May 17, 2017
Operator
Greetings and welcome to the American Eagle Outfitters’ First Quarter 2017 Earnings Call. At this time all participants are in a listen only mode, a question and answer session will follow the formal presentation.
[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
Thanks. Good morning, everyone.
Joining me today for our 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, note that during this call and 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 press release, which is posted to the Company’s website at www.ae.com in the Investor Relations section. Here you can also find the first quarter supplemental online presentation, which we will refer to today.
And now, I would like to turn the call over to Jay.
Jay Schottenstein
Thank you. Okay, good morning and thanks for joining us today.
During the first quarter we continue to execute on our priorities to position our brand and organizations for long-term success. In the midst of some of the most challenging times in retail, we are adapting our business model and leveraging our strength.
First quarter results reflected number of wins as well as a few challenges. Margins came under pressure as we increased promotions as per demand during slow traffic period.
This compared to a very positive and largely full price first quarter last year. This year we posted 2% comp increase in the quarter and expenses were well managed.
I'm never happy to report earnings below last year and we are working hard to strengthen results. Now I'll provide you a few insights into the quarter.
We did a good job building our competitive strength in jeans, bottoms and women's apparel which posted positive comps. Yet we continued to have opportunity to improve the men's.
Momentum of the Aerie brand was strong again this quarter, further demonstrating significant growth potential and strength of your. We posted record volumes in e-commerce, which accelerated from the prior periods.
Strong double-digit growth led to an online contribution of 26% to our total revenue up from 19% last year. Effective digital marketing and increases in mobile contributed to the growth, investments and an a more seamless and positive online shopping experience across digital channels also drove sales.
Now, as I look forward, we are intentionally focused on our strategic priorities to continue to fuel product innovation, strengthen our brands and delivered outstanding customers experience. Across the organizations, we are seeking efficiencies while ensuring that we are managing the business for a long-term.
This quarter we repurchase 6 million shares reflecting the strength of our balance sheet. Strong cash flow, attractive valuation and confidence in our brand and long-term strategies.
In this challenging retail landscape, we see tremendous opportunity to capitalize our strength including our financials, our brand and competitive advantages. We have outstanding team across the Company and they have a embraced the opportunities with the enormous energy and passion and for that I'm extremely grateful.
Lastly, let me underscore that during this time of upheaval across our industry, we see great potential for our Company and our leading brands. Thank you.
And now, I will turn it over to Chad.
Chad Kessler
Thanks, Jay. Good morning, everyone.
In the first quarter the American Eagle brand had some great wins and we also faced headwinds. Our brand is stronger than ever and well positioned, but there is lots of turbulence out there.
A choppy start to the quarter combined with a late Easter resulted in increased promotions. On a positive note, business improved and we had a positive comp over Easter compared to the holiday last year.
For the quarter, the American Eagle brand comps declined 1% with strengthen online partially offsetting weakness in-stores. This saw at a 4% comp increase a year ago.
We saw positive comps continue in men's and women's bottom with AE jeans achieving record first quarter sales. The teams continue to execute extremely well across our bottoms category.
We have real competitive advantages and offer our customer something truly special. Looking ahead to the back-to-school and fall seasons, we would take our AE jeans collection and marketing to the next level.
Highlighting our strengths and style, fit, innovation and wash. Jeans invited the ultimate expression of individuality and personal style.
With the strengths of our product and leadership position, we have a real opportunity to continue to gain share. Women's posted strong results again in this quarter with the apparel comps in the positive mid-single-digit, with our growing momentum in the women's top categories, this has been driven by an emphasis on outfitting with a well balanced tops collection that ties back perfectly to the AE jeans assortment.
I'm extremely pleased with how the team continues to deliver trend right top supported by an agile process and greater speeds in market. With each season we continue to gain new fans of our women's assortment, but we are focused on leveraging additional opportunity.
As we anticipated, men's tops were challenging in the first quarter dragging total men's comps to negative mid-single-digit. As I said on the last call, we are working on the men's business, which remains the top priority for the team.
As the first quarter progressed, we saw some signs of improvement in men's tops, which we hope continue as we approach to the back half of the year. AE's online sales accelerated where we saw exceptional results across the number of categories.
Our exclusive online product is also been well received driving incremental growth. Continuous improvement to the shopping experience, our advanced on the tool and digital marketing have driven growth in our online business, which now represents 22% of our sales.
We remain highly focused on delivering improvements across the brand including innovation, product leadership and an enhanced customer experience. The American Eagle brand is operating from a position of strength, our goal is to make sure we are putting the customer at the center of everything we do and giving them reasons to shop our brand.
That's how we will continue to win. Thanks to my team for the many successes we achieved this quarter and for their commitment to driving improvements across the brand.
And now, I'll turn the call over to Jen.
Jennifer Foyle
Thanks Chad and good morning everyone. Aerie delivered another great quarter posting a 25 comp increase.
I'm pleased to report that this marks our 13th straight quarter of double-digit comp growth. The first quarter also reflected acceleration from the prior year and built on a 32% comp increase in the first quarter of last year.
New to file customers increased and overall traffic to our brand both online and in-stores was up last year. Aerie's digital business was especially strong this quarter, showing rapid growth and accelerating from last year.
This led to a 47% online penetration in the first quarter, up from 35% last year. Our online slim and bra shop were particularly strong, yet we also saw strength across a broad range of categories.
We extended our slim collection this year adding new silhouette, more fashion and additional fits all of which have been extremely well received by our customers both in-store and online. Our new apparel collections led by Chill.
Play. Move., posted very strong results this quarter and we continue to see strengths in our lightly lined bras and bralettes.
We remain extremely excited by the ongoing opportunity to grow and expand the Aerie brand. Our Aerie real brand platforms continues to resonate with our customers.
We look forward to building on our campaign and expanding the Aerie lifestyle with fresh assortments and new products season-after-season. New store growth is on-track and we are also working hard to take the customer experience to the next level.
We are making sure we have the right talent at the store level to ensure an outstanding brand experience. I would like to thank my team for driving Aerie's ongoing success and for their great passion and hard work every day.
Now, I'll turn it over to Bob.
Robert Madore
Thanks Jen and good morning everyone. Although we are dissatisfied to report earnings below last year, we managed the business through a tough quarter.
In response to slower than expected start to the period and challenging mall traffic, our promotions increased pressuring margins. Yet we managed expenses well, generated healthy cash flow and saw a strong traffic and sales increases in our e-commerce business.
In addition to the many positives across the brand as called out by Chad and Jen, we saw improvement in consolidated traffic and transactions and the conversion rates in-stores and online increased the last year. Now looking more closely at the details of the quarter.
Total revenue increased 2% to 762 million from 749 million last year. Comparable sales increased 2% for the period, total net revenue included approximately 5 million received from the termination of a license agreement with a third-party operator.
Additional sales information can be found on pages six and seven of the supplemental online presentation. This quarter American Eagle comps were down 1% and Aerie comps increased 25%.
The average transaction size declined in the low single-digits. This was offset by a mid single-digit increase in a number of transactions.
Demand was slow to start the quarter yet business improved as the quarter progressed, which was highlighted by the positive Easter holiday and comp traffic up mid-single-digits in the quarter. The total gross profit decreased 5% to 278 million from 293 million last year.
The gross margin declined 270 basis points to a rate of 36.5% of revenue. Increased promotional activity caused 200 basis points of decline.
Buying, occupancy and warehousing deleveraged 70 basis points due primarily to increased shipping cost related to the e-commerce business in the quarter. SG&A dollar's decline 1% to 195 million as a rate to revenue SG&A expense improve 60 basis points to 25.6% from 26.2% last year.
Higher advertising expense was offset by lower compensation expense and favorability across a number of other expense categories. Depreciation and amortization increased 1.6 million to $40 million and deleveraged 10 basis points to 5.3% as a rate of revenue.
Adjusted operating income fell 28% to $42 million from $59 million last year and the operating margin declined 220 basis points to 5.6% as a rate to revenue. The effective tax rate decreased 32.4% compared to 36.4% last year reflecting the impact of discrete items this quarter.
Adjusted EPS of $0.16 decreased 27% from $0.22 last year. Adjusted earnings excluding restructuring related charges of 5.4 million or approximately $0.02 per diluted share, this consisted primarily of severance and related charges corresponding the home office restructuring as well as our initiative to explore closure or conversation of Company owned and operating stores in Hong Kong, China and the United Kingdom to license partnerships.
Now regarding inventory, which can be found on Page 8 of the online presentation. We ended the quarter with inventorial cost of 364 million up 9% from last year.
Ending units were flat last year while the average unit cost was up 9%. The increase in cost per unit reflects a greater mix of AE jeans, bottoms and Aerie apparel driven from our merchandise strategies.
Looking ahead, we expect second quarter ending inventorial cost to be up in the mid-single-digits. Capital expenditures totaled 40 million in the quarter and we continue to expect CapEx to be in the range of $160 million to $170 million for the year.
Roughly half of the spend relates to the store remodeling projects and new openings and the balance to support the digital business, Omni channel tools and general corporate maintenance. During the quarter we returned a total of $110 million to shareholders including six million shares repurchased for $88 million.
Additionally, we paid 22 million in cash dividends. 19 million shares remain authorized under the current repurchase program.
We ended the quarter with 225 million in cash compared to 239 million last year. With ongoing traffic declines, we are continually reviewing the store fleet and focusing efforts on extracting store efficiencies and productivity.
Our fleet is largely profitable, I want to emphasize that this is case across all mall types A, B, C malls as well as our outlet centers. However, when it makes sense where we are over stored and have a high likelihood of sales migration we are closing locations.
We are also building flexibility into our lease terms with over 500 stores in-store leases set to expire in the next three years. This year we plan to close between 25 and 40 store locations.
As previously discussed, we are selectively opening new Aerie stores and a handful of American Eagle stores in the U.S. and Mexico, where we believe we have opportunity.
Internationally, the Company plans to open 45 and close two license store locations. Additional stores information could be found on Pages 11 through 13 in the online presentation.
Now looking ahead to the second quarter, we expect second quarter earnings per share of $0.15 to $0.17 which is based on comparable sales of flat to a low-single-digit decline. The guidance assumes a lower merchandise margin due to increased promotions and a low-single-digit increase in SG&A dollars compared to last year.
This compares that our earnings per share of $0.23 last year and excludes potential impairment and restructuring charges. We remain focused on our strategic priorities centered on improving the customer experience and engagement with our brands.
We are also creating efficiencies and strong financial disciplines to strengthen the bottom line and deliver shareholder returns. Thanks and now will take your questions.
Operator
Thank you. At this time, we will be conducting a question-and-answer session.
[Operator Instructions] Thank you. Our first question comes from the line of Oliver Chen with Cowen & Company.
Please proceed with your question.
Oliver Chen
I just wanted to ask about the store footprint and if you can get recaptures, will you potentially decide to close at a faster rate and what are some of the guard rails for thinking about that in terms of or how that may proceed versus your annual program of 25 to 40, just we are thinking about how to optimize this and what can happen especially as your online business has been leading and growing nicely? Thank you.
Chad Kessler
Yes, sure. Oliver.
As I had pointed out in my prepared remarks, we are constantly evaluating our store footprint in the real-estate portfolio, although we have given some guidance for the year, we are looking to get more aggressive with store closings. we have been experimenting with closures of stores where we are able to really track sales migration and really analyze the relationship of the stores to our digital business.
I mean just to point out a couple of things, within our stores base it is the best place for us to drive new customer acquisitions still and 80% of our online returns get returned back to stores right. So they are very close interplay between brick-and-mortar and digital, although you may be seeing continued traffic declines in-stores and comp decreases in certain-stores.
Those stores are still very profitable. Although they may not be profitable at a four wall rate that they experienced three-four years ago.
They are driving very significant four wall profits and that's across all mall grades, A, B, C, outlet malls et cetera. But the short answer to your question is, yes we are looking to get a little more aggressive in our store closures than what we have communicated thus far as we continue to go through our market assessments.
Oliver Chen
Okay and on the inventory number, is it updated.
Jay Schottenstein
Okay, just to add to that. We want to do it in a smart way, so when we do close the store we pick up those sales, we pick up those profits.
We just don't want to close stores and close stores. We want to figure out how to optimize and maximize the sales, so when we do close we are able to keep the majority of it.
Operator
Thank you, our next question comes from the line of Anna Andreeva with Oppenheimer and Company, please proceed with your question.
Anna Andreeva
Great, thanks so much and good morning everyone. Question on the second quarter comp guide, flat to down low-singles.
I guess what is driving deterioration versus positive 1Q, what kind of promotional pressure are you guys expecting during the second quarter and Bob maybe talk about your comfort with inventory levels, what is driving the mid-single-digit increase ending 2Q. Thanks so much.
Robert Madore
Yes, so related to the revenue guidance that we gave for the quarter, it's really based upon what we are seeing quarter-to-date in trends across channel, I would tell you the guidance is comprised of significant improvements or increases continuing in digital and brick-and-mortar continuing to be feeling slight pressure in comps, but it's very much in-line with not only trends we are seeing currently, but what we anticipate for the remainder of the quarter. From an inventory perspective, what is really driving that is you know when we announced earnings at the end of Q4 at year-end inventory levels were up 17%.
When we guided to inventory levels at that point in time for the end of Q1, we believe that we were going to be closer about 12% we ended the quarter up 9%, so better than what we had anticipated in the beginning of the quarter. Looking forward, we are continuing to decrease inventory levels to get them better or more aligned with sales performance.
Having said that we have made strategic investments across roughly three product categories in the AE brand, in denim, and long bottoms and within the Aerie brand within the overall apparel category, all of which drive higher AUCs in those businesses particularly when you talk bottoms and denim are extremely skew extensive. You are talking multiple fabrics, multiple colors, multiple sizes et cetera, so to make sure you're in business in-line with the merchandizing strategies we have particularly as we start moving into back-to-school season, building inventories this summer that’s really what was driving inventory.
You know inventory units at the end of Q1 were flat.
Operator
Our next question comes from the line of Simeon Siegel with Nomura / Instinet. Please proceed with your question.
Simeon Siegel
Have you guys sized the top-line opportunity for Aerie, how large can you see the business growing, what does that do for Company level margins and then just what is the general break down of product penetration with any Aerie at this point. And Jay can you just share you view on the mall landscape, any thoughts on the competitive dynamics and may be any views on consolidation within the industry.
Thanks.
Jennifer Foyle
Sure, thank you Simeon, we are really excited about the Aerie potential, we are not going to stop, I say this on every call and there is a pass few actually more than a $1 billion easily. What I love about the Aerie composition is that we are not just about bras and undies, which I always will say, that’s our core competency business, but we have new product categories Swim, Chill.
Play. Move., and all those categories is really resonating with the customer, they are loving these new product offerings.
And it allows us also to post and ebb and flow when various product categories are down trending. So I love that ability in Aerie.
That said, bras and undies will still be well positioned at roughly 60% of the business and then the depending on the seasonality, we will post Swim and/or the apparel categories.
Chad Kessler
I mean just to add to that, there is a lot of white space within the Aerie world, today from a store portfolio prospective we only have a 103 standalone Aerie stores, so where some people may say we are over stored in AE, we are significantly under stored as it relates to Aerie. In addition to the standalone stores, we have owned 92 side-by-side Aerie location, so those are stores that are adjacent connected to AE stores.
So very small store base that we feel gives us an opportunity to be extremely selective in the locations and the markets we are not in and we are not deeply penetrating today. You couple that with the relationship we see between brick-and-mortar retail presence and digital business that’s driven by that, just to highlight what Jen said, we think Aerie represents a large growth opportunity for the Company.
And Jay do you want to handle the mall?
Jay Schottenstein
I was walking the mall yesterday, we still see a lot of stores with sings 40 off as far as the entire store, it's not a secret, there have been a lot of stores closing in like the last couple of months, I think 3800 sites closed, so we have to go to fight that. At the same time, our challenge is how do we make our customer feel more special.
And now we work on every day, we are challenging ourselves whether it would be adding certain product lines in and what can we do to make a better shopping experience. And also we are investing in the technology to keep our mobile site very exciting too.
So this is what you call this is the year of the disruption and its challenging but our people are up to it and most important thing is that we still see up a majority opportunity is out there.
Operator
Our next question comes from the line of Matthew Boss with JP Morgan. Please proceed with your question.
Matthew Boss
Thanks. On the gross margin front, how should we think about promotional mark down pressure versus IMU in both the second quarter and the back half of the year?
And then just larger picture, as DTC continues to grow what would be the offsets to the mix headwinds on a multiyear basis.
Robert Madore
Yes. So on gross margin we anticipate gross margin pressure in the second quarter pretty consistent with what we experienced in Q1.
We anticipate slight IMU improvement through continued cost reductions on like-for-like products, but we do anticipate and were currently seeing a continuation in the overall promotional environment. So I think you can expect gross margin pressures comparable to what we saw in Q2.
And then related to the larger picture directions soon we continues to grow what were the options be on a headwinds basis, so we are experiencing very significant growth in our e-commerce business. This last quarter, huge traffic increase quarter-over-quarter, year-over-year and it's a very significant transaction growth year-over-year.
We are going to continue to leverage, we are going to drive that growth. We have been very successful in a lot of our digital marketing initiatives, a lot of the investments as Jay pointed out that we have made in our e-commerce business on really enhancing the experience with the consumer optimizing our order management systems to really leverage our omni-channel capabilities are really translating and registering within the performance of the overall digital business.
So we are obviously going to continue to capitalize on that, we have had a question and a little bit of dialogue on this call around potentially accelerating our store closures from what we have communicated thus far. we are constantly analyzing the portfolio from a store-by-store and in overall market perspective to determine where we feel we are over stored et cetera.
So we are going to continue to drive digital the way we have and we are going to continue to drive rationalization of the real-estate portfolio, but at the same time driving improvement in-store productivity across the remainder of the fleet.
Jay Schottenstein
And also Bob it’s also very important to point to point out that when it comes to our core strength in our denim is getting stronger.
Robert Madore
Yes. Across all channels.
Jay Schottenstein
That's right, men's and women's brands are getting stronger.
Operator
Thank you. Our next question comes from the line of Brian Tunick with RBC Capital Markets.
Please proceed with your question.
Brian Tunick
Two questions. I guess maybe Jay there has been a lot of media reports about consolidation probably much needed in the apparel sector.
So I was just curious if you could remind us on your capital allocation thoughts and your balance sheet priorities. And then maybe for Chad, can you talk about the lead times on fixing the men's business on the women's strength where do you think your share gains are coming from?
Thanks very much.
Jay Schottenstein
To give my answer, we have always said that we have a policy. I'm not commenting on rumors or speculation, this remains our response.
Robert Madore
And just a little more on capital allocation and we have been pretty consistent with our strategy around this. Obviously we focus first and foremost on investing in our business, I think we have demonstrated that with where we have target our capital expense dollars over the year and I think it's really produce very significant returns across that channel in particular.
So we are going to continue to invest in our business where those investments are going to drive an appropriate level of return then beyond that obviously we look to return or provide returns to shareholders. This quarter, we provided about a 110 million of total returns to shareholders via dividends and the 88 million in share buybacks.
For share buybacks in particular, the one strategy that we have pretty consistently followed is that we are constantly looking to mitigate any EPS dilution related to accretion in share count. That's a starting point, beyond that we obviously look for opportunistic buying opportunities relative to our share price, fee multiples where we think that we are undervalued relative to our performance versus the remainder of the sector that we participate in.
So that's a constant evaluation that we do and that's really how we prioritize our capital allocation strategy.
Chad Kessler
Hey Brian, this is Chad jumping in on a question in men's and women's. I think it's really important to think about first what our total strategy is.
I think when I look at the future and how brands are going to evolve and how brands are going to be successful, I think it’s going to be about being famous for a category and being a destination. And for us that category is jeans and from jeans overall bottoms, but really everyday what we are focused on primarily is what can we do to drive the bottoms business and what are the right tops to go with that bottoms business.
So when I look at the total men's business, the bottoms business continues to be very healthy, the bottoms business had a record Q1 and the tops business we talked about had been more challenged. We are definitely very focused on making sure we have the right tops to go with the bottoms and the right tops that our customers looking for.
I think I said in the last call, we have hired a new head of men's merchandizing, in Q1 we brought on board a new head of men's design. In addition to that we utilizing Todd Schneider and the business to help with the assortment, he has been very involved in holiday.
So we are seeing some early improvement out there, in some of the niche businesses we are starting to see some strength, but we are not counting on that to start showing up out until the back half. So it is very early days, we are starting to see some improvement, but I think it's going to take a little time for that to show up.
In terms of women’s and where the share is coming from, I think it's coming from all over I think the bottoms business is driving customers in and she is finding that she can get the exact right tops to go with the bottoms when she is in the store. There are a lot of competitors out there that are giving up share and we are picking it up from whomever we can.
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, maybe if you can give us an update on the marketing campaigns and the loyalty programs. Some of those initiatives that I think you have in the place and where we are on those, and I think coupled with that the work that you guys have been doing on the new prototype stores, some updates there, modernizing the experience et cetera.
Chad Kessler
Sure, we are excited to see how the real campaign continues to evolve for AE, for back-to-school we are very focused on then on speaking very clearly and loudly to our customer about all the benefits that AE jeans have to offer, we really believe with the center of everything that we do. Kyle has brought on some fantastic talent, plus our digital marketing team, a new creative director, she has really strengthened that team and I think we are going to have a much more effective communications strategy to the customers going into back-to-school.
And in terms of the store experience, it’s something we will continue to be working on, we are actually presenting at the [indiscernible] letter today. It’s something of a prototype that we have get to work on.
And I think as Jay mentioned, creating great customer experiences is very important part of what the stores will be as we go forward. Bob talked about stores being a critical place of customer acquisition and also an important part of the e-commerce channel because they handle exchanges and returns.
And so having a great experience and having a great definition is important. Loyalty, our new loyalty program will be launching at the end of back-to-school right at the beginning of September.
So the new program is digital its tide more into our strategies of driving bottoms and bras and gent’s world and it can be a much better experience for the customer. So we are excited for that to launch.
Jennifer Foyle
And the Aerie real campaign is spectacular what we are doing here. I really would say that we own the body positivity platform, it's so interesting to see what a global impact that’s having on just, you read the news and it's just this is a way a life today and I would say even more so than bralettes we claimed and we own this and this is our brand DNA.
So I'm really proud of the work the team has done here. Again, our customer base grew 13% and we continue to grow double-digits, so obviously this campaign is resonating.
But what I love about the Aerie real campaign is it's not just how we portray our brand from the outside, it's what happens on the inside and how everyday this team lives by the DNA of our brand and without that the customer wouldn’t feel the impact. So there is so many new ways we are looking out how to excite the customer, using Aerie real at the helm and there is a lot of surprises on the way.
So we are really excited what this campaign is feeling. And based on the store experience, if you have not been to the Spring Street store please go, it’s a pop up store, there for a year a little bit more than a pop up I would say and it's amazing, I was there on Saturday, we had music and we had a customization machine making T-shirts, I couldn’t believe the output, I personally made 20 myself, and it was just a blast.
And what is that store is doing for the customer, we are definitely going to pluck some ideas from that and build on that of the learning we are seeing at Spring Street. So it's an incredible experience and as Jay mentioned, it's so important today to surprise your customer with something different and I think this experience is truly unique.
Operator
Our next question comes from the line of Janet Kloppenburg with JJK Research. Please proceed with your question.
Janet Kloppenburg
Good morning everyone. And Jen that story is quite beautiful in SoHo, congrats on that.
So both Jen and Chad, I was wondering if you could talk about margins trends, across the broad for you Jen what kind of emotional pressures you are seeing. And Chad it sounds like most of the pressure is coming from the tops category, I think men's and women's, but also if you could comment about your margins trends in bottoms that would be helpful.
And just on the lease renegotiations where you could share your thoughts, is it meaningful enough to help us think that the deleverage on buying and occupancy that that point of deleverage could improve as we look forward? Thank you.
Chad Kessler
So I think in terms of margins and the promotional environment, as you know it's been very tough out there. February was a tough month for everybody and so we started the season - the quarter over the tough month and we had to get a little more promotional then we like to be to get through to drive the top-line and keep our inventories cleans, I think we give that successfully.
So we delivered a good top-line, our inventories are cleaner than we had anticipated coming out of the quarter, we believe that that's going to continue in the Q2. The bottoms margins are very healthy, we had very strong margins in Q1, record margins back in Q1 in men's and women's bottom.
So that business continues to be very healthy, the top business we are at a little more pressured, it's good than more seasonal and the men's business as you know has been slower. So we do anticipate promotions continuing at a similar rate going into Q2.
But last Q1, you have to remember last Q1 was super clean. The promotions while to similar to Q1 should be more similar to last year in Q2.
So I think that would be a shift to a season from the quarters.
Jennifer Foyle
And same for Aerie, Chad we had record high margins last year, but still the flow through was very healthy in Q1 in Aerie, still retail leading industry margins I would say, so we are pleased with that. And again, going back to our ability to remix into new businesses, some of the margin pressure was offset by some of the newer businesses Swim and Chill.
Play. Move.
Robert Madore
Related to the lease negotiations and deleverage on buying, occupancy and warehousing. Pretty much all of the deleveraging with buying occupancy and warehousing was really related to online deliveries.
So as that business continues to penetrate greater across the company total, so this quarter digital represented 26% of total sales versus 22% last year right. So becoming a more significant percentage.
Digital itself was up significantly, if you look just at Jen’s Aerie business digital was up over 60% and it represents 47% of total sales in the quarter, right. So as that channel becomes a bigger percentage of our business and those transactions grow significantly, that's going to drive higher delivery expense associated with that.
On the lease side of buying our occupancy, as I said, as we get more aggressive with our store closures, we are going to be able to minimize or eliminate any deleverage we are seeing with that fixed rents expense going forward. And then obviously any improvement in comps if brick-and-mortar obviously would leverage rents too right.
So there is a number of initiatives and the things that we are looking to do or ways that the business is growing that are really impacting buying occupancy in warehousing in the aggregate. You really have to look at each of the elements separately.
Operator Thank you, our next question comes from the line of Omar Saad with Evercore ISI, please proceed with your question.
Omar Saad
Thanks good morning, thanks for taking my question. A couple of quick ones, wanted to see if you could elaborate on this kind of positive traffic number that you had in the quarter.
You just don't hear a lot of companies talking about positive traffic with apparel exposure, mall exposure and maybe talk about what you think some of the key drivers were there and the sustainability of it. I think that's probably the best place to start.
Thanks.
Robert Madore
Yes, I mean traffic vise yes we feel like one of the things that is going to make us stand out from a lot of our competition is an over our consolidated traffic increase. A big chunk of that is driven by our e-commerce business.
Traffic in brick-and-mortar was down mid-single-digits, but if you look at the digital business it was up in the 20s. So very significant traffic increase in digital.
I think it speaks to a lot of our new digital marketing efforts that are producing very good returns, I think Chad mentioned, Kyle really upgrading that team and that team really instituting some great marketing campaigns and traffic drivers that translated in the performance we saw.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Paul Lejuez with Citi, please proceed with your question.
Paul Lejuez
Just try and understand, is the simple issue you think that you guys are seeing as you put more make into the product, units flat even per dollars up more, that you're just not getting paid for what you're doing to the product in terms of the quality improvements you're making. And if that is kind of the simple issue what adjustments do you make to the product going forward, does it say something about your customers’ willingness to accept what you're doing, is it a competitive landscape issue, may be both just if you could talk on that a bit.
Thanks.
Jay Schottenstein
I actually don't think that we are putting too much in the product and I think the customer continues to pay for and respond to better product, discussed a lot of the growth and the inventory cost is driven by the mix in the bottom, which that is our category and we are not going to apologize for investing in bottoms, we are going to drive this business. we are going to continue to put stuff in the process.
Sorry. But we are going to continue invest in the products, we are going to continue to invest in bottoms, bottoms is our number one strategy and that's going to likely mix AUC up.
In terms of women's tops, we continue to invest more in the product and we are getting I think paid for that, we continue to. And then in men's is the one place where we maybe reached a little too far with some of the ticket prices without seeing the demand there so we have actually made some strategic adjustments to some of the men's tickets as we try to gain back share.
But part of the way that we won for the past three years is by investing in product, offering a better value to the customer and investing in bottoms and we are going to continue to do that. And I think the Q1-to-Q1 promotional activity is hardly just tough compared to the last year, it was such a clean quarter and now also the slow start to this year but.
We continue to invest in the product and we are able to do that because we continue to see like-for-like cost improvement and our goal is to offer the customer the best value we can.
Paul Lejuez
Well also Chad, could you talk about the technology too?
Chad Kessler
Yes and I think, within out bottoms category we continue to innovate the bottoms fabric that we are delivering in jeans, I think we offer fabrication that you are only going to get at American Eagle and then at premium competitors. No one else in our space has the bottom technology and innovations that we have and we will continue to invest and innovate there with new higher performance fabric and stretches.
Operator
Thank you. Our next question comes from the line of Michael Binetti with UBS.
Please proceed with your question.
Michael Binetti
Good morning. Thanks for taking my question.
A lot of our questions has been answered, but I just wanted to ask any commentary on your early thoughts on the trends and the malls maybe where you have seen an anchor vacate a mall.
Robert Madore
With some of the major anchors that have announced closures, the good news is out of our entire real estate portfolio, we don’t have a significant number of locations in those mall. But where we do and where the store has closed, we have not seen a traffic trend that is significantly different to our store, which is significantly different than what we are seeing across that mall grade average generally speaking.
Operator
Thank you. Our next question comes from the line of Susan Anderson with FBR Capital Markets.
Please proceed with your question.
Susan Anderson
Hi good morning. Thanks for taking my question.
I was wondering if you could talk about any reduction that you’re seeing in rent, it sounds like may be even some of the A malls are starting to get some reduction, now so just wanted to get your thoughts on that and then just any analysis that when you're looking at the store closures on the sales we can generate, so the sales that you're keeping either online or in other store. Thanks.
Robert Madore
Yes. So I think you're right, I think in light of the environment, in light of the continued year-over-year traffic declines, I think even within some of the A mall developer community, there is an understanding that they can’t necessary command the rent increases that they historically experienced, not to mention, maintain rents at current levels.
It's really on a case-by-case, developer-by-developer circumstance. But yes we obviously pursue that where it makes sense.
We are have very good partnerships with our mall developers, but where it make sense in light of performance. In light of in some instances, when we enter the mall we had a particular foot print that competed specifically with us, in some instances where we find that there are more competitors now in the mall than there were when we initially entered the location that’s very good ammunition for that kind of conversation that I was mentioning is one example.
And when we are looking at store closures and we have got experience with sales migration and transfer, it's pretty successful relative to most of what we have heard in the market. I'm not going to close this specific percentage of sales but depending on the market and store adjacencies in our density of real-estate within a marketplace, we can experience anywhere from 50% to 10% sales migration depending on a lot of different circumstances.
We have a great CRM database that actually we feel is a competitive advantage and we are able to use that information and to help us to determine which stores to earmark for closure or not, where we feel will have the best success of sales migration and et cetera. We continue to fine tune that, we continue to build that database and our capabilities to analyze those things appropriately, but it's a big piece of our real-estate portfolio review and our overall portfolio strategy.
Operator
Thank you. Our final question for today will come from the line of Dana Telsey with Telsey Advisory Group.
Please proceed with your question.
Dana Telsey
Good morning everyone. As you think about product costs and direct sourcing what are you seeing out there in terms of the ability for direct sourcing to be able to support product costs and its ability to drive the comp and where you are seeing raw material cost given the investments in higher quality lately?
Thank you.
Robert Madore
I'll try to answer that first and Chad can jump in where he feels I missed something. But there is a number of things that are really positively impacting our ability to continue to drive unit costs reductions.
One is just there is a lot of supply out there from a factory base perspective, which creates big opportunities. When we look at the percentage of our business that we go direct versus through agents that clearly represents an opportunity for us to further reduce cost as we look to change that model potentially or even use that as a I don’t want to say threat but a negotiating stents as we go forward.
We continue to do things like increase our fabric plat forming and other sourcing strategies and initiatives that will continue to drive those cost decreases and we are doing a better job of just consolidating production within factories committing to capacity levels within factories that again all allow us to negotiate lower per unit cost going forward. So we see we still have further opportunity to drive that and we believe we have a number of levers to pull to get there.
Chad Kessler
The only thing I would add is I think we balance that, we want to offer the customer the best value. We want to pay the best price and we have been paying less unlike the garment and doing all of that we want to be even faster than we have been.
So we are balancing those three things and see it has been something that we really, really improved over the last few years, that continues to help us to be more right with what the customer wants. All that should pay off.
Robert Madore
That's a great point Chad, because where we historically had place buys during particular timeframes. We have the ability to hold back on what our demand estimates are and not place those orders as early and we can hold back as much as 40% of a potential seasonal buy for just in time kind of delivery at that point so in chasing.
So, yes building speed and flexibility into our sourcing production function has been a huge focus and representing additional opportunity going forward too.
Operator
Thank you ladies and gentlemen, this does end our time for questions and concludes today's call. Thank you for your participation.