American Eagle Updates Its Playbook to Compete With Fast-Fashion

American Eagle Outfitters (AEO +1.23%) reported its first quarter earnings, announcing both a sales decline and lower profitability, continuing its downward trend. In American Eagle's first quarter earnings call, Interim CEO Jay Schottenstein stated "As anticipated, this was a challenging quarter as we faced a number of headwinds. Weakness in demand led to soft traffic and a 5% sales decline. This, combined with elevated inventories, created downward pressure on our margins." 

This challenging first quarter resulted in profit plunging 86% to $3.9 million, and revenue falling 5% to $646 million in comparison to the first quarter of 2013.  

Disappointing sales figures lead to additional store closings
If American Eagle's disappointing financial trend continues, the company will close approximately 150 stores in three years' time. In 2014 alone, the company plans to close 50 American Eagle stores and 20 Aerie brand stores, American Eagle's line of women's casual dorm wear and intimate apparel line.

This means that in the next three years, American Eagle is planning to close approximately 14% of its storefronts. As estimated by American Eagle, these 2014 closures will result in annualized after-tax savings of approximately $10 million to $15 million, beginning in 2015. These 2014 planned store closures appear to be more aggressive than in years past.

American Eagle is not alone in widespread store closures 
American Eagle is not the only teen retailer planning to close a sizable chunk of stores in 2014. Both Abercrombie and Fitch (ANF 0.33%) and Aeropostale (ARO +0.00%) plan to evaluate and close poor performing stores.

Abercrombie's Board of Directors approved the closure of the Company's 24 stand-alone Gilly Hicks branded stores, just over 2% of its overall stores. Similarly to Aerie, Gilly Hicks sells women's intimate and lounge apparel. Restructuring charges associated with the store closures for the full year are estimated to total a whopping $81.5 million.

Aeropostale is set to close a total of approximately 52 stores in 2014, on top of the 49 stores closed in 2013. Of those 52 stores, the company is closing two P.S. from Aeropostale stores which is the company's brand that targets children. Aeropostale started fiscal year 2014 with 949 stores, and the closure of 52 stores means it will close over 5% of its storefronts. 

Additional solutions to improve American Eagle's profitability
In addition to cutting underperforming stores, American Eagle has various other strategies in its playbook to improve its profitability. In order to compete with fast-fashion retailers like Forever 21 and H&M, the company has recently begun testing fast-fashion strategies in 75 stores, around 7% of its overall stores. Mr. Schottenstein estimated that fast-fashion apparel "should probably be 20% to 30% of the business." 

Also in stores, American Eagle said it will continue to cut back on markdowns and promotions, with the hope of boosting its average unit retail price and increasing its margins. This strategy of cutting coupons could either pay off big time for American Eagle, or it could dig its hole even deeper in its struggle for traffic. Cutting some promotional activity could result in higher selling prices for merchandise, but it will likely cost American Eagle valuable traffic. Outside of stores, American Eagle plans to reduce corporate expenses and continue to expand internationally. 

Improving the condition of American Eagle
As stated by Mr. Schottenstein, American Eagle is experiencing a decline in traffic as a result of a weaker than normal demand. If the customers are not buying, then expenses must be cut other places in order to maintain a profitable business model. 

If American Eagle fails to get its business in order, then look for it to  continue to close stores at record pace. American Eagle's plan of closing poor performing stores and cutting corporate expenses seems to be key in its uphill battle to improve company performance.