American Eagle Outfitters ‘pulls itself out of the mire’
Solid revenue increases at American Eagle Outfitters are evidence the self help measures the company has been employing continue to pay dividends.
This is especially so as they have been achieved against the backdrop of a teen fashion market that remains subdued and competitive, and during a quarter when the weather was mostly against apparel retailers.
Key to the transformation of American Eagle Outfitters is a step change in product assortments and in-store execution, especially at American Eagle bannered stores. Compared to a year ago, stores are looking cleaner with a much clearer proposition incorporating a sensible mix of staple and fashion pieces.
In line with changing tastes, the fashion pieces have more subtle branding and detailing, and many are focused on current trends and ‘must have’ seasonal items like parka jackets. These things, along with a notable step-up in the quality of garments, have helped to improve customer interest and conversion rates. This, in turn, is leading to higher sell-through and lower levels of discounting – something that American Eagle Outfitters was previously guilty of relying on to drive volume.
These lower levels of promotional activity have helped American Eagle Outfitters to rebuild its profitability, with net income increasing by an impressive 720 per cent this quarter to just over $74 million. Gains to the bottom line were also driven by store rationalisation and improved cost discipline – all things that will continue to deliver gains as the company moves into the final quarter of its fiscal year and beyond.
The renewed sense of energy and confidence that is present on American Eagle Outfitters’ shop floor is also evident in the boardroom where directors signed off on the acquisition of the Tailgate Clothing Company, which owns and operates Tailgate, a vintage, sports-inspired apparel brand with a college town store concept, and Todd Snyder New York, a premium menswear brand. Both of these businesses are entirely complementary to American Eagle Outfitters in that they have a more premium position and serve a slightly edgier, discerning customer. This is especially so for Todd Snyder which sells sweatpants at $175 and coats for as much as $1995. As niche as this may seem, as the growth of brands like Ted Baker attests, this premium segment of the fashion market is growing rapidly – and we see it as positive that American Eagle Outfitters now has access to this growth.
Moreover, it is positive that the acquisition is one that has been made on the grounds of giving American Eagle Outfitters access to a different part of the market and has been made at a time when the core business is firmly in recovery. This gives us confidence that the transaction has been made for the right reasons and not simply to hide difficulties in the core business.
That said, as much as the new businesses provide significant future opportunities, American Eagle Outfitters does need to ensure that its focus remains firmly on the core. Despite its recent success the market in which it operates remains very difficult and is subject to a number of unhelpful competitive dynamics, including the continued growth of fast fashion brands like H&M and Primark. None of this is to suggest that American Eagle Outfitters cannot continue its run of success, merely that it needs to keep both hands on the wheel if it is to steer a successful course.
This year has been one in which American Eagle Outfitters has managed to pull itself out of the mire. It has emerged as a stronger, leaner player with a much more distinct point of view. We believe that it will build on this progress in the final quarter and beyond. It will do so under the pragmatic and effective leadership of Jay Schottenstein, whose position as interim CEO has now been made permanent.
- Neil Saunders is CEO of retail analyst Conlumino.