American Eagle and Abercrombie & Fitch Compete for Younger Shoppers

Specialty retailers American Eagle (NYSE:AEO) and Abercrombie & Fitch (NYSE: ANF), having both established strong positions in the 18 to 24 year-old youth apparel segment, are now fighting for the hearts and wallets of even younger shoppers.

Abercrombie & Fitch sell’s children’s apparel under the brand name “abercrombie kids,” and intimate apparel for young women under the brand “Gilly Hicks.” American Eagle’s competing brands  are “77kids” for children and “Aerie” for young women’s intimate apparel. Here’s how the competition is shaping up:

Two companies, two different marketing plans

American Eagle sells its apparel at much lower price points than Abercrombie & Fitch and also makes heavy use of promotional discounting.  Abercrombie & Fitch maintains its premium brand image by not lowering prices, even in weak economic environments. Abercrombie & Fitch thrived during the early part of the past decade. But during the recent economic downturn, many  of Abercrombie & Fitch’s more affluent customers shifted to American Eagle.

American Eagle’s youth brands make more money…

Coming out of the recent economic downturn, aerie & 77kids stores were able to overtake Gilly Hicks & abercrombie kids stores’ revenue per sq. ft., with the spread increasing to around $100 by the end of 2009.

As we move out of recession, growth  in the luxury segment is likely to outpace the value segment, where demand tends to be less sensitive to economic cycles. This is an area of leverage for Abercrombie & Fitch. If Gilly Hicks and abercrombie kids manage to surpass aerie & 77kids in revenue per sq.ft and reach the $500 mark towards the end of our forecast period, it would mean an additional 5-6% upside to the $53.34 Trefis forecast for Abercrombie&Fitch’s stock.

But Abercrombie has more stores

Today there are more Gilly Hicks & abercrombie kids stores than aerie & 77kids stores. But we expect the number of aerie & 77kids stores to grow rapidly during our forecast period. This is mostly because the American Eagle brand has more mass appeal, giving the company more geographic options than Abercrombie & Fitch when it comes to new store locations. If the total number of aerie & 77kids stores surpasses the number of Gilly Hicks & abercrombie kids outlets to reach about 450 stores by the end of the Trefis forecast period, it would mean an additional 5-6% upside to the Trefis price estimate of $25.70 for American Eagle’s stock.

You can see the complete $53.34 Trefis forecast for Abercrombie&Fitch’s stock here. And check out our complete $25.70 forecast for American Eagle’s stock here.