American Eagle Outfitters: 2015 In Review

Casual apparel retailer, American Eagle Outfitters (NYSE:AEO) started the year 2015 struggling to find its place in the U.S. apparel market, which was inclining towards fast-fashion retailing. However, the retailer is ending 2015 on a high note, with a turnaround in its merchandise portfolio, customer response and ultimately comparable sales growth. With consistent efforts to revamp its offerings throughout the year, American Eagle finally managed to get its portfolio inline with customer preferences, which was evident from its Q3 results. It even made significant progress on the omni-channel front and expanded its reach into new international markets, thus lowering its operational risk while growing its overall revenue opportunity. In addition, the retailer acquired a small clothing company, in order to diversify its product portfolio and improve its competitive position against fast-fashion giants. Below, we take a look at key developments for American Eagle through the year.

Our price estimate for the company at $17, is more than 5% ahead of the current market price.

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Improved Merchandise Portfolio

American Eagle has traditionally been a retailer for basic logo-bearing merchandise.  But with the growing consumer affinity towards fast fashion brands, it was working proactively to add fashion depth to its portfolio. The retailer strengthened its core product category with more innovation in distinct finishes, fabrics and washes. It made considerable progress in transitioning its product portfolio from basic to fashion and saw notable success. American Eagle simplified its designing system to respond to changing customer tastes quickly and effectively. It removed layers within its design teams, reorganized the structure to implement direct accountability and enhanced its speed sourcing capabilities. One such development on this front was the retailer’s fast-track fashion capsules, in which merchandise moves from design to in-store receiving in just 60 days. By effectively leveraging these changes, the company has been able to improve its performance considerably over the latter half of the year.  Moreover, it can reap further benefits from these changes in the future.

Omni-Channel Progress

For many retailers,  e-commerce is not generating big business, despite continued robust growth. Accordingly, the need for omni-channel retailing has emerged. The entire apparel industry is gradually shifting towards this concept, which appears to be the future of retailing. Over the past couple of years, 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” program has seen tremendous success in driving incremental store traffic. Delivery times have improved to two days or less for more than 90% of its customers. New “state of the art” fulfillment center in Pennsylvania has played an important role in improving capacity and delivery efficiency. These factors, along with several other planned initiatives, make it apparent that omni-channel retailing still remains one of the top priorities for the company and can contribute to growth substantially in the long run.

Successful Marketing 

American Eagle’s seasonal 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 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 was intended to create excitement among customers about the brand’s iconic denim, and it paid off. The campaign was widely promoted over American Eagle’s official Facebook and Instagram page, and goes to show how American Eagle is approaching its marketing for its comeback.

International Expansion

American Eagle has been steadily expanding its reach in lucrative international markets mainly with licensing deals. This year alone, the retailer announced its expansion in Chile, Peru, Singapore, South Korea and Greece. In April, American Eagle entered entered a multi-year licensing deal with Eurofashion Limitada, a leading Chilean company and a division of the Cencosud S.A. Group.  This firm specializes in building international fashion brands and it will open licensed stores in Chile and Peru. In the subsequent month, the company inked licensing deals with SK Networks in South Korea, Trendz 360 in Singapore, and Notos Com Holdings in Greece. American Eagle had 111 licensed stores in 17 countries mid way through the year, and had plans to open a total of 40 such stores in the second half through different deals. By the end of November, the retailer had presence in 22 countries with 140 licensee stores. This makes it clear that American Eagle is on a licensed store opening frenzy, which has been triggered by its weakness in the domestic market. Not only will licensed store expansion bolster American Eagle’s revenues, it will even help in diversifying risks geographically. Good acceptance internationally can even set the precedent for subsequent retail store expansion.

Tailgate Acquisition

Early last month, American Eagle announced the acquisition of Tailgate clothing company and Todd Snyder New York for $11 million in cash and stock. Tailgate operates its own brand of vintage, sports-inspired clothing with a college-town store concept, and Todd Snyder is an upscale menswear brand. American Eagle’s main aim with these acquisitions to was to add distinct brands to its portfolio, in order to further strengthen its position in the market. We believe that these additions will reap benefits for the retailer in the medium to long run, by adding a new revenue stream and providing a diversified portfolio that can draw customers’ attention towards American Eagle stores and away from Zara and Forever 21.

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