How Important Is American Eagle’s Direct Business?

Increasing rates of internet penetration have facilitated the move from store to web shopping, as well as the proliferation of smartphones and tablets. As a consequence of this movement, American Eagle Outfitters‘ (NYSE:AEO) direct-to-consumer (DTC) business has grown rapidly, from $307 million in 2008, to $975 million in 2016, according to Trefis estimates. The US 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 apparel retailers, including American Eagle, which has been working hard to develop its omni-channel platform, and has shown significant progress so far.

Industry Trends Forcing A Move To The Digital Space

Online retail sales in the US have grown at a rapid pace over the past several years, thanks to growing internet usage in the country. Internet penetration in the US has gone up from 44% in 2000 to 88.5% currently. Furthermore, facilitated by the convenience of constant access, 92% of teens today go online daily, including 24% who are online constantly, according to a study conducted by Pew Research Center. Over half of the teens (aged 13 to 17 years) go online several times a day, aided by the presence of smartphones, which are available to nearly three-quarters of teens. The smartphone usage will only increase in the future, and this will likely result in a steady rise in online sales. This is evidenced by research which predicts online apparel sales in the US to increase its revenue from $63 billion in 2015 to $100 billion by 2019. This segment is considered as the most popular e-commerce category in the US, accounting for 17.2% of total e-retail sales in 2015.

Recent years have been hard for teen retailers, with some even filing for Chapter 11 bankruptcy, such as Quicksilver in September 2015, Pacific Sunwear in April 2016, and Aeropostale in May 2016. Earlier in the year, news also surfaced regarding the shuttering of The Limited. Others have hobbled along, including Abercrombie & Fitch, and Gap Inc. These once sought-after brands, among high school kids in the US, have been blighted as a result of their over-reliance on the footfall at shopping malls, and the rise of fast-fashion brands, such as H&M and Zara. This has led to a number of companies shuttering their stores. Macy’s announced it was planning to close 100 stores or 15% of its fleet. The number for J.C. Penney is 138, while that for Sears has been revised from 42 to a minimum of 150.

Retail analyst Jan Rogers Kniffen told CNBC in May of last year that he predicts 400 of the 1,100 enclosed malls in the US will close in the coming years, and only 250 of the remaining will thrive. The US has 23.5 square feet of retail space per capita, in comparison to 16.4 square feet in Canada and 11.1 square feet in Australia — the next two countries with the highest retail space per capita, according to a Morningstar report from October. Given this statistic, he further noted that the footprint is poised to decline “pretty fast.”

Growth In DTC Segment To Continue

Impressive performance of the DTC segment has been one of the growth drivers for American Eagle in recent quarters. For the company as a whole, the digital sales now account for 26% of the total revenues, up from 19% last year. Effective digital marketing, as well as growth in mobile continued to accelerate growth. Aerie, in particular, has benefited immensely in the online space, resulting in a 47% online penetration in the first quarter, up from 35% in the corresponding period of last year. Given the substantial progress seen in this segment, the company had also launched an exclusive online-only range, which was well received. The company has taken a number of steps to ensure a seamless online experience, which was also an important factor driving the sales. This growth trend is expected to continue in the future. According to Trefis estimates, the company’s online business will continue to grow at a high rate, reaching $1.63 billion by 2023.

In 2017, the company intends to undertake capital expenditure to the tune of $160 to $170 million, roughly half of which is expected to be spent to support the digital business, and omni-channel tools. Given the rise of its DTC business, and the ongoing mall traffic declines, the company also continues to assess its store locations. AEO’s fleet of stores are largely profitable, but it continues to look into cases where the company is over-stored or there is a high likelihood of sales migration. Furthermore, in its entire portfolio of 1,050 stores, 580 come up for lease expiration in the next three years, giving the company the flexibility to implement its aggressive store closure plans.

See our complete analysis for American Eagle Outfitters

Have more questions about American Eagle Outfitters? See the links below:

• Is A Wave Of Consolidation About To Hit The Fashion Retail Industry?
• Excessive Promotional Activities Hurt American Eagle’s Earnings
• Investors Overlooking American Eagle’s Growth Potential

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