Mar 1, 2017
Operator
Greetings and welcome to the American Eagle Outfitters’ Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Ms. Judy Meehan, Vice President of Investor Relations for American Eagle Outfitters.
Thank you. You may begin.
Judy Meehan
Good morning, everyone. Joining me today for prepared remarks are Jay Schottenstein, Chief Executive Officer; Chad Kessler, Global Brand President of the AE Brand; Jen Foyle, Global Brand President of Aerie; and Bob Madore, Chief Financial Officer.
Before we begin today’s call, I need to remind you that we will make certain forward-looking statements on the call today. These statements are based upon information that represents the company’s current expectations or beliefs.
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.
Also, please note that during this call and the in the accompanied press release, certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis. Reconciliation of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted to the company’s website at www.ae.com in the Investor Relations section.
And now, I would like to turn the call over to Jay.
Jay Schottenstein
Good morning and thank you for joining us. I am pleased to report that the fourth quarter adjusted earnings increased to last year and we are at the high end of our guidance.
The team did a great job managing the business through a competitive and challenging retail landscape. Merchandise margins and many of our quality of sales metrics improved from last year.
And I am proud to report that on an adjusted basis this marked the 10th consecutive quarter of earnings growth. We maintained very good momentum online where we achieved double-digit growth and consistency in chopping patterns throughout the quarter, mostly offsetting a volatile storage business over the period.
Merchandise highlights included women’s apparel, men’s and women’s, jeans and bottoms, which continued to grow. Of note, AEG gained market share ranking number one at 33% share of specialty store brands for 15 to 25-year-olds.
Aerie maintained strong momentum posting double-digit growth also gaining market share. We saw particular strength in core intimates and apparel while continuing to grow our customer base.
Since early 2014, our priorities have centered on superior merchandise infused with innovation, quality fabrics and outstanding value, supported by strong brands and omni-channel strategy in which we have invested significantly. The team has done a nice job achieving product cost improvements and delivering on-trend fashion faster to our customers wherever they choose to shop.
This work has delivered results. In 2016, AEO was among the few in specialty apparel to deliver positive financial results.
Our sales increased 2% and adjusted earnings grew 24%. And it’s been particularly gratifying to see greater consistency and sustained performance.
2016 marked our second consecutive year of sales and earning growth. Free cash flow was strong and we added $119 million to our cash balance ending the year with $379 million in cash and no debt.
Our company is healthy and strong. As a result, we are operating from a position of strength.
Now as we look ahead to 2017, we are well-positioned to build on our progress. We remain focused on our strategic priorities.
We still strive for continued market share gains across our brands in a market that presents opportunity for growth and we are focused on optimizing our business market-by-market. We will do this by further strengthening the brick-and-mortar fleet with select store closures, marketing consolidations and strong efforts to improve store productivity.
We are taking deeper and analytical reviews store-by-store to ensure we have positioned our brands to win. We will also be working to better leverage our omni-channel tools to deliver the best customer experience together with strong financial returns.
We are a sector leader in omni-channel capabilities and we plan to stay in this position. Finally, we will be expanding our marketing campaigns and launching a new loyalty program and that customer acquisition and retention.
We will fuel the growth of Aerie with investments in products, marketing, digital and store growth where we see tremendous future potential. I feel great about the team we have assembled over the past few years.
We have added critical leadership to talent and talent to key positions. This year, we are focused on gaining efficiencies across the organization driving better ways in working to improve profit flow through.
2017 marks American Eagle’s 40th anniversary. I am so proud of how far we have come and how incredible, relevant and enduring the brand is to many of our loyal customers.
We all look forward to this special year as we celebrate with our associates, customers and partners across the globe. In closing, I look forward to another successful year.
AEO is strong and healthy. We are well-positioned to capitalize on the strength of our brands and organization to fuel continued growth and return to shareholders.
Thank you. Now, I will turn the call over to Chad.
Chad Kessler
Thanks, Jay. Good morning, everyone.
We are pleased with how the American Eagle business contributed to the company’s fourth quarter performance. While our total comparable sales were down slightly, our merchandise margins increased to last year, the result of improved IMU and controlled promotional activity.
We achieved higher realized prices as customers continued to respond favorably to merchandise investments. Overall, the AE brand comparable sales declined 1% in the quarter, following a 3% increase last year.
Our women’s business was strong, posting a 4% comp increase with women’s apparel up 6% partially offset by weakness in accessories. The men’s comp is the part of the business we still need to work on.
Men’s comps declined 7% to last year due to weakness primarily in tops. Across both genders, bottoms were strong, including denim and pants.
Our customers continue to recognize the breadth of styles, quality and value inherent in our bottoms. I am proud of the continued market share growth and the AE’s product leadership in jeans and pants.
Women’s also saw very good strength across tops, including knits, shirts and sweaters. I am thrilled with how the team has driven AE women’s over the past few years.
I have tremendous confidence in the women’s creative teams and the process we have in place, which has been delivering greater consistency and accelerating growth in key categories. Our customers are continuing to respond to assortments that are trend-right, fueled by quicker speed to market and outstanding value and we are not satisfied or complacent.
We still see plenty of opportunity in women’s and remain committed to delivering the strongest merchandise capitalizing on new and evolving trends. Although we continued to see strength in men’s bottoms, in the fourth quarter, tops were disappointing.
This is a key area of focus and a priority for me. We have been doing more research and trend analysis in men’s.
This work has provided good insights we incorporated into our upcoming assortments. Additionally, we recently named the new men’s GMM who brings experience, leadership and further talent to the team.
I am committed to building an outstanding team and a strong process like we have in women’s. Getting men’s back on track is a significant opportunity.
I am confident that we will deliver better merchandise to our customers and return men’s with growth business. On the commercial side, despite channel shift, our stores remain highly relevant to acquiring and retaining customers.
Through the store fleet review, we will be working with the team to strengthen and upgrade our most important A locations to drive improved productivity and profitability across markets. This will include a focus on merchandising, delivering the best customer experience and modernizing the physical space.
By the end of this year, we expect to have a new prototype store design showcasing an updated expression of the AE brand and highlighting our leading jeans business. Marketing efforts will focus on continuing to build the American Eagle brand around youth empowerment and their We All Can brand platform, bringing it to life for our customers and creating a stronger emotional connection.
A highlight of the campaign was centered on AE’s authority in bottoms, strengthening our reputation as America’s favorite jeans brand. Thanks to the team for their many contributions in 2016.
And now I will turn it over to Jen.
Jen Foyle
Thanks, Chad and good morning everyone. I am pleased to announce another solid quarter for Aerie, posting a 17% comp increase in the fourth quarter.
This followed a 26% increase last year. The quarter also marked our 12th straight quarter of double-digit sales growth.
We saw a particular strength on the digital business as our customers responded well to our dedicated online Aerie shop. I am also pleased that we continue to attract new Aerie customers, adding a double-digit increase to our customer file this quarter.
By category, apparel performed well, highlighted by our sports and yoga inspired lines Chill. Play.
Move., which launched earlier in the year. We are having a lot of fun with this collection incorporating novelty along with lounge, yoga and workout apparel.
We also saw outstanding results in bralettes, which continue to grow, where we offered a strong combination of new fashion trends and function. Aerie sunny assortment, which includes core bras and matching undies also saw a positive customer response.
We have introduced extreme comfort, soft fabrics and we continue to expand the collection with updated fits and styles. The Aerie creative team has done an incredible job incorporating the newest trends and the best fabrics to build the strong foundation of core products infused with value and quality.
Although we are thrilled with the accomplishments in 2016, we are just getting started. There is significant opportunity and potential ahead.
This season, Aerie is a spring break destination. Over the next several weeks, we are highlighting our swimwear line.
There are exciting emerging trends and we have expanded into new silhouettes, more accessories and swim coverups. We have also started offering the swimwear shop online throughout the entire year.
On our store opening initiatives, we have recently expanded into new markets with openings in Denver and Hawaii. In addition, our temporary location in SoHo has been generating extremely positive results.
We have approximately 190 stores, including standalone and side-by-side, with meaningful presence in roughly 13 states. We have seen the opportunity to expand that number to 300 plus stores over time.
This allows us to grow the business as a true omni-channel brand and be very deliberate with our store openings. So in 2017, our mission is dedicated to further growth and expansion of the Aerie brand, building on the success of our merchandise collections and pursuing new market opportunities.
The Aerie team is so impassioned by our customers and their incredible response to the Aerie real platform and our focus on body positivity and natural beauty. Aerie is unique in today’s marketplace and we will continue to speak to today’s women authentically with a relevant brand message that completes the Aerie lifestyle.
Thanks to my team, and we look forward to the many opportunities 2017 brings. And now, I will turn the call over to Bob.
Bob Madore
Thanks Jen and good morning everyone. We are gratified to have delivered to our guidance with an improvement to last year despite the challenging retail environment.
The fiscal 2016 financial results reflect a very solid progress made by the teams across merchandising, product cost favorability, margin improvement, quality of sale metrics improvement, omni-channel strategies and expense management. As I review the quarter and the year, my comments will focus on the adjusted financials, which excludes certain items as detailed in the press release and tape [ph] on Pages 4 through 9 of the supplemental presentation.
First, looking at the fourth quarter, total net revenue decreased slightly to $1.1 billion. Consolidated comparable sales were up slightly following a 4% increase last year.
By brand, American Eagle comps declined 1% and Aerie increased 17%. On a consolidated basis, the average transaction value was up in the mid single-digits driven by a similar increase in the average unit retail price.
These increases were due to favorable sales mix of higher ticket items, controlled markdowns and improved IMUs. Traffic and transactions were down last year with weakness at brick-and-mortar, partially offset by strength in our digital business.
Digital penetration continues to increase, expanding at 27% of revenue in the fourth quarter. Total gross profit increased to $389 million and the gross margin increased 30 basis points to a rate of 35.4% from 35.1% last year.
Sourcing initiatives resulted in like-for-like IMU increases, which led to merchandise margin improvement. This was partially offset by higher delivery costs related to growth in the direct business and a slight de-leverage of rent.
SG&A expense of $242 million was flat to last year. Noted above and in the attached tables, we have adjusted last year to exclude the $9.4 million gain on the sale of the distribution center.
Investments in advertising were offset by lower incentive compensation and discipline expense management across the board. As a rate of revenues, SG&A de-leveraged 20 basis points to a rate of 22.1%.
Depreciation and amortization de-leveraged 10 basis points to a rate of 3.6%. Operating income rose to $107 million from $106 million last year and the operating margin improved 20 basis points to a rate of 9.8%.
Adjusted fourth quarter EPS of $0.39 increased 11% from adjusted $0.35 last year. As noted in our GAAP statements, in the fourth quarter, we incurred $21 million of asset impairments and restructuring charges related to our company owned and operating stores in the UK, Hong Kong and China.
These markets are not profitable and we are exploring a range of options to include a proposal to close certain stores and license the markets to third-party operators. We will likely incur additional charges this year as we finalize this initiative.
Now I would like to spend a few minutes reviewing the year. Our performance in 2016 was strong as we executed on our key priorities.
Revenue increased 2% to $3.6 billion and consolidated comps rose 3%. AE brand comps rose 1% and Aerie comps were up 23%.
Gross profit increased 5% to $1.37 billion and the gross margin leverage 90 basis points to 37.9%. The improvement in the gross margin reflected a higher merchandise margin based primarily on improved IMU.
Selling, general and administrative expense of $858 million was up 2% compared to $844 million last year due to higher advertising expense offset by lower incentive compensation. As a rate of revenue, SG&A leveraged 20 basis points to 23.8%.
Operating income increased 14% to $353 million and the operating margin increased 100 basis points to 9.8%. Adjusted EPS from continuing operations of $1.25 increased 24% from adjusted EPS of $1.01 last year.
For additional information, please refer to Page 10 of the presentation. Turning to the balance sheet, starting with inventory, which can be found on Page 12 of the presentation, we ended the quarter with inventory up 17%, reflecting average unit costs up 13% and units up 4% to last year.
Fall and holiday clearance was down to last year. And transit inventory was significantly higher than expected due to an acceleration of receipts as a result of the timing of Chinese New Year.
Fourth quarter on-hand inventory was up 6% and units down 3%. The inventory composition reflected an investment in AE bottoms to support better in stocks of long bottoms early in the spring season and an increase in Aerie inventory to support strong demand and new store growth.
The cost increase was due to a greater mix of higher ticket items, such as bottoms. Like-for-like inventory costs were down to last year as a result of benefits from various sourcing initiatives.
We ended the year with $379 million in cash and investments. As a result of strong free cash flow, cash increased to $119 million compared to the end of 2015.
We returned $91 million in cash dividends to our shareholders in 2016. Capital expenditures totaled $161 million for the year.
For 2017, we expect capital expenditures to be in the range of $160 million to $170 million with roughly half related to store remodeling projects and new openings balanced to support digital, omni-channel and general maintenance. 2016’s store activity can be found on Page 15 of the presentation.
In the year, we opened 12 AE stores, 13 Aerie stand-alone stores and 21 Aerie side-by-side stores. Additionally, we opened three Tailgate stores and one Todd Snyder store.
We continue to close underperforming stores, including 18 AE stores and eight old format Aerie stores in 2016. As Jay mentioned, we are undergoing a thorough analytic review of our store fleet.
We are seeking opportunities to further consolidate markets where it makes sense. Additionally, we are taking a deep dive market-by-market to ensure that we have best brand presence and that we are maximizing our commercial opportunity across stores and digital.
We have a healthy fleet with just 46 stores that were not profitable at year end. However, given the significant channel shifts and changes taking place at the mall, we are seeking opportunities for productivity gains and stronger profit margins.
At year end, we had a good bit of lease flexibility across the fleet with approximately 580 leases expiring in the next 3 years. Now regarding our outlook, in the first quarter, we expect earnings per share of $0.15 to $0.17 based on comparable store sales in the range of flat to low single-digit decline, which is consistent with the results so far this quarter.
We expect the lower merchandise margin due to increased promotional activity. SG&A expense is expected to be flat to last year.
Our first quarter EPS guidance compares to $0.22 last year and excludes potential asset impairment and restructuring charges. In closing, we will stay focused on our priorities to deliver product leadership and innovation, strengthen our brands and customer engagement, grow our Aerie brand and continue to leverage and expand our omni-channel and digital capabilities.
We are also working to gain efficiencies and strengthen financial disciplines across the organization. We have an opportunity to provide stronger decision support analysis and focus on driving quality sales with improved underlying metrics to our business.
We will focus on inventory management and strong return on investment on our investment decisions. Our goal is to continue delivering consistent and sustained long-term growth.
And now we will open it up to questions.
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Janet Kloppenburg with JJK Research.
Please proceed with your question.
Janet Kloppenburg
Good morning, everyone and congratulations on a very good year. Chad, I was just wondering if you could talk a little bit about the current trends and about the pressure you are seeing.
Is it continuing to come from the men’s side of the business or is there some weakness also in women’s emerging? And Jen, if you could just talk a little bit about any pricing pressure you are seeing in the bra, bralette business and how you are thinking about pricing in that category for fiscal ‘17?
Thanks so much.
Chad Kessler
Hi, Janet. Thanks for your questions.
Actually, our women’s business is very strong, it’s terrific and it’s been accelerating since last year. We continue to see strength – as people are – some of the trends are shifting, the customers are coming to us first continuing for bottom and we are seeing meaningful growth in our tops categories.
We are pretty balanced across the tops category. So I am really excited about how that team is operating, the process we have the speed to market that we continue to rely on and even get faster.
So, women’s business is doing quite well. We do still see some softness in men’s.
The men’s bottoms business has continued to be strong, men’s tops. As I have said on this call and some calls before, has been – it remains a real opportunity for us.
As I said that we have done some good research, we have been trying to get customers in and learn as much as we can. The good news is that the customer really likes the brand.
We have great brand acceptance. I think that’s why the bottoms business continues to be strong.
I think that we just haven’t been as clear in merchandising some of the trends as we can. The research really shows us that we have multiple customer types and we need to make sure that we are communicating to those customers effectively and clearly and that the customer understands some of the new things we are bringing in and offering.
And I think we are going to start to do that, you are going to start to see some clear merchandising and communications of the men’s customer throughout the spring and some our product shifts as we head into the fall season. So, it’s really – the best part is that the research is encouraging, the customer loves the brand and if we get men’s tops back to growth and operating like women’s, it’s a huge opportunity for us.
Janet Kloppenburg
Chad, when do you think we will see the new direction of the new GMM that you brought in for men’s?
Chad Kessler
Holiday will be his first season start to finish, but it’s hard – having done it myself a couple of years ago with that season, we are coming in and learning the brand and learning the customer. It’s hard to have total impact in that first season, but I think he is off to a great start and I think we will see improvements.
As I said some, I think, clarity in the merchandising throughout Q2 and Q3 and some product improvements heading into Q4, but – and then hopefully even more going into next year.
Janet Kloppenburg
Okay, thank you. Sorry, Jen, yes, hi.
Jen Foyle
No problem. Thank you by the way.
Listen, certainly, competition is getting fairly impressive in the bralette category. But as a reminder, we are pretty strategic on how we promote our business and we are building promotions to be competitive.
That said, Janet, as a reminder, that’s not our only portion of our bra business. We have a solid foundation in the sunny collection, which is we are still posting great results there and the customer loves that business and that core foundation brings her back.
And the bralette business is really what is adds a little fuel to the fire and excitement for the customer and we consider that our fashion business. So, we have to keep on looking forward in the lightly line category on trends that are emerging and making sure that we are introducing those new trends.
So, that’s really how we are sort of thinking about the business, Janet.
Operator
Thank you. Our next question comes from the line of Matthew Boss with JPMorgan.
Please proceed with your question.
Steve Zaccone
Hi, good morning. This is Steve Zaccone on for Matt Boss.
Thanks for taking our questions. So within the first quarter guidance from merchandise margins down year-over-year, are you still embedding improvement on the IMU line?
And then looking to the balance of 2017, do you expect to see merchandise margin return to expansion and then do you still expect to see 100 basis points of improvement on the IMU line?
Bob Madore
So, we are anticipating continued improvement on the IMU line. Having said that, it’s going to be partially offset by increased promotions in line with some of our strategies, particularly around being a little more promotional on men’s and women’s tops and some of our bottoms programs and strategies.
That’s going to translate to a Q1 operating income margin de-leveraging of roughly approximately 150 basis points in Q1. We do see AUR up slightly in the first quarter and improving significantly more into the second quarter.
So for the spring season, we are expecting AURs to be up in the mid single-digit range.
Steve Zaccone
And then just as we look to the balance of 2017, do you expect – could you expect an improvement on the merchandise margin line? And then I know you have talked about in the past seeing 100 basis points of IMU improvement, is that still the case for the full year?
Bob Madore
It is for the full year.
Operator
Thank you. Our next question comes from the line of Rebecca Duval with BlueFin Research Partners.
Please proceed with your question.
Rebecca Duval
Good morning. Thank you for taking my call as well.
So just a quick question on the inventory and then I just want to get some clarification with what you just said about the first quarter guidance. You said that the holiday markdowns were down on a year-over-year basis.
But in terms of inventory mix, do you feel like some of that pressure on the guidance is coming from the additional markdowns with sales coming in a little bit lighter than maybe expected for the fourth quarter? And then secondly, did you say that in terms of the guidance, does that mean you are guiding to AUR up mid single-digit range, but it’s really the traffic headwind?
Bob Madore
Yes, so couple of things. Regarding inventory, inventory was up 17%.
The biggest portion of the increase of $53 million year-over-year was in-transit. In-transit was up 113%.
With Chinese New Year falling for about 11 days earlier than last year, a lot of our Asian manufacturers shift merchandise to us within a 10-day window that they have before the PO state of shipment date. When you breakdown our growth and inventory overall, roughly 25% of that growth is meant to support the Aerie business growth.
We operate – we are operating 26 more stores at the end of 2016 than we did last year and we are anticipating opening up another 49, 50 locations in fiscal ‘17. 50% of that increase versus last year is investment in inventory for our women’s business.
The combination of both tops and bottoms, denim and other long pants, that business has really been performing very well, which Chad pointed out earlier. And then roughly 20% to 22% of the remaining increase is in men’s and it’s really to support the men’s bottoms strategies.
Men’s denim and other pants performed very well in Q4 and they are continuing to perform well. So we feel like our inventory is in line with where we want to invest.
And in fact, that our on-hand inventories are up 6%, but our units are down 3% speaks to our average unit costs being up 13% really based on higher cost merchandises. It’s a really mix of bottoms relative to the total of the business.
So that, coupled with the fact that our holiday fall clearance inventory levels are lower than the prior year, makes us feel okay with where our inventory levels are right now. And I think the second part of your question was are we still feeling comfortable with AUR being planned up in the year and I think I said that in the last question I answered, but I will reiterate that as a yes.
Judy Meehan
We will take the next question.
Operator
Thank you. Our next question comes from the line of Simeon Siegel with Nomura Instinet.
Please proceed with your question.
Gene Vladimirov
Good morning everyone. This is Gene Vladimirov on for Simeon.
Thanks for taking our question. Given the continued positive trends at Aerie I am just wondering how you are thinking about the business in terms of scaling up what do you think deal size could be, do you open more brick-and-mortar locations, do you allocate more floor space in existing stores, do you try push more of the business online.
And then also it looks like share counts have been creeping up, so just wondering on your thoughts on potential buybacks going forward, there has been any shifts and how you think about capital allocation? Thanks.
Jen Foyle
Hi, good morning. So as we think about Aerie and growth within the business, first and foremost, our online penetrations are significantly above industry average.
And we are really pleased with that business and that’s where we are seeing our customer acquisition really coming through the door. So we are highly focused on the digital channel.
And the nice part about that is what we are seeing is we can be very strategic in where we open stores so that we can really optimize the market. Using an example, we have one location where we actually do more business on the direct channel than in the store, so we see a really healthy penetration there.
And again, it allows us to acquire new customers, but think about the marketplaces that we are going into. And lastly, we share a solid customer Aerie and American Eagle, we share 80% of the women’s customers.
So we can also use American Eagle and their customer base and their filed and their learnings where they are located to make sure that we are very strategic and where we are going to position our store base. And that in conjunction with of course, I was managing our trends and looking at the future in trends and innovating, that’s really important to us.
Product is first, the product comes first in Aerie. And we are always thinking about what’s next and making sure that whatever we do that’s next is distorted and we are really going after those businesses.
Bob Madore
And to your question about potential buybacks, we are always looking at opportunities to buyback shares. I have – within our balanced capital allocation strategy.
We do consider the impact of share accretion and its dilution on EPS as part of the equation, but we feel like we have got a very balanced capital allocation strategy. First and foremost, we are focused on investing in our businesses, whether it’s remodeling stores, supporting the growth of the Aerie brand, which Jen just talked about, in addition to further investments in our omni-channel capabilities, which we feel are a competitive advantage for us.
Now I just kind of want to remind everybody that since 2010, we returned $1.6 billion back to shareholders, roughly 60% of that was through dividends and the remainder through share repurchases. We have a very competitive and healthy dividend yield that are roughly 3.4%.
We benchmarked very well against not only our peer group, but other world-class organizations. So the answer to your question is yes, we are constantly looking at the opportunity to buy share repurchases.
We don’t have any formal plans that we feel comfortable communicating at this point, but we are always open to it and looking at it as an opportunity.
Operator
Thank you. Our next question comes from the line of Oliver Chen with Cowen & Company.
Please proceed with your question.
Oliver Chen
Hi, really solid results. We had a question about thinking about near-term and long-term, in terms of the digital infrastructure, what are the things we should focus on in the year ahead and longer term.
And also, as you think about the topic regarding promotions and the context of traffic, some uncontrollable traffic factors, what are the next step forward for how that manages and the brand appropriate way. And related to long-term, if you could brief us on the framework for select store closures, should you could this faster or what’s your thinking as we think about how to grow this brand for many, many years ahead?
Thanks.
Bob Madore
Yes, I will take the first question. When you look at our strategies in FY ‘17, in particular, related to our digital business, we are primarily focused on a few areas.
One is personalization, the other is loyalty, international and then just overall performance of the site. We have got a pretty significant upgrade of our back end systems to really improve the efficiency and performance of the sites overall.
And as you look more long-term, we are going to continue to significantly invest in digital. It’s a significant percentage of our business.
It’s roughly 27% of the company’s total revenues and increasing every year in a very significant piece of Aerie’s penetration for sure, but also significant around the 26%, 27% to the AE brand also. But we are going to constantly look to differentiate the site from our competitors, improve the customer shopping experience, improve things like check-out functionality and other type things.
Mobile is a huge piece of our business and we have had over a 35% increase in mobile penetration within the site. So obviously, optimizing and enhancing our mobile capabilities going forward in the long-term will continue to be a focus to the business.
Jay Schottenstein
In terms of the promotions and how we are competing in this current marketplace, I really feel like American Eagle is competing from a business and of strength. We talked about that in our prepared remarks.
But when you think about the brand and you think about the environment, the products are better that it’s ever been. The brand is stronger than it’s ever been.
And there is a lot of turbulence going on out there. We have invested, as Bob is saying earlier, we have invested inventory in the places where the brand is strong in women’s tops and then our market leading bottoms businesses.
We have inventory there where we can go out and aggressively gain market share and that’s really our plan in Q1 with some of the increased promotions. I feel like – some of the promotions we have been running have been highly, highly effective at growing AUR and growing profitability and growing the business.
But I think that we can pay with some new targeted strategic promotions to drive a sense of urgency, to drive a customer and take advantage of our position and strength and drive as much market share gains as we can of the season and that’s really our intention.
Bob Madore
And relative to your questions regarding select store closures, can we be more aggressive, the answer is yes. And we are being more aggressive.
Unlike I think a lot of competitors we have a lot of flexibility built in our real estate portfolio. For instance, we only have 46 stores that are unprofitable.
And within the course of the next 2 years, 26 of those stores come up for renewal or lease expiration. Within the entire portfolio of 1,050 stores, we have got 580 stores that come up for lease expiration over the course of the next 3 years; 300 in fiscal ‘17, 200 in fiscal ‘18 and the remaining 80 in fiscal ‘19.
So just by the way our tenure within our portfolio and how leases expire give us a lot of flexibility. But even more aggressively beyond that and having that opportunity, we are looking at store four-wall profitability and looking at market penetration and where we feel we are over-stored in particular markets, we have tested and improving our ability to recapture sales after closing stores.
And we do very detailed analysis. We have great analytics and data available to us to show digital penetration versus brick-and-mortar.
And based on our learnings of closing stores and historical recapture rates, we will more aggressively look to close stores going forward.
Operator
Thank you. Our next question comes from the line of Anna Andreeva with Oppenheimer.
Please proceed with your question.
Anna Andreeva
Great. Thanks so much and good morning, guys.
Question on the competitive environment, just curious are you still seeing any dislocation from Aeropostale now that they are back to the new Aero and just bigger picture thoughts on the competitive set? And secondly, to Chad, can you maybe provide color on what drove weakness in accessories at Eagle in the fourth quarter and how quickly can that be rectified?
Thanks so much.
Chad Kessler
Yes. So in the fourth quarter, in particular, we were definitely negatively impacted by what was going on within Aero.
And in particular, Aero had 150 locations where we had locations where they had stores that were actually closing for good, not just liquidating inventory and repositioning. And what we found was we had a significant negative comp impact where they were really to down to 30 in those 150 stores that we are closing, particularly in the month of November where they were very aggressive with their inventory liquidation.
It had about a 4 comp point impact on us in November as an example. When you look at where there was an Aerie store across our entire portfolio consisting of both stores that were closing for good and 300 plus stores that they were just liquidating inventory and repositioning, we saw an approximate 1 comp point negative impact.
Post holiday and looking at Q1, we have seen roughly in those locations that they closed permanently about a 1 comp point positive impact to us thus far.
Bob Madore
So, in terms of accessories, it’s really – when I look at the business and I look at where we are making investments, it’s really been a strategic pullback, in fact, in accessories. So, the business till last year was weak, but we have really been focused on the higher productivity and higher maintained margin categories, such as women’s apparel and bottoms.
As for accessories, we are trying to focus more on key seasonal product categories. You might have seen – we set a floor-set over the weekend and part of that floor-set was we built a new jewelry wall, which I think looks great and as strategic investment in that category.
We are trying to be, as I said, more focused and drive that business through strong seasonal trend items. But in total, we have shifted investments into the apparel business.
One big highlight I would like to call out is the men’s underwear business. That is a huge position – hugely strong business for us.
We continue to gain share and see improvements there. So we are looking at all of our accessories categories in that way.
Where can we dominate, what’s the outfit completed for the season, how can we make a strong statement, and that might mean in total a few less sales dollars in accessories, but hopefully, a stronger overall store and higher productivity in total.
Operator
Thank you. Our next question comes from the line of Adrienne Yih with Wolfe Research.
Please proceed with your question.
Adrienne Yih
Good morning. Can you hear me?
Bob Madore
Yes.
Adrienne Yih
Okay, great. Jen, my question is for you, well, the first quick question for you, the opportunity obviously with Victoria’s Secret exiting swim, can you talk a little bit about that?
The product looks fantastic by the way. And then is there room for kind of a bigger penetration of active athleisure with the Aerie box?
And then really quickly for Bob, can you give us impact of the 53rd week on sales and EPS? Thank you.
Bob Madore
Yes.
Jen Foyle
Okay, sure and thank you. Yes, we are really excited about the swimwear business.
And in fact, that business has been a growth category for us and that’s the other position of strength with Aerie. We do have other categories.
We believe obviously in our core categories of intimates and that’s our maintained margin business, so to speak. But when we think about swimwear we have got pretty aggressive in that business prior to any competition exiting the business and on top of getting aggressive, we really distorted the right trend and stood for the correct trend, which was one pieces and we really went after that trend.
And we have seen strong results in that category. So we are really excited about swim.
And our Chill. Play.
Move., that has been an outstanding launch for us. We launched back in September.
And the innovation in that category has been phenomenal. The design team did a great job really building the legging business for us, which is really dominating that category.
And then thinking of that business what’s also nice is we have tied it into our platform as well. So about being Aerie, we hold a healthy living life, enjoying life, it really – it’s everything we believe in being part of Aerie real, so another real adjacency for the business.
Bob Madore
And to your question on the impact of 53rd week, so the 53rd week represents about little less than $50 million in sales and it has an approximate $0.03 impact on EPS.
Judy Meehan
We will take the next question.
Operator
Thank you. Our next question comes from the line of Eric Beder with Wunderlich Securities.
Please proceed with your question.
Eric Beder
Good morning. Congratulations.
Jen Foyle
Thank you. Thank you.
Eric Beder
Can you talk a little bit about more about the international business in terms of restructuring the pieces that you might bring into a joint venture, what was kind of the thought process in the longer term potential of this business? And on a related note, how are the Canadian and Mexican direct businesses looking?
Bob Madore
Yes. So, the businesses that we are looking to potentially change our business model, our business in the UK where we have 3 retail locations, Hong Kong, where we have 6, and within China, where we have 10.
And all three of those markets in those businesses are currently unprofitable. And we feel as though that we have got a much better chance of success proven by our existing franchisee or licensing models and relationships that we enjoy in other markets that we are better off with a larger – a few larger partners that have a proven track record that understand the market.
They know the real estate. They have access to the real estate.
They know the target customer. They are in tune with fashion trends, global fashion trends etcetera.
So, we feel as though we have got a better opportunity partnering up with the right people. Relative to Canada and Mexico, both of those businesses represent our most profitable international businesses.
We are early days in international digital to be honest with you. It represents about 5% of our total digital business, but it is an area that we are focusing on continuing to grow and improve going forward.
Operator
Thank you. Our next question comes from the line of John Morris with BMO Capital Markets.
Please proceed with your question.
John Morris
Thanks. Hey, my congratulations to you guys on a good solid year as well.
So let’s see, Chad, thanks for all the color you have been giving us. On the men’s, I think when you were discussing it earlier in some of the moves talking about the desire for getting more focus.
Are you considering narrowing the CC or the SKU count, just wondering if we will see some editing of the assortment that way and if you can give us any kind of approximate measures of that? And where would those new prototype stores be, so we can look for those and anything you can tell us about what will be really different there?
And then Jen, you gave us good information about the new customer acquisition, which I think is so important and such an opportunity for your business, can you put that in context, is that kind of a steady rate of improvement or has that been increasing? Thanks.
Chad Kessler
Sure. So taking the men’s question, we have already pulled back CCs in men’s.
In the total box, we have actually pulled back some CCs trying to drive higher productivity and really make sure that we have the depth of inventory and in-stocks that we need to have. We might – as time goes on, we might pull CCs back a little bit further in men’s.
We have expanded starting this spring season, we have given some more floor space to men’s apparel on the store, but we don’t – we want to make sure that we continue to look strong in both genders as we move forward. So, as I said, we have pulled back slightly in men’s already and I don’t anticipate this year really pulling men’s CCs back much further.
And in fact hopefully, as we get men’s returning to growth, there won’t be any demand to do that. As for the new stores, we have some – we are working on the prototype now.
We hope to have a prototype store open by the end of this year. We will definitely keep you informed as to where that’s going to be and hopefully, we can take the book through it.
The idea is really is to modernize the shop experience for the customer. We have talked a lot about channel shift.
We talked about the shift to mobile. I think the way the customers experience stores today is different than the way they have experienced stores in the past.
It’s going to be more modern, a little more open, but really also leverage and emphasize our leadership in bottom. So you walk in our store today and we have huge market share leadership in bottoms.
But I don’t really feel like you feel that as much as you could in the store. So we are looking to emphasize that, to have a new experience for the customer and really make it – make the brand resonate more strongly through this new store and the new store experience.
I think with all the all omni-channel capabilities we have, I think it becomes even more important for the stores to be a way to feel – to experience the brand in person, to learn about the product and for us to have positive outreach for the customer. So we will keep people informed and we will hopefully be able to take people through that store when it opens.
Jen Foyle
And John, we have seen double digit increases pretty steadily as far as customer acquisition in Aerie. And I would like to call out the marketing team.
They have been doing an amazing job just tirelessly reaching out to our customer in new and innovative ways. For instance, we just opened up in December a pop-up store in SoHo, a pop-up shop, which is very experience show and it’s an entirely different experience for Aerie the early, but it calls to again, the DNA of our brand and what we stand for.
So ideas like that, we continue to generate and it’s really helping us with the customer acquisition as well as John, leveraging the AE brand, our big brother, I would like to say, our big sister. We are – we share the nave and that certainly introduced Aerie to millions of new young women who are excited about the brand.
Operator
Thank you. Our next question comes from the line of Tiffany Kanaga with Deutsche Bank.
Please proceed with your question.
Tiffany Kanaga
Hi. Thanks for taking my question.
When you add up all the puts and takes together on the gross margin and operating margin lines, do you believe you can expand margins this year towards that 10% to 12% goal and what are the key drivers behind your margin outlook for the full year?
Bob Madore
So I wouldn’t go as high as the 12% range for fiscal ‘17, but it’s clearly one of our long-term strategies for sure. And that’s in line with some of our historical highs.
Yes, we do believe that we will be able to improve both gross margin rate and operating margin rate for the year. Significant portion of that is going to come from increased IMUs, which has really been an area that we have demonstrated we can deliver on and it’s probably the single biggest contributor to our gross margin expansion on the year for 2016.
That also affords us the opportunity to be a little more promotional in certain of these categories like men’s and women’s tops, as we talk about, really getting in deeper into men’s and women’s bottoms, so that we have got an everyday pricing strategy that is really enticing to the customer, coupled with product innovation, product quality, etcetera. So increased IMU, cost reductions is going to be the biggest contributor to that.
And then in addition to that, another contributor to operating income improvement is really, we are very focused on disciplined expense management. I feel and I know the team feels we have additional opportunity to be more efficient and effective with where we spend our money, how and how much.
And it’s something that we challenge and look at every day. So those things combined are what make me – us feel comfortable that we will be able to drive overall margin improvement.
Judy Meehan
Melissa, we can take one more question.
Operator
Thank you. Our next question comes from the line of Randy Konik with Jefferies.
Please proceed with your question.
Randy Konik
Yes. Thanks a lot.
So I just want to go back to the customer file [ph] because I think it’s pretty interesting, so Jen, can you give us some perspective on how large the Aerie customer file is relative to the American Eagle women’s customer file and are you guys doing some work on how to kind of cross-pollinate or convert the AE file to drive additional Aerie file kind of growth, but also kind of productivity through the area customer – the Aerie customer, just kind of looking at – it looks like some easy opportunities to kind of grow the file, grow the productivity of the file, lifetime value of the person or persons within these files. And I just kind of want to get some perspective on what you are doing from a data analysis perspective on Aerie, but also the broader AE customer file that you guys have?
Thanks.
Jen Foyle
Well, it’s pretty simple, Randy. And when you think about the Aerie business, we were well under-penetrated, our file when we began this journey on the Aerie Real campaign.
So to put it in perspective, now we are more in line with where we sit from a sales penetration to the AE business. So it has grown nicely, like I said, double digits year-over-year.
And as Bob mentioned, we have amazing analytics around our customer and who she is and where she lives and what she buys. And so of course, we are digging in every day and looking at that girl and speaking to her in new ways.
And as I mentioned earlier, she literally can go through and be introduced to our brand through the AE channel. We exist on the AE page.
We have – and like I said, we share the nave. So it’s really just leveraging these analytics and speaking to her more.
And with social media today, you have to think about that like as we build our awareness through that channel, I mean that’s exponential. So it’s really through those.
Bob Madore
I would just add to that Jen, that with the increased penetration of mobile on the site and that trend is going to continue, it’s just another opportunity for us to capture new customer and new customer names for the file. As advanced as our customer analytics, CRM analytics are and we have gotten confirmation from some outside organizations that have been very impressed with that.
I think we still have additional analytic capabilities to harness that even more. So it is good as we are, I think we could be and get even better.
Jay Schottenstein
So Randy I just want to jump in on this one. The AE file, as you asked about that specifically, has undergone some transition over the past few years as we have increased the product, the strength of the product and as we have reduced promotions, we have transitioned that file, we have shrunken the size of the total file and some of the bargain hunters have fallen out.
But overall, the file today is healthier than it’s been. We have more omni customers who are spending more money.
And that’s what’s really allowed us to grow. But right now, we are in a position where we really feel like we have got a healthier file and we are going to focus on acquisition and on retention.
And that’s – we have Kyle Andrew onboard now and that’s one of our highest parties for the year. And part of that’s going to be our loyalty program that’s going to roll out in Q2.
We have a very high percentage of our customers participate in loyalty today, but our program is outdated, it’s not digital and we think some of the perks that are in it are not as compelling as they could be. So for AE, we are looking to focus on acquisition and retention.
And we think our loyalty program is going to be a really great benefit there.
Jen Foyle
And Aerie is participating in that program as well.
Jay Schottenstein
Yes, it’s AE Inc. loyalty program.
Judy Meehan
Okay.
Operator
Thank you. Ladies and gentlemen that does conclude our question-and-answer session and also our call.
Thank you for your participation. You may now disconnect your lines.