American Eagle Outfitters‘ (NYSE:AEO) operates its American Eagle and Aerie stores’ in North America, and its direct-to-consumer channel globally. Since its American Eagle stores account for more than 75% of total revenues, it is the most important business segment for the retailer. In 2011, American Eagle stores generated $2.52 billion in revenues and $500 million in EBITDA. The retailer’s overall revenues and EBITDA were $3.16 billion and $686 million respectively.  In this analysis, we will discuss how the retailer makes money through these stores and what strategies it follows for improving its sales.
How Do American Eagle Stores Make Money?
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All of American Eagle Outfitters’ American Eagle stores are in the U.S. and Canada. As of fiscal 2011, the retailer operated around 920 stores in these two countries.  Through these stores, the retailer offers its own brand of high quality and trendy clothing, accessories and personal care products at affordable prices while targeting 15-25 year old customers. The American Eagle collection includes standards such as jeans and graphic T’s, as well as essentials such as accessories, outerwear, footwear, basics and swimwear.
Store Consolidation Strategy
American Eagle Outfitters operated around 920 stores at the end of 2011, down from 946 in 2009.  The company closed some stores since it felt that the U.S. market was getting saturated. With this consolidation, the retailer intends to improve its store productivity. For instance, the retailer operated 934 stores in 2010 with an average revenue per square feet of around $440. However, in 2011 while the store count came down to 920, the revenue per square feet increased to about $470 with an overall revenue growth of 1.4%.  We expect American Eagle Outfitters to further close down a few number of stores. Its competitor, Abercrombie & Fitch (NYSE:ANF), is also following a similar strategy by discontinuing its under-performing stores. Aeropostale (NYSE:ARO), on the other hand, still seems to be expanding in the U.S. market.
How Is The Retailer Boosting American Eagle Stores’ Sales?
American Eagle Outfitters is looking to increase its comparable store sales with a combination of fashion responsiveness, successful marketing and balanced pricing. Additionally, the retailer is also taking steps to improve the in-store shopping experience. American Eagle Outfitters successfully launched new fashion in its main categories such as denims, knit-tops, shorts and colors in Q2 fiscal 2012.  The success was driven by an increase in the variety of products, alteration and addition of designs such as new heritage fits, new washes, color palette, prints and patterns. In the third quarter, the retailer further added new styles, fits, colors and treatments to its apparel range.  It also maintained the strength in its core denims and bottoms by adding the prevailing trends.
American Eagle Outfitters is following a 360 degree integrated marketing plan, including the TV commercials and advertisement on mobile phones. The retailer has advertised through a number of social media partners as well. Amid the highly promotional teen apparel industry, the retailer is looking to add more product variety in the mid-price and the opening-price tier.  The retailer has started offering Wi-Fi and tablets (for browsing through the products) in its top performing stores. The tablets will also enable the customers to use the retailer’s e-commerce platform within the stores. We believe that such additions will enhance shopping experience and subsequently drive more traffic.
The aforementioned strategies have helped American Eagle Outfitters report substantial increase in its comparable store sales. In the first three quarters of fiscal 2012, its comparable store sales increased by 17%, 7% and 8% respectively. 
Our price estimate for American Eagle Outfitters stands at $25, implying a premium of about 15% to the market price.Notes:
- American Eagle Outfitters’ SEC filings [↩] [↩] [↩] [↩] [↩]
- American Eagle Outfitters’ Q2 fiscal 2012 earnings transcript, Aug 22 2012 [↩] [↩]
- American Eagle Outfitters’ Q3 fiscal 2012 earnings, Nov 28 2012 [↩]