You know that a business story is big news when it makes the front page of my local paper, the Pittsburgh Post-Gazette. OK, so the Penguins and Steelers not playing makes it a slow news cycle, but the Post-Gazette is moving away from any sort of business focus -- the paper just cut out its daily stock price listing and doesn't even publish a Business section on Mondays.
However, American Eagle Outfitters (NYSE: AEO), headquartered here in Steel City, made the front page over the weekend on news that AE President and Chief Merchandising Officer Susan McGalla would step down early next year. Yep, the stock price dropping by double digits definitely got folks' attention around here.
And AE's stock price isn't the only thing on sale lately: The merchandise itself is practically a blue-light special, with clearance prices up to 70% off of original prices. Retail has been a tough sector lately, but why has American Eagle been hit so hard? And the bigger question is whether AE can rebound and take off from the eagle's nest, given that the economy doesn't look to improve any time soon.
Martin + Osa = key to turnaround?
Interestingly, April and May retail sales results have been dominated by higher-end retailers like The Buckle (NYSE: BKE), which rounded up an impressive 35% increase in comps for May, and lower-end retailers such as Aeropostale (NYSE: ARO) with a 6% same-store sales jump. Even luxury retailer Nordstrom (NYSE: JWN) scored a sales increase of 11% last month.
So, folks are still buying, but at extremes. That's why American Eagle's Martin + Osa stores could be a big piece of the company's future success. The "refined casual" look touted by the 22 stores could be the fashion that upscale customers are looking for. While the brand had struggled to determine the right mix of price and merchandise, AE says that same-store sales for Martin + Osa have increased by as much as 50% for stores open for at least a year. Compare this with last month's 9% decline in same-store sales for American Eagle stores, and maybe AE is onto something by targeting high-end consumers.
Eaglet's to the rescue
AE's new "77kids by american eagle" concept, set to start online later this year, also may have potential. While The Children's Place (Nasdaq: PLCE) has struggled for some time, it seems to be bouncing back, along with higher-end Gymboree (Nasdaq: GYMB). Again, higher-end retail specialty products could be the ticket in this market.
In the end, though, AE's fortunes lie with the flagship American Eagle brand, which is going to have to find a way to drive business in a teen market where jobs may be scarce this summer for both kids and parents. Right now, the strategy seems to be to sell as much inventory as possible with prices riding as low as those once-trendy low-rise jeans. American Eagle has always been a moderate retailer: not as pricey as Abercrombie & Fitch (NYSE: ANF), but not as cheap as Aeropostale. The current drastic cut in pricing may work as a stop-gap measure, but it doesn't seem to be a great long-term strategy, especially considering the higher-end brand extensions that AE is working on.
Of course, who knows what the fashionista teenagers will be looking for this fall beyond hoodies and jeans. Back-to-school shopping is only a month or two away and this season will be as competitive as ever with gas prices lingering at $4 per gallon. Departing exec McGalla plans to focus on Martin + Osa for the next few months, which could signal that the new concept is a high or low priority for the company, depending on how you look at it. Either way, American Eagle must deliver some sales spark to pull out of its current spiraling nosedive.
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