American Eagle Outfitters Banks On Store Consolidation And Omni-Channel To Improve Its Store Productivity

-33.16%
Downside
25.59
Market
17.11
Trefis
AEO: American Eagle Outfitters logo
AEO
American Eagle Outfitters

American Eagle Outfitters‘ (NYSE:AEO) mainline brand revenue per square feet (RPSF) improved consistently from $434 in 2009 to $521 in 2012, as disciplined inventory control and a balanced pricing strategy helped it deliver trendy and affordable merchandise that resonated well with customers. In addition, the retailer’s 360 degree marketing strategy and loyalty rewards programs bolstered its brand image in the U.S., building a strong and  loyal customer base. However, in 2013, the company’s RPSF crashed to $469, as U.S. buyers shunned American Eagle for fashion-forward brands such as Zara & Forever 21. American Eagle was unable to attract customers, due to its perseverance with basic products and off-pitch fashion calls. Adding to the retailer’s problems, the entire U.S. apparel industry struggled last year due to weak consumer confidence and changing spending patterns.

We expect American Eagle’s RPSF to decline further this year, as it didn’t report promising results in the first two quarters. However, we believe that this figure might have bottomed out, and hence will show some recovery in the future, backed by the company’s store consolidation strategy, online growth and omni-channel development. During its Q1 earnings call, American Eagle unveiled plans to close 150 underperforming stores in the next few years. By closing stores that do not account for significant traffic, American Eagle will be able to improve its store productivity. Over the past few years, the retailer’s direct-to-consumer business (which mainly includes e-commerce) has grown rapidly, despite its overall struggle. Last year, the company integrated its online channel with its stores channel, in the wake of industry wide shift towards omni-channel retailing. Since then, it has made significant progress on this concept. Overall, growth in online sales and incremental store revenues on account of omni-channel retailing  should push American Eagle’s RPSF up.

Our price estimate for American Eagle Outfitters stands at $13.45, implying a premium of about 5% to the current market price.

Relevant Articles
  1. Will Q4 Results Help Extend The 14% Gain In American Eagle Stock Since Beginning of This Year?
  2. American Eagle Stock Up 32% Over Last Twelve Months, What’s Next?
  3. Can American Eagle Stock Return To Pre-Inflation Shock Highs?
  4. American Eagle Stock Has Upside Potential To Its Pre-Inflation Peak
  5. American Eagle Outfitters Stock To Likely Trade Higher Post Q1
  6. American Eagle Stock Looks Undervalued

See our complete analysis for American Eagle Outfitters

Omni Channel

With e-commerce not turning into a big business for many retailers despite continued robust growth, 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 15 months, 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” pilot program has helped it attract those customers, who could have shied away from the retailer if the inventory pool wasn’t integrated across all the channels. The initial roll out was slow, but the company soon went aggressive on its deployment. In its Q1 earnings call, American Eagle had stated that this service would be available in 100 stores by the back-to-school season. However, it had 255 stores offering this service at the end of Q2.

The retailer reported that its BOSS program has exceeded all expectations, and this might help it operate with fewer markdowns and better inventory utilization in the future. Also, American Eagle has improved its delivery time significantly and it now delivers products in two days or less to more than 90% of its customers. It opened a new “state of the art” fulfillment center in Pennsylvania in July, that has played an important role in improving capacity and delivery efficiency. In addition, American Eagle has several other projects planned that are intended to optimize shopping experience across online and mobile channel. It is in the process of adding new features to its website including 360 degree product view and more on-body product display. The company is relaunching an updated version of its mobile app, that will now run faster and have a better interface.

All these efforts, along with the anticipated growth in online apparel sales, are likely to help American Eagle improve its revenue per square feet going forward.

Store Consolidation

American Eagle operates a vast network of over 900 mainline stores in the U.S. While such a presence enables the company to encompass a large customer demographic, it also increases the chances of self-cannibalization. There also exists a possibility that the retailer operates certain stores in regions where foot fall is significantly lower than what the stores can handle. Under such situations, stores do not operate at their full capacity, which results in low RPSF and higher SG&A expenses. Since American Eagle is already struggling to attract customers due to low brand loyalty, it is planning to close under-performing stores to offset the impact of low store traffic.

In its Q1 earnings call, American Eagle’s management stated that it has identified 150 stores to close in the next three years out of its 300 stores whose lease will expire by 2017. By shutting stores that do not run on their full capacity, American Eagle will be able to reduce its square footage at a faster rate than its revenue decline. This will result in an improvement in its revenue per square feet. However, the company cannot close stores beyond a certain limit, as it needs to have a store network capable enough to support its omni-channel needs. Hence, we believe that American Eagle will continue to open stores simultaneously at lucrative locations, and might not close any more stores after it is done with these 150 outlets.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research