After Slow Spring Start Can American Eagle’s Online Sales Boost Earnings?

American Eagle Outfitters (NYSE:AEO) is scheduled to release its Q1 fiscal 2013 earnings on May 22, and the delayed spring in the U.S. is likely to weigh on the results. Despite the retailer’s efforts concerning its spring season collection, the initial store traffic was disappointing.

However, American Eagle’s strong direct-to-consumer channel will play a crucial role in offsetting this impact. Moreover, its rewards program and marketing & pricing strategies, which are aimed at improving customer engagement can help the results.

See our complete analysis for American Eagle Outfitters

What American Eagle Outfitters Did For Spring 2013?

American Eagle Outfitters has maintained tight control over its inventory, which has allowed it to launch new fashion and operate with fewer discounts. For the spring season, the retailer introduced bright colored palettes such as indigo washed navy, lifeguard red, nautical yellow and sailcloth white, inspired by vintage nautical flags of World War II. ^[1]

For its women’s merchandise segment, it launched a wide range of trends such as ballet to barbie pinks, mint to seafoam, ultra feminine lilacs and lavender, in a variety of fabrics and silhouettes. ^[1] According to the company, customer response to these trends was encouraging. ^[2]

To support the spring collection, American Eagle Outfitters came out with its spring campaign – “Project Live Your Life”. The campaign features 12 non-model people from different professions with their favorite products from the collection. These are people chosen on the basis of their peers’ votes. The campaign helped the retailer promote its products among people across various fields such as music, rugby, origami, dance, photography, golf and others. ^[3]

Why This May Not Pay Off?

Although American Eagle Outfitters believes that it is well positioned in terms of product assortments, the initial store traffic during the season remained well below its expectations. ^[4] The timely launch of the spring collection didn’t help as the prolonged cold weather in the U.S. weighed on the demand of spring clothing. During the last week of March, demand for shorts fell by 12% as compared to the same week of the previous year. ^[5] Due to lower customer traffic, American Eagle might face inventory hangover issues that can impact the launch of its summer collection. Also, it may sell its products at heavy discounts to clear its inventory, which will bring down its comparable store sales. Either way, the company’s first quarter results are likely to get affected.

However, Strong Growth In Direct-To-Consumer Channel Can Offset The Impact

The apparel industry in the U.S. is being driven by the sustained growth in direct-to-consumer channel. Historically, players such as Urban Outfitters (NASDAQ:URBN), Abercrombie & Fitch (NYSE:ANF) and Gap (NYSE:GPS) have seen substantial growth in this business. Even American Eagle Outfitters’ own direct revenues increased at an average annual rate of 10%, during 2009 and 2010. Although the growth has been slower than that of its peers, it picked up substantially in 2012. We expect the growth to continue in this quarter as well, getting further boost from the retailer’s strong product offerings

We’ll also keep an eye on the retailer’s progress on its new distribution center and efforts to create a platform for omni-channel capabilities. Omni-channel refers refers to a seamless shopping experience through all the available channels such as physical stores, mobile, Internet, catalog, etc. It enables retailers to engage customers irrespective of the shopping channel they prefer. During the last quarterly results, the retailer stated that it will be implementing a new global enterprise system, which will integrate its point-of-sale system and merchandise system. ^[6]

Efforts To Enhance Customer Engagement Should Help

American Eagle Outfitters employs a number of strategies to attract customers and provide them with the best deals. The retailer uses a 360 degree marketing approach encompassing the social media channel, TV commercials and mobile advertisements. ^[7] Moreover, it is looking to add more product variety at opening-priced, mid-priced and high-priced tiers. ^[7] Striking a balance between these will help the retailer attract customers from different demographics.

American Eagle Outfitters’ reward program aims at increasing store traffic. This program allows customers to earn one reward point per dollar spent at the store or e-commerce website. These points are totaled every three months after which the customers become eligible for discounts. ^[8] Additionally, they are offered a 15% discount on purchases made during their birthday months. Last year, the retailer witnessed a 36% increase in new customer signups for the program. ^[6] Keeping customers interested is the basic rule of retailing and American Eagle Outfitters appears to be doing the right things to achieve this. Together, these strategies should offset the impact of delayed spring season.

Our price estimate for American Eagle Outfitters stands at $27, implying a premium of about 35% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Spring 2013 Designer Inspiration, American Eagle Outfitters, Jan 18 2013 [↩] [↩]
2. American Eagle Outfitters’ Q4 fiscal 2012 earnings transcript, March 6 2013 [↩]
3. American Eagle Outfitters Features Real People In Spring 2013 “Project Live Your Life” Campaign, American Eagle Outfitters, Feb 28 2013 [↩]
4. American Eagle Outfitters Sees Spring Slowdown Coming, Post-Gazette, March 7 2013 [↩]
5. Prolonged Winter Puts Retail Sales In Deep Freeze, CNBC, March 31 2013 [↩]
6. American Eagle Outfitters Q4 fiscal 2012 earnings transcript, Mar 6 2013 [↩] [↩]
7. American Eagle Outfitters’ Q2 fiscal 2012 earnings transcript, Aug 22 2012 [↩] [↩]
8. American Eagle Outfitters’ Reward [↩]