Greetings, and welcome to the American Eagle Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Judy Meehan. Thank you, Ms. Meehan, you may begin.

Good morning, everyone. Joining me today are Robert Hanson, Chief Executive Officer; Roger Markfield, Executive Creative Director; and Mary Boland, Chief Financial and Administrative Officer. Before we begin today's call, I need to remind you that during this conference call, we will make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results actually realized may differ materially from those expectations or beliefs based on risk factors included in our quarterly and annual reports filed with the SEC. Our comments today will focus on results from continuing operations and excludes other non-GAAP adjustments. Please refer to the adjusted operating statements accompanying the press release. We've also posted a second quarter financial supplement on our website. And now, I'll turn the call over to Robert for his opening remarks.

Thanks, Judy, and good morning, everyone. I'm pleased to introduce Mary Boland, our new Chief Financial and Administrative Officer. I know she looks forward to getting to know all of you over the next several months. Today, I'll start with highlights of the second quarter. After Roger and Mary give additional color on the quarter, I'll come back and provide an update on our initiatives and strategic goals. Business momentum continued nicely in the second quarter, led by successful product and marketing execution across our brands. Net sales rose 11% and adjusted EPS increased 62%, well exceeding our initial expectations. Despite a tough retail landscape, we delivered a competitive top line with less promotional activity. This combined with favorable merchandise comps and expense leverage, fueled higher margins and returns. The second quarter adjusted operating margin expanded over 300 basis points to 9.1%. We're certainly pleased with this result, but recognize it is against very weak margins last year and still below an acceptable margin run rate. As we look forward, we see plenty of potential for further margin expansion. Now let me run through some of the second quarter highlights, starting with kudos to Roger and the team. They executed well, building on our famous 4 categories while interpreting new trends for our customers. We are delivering a better product-driven customer experience. We saw a 33% increase in active customers and drove increases in traffic and conversion. All of this great team performance helped us achieve record second quarter sales results in a highly competitive environment. We did a good job executing our promotional plans, balancing top line growth with profit improvement, which is an area of further opportunity. aerie contributed to our growth, led by strength in intimates. We experienced higher productivity and stronger overall operating margins. We're making good progress and seeing greater consistency, yet our focus is squarely on increasing aerie's profitability as we move ahead. E-commerce produced 28% sales growth this quarter and contributed even higher bottom line results. We saw strong traffic and online conversion, with strength in our famous 4 businesses. During the quarter, we also launched our online factory store, which is aligned with our outlet growth strategy. To wrap up the second quarter, I'm proud of the team's progress, particularly within the context of this retail landscape. Our focus is on the future and bringing consistent performance over the long haul. On that note, we are not even through the first chapter of maximizing our true potential. More on that in a few minutes. Now, Roger, over to you.

Good morning, everyone. We were once again pleased by the brand momentum demonstrated in the second quarter. We experienced consistent strength across the assortments, including our famous 4 categories: denim, shorts, knit tops and color, as well as near-in businesses like dresses, woven shirts and fashion tops. Both men's and women's comps increased in the high single digits. Our assortments were trend-right, distinct and colorful, setting us apart across the retail landscape. The teams are executing well on our core basics, core fashion and fashion, which has been both tight and is turning faster. With strong merchandising and design leadership, the team is doing a great job reading and interpreting new fashion trends for our brands. We are really pleased with how our back-to-school season has trended so far. Our plan was solid across our business, and our customers are really responding. This season, we delivered compelling fashion, a wear-now focus, more product flows and a leading diverse denim assortment. Our strategy is to flow more newness regularly to stores, delivering what our customers want when they want it. This was demonstrated by our by "buy now, wear now" assortment in July, which emphasized outfitting around shorts and tees. Our fashion line, which represents about 25% in women's and 15% in men's, has distinguished us in the marketplace. And our leading denim line is diverse across fits with new styles combined with our heritage fits, new washes and treatments, as well as the right balance of indigo, the right color palette plus prints and patterns. Consistent with our strategy of regular product flows, our new fall assortment arrives in the stores later this week, Friday. Within both American Eagle Outfitters and aerie, our creative talent has been strengthened and we are now well positioned to deliver unique trend-right assortments and well-targeted marketing campaigns that are consistent with our brand DNA and right for our customers. We look forward to ongoing success, and importantly, driving the very best customer experience. Mary will now cover the financial results.

Thanks, Roger. It's great to be here. During my first few weeks, I've spent time getting to know our teams, including spending time in stores and our facilities. Over the next several months, I look forward to meeting all of you. Okay, back to the financial results. During the second quarter, total consolidated sales increased 11% to $740 million compared to $669 million last year. Comparable store sales increased 9%, including e-commerce. By business, American Eagle Outfitters increased 7%, aerie was up 13% and e-commerce increased 28%. On a consolidated basis, comps were positive across all geographic regions, including Canada. Sales growth was driven by higher traffic and conversion, combined with an increase in the average selling price. Gross profit of $277 million increased 17% to last year. The gross margin rate improved 210 basis points to 37.4%. The merchandise margin increased 120 basis points. About half of that improvement related to lower markdowns and the other half due to favorable product costs. Rent leverage drove the remaining 90 basis points of margin expansion. SG&A expense increased 9% to $178 million, leveraging 40 basis points to a rate of 24%. The dollar increase was primarily driven by incentive compensation and our continued investment in advertising. Depreciation and amortization declined $3 million to $32 million and leveraged 80 basis points. The dollar decline relates to store impairments taken in last year's fourth quarter and maturing assets. The adjusted operating margin of 9.1% improved 340 basis points to last year. Adjusted net income of $41.6 million increased 66% with adjusted EPS of $0.21. A few weeks ago, we closed on the sale of the 77kids business, which is reported as discontinued operations. In total, we expect to incur an after-tax loss of approximately $35 million, which is on the low end of…

Thanks, Roger and Mary. For 2 quarters now, we've demonstrated improvement in the fundamentals and have been executing on our 5 near-term operating goals: driving a competitive top line and strengthening margins, instilling inventory principles, repositioning our store fleet, accelerating growth in e-commerce and leveraging our infrastructure. These initiatives are rooted in delivering near-term sales growth and margin improvement. We've also been working on our strategic plan aimed at consistent profitable growth and strong returns quarter-on-quarter, year-on-year. The first pillar of our strategy is to fortify our brands. We are building scalable foundational improvements to our business. These initiatives include sharpening the brand DNA for American Eagle Outfitters and aerie, refining the assortment architecture, implementing a differentiated supply chain model and developing a segmented approach to product allocation. Before I arrived, Roger and team were strengthening our merchandise assortments and driving the success we've seen so far this year. Taking this success forward is our focus. The brand DNA and assortment architecture initiatives are well underway. This work is important to building a competitive top line consistently over time through broadening our brand appeal and gaining new customers. Stronger inventory principles have been put into place with more closely aligned inventory and sales plans and greater emphasis on margins. To support ongoing efficiencies, we are implementing a differentiated supply chain model to improve inventory flow, turns, lead times and to optimize product costs. We are also developing a product allocation model to distort inventory flows by defined store profiles. As we fortify our brands and ingrain operational improvements, we're also pursuing growth across North America. As we close underperforming stores, we see the opportunity to increase productivity in existing stores and open targeted locations in under penetrated markets. Our best and most productive locations will be revitalized with an updated…

[Operator Instructions] Our first question is coming from the line of Tom Filandro with SIG.

First, if I could, Robert, could you just give us an update, given the strong year-to-date performance maybe on your operating profit margin objectives and maybe some of the drivers. How should we think about gross margin, SG&A over the long term? And Mary, could you just help us on the tax rate for the year in the guidance because the tax rate did look lower in the second quarter relative to our expectations?

Thanks, Tom. Related to kind of realistic long-term operating margins for the business, I think consistent with what I've said in the past, our goal is to get back to a double-digit annual operating margin and we'd be targeting longer-term operating margins in the mid-teens. Clearly, we have top line opportunity, margin opportunity, as well as the opportunity to optimize our selling channels and have leverage in our corporate infrastructure. So we feel pretty confident that we can get there. We're well on our way. The increase in the second quarter was a respectable one, but well below that targeted run rate, so we feel like we've got a lot of opportunity for improvement. And as you've referenced, I think our single greatest improvement opportunities are IMU and markdown percent. Mary?

Tom, regarding the tax rate. In Q2, as we mentioned, we had a couple of onetime adjustments to our tax rate, a couple of tax settlements. For the fiscal year, we're looking at a tax rate of 37% to 38%. We typically run about 38% -- a little over 38%, so we'll end up the year somewhere in that 37% to 38% range.

Our next question is coming from the line of Adrienne Tennant with Janney Capital Markets.

Robert, my question is on the television commercials. They look great. I was very pleased to see you kind of being proactive with the marketing. So I was wondering if you can talk about any early return on investment that you're seeing there and what the plans are, go-forward, for maybe fall and holiday TV?

Sure. Well, look, the marketing team has done an excellent job on 2 levels, Adrienne, and I appreciate the comment. They've sharpened the brand DNA, and I think, as I mentioned in the last call, our intent was to demonstrate that through our integrated marketing program from back-to-school forward. We're really pleased with how the program has come out from an overall look and feel perspective, how it is surrounding our customers with a 360-degree point of view about the brand. It's about our brand. It's about our product leadership, especially in denim. And it is consistently supported by our leased [ph] lines, which promote the value of American Eagle Outfitters. So I feel we're executing well. It's too early to call the ROI, but what I would acknowledge is all of our marketing activities have been sharpened over the last couple of quarters and I think it's evidenced by the increase that we've recently experienced in customers in our CRM and loyalty programs. We have about a total of 27 million customers in those programs. We have 18 million customers that are active and that's about a 33% increase among active customers in the second quarter. We'll be looking for those kinds of metrics, as well as brand share and equity improvements as a result of the consistent execution of this campaign. Our intent, obviously, is to start with back-to-school and continue to pour fuel on the fire as we move through the third and fourth quarter.

The next question is coming from the line of Eric Beder with Brean Murray.

When you look at -- and you guys have done a great job with the fashion product. And when you look at going forward, do you see that the fashion is going to continue to escalate? We've been through a period where the fashion product has not been that exciting just throughout the teen segment. Are we now in the kind of cusp-level area where the customer is going to be more fashion focused and much more driving that? And you're at 25% to 15% fashion product, is that the right mix or do you want to raise that even more?

Eric, we're really pleased with the fashion portion that we have at this point in time. The core fashion is a very big number today versus fashion. And most people would consider the core fashion as pretty fashionable. So when you put the combination together, it's very powerful and we see tremendous trends moving forward. Our teams are very focused on it. You'll see a new floor set, it gets set on Friday, Friday night. If you can visit our stores on Saturday and Sunday, I think you're going to be really pleased.

And the only thing I'll add, Eric, because I think Roger and the team are doing such an excellent job executing across-the-board at the moment, when you look at our strength, it's really quite broad-based. Our fashion is working, but we've also had tremendous success in all of the famous 4 categories that we've been speaking to you guys about. And I think the key to the success that Roger's built with the team is the balance of the assortment and the consistent focus on flowing new merchandise into the stores. So it's just -- we're firing on all cylinders at the moment and our intent is to keep doing that.

Our next question is coming from the line of Dana Telsey with Telsey Advisory Group.

Quick question, first, on holiday. Roger, how are you thinking of the holiday merchandise assortment, tops and bottoms, the opportunities this year as compared to last year? And then the new supply chain initiative, how do you see that impact on inventory margin and the timing of it? And just lastly, just aerie plans on existing and stand-alone shops and how you're thinking about it?

On the holiday season, Dana, you know that we're, in the teen space, we're the go-to destination for holiday. Usually, when back-to-school is this strong, we find the same thing, not a guarantee, evidenced in holiday. I think our holiday assortments are very fashion-appropriate and you know it's a driving bottoms business at the present time, but we're very focused on having a ratio of tops to bottoms that makes sense.

And Dana, on the -- thanks for the compliment as well. And on the supply chain, what I would say is we've already gotten very strong inventory principles in place, which have driven the improvements in our inventory position that Mary mentioned, as well as our confidence in our ability to deliver the back half guidance that we provided. If you look at those principles, they've been in place since the beginning of this year and are really helping us on 2 levels, which is to make sure -- 3 levels, actually, to make sure that we own the right goods and are able to sell more at ticket and first markdown versus clearance, that we are improving our overall margin because we're actually starting to see adjustments in our markdown rate versus where we were a year ago. And importantly, we're just executing to that leaner inventory strategy that we've talked about. The teams already had in place a really strong differentiated supply model, which I've mentioned in prior calls. I think our challenge is just to fortify it further, so making sure that we're looking at how we're sourcing our core product, our core fashion and our fashion product with different approaches to supply so that we're receiving the goods that we need to just in time and that we're taking the cues to what the customer is buying as close to ownership of the goods as possible. We'll see quarter-on-quarter improvement throughout the balance of this year, but especially see improvements in that as we go through 2013. Regarding aerie side-by-side and shop-in-shops, obviously, that will take us some time. We've evaluated the entire store fleet between the United States and Canada. We've identified the total number of stores, which we're not going to be revealing at the moment that we think qualify for either a side-by-side or shop-in-shop. And we are currently evaluating the speed by which we'll be able to execute that transition with our landlords and we'll keep you posted as we take you through the strategy plan later in October.

Our next question is coming from Randy Konik with Jefferies & Company.

So Robert, quick question, your inventories are down nicely, that's a good job, and we're seeing the inventories down at Aeropostale and they're going to get down -- they're going to be leaner at Abercrombie when they start the fourth quarter. So how do you think about the ability for the industry or the sector and you, in general, to retain gains from your average cost reduction in the back half of the year and then going into next year? And then can we just get an update on where we are with the buyback? And then lastly, just remind us on where the inventory turnover you think you can get, what kind of level you think you can get to and in what period of time?

You got 4 questions in there, well done. True to form, true to form. Well, in terms of -- I think your question about inventory is really related to our ability to maintain the pullback on the promotional cadence that we've been able to achieve and continue to deliver a competitive top line and an improvement in our margin rate broadly. That's my assessment of the question. I think we are targeted to achieve the inventory performance that Mary articulated in her comments. We're on track to do that. We're very confident that we'll be able to retain the benefits that we're seeing from improvements in cotton economics and average unit costs. Our intent is not to change anything about how we've executed in the first half of the year. Our intent is to execute our roadmap, which includes a leaner approach to inventory, having confidence in our brand and our product to give the customer a market-leading product assortment, have them choose based on the market leadership of our product. Value is a part of that mix, but it's not the primary driver. We're prepared to compete, but we're doing so in a very considered, studied way, which has enabled us to pull back and it's our intention to be able to do that through the balance of the year but still deliver a competitive top line inventory on principles and to have the flow-through from improvements in average unit costs. And relative to the capital allocation plan, I think that was your question, we'll come to you in October. Our intent, as I mentioned in my comments, is to have a balance between our first priority, which is investing behind growth, and holding an appropriate cash reserve and returning cash to shareholders, and we'll update you on that in October.

And then just on inventory turnover, what do you see as a long-term kind of number, if you'd give us one?

We aren't going to articulate a long-term target at the moment, Randy, because we're working through that, but our intent, if you look at enterprise-wide inventory, is to show measurable improvement annually over the next several years and we see plenty of opportunity to do that. I think we'll be able to be a little bit more specific when we talk to you in October, but I would feel fairly confident that we can see measurable improvements in inventory turns.

Our next question is coming from the line of John Morris with Bank of Montréal.

So my question actually would be regarding the international expansion opportunities beyond Mexico, how you have been thinking about Asia, Europe, but both in terms of the performance there, what you can be doing a little bit better, but also kind of longer-term strategic thoughts with respect to those franchises.

We're going to give a lot more color on this when we meet to share our strategy plan in October. But what I can say, again consistent with what we've said in the past, is our intent internationally is to be very considered, to balance the model between countries that, like Mexico, we would consider doing directly those that would make more sense to do as a joint venture and then the successful country license strategy that we've already been deploying for some time now. We have been very excited about the broad-based acceptance of our brand where we have already licensed it in international markets. And if I were to just reference the Japanese business at the moment, we have now 3 stores open that are exceeding our expectations pretty considerably, and that's a very competitive market not only for sportswear in general but denim, specifically. So I feel -- we feel fairly confident about it. We're clearly focused on fortifying our brands and growing in North America as our primary focus in the short to medium term. And as I mentioned in my comments, we look at the direct approach to Mexico as an opportunity to pilot a roadmap that we would use for longer-term international expansion, and we'll keep you posted on that when we meet again in October.

Our next question is coming from Kimberly Greenberger with Morgan Stanley.

I was trying to just understand the inventory commentary. It looks like inventory is up year-over-year about $5 million and that's on top of a 31% increase last year. So I was just trying to figure out if inventory is at a level that you're comfortable with or if there's an opportunity here over the next couple of quarters when you had, I guess, 40% growth in Q3 last year to actually see more robust declines even beyond that sort of mid-single-digit level.

So Kimberly, let me give an overall comment and then I'll let Mary talk about what our plans are for the back half of the year. I think as you have heard Roger and I talk about for the past couple of calls, is we feel very confident in the inventory principles that we put in place. You're seeing a quarter-on-quarter linear improvement in our inventory ownership. We clearly had more inventory than we needed during 2011 and the inventory principles were put in place to make sure that we own the right goods and the right customer choices at the right level to sell more products at ticket in first markdown and have less clearance and improve our all markdown rate. So we feel confident that although we are up in the first half of the year as we said we would be, we're seeing a dramatic improvement in our overall performance. As I've said, I've got a bias towards lean inventory, but also competitive top line. We can do both. And our intent is to be down on a linear basis as we move through Q3 and Q4 to more normalized levels over time. Mary, you want to...

Yes, I think the only other thing I would add is that, as I said earlier, we'll be down on cost per foot in the mid-single digits and it is driven by 2 things. It's driven by unit cost, but it's also driven by units per foot as well, too. So -- and we'll see that probably build a little bit in the fourth quarter as our cost year-over-year mitigates a little bit with -- a little bit more with the cotton economics flowing out. So again, you'll see both coming down in the back half of the year and building as we get to the fourth quarter.

Okay, that's helpful. Any update on the pathway to profitability for aerie? And do you have anything -- any sort of goals in mind in terms of the number of quarters or number of years until you'd like to get there?

Sure. I mean I'll take a shot at the first comment and then I want to have Mary comment as well. The thing, I think, it's important to keep in mind is aerie, all-in, is profitable. We've been saying that for some time. It's modestly profitable. We have a strong and profitable business in our direct business, as well as in our shop-in-shop locations, meaning in-store within American Eagle Outfitters stores. The aerie stand-alone stores have been slightly dilutive. As a reminder, we impaired about 57 stores at the end of 2011. We're closely evaluating -- we closed 2 already, we're closely evaluating the balance of those doors, but believe the balance of the fleet has the potential to hit our targeted run rate -- margin run rate and return on invested capital objectives. So we're feeling confident about our ability to further build on aerie's profitability with the approach we're moving forward, which is predominantly on side-by-sides and shop-in-shop locations with a full assortment of bras, undies, sleep, lounge, swim, personal care and fragrance. But we'll keep you posted, especially as we talk more specifically in our strategy plan in October about the plans from a more quantitative perspective.

I don't have much more to add versus what Robert just said, but clearly, the stand-alone stores do continue to make progress and we expect that trend to continue through the balance of the year and into next year. And then as we look at the mix of our shop-in-shops and side-by-side, we would expect to see further improvement.

Our next question is coming from Paul Lejuez with Nomura Group.

Robert, can you talk maybe a little bit about the driver of your comps that you expect in the second half? Just wondering if, with inventories down, you're going to be relying on a little bit more AUR and a little bit less on the transaction side? And then just also wondering if you could talk about your performance by mall type, A, B and C?

Sure. Well look, most importantly, it's all about product and I think Roger has given a really good assessment of what we're doing -- what we're planning for the back half of the year. Look, what I would say about what drove our performance in the second quarter, which we're going to continue to focus on, is the famous 4 categories that we've talked about. We had great strength across so many categories in the second quarter between -- on the men's side, shorts, woven shirts, pants, knits, polos; our underwear program; on women's, denim, dresses, shorts, skirts; our bare knit program in addition to just really having our fashion, that 25% in women's and 15% in men's accepted so strongly. So our intent is to continue to focus on that. Obviously, we are really pleased in the second quarter because we saw a measurable improvement in all of the metrics that we track. We had a nice improvement in comp. We had strong improvements in our overall margin performance. We had improvement in our markdown rates. Importantly, though, we saw an improvement in traffic and conversion. So what I think you're seeing from us, Paul, is the sharpening of our brand DNA, getting a good brand message out in our marketing, the leadership and the product assortments that Roger and the team are putting forward, supported by an excellent execution of our field teams, which is driving the conversion of the traffic that we've been able to get. Our intent would be to continue that through the back half of the year and we do believe we have a slight AUR opportunity, but it's not because we'll be looking at increasing prices. It's really a question of mix. And overall, we're putting out, as I mentioned in prior calls, more customer choices in the mid-priced tier and the highest-priced tier and maintaining that customer choice offer in our opening price tier. So it's all about balance, and I think the team is just executing well across-the-board at the moment. That's our intent and believe we can deliver strong back half results with that even while we're biased towards a lean inventory investment behind the business.

And then mall type?

In terms of mall type, we're actually -- again, in the second quarter, we saw broad-based strength across all formats. We're particularly -- what I'm pleased with, Paul, maybe I'll put it this way, is we troughed in terms of dollar sales per square foot and -- around the $425 range. We've already captured back about $40-a-square-foot productivity. That's broadly based, meaning we've seen it from A to E across-the-board. We're seeing, because we are distorting our investments behind, as we said we would, the top 3 formats as well as outlet, we're seeing a particular improvement there because we're fueling those big Bs, if you will. But we're actually seeing broad-based strength across the assortment. As I mentioned, we will selectively call some of the underperforming doors. But at the moment, we have very limited unprofitable doors. And even though we have a few, half of those are cash flow positive. So we're feeling really good about our real estate portfolio at the moment.

Our next question is coming from the line of Jennifer Davis with Lazard Capital Markets.

My question is on the outlet strategy. I know you're planning on expanding that, but could you talk a little bit about how much product is made for factory and how much is actually just regular-priced merchandise and how much is clearance that's moved over and then how you see that potentially changing in the future?

Sure. Jennifer, as we've mentioned in the past, our outlet business is about 7% of our total sales at the moment. And if you look at our broad-based competitive set, they typically have about 15% to 20% of their business in the outlet sector. So that clearly demonstrates a pretty significant growth opportunity. We're excited about that because the outlets, generally speaking, are in the $600 or more square foot productivity range. They're big Bs for us as outlet stores and they generate a four-wall margin in the kind of 30% range relative to the main line fleet of around 20% now. It's slightly improved since last time we spoke on main line. So we feel really good about it. The opportunity, obviously, would be to, over time, double to potentially even triple the size of the business, but we're going to be very considerate, making sure that we get the right real estate locations in the right malls in the right order to make sure that we're expanding thoughtfully and also recognizing that it's just one part of our North American growth story. Right now, we have a very limited amount of goods that are made-for. Our intent is likely to get that up to between 40% and 50% with 40% and 50% to be presentation product and the balance clearance. I think we have an opportunity to have a slightly more balanced mix between made-for products and presentation product just because we offer a great value already to our customers and it's about using the made-for product to distort customer choices that are in high demand and give them terrific value in the outlet channel. Currently, we're below 20% made-for product, so we have the opportunity to more than double that.

Our next question is coming from the line of Anna Andreeva with FBR group.

I had a couple of questions. You talked about being pleased with the onset of back-to-school selling so far, and the stores do look terrific. You guys did guide for actually slight acceleration on a 2-year comp run rate, so I'm not sure if I missed it. Did you quantify what quarter-to-date comps are running thus far? And then looking at gross margin expectation for the back half, just given the much better second quarter gross margin, how should we think about 3Q and 4Q given the cotton tailwind coming in and the unproductive inventory that you guys talked about?

It's Mary. So on the comps, what we're seeing here in the back half of the year, as we mentioned, is kind of mid-single digits in Q3 and low single digits in Q4. And as you look at that versus prior year, we feel okay about the year-over-year total comps as we make our way through Q3 and Q4. With regard to margin, we do expect to see some margin expansion in half 2. We see about 2/3 of that margin expansion coming from the reduction on cotton costs and about 1/3 of that margin expansion coming from lower markdowns, especially when you look at Q4, which was both the peak of cotton and probably the peak of our markdown expenses as well, too.

Great. And any color on quarter to date?

No. Although what I would say is that, as Roger mentioned, we are off to a good start here with back-to-school and continue -- hope that trend continues.

If I might, we're 3 weeks into the back-to-school quarter. Obviously, we're really pleased with where we sit at this point in time. What we do know is the brand is incredibly relevant. Our marketing through our DNA is right on target. It gives us the individual lifestyle that our generation wants, and we're really pleased with what's happening with denim. We're clearly dominating in that category and that takes fashion with it.

Our next question is coming from the line of Steph Wissink with Piper Jaffray.

Robert, can I just have you clarify one remark you made earlier? You mentioned that 23 million of your customers are part of your All-Access program and 18 million are active. Can you just clarify what metrics you use to define an active customer? And is this part of kind of the overall strategy to decline or to push down your customer acquisition cost as a result of that program? And then my question regarding the execution of the faster, more frequent floor set, is that enabled by technology or is that something that's truly just a change in philosophy that you're expecting to then embed technology over time to further drive efficiency in that area?

Sure. So the number, Stephanie, was 27 million in the program, with 18 million active, and it's about a 33% increase in active customers in the quarter. So we really look at active customers based on their most recent engagement with the brand. That's how we track that. Obviously, we have a lot more customers in the loyalty program, but what we care about is which customers are actively engaged with the brand, in the process of engaging with us across our marketing and our product and in the process of purchasing with us. We are highly focused upon, because they represent the greatest return for us, our most loyal customer base. Our intent, as I mentioned in my comments, is through the sharpening of the DNA, the improvement in the assortment architecture, how we're marketing in that 360-degree marketing approach, is to broaden the appeal of our brand and to really hyperly focus on increasing customers that are in our loyalty programs, as well as those that are active. We are, and we'll talk about this during our strategy plan, very focused on making sure that we're making the appropriate investments in our infrastructure as well as in our customer-facing technology innovation so that we can put the customer at the very center of our thinking each and every day, make sure that we have created an experience, which is technology-enabled that lets him or her shop on their terms, how and when they want to whether it's a mobile device, a tablet device, desktop, in-store, all of the above. And our intent is to get to a point where, and we'll talk to you about when we believe we can be there, to have a really well-integrated single view of the customer, have all our inventory integrated so that we can take advantage of our inventory ownership and never disappoint a customer who wants to engage with our brand. So that's what we're up to on that program.

Okay. Then just a follow-up on the floor sets, Robert, if you can just talk about, is that technology-driven or is that something that's more philosophical and moving towards technology?

Part of the business is art and part of the business is science. At this point, I think, quite frankly, we're the only one capable of doing 11 floor sets a year. We're very good at it. There's a whole process in place and we execute to that process and it's working better than it's ever worked before.

And obviously, combined with our inventory principles of having the right amount of investment behind customer choices in each one of those floor sets, not too much, not too little, so that we service the customer against core, core fashion and fashion with those consistent flows in the "buy now, wear now" approach to the assortment that Roger has gotten in place, we feel good about our ability to compete on the terms that he just defined.

Our next question is coming from Janet Kloppenburg with JJK Research.

Roger, I was wondering if you could talk a little bit about, I believe you made a comment that in your core category businesses, your 4 core category businesses, continue to be strong. And in light of the competitive environment right now where we've seen heated up competition in those categories, I'd like you to maybe talk about the attributes that are helping those categories to outperform for you. And for Robert, I was wondering if you could talk about your marketing plans given how effective your marketing has been over the last quarter and if your guidance includes an increase in annual marketing and in what venues that might occur.

Janet, as Robert said, as I've said, it's broad-based, it's across all categories and denim is absolutely leading it.

How is the top business, Roger? Is it up to your expectations?

Yes, it is.

And Janet, appreciate your comments on the marketing plans. As I mentioned earlier, I think the team's done a terrific job of sharpening the DNA and then putting out a really well-integrated marketing plan. It is a 360-degree integration of the marketing. It includes, obviously, the television commercials that you've seen, which had a really strong customer engagement component to it, both featuring real people as well as engaging people in the social media space and the opportunity to potentially be in our campaigns next year. So we had a very broad-based approach to marketing using traditional media, but a really strong emphasis on social, mobile and our partnerships through a number of the social media partners that we have leveraged. Our intent is to continue with that approach, shifting more of our investment over time towards social media engagements and mobile, in particular. But at the moment, that 360-degree program's delivering well. We do have an increase in our advertising investment planned for the back half of the year that is in our guidance. And obviously, we have a really strong ROI mentality related to our advertising investments. So as long as we are delivering improvements in sales and traffic where we're converting and delivering the returns that we expect, we will continue to invest behind the growth of our business.

Our next question is coming from the line of Dorothy Lakner with Caris & Company.

I wondered if Robert could give us a little bit of color, I'm sure you'll be doing more of that in October, but just a little bit of color on the assortment architecture initiatives, kind of where are you now and maybe just broad brush what you're -- what the time line is on that? And then for Mary, in terms of the SG&A guidance in the back half of the year, I think you said low teens, if I'm not mistaken. Should we kind of allocate that equally between third quarter and fourth quarter? I think fourth quarter last year did begin to come up quite a bit. So kind of how should we look at that in the back half?

Thanks, Dorothy. We have been working as a team to really just refine, I think, a great assortment architecture that Roger and the team had in place already, and it's what Roger's mentioned up to this point in the call. We have categories for which I think we're famous, the customer expects us to be the best at in our sector, denim being obviously the most obvious for back-to-school. But categories like denim, shorts, solid knits, Roger's mentioned we're a store of color. Those are incredibly critical to us. Obviously, the things we'll focus on, which we won't mention specifically, will shift as we move into the fall and holiday seasons. We -- the second category is a category that we just call near-in. They're categories that we're really dominant in, but isn't, at the moment, a category that we think we've fully optimized or are as famous as we'd like to be for. I think if I just point out, our men's underwear business is an example of that. That would be a good example there. And then, as Roger mentioned, we have about 25% of our customer choices in women's and 15% in men's in true fashion. What we are intending to do is just to distort our investments behind our famous 4 categories and our near-in categories while maintaining a really relevant category-leading, high-turning, super relevant fashion assortment for both men's and women's, and the balance between those is critical. I feel we've made great progress this year, but we're never satisfied. We're going to stay humble and hungry.

Dorothy, regarding the SG&A guidance for the back half of the year, I did mention that we're expecting growth in the low teens. Between Q3 and Q4, honestly, it's pretty close, 50-50, between the 2 quarters, maybe a little bit more growth in Q4 as we look at our incentive comp accruals through the balance of the year, but pretty close to 50-50.

Our last question is coming from the line of Betty Chen with Wedbush Securities.

I was wondering, Robert, I think earlier in your remarks you mentioned also that you continue to see some opportunity in the online business, which grew very nicely in the quarter. Sort of -- what sort of additional features should we look for? Do you have all the various IT components you need to facilitate that? And then could you also remind us what it was as a percent of sales in the second quarter and what is your target for that business as a percent of sales over the longer term?

Sure. Thanks, Betty. In terms -- as I mentioned when I first got here, we're really focused on distorting our growth behind our online business. It's obviously where our target shops. I don't know about you, but I can see oftentimes 2-year-olds that are better on a tablet than I am. So it's important for us to really focus on leading in the online commerce space and the omni-channel space because of the relevancy to mobile and tablet shopping for our target in particular. The team has been successful. Thus far, it's been 12% of our overall business and our intent is to grow it into -- on our existing capabilities, meaning our existing IT infrastructure and platforms, into the mid- to high-teen range. The approach we have is really 3-tiered. It's obviously very much about the unique assortments that we have. We obviously feature our core assortments, which can be found in stores, but then are distorting our online offer with unique assortments that are only found in ae.com and aerie.com. Customer acquisition is the second focus. I've mentioned that a lot. We have 27 million customers in our program, 18 million active, added 33% in the second quarter. Our intent is to, as we cycle through customers who become inactive, is to always be adding incremental customers to that loyalty program given how important they are to our overall performance. And the third is to develop a really aggressive, and we'll talk about this in more detail in October, roadmap from an IT infrastructure standpoint, but especially the customer-facing technology innovations that would enable us to have a single view of the customer, a single view of our inventory which we actually have at the moment. It's the ability to activate that across the multichannel distribution strategy that we have and be in the position to put out the best omni-channel brand and product-driven customer experience for our target. We have, and we'll talk again in October about this, we have built our capital investment plan to support both the infrastructure and IT innovation investments required to lead in this space. It's absolutely our intent to do so, and we'll keep you posted in more detail in October.

All right, that concludes our call today. We report our third quarter results on Wednesday, November 28. So thanks for your participation today and continued interest in American Eagle Outfitters.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.