American Eagle Outfitters Beginning To Get Things Right

American Eagle Outfitters (NYSE:AEO) is among those casual apparel retailers in the U.S. that have struggled over the past couple of years due to their over-reliance on basic logo merchandise and an industry-wide decline in foot traffic. There was a time when American Eagle brand was popular among the American youth, who gleefully bought its logo t-shirts, jeans, hoodies and shorts. However, with the emergence and growth of fast-fashion brands, buyers’ interest shifted to affordable fashion-forward merchandise, which negatively impacted sales at American Eagle, Aeropostale (NYSE:ARO) and Abercrombie & Fitch (NYSE:ANF).  Moreover, not one of  these firms has been able to proactively respond to this changing trend.

Now, American Eagle is beginning to show some signs of improvement. Its has returned to positive sales growth and even its gross margins have started to expand. This can be attributed to the fact that the company has finally identified the right mix for its merchandise portfolio. The retailer had started the year 2014 with a number of problems that were centered on the fact that its product portfolio had a limited fashion variety and its online channel was insufficiently sized, but it improved considerably half way through the year. In fact, in the fourth quarter of 2014, American Eagle offered an updated merchandise variety in a better store environment, which resonated well with customers, allowing the company to operate with fewer markdowns and attract new customers.

Our price estimate for the company at $14.07, is about 15% below the current market price.

See our complete analysis for American Eagle Outfitters

Merchandise Portfolio Gets Better

A number of casual apparel retailers in the U.S. are working on their merchandise range to strengthen their footing against fast-fashion players such as Zara and Forever 21, but they haven’t seen any significant success so far. However, American Eagle has shown small signs of improvement in its merchandise portfolio and it even has results to show for it. During the fourth quarter of 2014, the company was able to operate with fewer discounts, which is evident from its gross margin improvement and rise in average retail prices. American Eagle’s mainline brand’s improvement was driven by better styles as well as proper inventory management that negated the need for markdowns. The management specifically mentioned in the earnings call that high attention to detail and innovation helped the sales of core categories such as knit tops, women’s denim, sweaters, men’s pants and accessories. Aerie was a standout performer, delivering 13% growth in comparable sales during the quarter driven by strength in PJ’s and soft bottoms. Although American Eagle is still far from establishing itself as a fashion retailer, we believe that it is several steps ahead of its counterparts such Abercrombie & Fitch and Aeropostale. The company just needs to sustain this control over merchandise design and pricing, and proactively identify changing customer preferences, in order to deliver the best merchandise.

Marketing Campaigns Show Success

American Eagle’s last season marketing campaign (termed #AEOLiveMEGAzine) was a big success. It allowed the company to engage customers in a more interactive manner with the use of social media platforms. Through this campaign, the retailer encouraged potential buyers and followers to express themselves by sharing music and dance they love over Instagram. Taking a step further in encouraging buyers to express themselves, American Eagle recently launched the #AEOLiveEXpress campaign in tandem with its ripped jeans collection launch, asking buyers to place temporary tattoos on their skin visible through the holes in the jeans. This innovative idea is intended to create excitement among customers about the brand’s iconic denim. The campaign is being widely promoted over American Eagle’s official Facebook and Instagram page. ^[1]

Innovation and creativity in marketing is something that apparel retailers desperately need. It helps in brand building and strengthens a retailer’s position in the market, which ultimately gets customers running to its stores and websites. Victoria’s Secret has done this exceedingly well over the years and retailers such as Zara and Forever 21 are thriving on their “fast-fashion” brand image. Before its merchandise goof ups, even Urban Outfitters (NASDAQ:URBN) was riding swiftly on its preppy and eclectic brand image. American Eagle may well be on its way to recovering its lost brand essence, but it needs to be consistent and patient and should not try anything that does not suit its iconic brand image. Aeropostale tried that once and failed terribly.

Several Ongoing And Upcoming Omni-Channel Initiatives

In addition to improvements in its product portfolio, American Eagle is progressing very well towards the development of its omni-channel platform. Some of the priorities for the company in 2015 are to sustain the growth momentum in digital sales, deploy new omni-channel initiatives and progress further on the existing ones. The retailer plans to launch a localized website for the U.K. this year and will soon introduce its redesigned site for the domestic market. It is working on enhancing the online product variety for American Eagle and Aerie, and also planning to roll-out new POS (point of sales) systems across the U.S. store network to enable mobile checkout and enhance customer security. Also, American Eagle is looking to add a “reserve online” service to its existing omni-channel tools such as “buying online”, “ship from store” and “store to door”. ^[2] Although American Eagle appears to be moving swiftly in its omni-channel quest, it is unlikely to see any significant results in the near future, given the small size of its online business. However, omni-channel development is a marathon rather than a sprint, and American Eagle appears to be moving swiftly.

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1. American Eagle Outfitters fills customers’ ripped jeans with tattoos, Marketing, Apr 27 2015 [↩]
2. American Eagle Outfitters’ Q4 fiscal 2014 earnings transcript, Mar 4 2015 [↩]