How Factory Channel Expansion Fits In American Eagle’s Omni-Channel Goals

With the entire U.S. apparel industry gradually adopting omni-channel retailing, even American Eagle Outfitters (NYSE:AEO) is closing underperforming stores to align its domestic store fleet with its omni-channel goals. It is simultaneously replacing these outlets with factory stores at strategic locations that have been identified to minimize self-cannibalization and maximize efficiency of the omni-channel model.

With physical store retailing gradually waning, American Eagle is looking to earn more through the online channel, with its store network acting as fulfillment centers in addition to catering to incoming store traffic. The retailer has realized that its factory outlets can do a better job in attracting customers than its mainline stores, as they offer merchandise at cheaper prices. Hence, the retailer is expanding its factory network simultaneously to its mainline store closures.

Though revenue per square feet earned through factory stores is relatively lower, the company believes that they can drive greater traffic, which can subsequently boost its brand visibility and reach. Besides, the company is ultimately shooting for omni-channel retailing, and factory stores can perform the supporting role equally well. Considering these two factors, factory stores appear better equipped for American Eagle’s omni-channel model than its full-price stores.

Our price estimate for the company at $15.28, is about 10% below the current market price.

See our complete analysis for American Eagle Outfitters

However, the retailer may not increase its factory store count relative to its full-price store count to a large extent (currently they don’t contribute much and American Eagle does not report the figure), as this can have a significant negative impact on overall revenue per square feet and gross margins. Therefore, the company is trying to balance between the two formats, as it consolidates its mainline network and grows its factory channel. American Eagle opened 39 factory stores in 2013 and a sizable portion of 60 stores opened in 2014 comprised of factory outlets. The company closed 49 full-price stores last year.

Why Omni-Channel Is An Important Move For American Eagle

From $307 million in 2008, American Eagle’s direct revenues increased to an estimated $556 million in 2014. 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.

Research has shown that around 84% of the retailers worldwide believe that creating a consistent customer experience across channels is very important. ^[1] 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, the research’s results are not surprising.

With foot traffic across the industry plummeting, it makes sense for retailers such as American Eagle to leverage their vast store network to enhance their online sales. However, to narrow its expenses and have an optimum presence in the country in-line with its omni-channel model, American Eagle is consolidating its mainline brand network. Last year, the retailer unveiled plans to close 150 stores by 2017.

How Factory Channel Fits In

Simultaneous to its mainline store consolidation, American Eagle is aggressively expanding its factory network, in order to drive greater traffic amid an industry-wide lull. Across the market, buyers have scaled back their spending on apparel and hence, cheaper products in factory stores are likely to entice them. Therefore, continuous expansion of this format can have a positive impact on overall customer traffic. In fact, American Eagle has mentioned in its earnings call that factory stores have performed very well so far.

When it comes to acting as fulfillment centers for online orders, American Eagle just needs an outlet at the right location – either full-price or factory. In a way, store consolidation and factory channel expansion are helping American Eagle right-size its store fleet from the point of view of omni-channel retailing. We believe that American Eagle’s factory network is a vital component of its omni-channel model. A few years down the line, the factory network can become a notable part of the company’s overall store fleet, in our view.

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1. Retailers Lag Behind Consumers’ Omnichannel Desires, eMarketer, Dec 18 2013 [↩]