American Eagle Outfitters’ Profits Fall But It Still Looks Good For The Long Run

Shares of teen apparel retailer American Eagle Outfitters (NYSE:AEO) fell by more than 5% after its Q4 fiscal 2013 earnings per share missed the consensus estimates and it issued a conservative guidance for the first quarter. The retailer’s earnings per share for the fourth quarter remained low at 5 cents, which was well below the expected figure of 26 cents. Also, its revenues declined by almost 7% to $1.04 billion due to weak consumer spending and low store traffic on account of extreme cold. For the entire year, American Eagle’s revenues fell by 5% and its operating income stumbled by 47%. ^[1] Throughout fiscal 2013, the company struggled for growth due to the sluggish economic environment, low brand loyalty, weak mall traffic, missed fashion calls and fierce competition from fast fashion brands such as Forever 21 and H&M.

While American Eagle expects to continue facing challenges in the first quarter due to extreme weather, we believe that its growth can pick up gradually. The retailer’s efforts to improve its brand image can yield fruitful results as it has been one of the most popular teen apparel brands in the past. As the company is strengthening its omni-channel platform to provide a seamless shopping experience, its store and web traffic should improve going forward.

A while back, American Eagle’s CEO Robert Hanson made a surprising exit from the company. Although the reason for his departure is not clear, interim CEO Jay Schottenstein stated that the company is searching for a new CEO.

Our price estimate for American Eagle Outfitters stands at $18.88, implying a premium of about 45% to the market price. However, we are in the process of updating our model in light of the recent earnings release.

See our complete analysis for American Eagle Outfitters

American Eagle Is Looking To Revamp Its Brand Image

Over the past year, American Eagle has seen its brand falter in the U.S.,burdened by its over-emphasis on basic products, its missed fashion calls and limited fashion variety. As a result, teenage buyers have developed a perception that American Eagle brand is no longer “cool”. Even the company recognized that its merchandise assortments and the overall customer shopping experience were not well received during the holiday quarter. Therefore, American Eagle had to use heavy markdowns to attract customers and clear its holiday inventory. ^[1]

However, the company is working very hard to rejuvenate its brand image by specifically focusing on product design and marketing. Despite its weak connection with the customers, some of American Eagle’s products such as denim still remain very popular. Recently, music icon Shakira wore American Eagle jeans in Women’s Health magazine, which somewhat defines its popularity. ^[1] We believe that the company has an opportunity to leverage such products to better drive its topline growth.

American Eagle is looking to strengthen its product assortments with more innovation in distinct finishes, fabrics and washes. Moreover, the inclusion of Chad Kessler (new chief merchandising and design officer) in the designing system is expected to bring some fresh and relevant changes to the brand’s merchandise. The retailer is also looking to enhance its focus on accessories and outerwear, which were de-emphasized last year. Additionally, American Eagle is organizing certain marketing events such as AE Real People and Aerie’s Real campaign to engage its customers in an appealing manner. ^[1] We expect these efforts to have a positive impact on American Eagle’s brand image going forward. However, the retailer will have to show consistency in delivering season- and trend-relevant products.

Omni-Channel Efforts Will Help Store And Web Traffic

Even though American Eagle’s store business struggled last year, its e-commerce revenues increased by double digits. ^[1] However, since e-commerce accounts for only 12%-13% of the company’s revenues, it did not have a sufficient impact on the results. Therefore, American Eagle is looking to leverage its strength in the online channel to enhance its store sales. The retailer 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, and drive greater web and store traffic.

Last year, American Eagle implemented Teradata CRM system, which builds 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. Additionally, American Eagle introduced the pilot of its ship-from-store program last year and will expand it further by this fall season. Its new distribution center will open this summer, which will enable the retailer to have a single pool of inventory. ^[1] 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. ^[2]

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. American Eagle even has the opportunity to gain a competitive advantage since the current landscape of omni-channel retailing is not well-developed in the U.S. According to eMarketer, retailers have been inefficient in coping 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. ^[3]

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1. American Eagle’s Q4 fiscal 2013 earnings transcript, Mar 11 2014 [↩] [↩] [↩] [↩] [↩] [↩]
2. ShopKick Starts 100-Store iBeacon Trial For American Eagle, Biggest Apparel Rollout Yet, Techcrunch, Jan 16 2014 [↩]
3. Retailers Lag Behind Consumers’ Omnichannel Desires, eMarketer, Dec 18 2013 [↩]