Fool on Call: American Eagle's Flight Plan

The latest call from Abercrombie & Fitch (NYSE: ANF  ) described the state of the youth apparel retailer's development efforts, including its international strategy and the upcoming launch of an entirely new brand code-named "Concept 5." Now it is rival American Eagle Outfitters' (NYSE: AEO  ) turn. AEO's most recent earnings conference call similarly focused on growth, but its eagle eye seems trained more on new branding opportunities than global markets.

An American abroad?
Aside from a presence in Canada, AEO's footprint outside of the U.S. is much smaller than A&F's. Its e-commerce site does ship goods to 41 countries outside of the U.S., according to AEO's 2006 10-K filing. Those limited online sales may suggest future opportunities abroad, but AEO's management gave me the impression that the company's flagship brand isn't quite ready for a full-scale launch overseas.

I'm guessing that a brand named "American Eagle" faces greater challenges in connecting with international consumers than a more nation-neutral brand like Abercrombie. We should soon know whether I'm right, since CEO Jim O'Donnell promised more definitive information on AEO's international opportunities sometime next year.

Feathering the nest
We can find definitive direction on AEO's growth opportunities for its two newest brands, aerie and MARTIN+OSA. Of the $240 million to $260 million AEO has projected in capital expenditures for this year, most will fund new and renovated American Eagle Outfitters stores, but a growing proportion will spur these new brands' development. The company plans to open just 32 new flagship stores, as opposed to 37 new aerie and 14 M+O locations.

Management is particularly excited about aerie and the opportunity to expand its offerings in women's intimates. While Limited Brands' (NYSE: LTD  ) Victoria's Secret dominates in the upscale side of this biz, the niche for younger women seems open for the taking.

The company sees significant upside for aerie, and it's aggressively pursuing this opportunity. By the end of this fiscal year, AEO plans to have 37 new aerie stores up and running, more three times the current 11 locations. The bulk of this development will come in the second half of the year, with 29 stores planned to open from now until the end of December. Look for the company to add 50 or more aerie sites next year.

Be nice to your little sister
Later in the call, one participant asked how AEO handles aerie's development in proximity to existing American Eagle stores, which also carry aerie merchandise. Susan McGalla, the company's chief merchandising officer, explained that aerie stores are opened in "very strong markets" that can profitably handle both brands' presence. When a new aerie site opens, the existing flagship store pares back its aerie offerings. Keeping limited amounts of aerie goods in flagship stores helps the new brand get attention from the flagship's greater customer traffic.

In addition to rapid store development, aerie is also aggressively expanding its category assortment. By the holiday season, aerie customers will be introduced to a new fitness line, as well as personal-care products including cosmetics.

AEO may be onto something with aerie. According to management, the new brand has enjoyed immediate success, being both "highly productive and profitable from the start." We'll see whether Abercrombie & Fitch's new "Concept 5" turns out to be a retailer dedicated to young women. Aside from this potential threat, aerie appears to have plenty of open field to run in, capitalizing on domestic and international opportunities in this niche market.

Pursuing the 25 to 40 age group
AEO's also targeting the 25 to 40 crowd, currently served by Guess? (NYSE: GES  ) , Polo Ralph Lauren (NYSE: RL  ) , J Crew (NYSE: JCG  ) , A&F's RUEHL, and Gap's (NYSE: GPS  ) Banana Republic. These brands' considerable power might explain why AEO's MARTIN+OSA concept has struggled in its early stages. M+O is expected to be a $0.15 to $0.17 hit on AEO's full-year EPS numbers.

According to the call, management is implementing two strategies to get M+O off on the right foot. First, it's refreshing its merchandise, starting with the fall lineup. Second, it's changing the brand's store development strategy. Initially, M+O stores opened in larger, high profile markets -- right in the middle of all the competitors mentioned above, and many more that aren't. In the future, we should start to see M+O sites popping up in small to mid-sized cities where rivals are fewer. CEO Jim O'Donnell believes the brand can achieve profitability more quickly this way.

2008 is an important year for AEO
AEO is quickly approaching its saturation point in the domestic market, and its international opportunities remain cloudy. The performance of its two newest brands will be critical to sustain AEO's subsequent growth. While aerie seems more or less ready to meet this challenge, MARTIN+OSA remains in doubt. I'm not sure what 2008 holds for American Eagle, but we should find out more in the company's end-of-year conference call.

Further fashionable Foolishness:

American Eagle and Gap areMotley Fool Stock Advisor selections. Gap is also anInside Value pick. Limited Brands is both an Inside Value pick and a Motley Fool Income Investor recommendation. Try any of these market-beating newsletters free for 30 days.

Fool contributor Jeremy MacNealy has a couple of American Eagle Outfitters plaid shorts in his wardrobe, but has no financial interest in it or any other company mentioned. The Motley Fool has a fit and fashionable disclosure policy.


Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 535695, ~/Articles/ArticleHandler.aspx, 10/25/2014 4:13:26 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement