Why Is Omni-Channel Imperative For American Eagle Outfitters?

With growing Internet penetration, a consistent customer shift from store to web shopping and the proliferation of smartphones and tablets, American Eagle Outfitters‘ (NYSE:AEO) direct-to-consumer business has grown rapidly. From $307 million in 2008, the retailer’s direct revenues increased to an estimated $560 million in 2014. However, despite this growth, e-commerce has failed to translate into a big business for the company, and other retailers have confronted the same issue. In fact, several retailers across the market have lost more due to a fall in foot traffic than they have gained from incremental online sales. 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 $16, implying a discount of about 5% to the market price.

See our complete analysis for American Eagle Outfitters

American Eagle Needs Omni-Channel Because Online Is The Future

Online retail sales in the U.S. have grown at a rapid pace over the past several years, thanks to growing Internet usage in the country. Internet penetration in the U.S. has gone up from 44% in 2000 to 87% in 2014, and over 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 64% by the end of 2017, which suggests that an increasing number of buyers will shift to online shopping in the near future. ^[2] This is likely to result in a steady rise in online retail sales, which is evident from eMarketer’s projections that online apparel sales in the U.S. will grow from $52 billion in 2014 to $86 billion in 2018. ^[3]

U.S. buyers are rapidly shifting from store to online shopping, with foot traffic declining in mid-to-high single digits in almost every month for the past couple of years. 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.

American Eagle Is Jogging Towards Its Omni-Channel Goals

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.

American Eagle reported that its BOSS (buy online ship from store) program has exceeded all expectations, and this might help it operate with fewer markdowns and better inventory utilization in the future. Also, the retailer 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 2014, 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 the online and mobile channels. It is in the process of adding new features to its website, including 360 degree product viewing and more on-body product display. The company has relaunched an updated version of its mobile app, that will now run faster and have a better interface. Also, the store consolidation and simultaneous factory channel expansion are helping American Eagle right-size its store fleet from the point of view of omni-channel retailing. Factory outlets, offering products at relatively cheaper prices, can attract more buyers and serve as fulfillment centers for online orders at the same time.

Considering that the entire industry is shifting towards omni-channel retailing, progressive growth towards this concept is 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 [↩]