American Eagle Can’t Fly in a Tough Retail Environment

In an industry that emphasizes increasing annual sales, American Eagle Outfitters (NYSE: AEO  ) missed the boat and so did its competitors.  American Eagle, which was once considered the king of teen and twenty-something retail, recently announced that its total net revenue for the 13-week fourth quarter of the 2013 fiscal year decreased 7%. Additionally, at the end of the 2013 fiscal year, the company reported a quarterly profit of $10.5 million, which was down from $94.8 million in the prior year. 

A tough macro-environment
Fashion retailers had a tough 2013, especially during the holiday season. The nasty winter weather that hit most of the country this year appears to be a key reason for the winter sales slump. Consumers did not flood the malls like they usually do, as foot traffic in retail locations was down in November and December. It is theorized that in addition to the winter weather discouraging customers from visiting retail locations, e-commerce has kept many customers out of stores. According to a widely used traffic counter, overall foot traffic at retail stores was down 15% during the 2013 holiday season.

Retail trends
Many retailers, including American Eagle's main competitors Abercrombie & Fitch  (NYSE: ANF  )  and Aeropostale  (NYSE: ARO  ) , attempted to combat the lack of traffic by offering deep discounts and deals for customers. For example, American Eagle said its earnings plummeted as its sales declined and its margins narrowed as it offered a substantial number of promotions and discounts. Near Black Friday and Christmas, the retailer discounted its entire store inventory by 50% during select time periods. While these types of blowout sales strategies may have lured in some additional traffic for the retailers, each item they sold made less of a difference for them.

Where is American Eagle struggling?
The retailers' operating incomes appear concerning. For example, American Eagle's operating income fell from $395 million in 2012 to $141 million in 2013 for a whopping 64% drop.  Investors often use operating income to assess the general prosperity of a company, so a drop that big has extreme significance because the company has less money available for its shareholders, expansion plans, debt reduction, and other important business objectives.

American Eagle versus the competition
As the table below shows, these companies each display some level of financial decline. Unless they have new tricks up their sleeves, they may be in for depressing rides.

Company

2012 Operating Income

2013 Operating Income

Percent Change

American Eagle Outfitters

$394.6 million

$141 million

-64%

Abercrombie & Fitch

$381.6 million

$222.8 million

-42%

Aeropostale

$59.5 million

-$185.2 million

-411%

The future of fashion retail
In order for these fashion retailers to remain relevant, they will need to anticipate trends and offer on-trend products for low and attractive prices. Today's teens are very fashion-conscious and they will hunt down the best fashion options they can find at the best prices. American Eagle, Abercrombie & Fitch, and Aeropostale must find new and innovative ways to get consumers back in their stores to purchase products that will provide sufficient returns for their shareholders. Until they can solve that problem, business will be an uphill battle for American Eagle and its competitors.

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