Technology’s Implications for Teen Retailers: Aeropostale, American Eagle

The technology world is changing rapidly and holds large implications for how business is done in the apparel industry. Suddenly the advancements of tablets and smartphones has catapulted internet and mobile sales as the prime strategy of apparel retailers going forward. The teen apparel sector includes companies like Aeropostale (NYSE:ARO), Abercombie & Fitch (NYSE:ANF), American Eagle Outfitters (NYSE:AEO) & Gap Inc. (NYSE:GPS) is abuzz with these technical advancements in retail, as the age group 15-25 form the core of smartphone and tablet users demographically.

According to a study from IHL Group, more than 2.7 million tablet devices will be shipped for use in North American retail and hospitality by 2015, an astronomical increase of 450% over current rates. ^[1] As the IHL Group president Greg Buzek sums up “A complete transformation of the customer experience will occur at clothing and department stores over the next three years.” Below we look at how the apparel sector is getting influenced by technical advancements.

See our full analysis for Aeropostale | Abercrombie | American Eagle | Gap

Growing scale of smartphones and tablet penetration

The number of people using smartphones and tablets is rapidly increasing. According to a recent Nielsen report published on September 26th, U.S. smartphone penetration stood at 43% in August 2011. ^[2] The tablet, which is just an year old phenomenon, had a penetration rate of 5% in May 2011. ^[3]

And the impact of these platforms has already started emerging. For instance in August Aeropostale announced an Android app to help grow its mobile business ^[4] and recently American Eagle announced the launch of the Google Wallet mobile shopping experience in selected American Eagle Outfitters, Aerie and 77kids stores ^[5]

Brand identity is not just limited to retail space

With the social networking sites quickly becoming a daily part of one’s life, the brand identity as well as loyalty has ceased to exist just to the retail space and in fact entered into the internet also. Most of the big apparel retailers are actively maintaining online stores on Facebook, where they are being followed by an ocean of followers.

Additionally it has also provided an opportunity to the retailers to do business in the markets even where they don’t have a store presence. Quite recently Aeropostale rolled out its global shipment plans banking primarily on the strength of its 5 million+ loyal fan base on Facebook. (See: Aeropostale Rolls Out Global Shipping to Improve Sales & Margins)

Cost consciousness and margin improvement

Last but not the least, internet and mobile business has provided the apparel retailers an opportunity to save on the cost side, which is extremely important in current macroeconomic weakness. Establishing an internet/mobile channel requires significantly less capital expenditures than that of setting up of stores, which is benefiting in the growth of the already cash strapped apparel industry.

Additionally as the contribution of internet/mobile sales to the overall sales increases, we expect the margins of the apparel retailers to improve as internet/mobile business carry significantly higher margins than that of retail sales. For instance, according to Trefis estimates Internet & Catalog Order EBITDA margin is roughly 2x that of Aeropostale Stores EBITDA margin.

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1. IHL releases its report on tablet shipments for retail, Source: Retail Info System News [↩]
2. U.S. smartphone penetration, Source: nielsenwire, September 26th [↩]
3. Nielsen reports tablet penetration rate in U.S., Source: mocoNews.net [↩]
4. Aeropostale launches android app to increase m-business [↩]
5. American Eagle introduce Google Wallet mobile shopping, Source: American Eagle, October 12th [↩]