American Eagle Outfitters: Why Omni-Channel Was An Inevitable Move

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 shopping and proliferation of smartphones and tablets. From $307 million in 2008, the retailer’s direct revenues increased to $467 million in 2012. Even as the company struggled during fiscal 2013 through a tough retail environment, its e-commerce revenues increased by 13% to $527 million. So far in fiscal 2014, American Eagle has failed to recover from its slump and hasn’t reported its online growth. However, we believe that a steady rise in its e-commerce revenues has continued this year, given the industry-wide gradual shift towards online shopping. 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 the online channel. This is becoming an inevitable move for U.S. apparel retailers, including American Eagle, which is working hard to develop its omni-channel platform and has shown significant progress so far.

Our price estimate for American Eagle Outfitters stands at $13.45, implying a discount of about 10% to the market price.

See our complete analysis for American Eagle Outfitters

Robust Online Growth Explains the Need for Omni-Channel Retailing

Driven by growing Internet usage and proliferation of smartphones and tablets, online retail sales in the U.S. have grown at a rapid pace over the past several years. Internet penetration in the country has gone up from 44% in 2000 to 87% in 2014, and almost 50% of the U.S. population now uses smartphones. ^[1] While Internet penetration is already on the higher side, smartphone penetration is likely to go up to 65% by the end of 2017, which suggests that more buyers will switch to online shopping in the coming years. ^[2] This will ultimately translate into steady online retail sales growth, which is evident from eMarketer’s projections that online apparel sales in the U.S. will grow from $45 billion in 2013 to $86 billion in 2018. ^[3]

The gradual customer shift from store to online shopping has already begun as foot traffic has declined by 5% year over year in almost every month during the last couple of years, but e-commerce sales have grown by 15% year over year every quarter. This transition appears to be a permanent one and hence, it clearly explains why U.S. retailers are in dire need of a solution. Most of them operate a vast store network, which won’t be running at its full capacity in the years to come given the consistent decline in foot traffic. Therefore, several retailers are now looking to integrate their online and stores channels so that they can divert web traffic to stores by providing certain incentives.

Researches Show Most Retailers are Moving Towards the Concept

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. ^[4] 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. ^[5] Given that multichannel shoppers have a tendency to spend more than regular shoppers as they have access to a wider product range and additional discounts, results of these surveys are no surprise.

What’s worth noticing here is that 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. ^[4] This provides a big opportunity for specialty retailers such as American Eagle to take a giant leap towards the development of their omni-channel platform.

American Eagle is Progressing Well with its Omni-Channel Quest

Omni-channel retailing enables the retailers to engage customers irrespective of the shopping channel they prefer. American Eagle has taken several steps towards the development of its omni-channel platform and all of them have shown good promise so far. Its 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.

In its Q1 earnings call, American Eagle had stated that its “buy online and ship from store ” (BOSS) service would be available in 100 stores by the back-to-school season. However, the company went aggressive on its deployment and had 255 stores offering this service at the end of Q2. The retailer reported that its BOSS program has exceeded all expectations, and this might help it operate with fewer markdowns and better inventory utilization in the future. Also, American Eagle has improved its delivery time significantly and it now delivers products in two days or less to more than 90% of its customers. It opened a new “state of the art” fulfillment center in Pennsylvania in July, that has played an important role in improving capacity and delivery efficiency. In addition, American Eagle has several other projects planned that are intended to optimize shopping experience across online and mobile channel. It is in the process of adding new features to its website including 360 degree product view and more on-body product display. The company is relaunching an updated version of its mobile app, that will now run faster and have a better interface.

Considering that the entire industry is shifting towards omni-channel retailing, progressive growth towards this concept is a good news for American Eagle. 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. 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.

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1. Internet usage and population growth, Internet World Stats [↩]
2. Smartphone penetration in the United States from 2010 to 2017, Statista [↩]
3. U.S. Retail Ecommerce Sales Highest for Computers, Consumer Electronics, eMarketer, Apr 11 2014 [↩]
4. Retailers Lag Behind Consumers’ Omnichannel Desires, eMarketer, Dec 18 2013 [↩] [↩]
5. Omnichannel Is The Key For the 2013 Holiday Shopping Season, eMarketer, Sep 10 2013 [↩]