American Eagle Outfitters’ Omni Channel Initiatives Should Help It Remain Competitive

Over the past few years, American Eagle Outfitters‘ (NYSE:AEO) direct-to-consumer business (which mainly includes e-commerce) has grown rapidly, driven by the increasing popularity of online retailing. From $307 million in 2008, the retailer’s direct revenues increased to $467 million in 2012. Even as the company struggled during fiscal 2013 due to the tough retail environment, its e-commerce growth remained positive. American Eagle’s online sales increased by 24% in the first quarter, 11% in the second quarter and 17% in the third.

Despite this growth, e-commerce hasn’t turned into a big business for the company, which has been the case with other retailers as well. In response, the U.S. apparel industry is gradually shifting towards omni-channel retailing, which refers to providing a seamless shopping experience across stores and online channel. This is becoming an inevitable move for U.S. apparel retailers, including American Eagle that is working hard to develop its omni-channel platform.

Some reports suggest that multichannel customers have a tendency to spend more than regular customers. Response to this concept has been so strong that retailers are actually struggling to fulfill customer demand. Therefore, we believe that developing its omni-channel platform should be among American Eagle’s top priorities. With its aggressive push towards this concept, the company can utilize its vast store presence to take advantage of the boom in the online retail market. More importantly, it will help American Eagle to remain competitive in the U.S. market where most retailers are adopting multichannel retailing.

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

Apparel Industry Is Shifting Towards Omni-Channel Retailing

The U.S. apparel market is highly saturated with a number of established chains and private label players sparring over prices, quality, fashion trends, and other aspects of the business. Such a competitive environment has limited the room for growth for apparel players, forcing them to focus on alternate channels such as e-commerce. However, despite the retailers’ efforts and the surge in online retail sales, e-commerce has not grown into a big business for several players, including Gap Inc (NYSE:GPS), Aeropostale (NYSE:ARO), Guess (NYSE:GES) and also American Eagle Outfitters. The direct-to-consumer business accounts for just 12% of Gap’s revenues, 9% of Aeropostale’s revenues and 13% of American Eagle’s revenues.

Since online business isn’t getting big, retailers are now looking to leverage customers’ online shopping interest to enhance store sales. According to a survey conducted by Retail Systems Research (RSR) in June 2013, around 84% of the retailers polled worldwide believed that creating a consistent customer experience across channels was very important. ^[1] Moreover, multichannel shoppers have a tendency to spend more than regular shoppers as they have access to a wider product range and additional discounts. Therefore, investing in omni-channel retailing is quite essential for U.S. retailers. An Edgell Knowledge Network survey suggested that a majority of retailers in North America are planning to ramp up their consumer mobile initiatives over the next two years. ^[2]

However, the current landscape of omni-channel retailing is not well-developed in the U.S. According to eMarketer, retailers have been inefficient in coming up with multichannel shoppers’ demands. The RSR survey found that less than one in five respondents reported full synchronization in the 13 most important aspects of omni-channel strategy. ^[1] This provides a big opportunity for American Eagle to completely develop its omni-channel platform ahead of its peers and gain a competitive advantage.

American Eagle’s Push Towards Multichannel Retailing

Omni-channel retailing refers to a seamless shopping experience through all the available channels such as physical stores, mobile, Internet, catalog, etc. It enables the retailers to engage customers irrespective of the shopping channel they prefer. American Eagle is making substantial investments to improve and upgrade its technology and is working on implementing its global enterprise system. This Oracle-based system will integrate its point-of-sale and merchandise system, providing customers with a consistent shopping experience across channels. The flexible system will allow the retailer to respond much faster to changing needs of the business. ^[3] Overall, this will help the company drive greater store as well as web traffic.

Last year, American Eagle implemented Teradata CRM system, which will build a foundation to support personalized customer data. The company also launched the IBM Sterling Order Management System, which provides a single view of demand & supply, customized fulfillment process and a single source of order information. ((Sterling Order Management, IBM)) This system will allow American Eagle to strike a balance between order promising and fulfillment, thus improving customer satisfaction. The retailer stated that this initiative will drive greater inventory utilization and will be incremental to sales. American Eagle’s new distribution center in Pennsylvania, which is expected to be operational by mid 2014, will enable it to directly ship products to U.S. customers within two days. Earlier this year, the company announced that it will install Apple‘s (NASDAQ:AAPL) iBeacons in 100 of its stores. This technology sends push notifications (discounts and offers) to iPhone users when they are inside a retailer’s stores. American Eagle’s seriousness about its omni-channel platform is evident from the fact that this iBeacon rollout is the biggest ever in the apparel market history. ^[4]

While the retailer has enjoyed strong growth in its e-commerce business over the past several quarters, its store business has struggled due to missed fashion calls. We believe that by strengthening its omni-channel platform, American Eagle will be able to garner significant customer attention over the Internet, and subsequently divert its web traffic towards its stores. Over time, this can help the company improve its store sales and better anticipate customers’ tastes. Moreover, with almost all the retailers moving towards this retailing concept, it will allow American Eagle to remain competitive.

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1. Retailers Lag Behind Consumers’ Omnichannel Desires, eMarketer, Dec 18 2013 [↩] [↩]
2. Omnichannel Is The Key For the 2013 Holiday Shopping Season, eMarketer, Sep 10 2013 [↩]
3. American Eagle Outfitters’ Q1 fiscal 2013 earnings transcript, May 22 2013 [↩]
4. ShopKick Starts 100-Store iBeacon Trial For American Eagle, Biggest Apparel Rollout Yet, Techcrunch, Jan 16 2014 [↩]