The Slow Death of an American Brand

When the chips were down, American Eagle Outfitters failed to find a way to make things work.

May 22, 2014 at 6:00PM

There are all sorts of reasons to invest in a business -- and none of those reasons seem to apply to American Eagle Outfitters (NYSE:AEO) anymore. The teen retailer reported its first-quarter earnings yesterday and got a cold shoulder from the market. Sales, gross margin, operating margin, earnings per share, and cash on hand all fell over the same period a year ago.

The American Eagle brand is being overshadowed by the few remaining strong teen retailers like Gap (NYSE:GPS) and Urban Outfitters' (NASDAQ:URBN) Anthropologie brand. American Eagle's long focus on basics has worn thin, and the strength of the logo is no longer carrying the company.

The death of the American Eagle brand
American Eagle rested on its laurels for too long. In this same period back in 2010, American Eagle had something going on. Comparable sales were on the rise and the business was expanding. Back then, the company had made a strong move into denim, taking away a chunk of disaffected customers from Gap, whose brand was down and out.

Now the tables have been flipped and Gap is the one trying to ride the denim wave. Gap's denim has been a constant point of focus for the company and has ended up being one of its strongest performers. Meanwhile, American Eagle has been out of the denim race and is now trying to work its way back in.

Across the rest of the store, American Eagle's brand simply isn't pulling its weight. Compare that to the Anthropologie brand, which has been keeping Urban Outfitters happy for the past year. Comparable sales at Anthropologie have been the one redeeming quality in Urban's portfolio. In the quarter reported last week, the company's eponymous brand had a 12% drop in comparable sales, but Anthropologie managed an 8% increase. Anthropologie is a brand that's showing the kind of strength that American Eagle would kill for.

The future of American Eagle
From here on out, it's a tough road for American Eagle. The constant drop in sales means that the business can't even get its footing to try to make some sort of concerted effort. Instead, it's spending all its energy on staunching the bleeding. That's the reason gross margin has taken a hit -- falling almost 4 percentage points this quarter.

American Eagle is working in a promotional environment to try to get customers back through the front door, but the customers are seeing constantly discounted merchandise, driving the brand's value down even further. It's a horrific cycle for a retailer, and it's difficult to break free from.

American Eagle's biggest opportunity may be in culling its biggest losers in order to make the business leaner and more concentrated. In this earning announcement, the company said that it would close 150 of its 1,057 locations over the next three years. If the rest of the company can keep its head above water that long, we may finally see some good news from American Eagle -- but I'm not going to bet on it.

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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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