proceed with your question.
John Morris
Thanks. Congratulations on the quarter, and also to Chad and Jen.
Chad -- well, a question for Chad and Jen. Chad, at dinner in Orlando, we talked about the bottoms category.
You are such a destination in bottoms. I think that the way that you're doing some of the athlete shirt trends and whatnot.
How is denim doing? What's the outlook for denim currently?
Have you seen a continued improving trend there? And then Jen, with the Aerie business, key drivers, you mentioned them in the remarks.
Wondering if you can elaborate a little bit more, and talk about the profitability going along with it? Are you seeing a commensurate improvement in merch margins there as well?
Thanks.
Chad Kessler
So in terms of bottom here we really do well we’re a huge bottom definition for our customer, denim definition for our customer. We really are focusing on his and her entire bottoms order and seeing nice gains there in total.
In terms of denim we’re actually pretty excited about denim. We had a good fall and women’s after launching denim x and that momentum continues in this spring.
Men’s we’re seeing a stronger trend in denim coming out of holiday with the destroyed cap so we delivered for the trends for say and we’re passing some innovative denim fabrications and fits in men's that we’re getting strong reaction to. So we feel good about denim overall both men’s and women’s and the total bottoms business entirely.
So we talked a lot of tops bottoms definite foundation and we feel strong about that.
Jen Foyle
And in Aerie certainly we have the profits followed with the sales and the top line growth as you recall we resized the fleet and to leverage the side by side opportunity closing some non-productive stores as well as driving the direct business and then certainly driving the product attach to that. So that whole combination and the team we’re delivering really hit the profit line so it’s really what we talk.
Operator
Thank you. Our next question today is coming from Rick Patel from Stephens Inc.
Please proceed with your question.
Rick Patel
Good morning. Great progress.
I'll add my congratulations to Chad, Jen, and the team, as well. So can you talk a little bit about omni-channel?
And you've rolled out the capabilities to new stores, any way to quantify the impact this is having to comps or to conversion? And then, as a follow-up, can you provide some color on AUC, perhaps how that changed in the fourth quarter?
And any way to quantify how we should expect that to change in the first half versus back half of this year?
Michael Rempell
Great it’s Michael Rempell, I’ll take both of those. So on the omni-channel side the team had a lot of success this year.
So the buy online or the ship from store program that you mentioned before really exceeded our expectations this year. It allowed us to leverage inventory in the store the team executed really well lot of people can implement technology, but very few companies I think could execute across the board across store operations technology and training the way our teams did.
So it did have a nice impact on comps we did approximately $50 million revenue through that program, which was about double our expectations and that’s and that was in really the third and fourth quarters. So we’re looking forward to having that for the full year and we see plenty of other opportunities Jay mentioned the reserve in store program that we’re going to have this year.
We’re very confident in our ability to execute that and we’re very excited about the ability for that program to drive really qualified traffic into our store. And on the AUC side we’re seeing opportunity for AUC in the back half.
To quantify we’re seeing anywhere between 3% and 7% improvement in AUC so what I would tell you is consistent with our strategies we plan on taking a portion of that and flowing it directly through the bottom line. And a portion of that and reinvesting into the product supporting our strategies of better product, better value, and ultimately arrest promotional business.
Operator
Thank you. Our next question today is coming from Dana Telsey from Telsey Advisory Group.
Please proceed with your question.
Dana Telsey
Hi, good morning, everyone, and congratulations. And congratulations, Chad and Jen on the promotions.
As you think about both the cadence of promotions being planned going forward, how do you think about the cadence as we go into the spring break season? And on the drivers of the mid single-digit comp guidance for the first quarter, how do you think of the elements underneath that?
Thank you.
Chad Kessler
In terms of the promotional cadence for spring we do continue or that used to continue to reduce the promotions that we’re running in the store fewer box off promotions smaller discount. Our goal is to try to drive more traffic into the store we know we can convert most we have the customer in that.
So our goal is to try to make our lease on and our promotional activity more engaging for the customer. We said any for said this week this weekend with a new lease sign, which I think we’ll speak to that somewhat, but you can just see if we can.
But the goal is really try engage the customer get them excited about being in the store excited about the product and really speak to product first, price second and we’ve started to see that being effective later drive both sales and profitability and continue to make that our goal.
Jen Foyle
And that’s did out for Aerie the nice thing about the business is in both Aerie and AE were publican’s left promotion from last year. So we set the course to prepare ourselves for easier hurdles going back from the promotion last year so it’s nice to be able to get in front of that.
And just the pricing and dividing our customers.
Mary Boland
Yeah and I would say in addition to traffic and conversion, which is Chad and Jen just mentioned is we’re looking for AUR to be up mid-single digit as well as we deliver that great and compelling product and are able to reduce – reduce somewhat down slightly getting back half for 2015.
Operator
Thank you. Our next question today is coming from Paul Alexander from BB&T.
Please proceed with your question.
Paul Alexander
Hi, thanks for the question. Jay, you noted that there's no news to talk about yet in the CEO search.
But can you talk a little bit philosophically about the search? It doesn't seem like there is a ton of urgency to name one right away, and it sounds like you love your current team obviously.
So just what's your thinking about the need for the CEO, and what are you looking for in a CEO that -- to add that you don't currently have? Thank you.
Jay Schottenstein
What we have and I said earlier excuse me we had something certain amounts and like that’s it. But from my standpoint I’ll make sure the personally put in is a right person.
I’ll make sure that we had the right temperament of the person that readily put in this position will bring something to the table, bring something to the place, and has a certain vision that we buy into that’s what we’re looking for as a person who can draw bring everyone together and has a vision.
Operator
Thank you. Our next question today is coming from Lindsay Drucker Mann from Goldman Sachs.
Please proceed with your question.
Lindsay Drucker Mann
Thanks. Good morning, everyone.
I just wanted to clarify, the $0.02 impact that you're talking about from the port issues in the first quarter, is that a function of higher shipping costs, or is that a function of having less goods to sell in 1Q, and more of a -- something that might be weighing on the comp guidance? And so, maybe we should think about the underlying comp guidance of mid single-digit being higher if you weren't held back on some of these units?
And also, did you have any port costs in the fourth quarter number? And then, the second thing is how should we think about tax rate for fiscal '15?
Thanks.
Mary Boland
Okay I would that $0.02 impact is what we have in half inventory related. In Q4 minimal impact in terms of freight issues related to the port strike.
The team is able to manage through that I think pretty effective way and then the tax rate for 2015 assuming around 40%.
Operator
Thank you. Our next question today is coming from Paul Lejuez from Wells Fargo.
Please proceed with your question.
Jennifer Davis
Hey, it's actually Jennifer Davis on for Paul. First question, Mary, could you talk a little -- I know you haven't given full year guidance, but maybe some thoughts around SG&A?
I think you said fixed costs would be flat. But I also think on the last call, you said that you expected SG&A for the year for 2015 to be flat to down slightly.
So just wondering if that's changed at all? And then secondly, a clarification on the buy online, ship-from-store.
I know you said it had a nice impact on comps, a $50 million benefit to revenue. Could you talk a little bit about margin there?
Other retailers have been talking about lower margin than they originally thought, given the increased shipping costs, et cetera. So a little color on that would be helpful?
Thanks.
Mary Boland
Okay. Regarding SG&A for 2015, the team continues to stay focused on expense reduction and I think doing really nice job.
We do expect our fixed expenses to be flat to decline as we look forward into 2015. The one caveat is obviously variable expenses are depending on how the year plays out, what ultimate comps we do end up delivering for the year, those expenses will of course be driven by positive sales and performance throughout the year.
We do expect though to leverage our operating expenses for the year with our fixed expenses being down either flat to down slightly and whatever variable expenses flow through. I think in terms of your question and gross margin for buy online, ship-from-stores, we are seeing good flow-through on our gross margin, its on our margin, its to our expectation as we had planned for the year.
Michael Rempell
Right and I would just add that, when think about that program and we analyze the profitability not only does it show a nice profit albeit there are some incremental delivery costs. What it really allows us to do is leverage our inventory across the company as a whole.
So we’re able to actually get drive a higher margin rate through our e-commerce business because we have higher sell-through leveraging inventory that we have in the stores.
Operator
[Operator Instructions] Our next question today is coming from Susan Anderson from FBR Capital Markets. Please proceed with your question.
Susan Anderson
Hi. Thanks for taking my question, and congrats on a really good quarter.
On the international expansion, with now opening owned stores, I don't know if you could give a little color on what you think the timeline of the profitability of these stores will be? And then, with the finalizing of the fulfillment center, is there any benefits that you would talk about for this year through the P&L?
Thanks.
Simon Nankervis
In relation to international expansions, its early days for us with that global footprint of the owned and operated. So why we look at out international business is in totality including the license business with the owned and operated business and we're actually seeing good flow-through from that business today.
So, the way we - the strategy we ended, the markets that we would say that our license business would enable us to grow international business - the owned and operated markets without us needing to significantly invest and that strategy is playing out at the moment. So we've been very happy with what we're seeing.
Chad Kessler
On the distribution center, I appreciate the question, what you’re going to see this year in terms of cost, we will have some opening costs as we shift retail from our existing fulfillment center into Hazelton but I do expect leverage in the back half of the year and we should see that in our processing cost. We've to keep in mind that DC, the reason we're so excited about it is because while a lot of people are building e-commerce or converting DC's into e-commerce DC's, this is DC built to handle both retail and direct in the same distribution center.
So there is a lot of efficiencies and a lot of leverage both in inventory and in our associate in the DC and lot of flexibility with how we allocate those resources.
Operator
Thank you. Our next question today is coming from Janet Kloppenburg from JJK Research.
Please proceed with your question.
Janet Kloppenburg
Good morning, everyone. Congratulations to Chad and Jen, and congratulations to Roger on a really great turnaround in a very difficult year.
Two questions, really quickly. Do we think that, or do you think that the denim business is turning because of new trend in the business?
Or is it simply a function of replenishment on bottoms? And just for Mary or anybody, I was wondering what the outlook, was in the outlook business.
I know it had been challenging in fiscal '14, and I am wondering if you're seeing improvements there as well? Thanks so much.
Roger Markfield
Hi, Janet in terms of – I think we are seeing a lot of positive things happening in the Denim business. First with the Denim business being, really in the bottoms business being our foundation, we really are careful to make sure that we’ve invested enough inventory that we can have the sizes available to our customer and I think that, that compared to some competition that might not be taking those positions, I think is important.
But I think beyond that, I think we are seeing that there is a lot happening in terms of silhouette, fabric, silhouette and fabric innovation both in men's and women's. We've seen a big shift that we talked about before in women's when we set the Denim X collection in September and continuing to expand that this spring with Sateen X that's launched.
But the fabric innovation in Denim is really driving excitement for the customer and I think becomes a conversion opportunity in stores. In men's we are also looking at innovation as I mentioned before, we are currently testing and are bullish on for fall.
We are also seeing Silhouette changes happening. So I believe there is a lot of – there is a lot of newness happening in denim that we are excited to talk to our customer about and we remain bullish on our category going forward.
Michael Rempell
Janet in relation to your question on our factory business, we still remain incredibly positive about our factory business. That is why it is healthy, it generates a four-wall profit in all of the stores, it is a double-digit four-wall profitability.
It still performs above the balance of the main line fleet on a turnover per square foot basis. Have we seen a shifting in the way the consumer is shopping?
Yeah, we've seen that in the last year but we still remain committed to the investment and we are still seeing great returns. So we'll continue to expand that footprint although it will substantially reduced new store right over as we go through this year and beyond.
Operator
Thank you. Our next question today is coming from Richard Jaffe from Stifel.
Please proceed with your question.
Richard Jaffe
Thanks very much guys. And I'm pleased to hear how well Aerie is doing.
If you could elaborate a little bit on the success of the side by side stores, the shop-in-shops, and how you see this business growing, and how big you think it could be? That if, say, if you take your most successful shop in shop, could you see that in every location?
And if so, how much larger would the Aerie brand become?
Mary Boland
Yes sure. Well first just thinking on the year, the team put a plan in place and delivered I am really proud of the work the team did and then we assembled the team not too long ago.
So that said, we are only just beginning. I think we are really excited about the opportunity.
There is certainly wide space for this customer that we see, we think that there is certainly opportunity leveraging the box, leveraging AE, they are big brands, they have a huge customer base and we speak to the same girl. So certainly by doing so, opening up the side by side stores, the shop within shop opportunities, we are seeing nice leverage on the square foot base there, reducing obviously the square foot where we had some bigger standalone stores.
And then just again, delivering that she wants to see. We launched several product categories this year and one being that has been a huge success in bras, the Sunnie bra.
That bra is winning over so many customers and we are thrilled and we are going to leverage that going forward. And then undies, those two categories are just amazing for us and certainly the roots of the business.
But I think what we have seen going forward is there is opportunity in other categories. For instance in holiday, we leverage PJs and sleep, and also the gifting category.
Roger mentioned in his opening comments the blankets scarves. That was an incredible gift that really the customer loved to see in holidays.
So, we will continue to offer exciting other categories as well as their fundamental businesses.
Simon Nankervis
Just to provide a little bit of color on the numbers. We doubled our side by side fleet last year.
We doubled the square footage. We actually reduced the total square footage in Aerie but we actually only - our square footage was half in those side by side locations from the free standing stores.
But we were able to retain over 80% of the revenue on incremental profitability. So, we see the strategy being very, very profitable for the company and its something that we're focused on expanding over the next two years.
Mary Boland
Kevin we have time for one more question.
Operator
Thank you. Our final question today is coming from Oliver Chen from Cowen and Company.
Please proceed with your question.
Oliver Chen
Thanks a lot, congrats guys on really a great-looking product and all the execution. Regarding the excitement on women's top going forward, how are you feeling about the breadth versus depth of this category, and where do you see it evolving as you look to the enthusiasm you're seeing?
And I was just curious about the price point angle too, and how you're feeling about the assortment, and how that may move? And then, Mary, as we model merch margins, are we -- is it a back half opportunity as well, in terms of overall context for that line on the income statement?
Thanks.
Jay Schottenstein
In terms of women tops assortment, we have a limited size box. I don't see it really expanding the breadth of the assortment much beyond what we have today.
I think where we've fallen down in the past few years in terms of women's tops is not having the trend right items or not having the right outfitting for the customer to go with their bottoms. So, our focus really in growing that business is around building a strong assortment that provides great outfitting, great quality, great value to the customer, not necessarily a much bigger assortment.
Of course, we’ll ebb and flow in terms of the categories within tops in terms of how the trend is going but the total customer choices in stores will remain relatively constant. In terms of the AUR, I think part of the challenge we had in the spring last year in addition to some fashion missteps, I think in terms of tops also was actually trying to compete too much on price.
Really, I believe strongly that our customers loves American Eagle for the value we provide and if we can provide great trends, great quality at the right price, which she perceives it as being good value then we will get a strong return there. So, we expect our strategy includes getting slightly higher AURs which we were seeing so far.
Mary Boland
And then in terms of merch margins, yes, we definitely see opportunity throughout the year including the back half of the year but Q4 of 2014, we have over 400 basis point improvement in merch margin. So, that will be a little bit difficult to anniversary at that kind of magnitude.
So it will be a bit more muted in the back half but clearly still opportunity.
Judy Meehan
Okay. That concludes our call today.
Thank you everyone for your participation and continued interest in American Eagle Outfitters'.
Operator
Thank you. That does conclude today's teleconference.
You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.