Q2 2025 Earnings Call Contradictions: Tariffs, Merchandising, and Margins

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 3, 2025

Financials Results

• Revenue: $1.28B, down 1% YOY; comparable sales down 1% YOY
• Gross Margin: 38.9%, compared to 38.6% last year
• Operating Margin: 8.0%, compared to 7.8% last year

Guidance:

• Q3 comps expected to increase low single digits; QTD mid-single-digit positive with strong Labor Day.
• Q3 operating income expected at $95–$100M, including ~$20M tariff costs.
• Q3 SG&A to rise high single digits (advertising); tax rate ~25%; weighted average shares ~172M.
• Expect slight BOW deleverage from higher digital mix and Aerie/offline growth.
• Q4 comps expected to increase low single digits; operating profit $125–$130M; tariffs $40–$50M; SG&A down slightly.
• 2025 CapEx ~ $275M; open ~30 Aerie/offline locations; remodel 40–50 AE stores; close 35–40 AE stores.
• Expect to repay most revolver by year-end and rebuild cash.

Business Commentary:

• Revenue and Financial Performance:
• American Eagle Outfitters reported total revenue of $1.28 billion for Q2 2025, marking their second-highest revenue for a second quarter, with a 1% decline from the previous year.

• The decrease was due to a lower average unit price offset by a growth in transactions, indicating positive traffic across selling channels.

• Product and Marketing Initiatives:

• Aerie delivered comps growth of 3%, driven by positive demand across major categories like intimates, soft dressing, and activewear, marking a significant turn from the first quarter.

• The success was attributed to improved product collections, exciting marketing campaigns like the Aerie x Sydney Sweeney denim campaign, and strategic partnerships.

• Operational Efficiency and Cost Management:

• SG&A expenses were down 1% to $342 million, with compensation costs decreasing due to restructuring initiatives, offset by investments in advertising.

• Operational efficiency improvements and cost management programs contributed to the decline in SG&A expenses.

• Tariff Impact and Mitigation Strategies:

• Tariffs are expected to impact the company's gross margins with costs increasing by 8%, affecting the second half of the year.
• Mitigation strategies include rebalancing country of origin, cost negotiations with vendors, and optimizing freight costs, with some pricing adjustments to offset the impact.

Sentiment Analysis:

• Q2 operating income $103M, up 2% YOY; diluted EPS up 15% YOY; gross margin 38.9% vs 38.6% last year. Q3-to-date comps up mid-single digits with record Labor Day. Guidance calls for low single-digit comp growth in both Q3 and Q4, with ongoing tariff mitigation and SG&A control.

Q&A:

• Question from Jay Sole (UBS): How will you sustain momentum from the Sydney Sweeney and Travis Kelce campaigns, and are customers buying only collab items or across the store?
  Response: Campaigns delivered unprecedented national new customer acquisition and denim sellouts; focus now is converting buzz into repeat purchases, with demand spanning jeans and broader assortments.

• Question from Jay Sole (UBS): How much of the improvement is better assortments versus campaign excitement as you move into back-to-school and holiday?
  Response: Assortments materially improved (fleece, jeans, tops) with seasonally right product; shorts were soft, but momentum strengthened through Q2 and into Q3.

• Question from Paul Lejuez (Citi): Provide comp components (transactions, AUR/UPT) and clarify tariff impact and pricing contribution.
  Response: AUR down mid-single digits; traffic up; digital AUR flat; tariffs mitigated to ~$70M (vs ~$180M unmitigated) via sourcing shifts, vendor costs, freight; pricing is a smaller lever.

• Question from Paul Lejuez (Citi): What do you expect for AUR in the back half?
  Response: Q3-to-date AUR up low single digits; expect similar for the back half.

• Question from Jungwon Kim (TD Cowen): What percent of Aerie is intimates, and how will you recapture share? Any color on existing customers?
  Response: Intimates ~1/3 of Aerie; relaunching with lace-led capsules and Aerie 2.0 to regain share; campaigns drove broad-based new customer gains alongside existing-customer engagement.

• Question from Janet Kloppenburg (JJK Research): Which categories are weaker, can intimates strength sustain, and what about denim pricing?
  Response: Shorts were soft; denim AURs up with good-better-best pricing; intimates (undies, core bras) gaining share with plans to sustain; selective price increases will continue as part of tariff mitigation.

• Question from Alexandra Straton (Morgan Stanley): Why is Q4 gross margin more pressured, and how long will campaign-driven sales momentum last?
  Response: Q4 faces higher tariffs ($40–$50M) plus slight deleverage; promotions assumed but optimized. More momentum ahead with a second Kelce drop and ongoing Sydney Sweeney campaign elements.

• Question from Christopher Nardone (BofA Securities): Is the ~$40–$50M Q4 tariff impact ~250–300 bps and what offsets help? Also, men’s progress vs denim?
  Response: Tariffs imply ~250–300 bps in Q4; offsets include sourcing remix, cost negotiations, freight optimization, and fleet rebalancing. Men’s is improving—tops and denim trending with more upside ahead.

• Question from Rakesh Patel (Raymond James): How long will the campaigns run and how is marketing spend phased in H2?
  Response: Both campaigns continue through H2 (second Kelce drop); SG&A up high single digits in Q3 mainly from advertising, while Q4 SG&A is flat to slightly down with ads up low single digits.

• Question from Corey Tarlowe (Jefferies): What drove SG&A leverage on a negative comp, and is it sustainable? What about incentive comp?
  Response: Multi-year cost initiatives reduced SG&A; full-year SG&A up ~1–2% with advertising the only growth; aim to leverage SG&A on 3–5% revenue growth; incentives are lower this year.

• Question from Marni Shapiro (The Retail Tracker): Any inventory pull-forward and plans for future collaborations?
  Response: Only minor inventory pull-forward around tariff timing; early collab sell-through strong with more drops and holiday concepts in development.