Did Dismal Sales Growth Push American Eagle Outfitters’ CEO Towards Exit?

Soon after its disappointing holiday results, teen apparel retailer American Eagle Outfitters (NYSE:AEO) announced that CEO Robert Hanson was leaving the company. This move came as a surprise as Hanson’s contract was not over and he had formulated some valuable strategies for the retailer’s turnaround. American Eagle’s Executive Chairman of the Board, Jay Schottenstein, was named interim CEO. ^[1]

The real reason behind Hanson’s departure is not clear, but we believe that weak holiday results might have pushed the company to take some decisions. However, the change of CEO might not be the best option as Robert Hanson’s strategy was exactly what the company needed. Highly fashion conscious and fickle U.S. teenage buyers have lost their interest in American Eagle Outfitters, which has weighed heavily on its sales in 2013. Hanson was planning to reinvigorate the brand perception by adding a greater variety of trend- and season-relevant products. Such a strategy has helped a number of retailers such as Gap Inc (NYSE:GPS), Urban Outfitters (NASDAQ:URBN), Forever 21 and Hennes & Mauritz, and might have worked for American Eagle as well. However with Hanson’s exit, the company’s turnaround strategy becomes somewhat uncertain. We believe that Jay Schottenstein should pick up from where Robert Hanson left.

Our price estimate for American Eagle Outfitters stands at $18.88, implying a premium of about 35% to the market price.

See our complete analysis for American Eagle Outfitters

Why Is American Eagle Struggling?

Lately, U.S. buyers have shown low brand loyalty as they have been readily shifting to brands that provide relevant fashion at affordable prices. American Eagle has been at the receiving end of this trend due to its missed fashion calls, over-emphasis on basic products, and limited fashion variety. As a result, teenage buyers have developed a perception that American Eagle brand is no longer “cool”. On the other hand, retailers such as Gap Inc and Urban Outfitters have seen tremendous success by offering a vast variety of trendy products, in line with the changing seasons.

In a press release last month, American Eagle stated that its comparable store sales during the holiday season declined by 7% on top of 5% growth in the comparable period last year. The company also slashed its EPS guidance for the fourth quarter saying that it is expected to be near the lower end of its previous guidance of $0.26-$0.30. At that time, Robert Hanson had stated that the company’s sales were mainly impacted by the promotional environment in the U.S., resulting from weak consumer confidence and low store traffic. ^[2] Moreover, American Eagle was unable to grab a sizable share of low consumer spending on apparel.

What Strategies Was The Company Employing?

We believe that American Eagle was moving in the right direction even though its results suggested otherwise. The company had started laying a greater emphasis on its fashion products that were inline with changing customer taste. Hanson and team were making several efforts on this front, such as keeping smaller inventories of broader assortments, hiring Chad Kessler as the chief merchandising and design officer, increasing speed-to-market, employing a flexible design system, etc. Recently, Robert Hanson had stated that he was confident about American Eagle’s inventory management and his efforts to adapt to the changing retail landscape. ^[2]

Given the consumer behavior in the U.S., we believe these efforts were well-directed. With buyers not being too loyal to any particular brand these days, it might not be difficult for American Eagle to change its brand perception gradually by consistently offering appealing products. The company has seen healthy growth in the past (2011 & 2012) and we believe that it can relive those days.

Hanson’s Departure Was Surprising

Robert Hanson joined American Eagle in 2012 with a three year contract. His strategy for the business’ revival, which appeared to be the right way to go, was yet to be tested. Hence, the news of his departure surprised many including several analysts at Wall Street. ^[3] It is likely that the CEO was under a lot of investor pressure due to the company’s dismal performance in 2013, the year in which its stock stumbled by almost 35%. Such a situation came up with Abercrombie & Fitch‘s (NYSE:ANF) CEO Mike Jeffries as well, who was criticized for his company’s declining sales and failed strategies.

We believe that American Eagle should continue working on the set of strategies formulated by Robert Hanson. That is the only way the company can rejuvenate its business.

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1. American Eagle Outfitters Names Jay Schottenstein Interim CEO, American Eagle Outfitters, Jan 22 2014 [↩]
2. American Eagle Outfitters Provides Fourth Quarter Update, American Eagle Outfitters, Jan 9 2014 [↩] [↩]
3. American Eagle Outfitters Should Hunt Elsewhere, The Wall Street Journal, Jan 23 2014 [↩]