American Eagle To Close 150 Stores Following Dismal Results; Omni-Channel Progress Looks Good

American Eagle Outfitters‘ (NYSE:AEO) troubles continued in Q1 fiscal 2014 as its comparable sales declined by 10% and revenues fell by 5% on account of weak demand due to economic uncertainty and unfavorable weather. Because of weak sales growth and heavy promotional activities, the company’s net income plummeted to $3.87 million or $0.02 per share from $27.98 million or $0.14 per share in the same quarter last year. Store traffic remained low throughout the quarter, which has been one of the main problems for American Eagle over the last one year. Although the retailer has been trying hard to convince its customers that the brand is still “cool”, its efforts haven’t yielded desired results.

With its top line growth getting arduous, American Eagle has started focusing on shielding its bottom line growth. During the earnings call, the company unveiled plans to close 150 stores in the coming three years, which can help it reduce operating expenses and ameliorate overall store productivity. ^[1] While revenue growth will be under tremendous pressure, closing stores that do not generate significant foot traffic will help the company improve its operating margins. To diminish the intensity of revenue decline, the company is aggressively pushing its omni-channel platform that bridges the gap between online and store space, and helps improve same store sales. American Eagle has deployed several strategies on this front in the past, which have been progressing rapidly and exhibiting tremendous promise.

Our price estimate for American Eagle Outfitters stands at $16.77, implying a premium of close to 60% 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

Store Consolidation To Help Productivity

American Eagle operates a vast network of over 900 mainline stores and close to 130 Aerie stores in the U.S. While such presence enables the company to encompass a large customer demographic, it also increases the chances of self-cannibalization. There also exists a possibility that the retailer operates certain stores in regions where foot fall is significantly lower than what the stores can handle. Under such situations, stores do not operate at their full capacity, which results in low revenue per square feet and higher SG&A expenses. Since American Eagle is already struggling to attract customers due to low brand loyalty, it is planning to close under-performing stores to offset the impact of low store traffic.

In its earnings call, American Eagle’s management stated that it closed six  American Eagle and 14 Aerie stores during Q1 and will close another 70 stores (50 AE and 20 Aerie) in 2014 upon lease expiration. Overall, the company has identified 150 stores to close in the next three years out of its 300 stores whose lease will expire by 2017. ^[1] Closing stores that do not account for significant traffic will help American Eagle improve its operating margins as well as revenue per square feet. This can boost the retailer’s cash flow, which will ultimately have a positive impact on its stock price.

Progressive Omni-Channel Efforts Can Help Revenue Growth

Even though American Eagle’s store business is struggling, its e-commerce revenues are growing in double digits. However, since e-commerce accounts for only 12%-13% of the company’s revenues, it does not have a sufficient impact on the results. Therefore, American Eagle is gradually switching to omni-channel retailing to leverage its strength in the online space to enhance its store sales. The company has taken several steps towards the development of its omni-channel platform and all of them have shown good promise so far. American Eagle’s buy online and ship from the store pilot program have helped it attract those customers, who could have shied away from the retailer if the inventory pool wasn’t integrated across all the channels. ^[1] At present, the retailer ships directly from 50 stores and it plans to take this count up to 100 in the back-to-school season. Moreover, its new fulfillment center scheduled to open in July, is expected to enhance its capacity and reduce delivery time. ^[1]

In addition, American Eagle has several other projects planned that are intended to optimize shopping experience across online and mobile channel. It plans to introduce several updates for online websites throughout the year that will improve product display and navigation. Later this summer, the retailer will launch a new mobile app with better functionality and faster speed. ^[1] Progressive growth towards omni-channel retailing is a good news for American Eagle considering that the entire industry is shifting towards this concept. This will not only allow the company to remain competitive in the market, but will also help it enhance its product visibility among tech savvy shoppers.

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1. American Eagle Outfitters’ Q1 fiscal 2014 earnings transcript, May 21 2014 [↩] [↩] [↩] [↩] [↩]