Jonna Kim: Got it. Thank you.
Michael Rempell: Thank you.
Operator: Thank you. Our next question comes from the line of Corey Tarlowe with Jefferies. Please proceed with your question.
Corey Tarlowe: Great. Thanks so much for taking my questions. I was wondering if you could talk a little bit about the new store design that you have. And it sounds like it’s early days, but it does also seem like you’re witnessing some pretty promising results from that. So could you maybe talk a little bit about what you’re doing differently in this new store design?
Jen Foyle: Sure. First and foremost, we’ve – Michael mentioned that we’re in three malls, as he stated, Polaris, Palisades and Oakbrook in Illinois. So they’re all semi-different formats, but it’s very focused on more of a modern design, approachable design. The opening — just the entrance alone is very inviting. I was really pleased to see when I went to Palisades to see all three brands in the mall. I mean just our store designs really — we definitely needed a new concept for American Eagle. It was time. We’re calling it lived in. And I really like what I’m seeing. The results are definitely well above average. And we really we feel excited about it. So we’re in the middle of some of these new strategies, AE77, AE 24/7, which is our men’s active concept.
Early reads there are very encouraging to the point where we’re launching some of the product that was tested in fewer stores to all stores. We’re up to a lot over here. Also, just to add on SoHo, our store there now has all brands consolidated into it, including AE77. And we just did our first pass at a remodel there. It will be in full swing headed into November. But just I love what I’m seeing early on. The teams — we only set forth on this initiative about two months ago. This shows you how swiftly our teams work, and they’ve already put together an entire concept around the store. It looks beautiful. I’m going to go revisit it after this call, and I invite everyone to go see it. It’s — we’re calling it The Gateway. It has all of our house of brands, and it’s the entrance into SoHo. So I think it’s just really an exciting concept, and there’s more to come here.
So like I said, I’m encouraged by the early reads. In some cases, Michael mentioned, we reduced square footage but went into the 50-yard line. And we’re seeing better sales in smaller square footage. So that’s always a good recipe. So more to come. And again, we’re going to start to incorporate this new design into our strategies going forward.
Corey Tarlowe: That’s great. Thanks. And then was just wondering if you could talk a little bit about what you’re seeing in denim. Thanks so much.
Jen Foyle: Denim is our — denim is everything we do. It’s amazing what this AE team accomplishes. Just when I look at competition, our price points, our quality, our washes, our ability to chase an ebb and flow, a very complex business. As you know, size, intensity, ownership but still allowing us to be fluid in our assortments. Because fashion is definitely changing in that category. We’re seeing fashion mixes go higher than we’ve ever seen, and we’re creating, testing strategies so that we can ebb and flow faster than we’ve ever had. I just got through all the testing for spring for next year. And we’re really able to impact receipts. Definitely wider silhouettes, as I mentioned earlier, in both men’s and women’s. Men’s is seeing an inflection point in fashion, and we’re pretty excited about the future.
So — and I think we’re ready to compete. And it’s not just denim bottoms. It’s denim as a holistic category. Really exciting things happening out there. And we’re starting to show up. If you go into our homepage right now, you’ll see. And we’re going to continue to drive this business home.
Mike Mathias: Hi, it’s Mike. And hopefully, everyone can hear me now. Let me start for those technical difficulties. Let me double back and answer, I think, Adrienne, Matt and Paul had questions on SG&A and just where we are on our profit initiatives. So if you go back to our Q1 guidance, at that point – and well, first, Adrienne, yes, we are incented on EBIT, not revenue. And if you go back to our Q1 guidance, we were not assuming an incentive accrual in the year at that point. With the 30% increase in our guidance range now, we are. We’ve crossed that threshold for accruing incentives. And based on that timing, it will be — it’s back half-weighted, which is the guide you’re getting with mid-teen SG&A growth for the back half.
So on an annual basis, then we’re talking about low double-digit SG&A, call it, 10%, 11% for being projected. And with that, though, we — our initiatives initially — our initiatives on the profit side are very much focused on gross margin and immediacy. We’ve seen some benefit in Q2. Our guidance includes some significant benefit in the back half. But we do have work streams across really every area of the P&L. So work continues. If you think about the OpEx that’s up in gross margin, we actually saw a reduction to those operating expenses in the second quarter. So even with SG&A up high single in the first quarter, our OpEx was only up mid-single. And if you would normalize for the baseline of incentives we’re not talking about, our total OpEx for the second quarter was actually down to last year.
For the back half sort of on an annual basis, then we’re talking about double — low double-digit SG&A growth. Those operating expenses and gross margin that span design and merchandising, compensation, rents, delivery, distribution costs, those expenses are projected to be relatively flat for the year. So with the SG&A in the low double-digit range, OpEx is only up about, call it, high single. And if I would normalize year-on-year on that baseline of incentives, our total OpEx would be up mid-single. From there, like I say, we’ve got initiatives across every area of the P&L, we believe there’s more annual benefit coming through those gross margin expenses. We’ve got work streams as we’re calling them against 80% of our SG&A spend right now across really all the big buckets that make up that — those dollars.
We’ve got a lot of positive momentum happening there. But the SG&A piece takes a little longer to get at. We’ve got contractual obligations. We’ve got RFPs out. We’re bidding expense categories. We’re looking at consolidating vendors for things across services, across maintenance. We’ve got org design and labor model changes that we’re testing into that we look want to implement things into 2024. So there’s a lot of work – positive work happening across our teams right now. We’ll have more updates in November and the end of the year on the progress on the SG&A front, but we’re really pleased with kind of all the OpEx progress we’ve made down through gross margin at this point that’s coming through our results. If you kind of look at the gross margin guidance that we’re implying for the year, other than 2021, it would be the highest back to like 2012 or even 2008, 2009 periods.
So we’re seeing a lot of benefits come through there with more to come through SG&A. We’ll provide more updates on coming calls.
Operator: Thank you. Our next question comes from the line of Janet Joseph Kloppenburg with JJK Research Associates. Please proceed with your question.
Janet Joseph Kloppenburg: Hi, everybody. Congratulations on the progress. Mike, you just gave out a lot of different numbers on SG&A, excluding incentive comp and all of that. I guess what I’d like to understand is the SG&A outlook for the second half is different than we all expected and versus your prior guidance. So what I’d like to understand is, as we look into fiscal ’24, should we expect that on a total basis, there’s opportunity for meaningful SG&A reduction? Or is the incentive comp going to continue to push the SG&A levels higher or other factors like Aerie’s store rollout? I’d like you to flesh that out a little bit for us. And Jen, I think your guidance assumes that comps decelerate from current trends. Perhaps you could talk about what’s driving that. Maybe clearance levels would be lower year-over-year or other factors that are influencing the third quarter outlook versus current trends. Thank you so much.
Mike Mathias: Hi, Janet, let me — so let me just simplify it. I know I said a lot earlier, but — so with SG&A guidance being up low double digits for the year, let’s just focus on this year, to your point. About 40% of the dollar growth is related to incentives, again no accrual last year. The expectations for next year would be no, that we’re really kind of looking at a baseline accrual this year and that we would look to probably anniversary something similar next year. So there wouldn’t be any additional pressure on ’24 based on what we know today. And from here then, we are looking at progress and have a road map in place where we believe we can provide some significant leverage next year, knowing that we wouldn’t have that headwind or that sort of apples-to-oranges compare for incentives.
And again, 80% of our SG&A is kind of under a microscope right now with a lot of work happening cross-functionally between our finance teams, supply chain, IT, merchandising and planning. We’ve got a lot of great momentum happening across our entire expense base. We’re seeing some benefits in our new guidance this year, but we expect even more on an annual basis between next year and even into ’25. So more to come, but we would expect OpEx to leverage off of all this work and leveraging even incentives at this point next year.