When Jim O'Donnell, CEO of American Eagle Outfitters (NASDAQ:AEOS), gave his Jan. 11 presentation at the ICR XChange conference, he wasted little time in addressing the top issue on investors' minds: how the company expects to continue its strong growth trajectory.
It's the brand, stupid
This Motley Fool Stock Advisor recommendation is a top retailer of jeans, T-shirts, and accessories. The stock doubled in 2006, and it's up 9% so far in 2007.
American Eagle has savvily differentiated its brand from rivals, while displaying adept timing with fashion trends. According to O'Donnell, that's no accident. His company has a "SWAT team" that travels to key trend-setting areas of the globe to get a sense of the next big thing. American Eagle also holds periodic focus groups, and conducts various trips to shopping malls to talk to consumers.
It's a lot of work, but it's absolutely necessary. The company's core demographic of 15-to-25-year-olds demands a certain cool factor. So far, these consumers rank American Eagle No. 3 worldwide, trailing only Nike (NYSE:NKE) and Sony (NYSE:SNE).
The latest big thing for American Eagle: knitwear for men and women. The CEO believes that the category has plenty of upside remaining, and described it as a good "margin producer."
Scaling up
As American Eagle continues to grow, it needs a scalable infrastructure. The company has made significant investments here, installating a ShopperTrak system for real-time tracking of key customer metrics. The company is also installing a new Web-based point-of-sale system, which should greatly improve integration with the company's Web properties.
These technologies should also help with inventory management, a critical skill for retailers, especially those dependent on the latest trends. American Eagle carefully tracks regional customer trends to strategically mark down slower-selling items in areas of the country where they'll most likely get sold, which could help reduce the company's inventory writedowns.
The AE.com web site may be a small part of American Eagle's business at present, but O'Donnell said he's devoting more resources to the property. He sees the dot-com as "more than just a sales channel," considering it an ideal way to connect with customers, especially in a demographic whose members have made technology a part of their everyday lives.
Ready for takeoff
In 2006, new American Eagle stores showed an average return on investment of 70%, while remodeled stores enjoyed an average incremental profit improvement of 53%.
Still, the company realizes that it needs to move into other categories, including its aerie and Martin+Osa brands. While these chains are still small, their results have been encouraging so far. O'Donnell believes that these businesses could generate more than $1 billion in revenues within the next 10 years.
In the meantime, it looks like American Eagle should continue its upward momentum. It's making the right moves on its merchandise mix, branding, and infrastructure. The company's increased focus with its online efforts could create some exciting announcements in 2007.
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Fool contributor Tom Taulli does not own shares mentioned in this article. He is currently ranked 1,623 out of 19,864 in CAPS.
