American Eagle Tween Strategy

American Eagle Outfitters 2004-2006 Prepared by Andrew Jenkins, Rotman School of Management, University of Toronto 2003

American Eagle (AE) Logic Outline

S tatus: AE has experienced continued growth in sales, store count and overall square footage

C hange: Despite that growth, AE has seen declines in key financial measures such as ROE, Comparative Store Performance (COMPS) and gross margin

Q uestion: What must AE do to combat those trends?

A ction: AE must enter the Tween market (approximate ages 8-12)

1. The market is attractive

2. American Eagle is well positioned to succeed in the market

3. This strategy avoids past mistakes made by American Eagle and its competitors

S C Q A 1 2 3

AE’s aggressive expansion in overall square footage and number of stores have been the key drivers for Sales and EBITDA growth in the past five years… Source: Annual Report S

AE and its major competitors have seen highly positive 5YR Cumulative Average Growth Rates with the exception of The Gap…. S Source: Multex Investor 22.75 30.10 Pac Sun 32.80 25.06 Abercrombie & Fitch -1.31 17.31 The Gap 33.73 29.75 American Eagle EPS Sales Company 5 YR Percentage Growth In

Despite growth in Sales, AE has seen declines in ROE and Comparative Store Performance (COMPS)…. C Source: Annual Report

AE Gross Margin has also declined despite continued company growth…. C Source: Annual Report

AE’s and its major competitors have performed poorly with returns to shareholders over the past five years…. C Source: Annual Reports

AE and it’s major competitors have also seen declines in gross margins…. C Source: Annual Reports

What must American Eagle do to combat those trends? Q

American Eagle must enter the Tween market because….

1. The market is attractive

2. American Eagle is well positioned to succeed in the market

3. This strategy avoids past mistakes made by American Eagle and its competitors

A 1 2 3

The Tween Market is attractive because it is the fastest growing and largest market segment….

4 million kids enter their tweens every year

19-and-under group is 78.2 million > 77.8 million baby boomers

12 and under spent $27.9 billion of their own money and influenced another $248.7 billion

Source: USA TODAY 2000 & DSN Retailing Today 2002 1

American Eagle is well positioned to face the existing market forces in the Tween market…. AE’s Unique Brand difficult to duplicate AE’s Economies of Scale takes time to achieve Unlikely to launch their own unique brand Large market with large amount of choice Many competitors in the marketplace but AE has desired brand at value prices compared to competitors 2 Suppliers: Low Rivalry: MODERATE Buyers: Strong Substitutes: Low New Entrants: LOW

By building on its core strengths in the specialty retail sector, AE will succeed in entering the Tween market…. BRAND = BIGGEST STRENGTH VALUE PRICING ADVANTAGE VS COMPETITORS MARKET POSITION - #3 WITH 28% MARKETSHARE 2

AE’s focus on Ladies and Tweens will offset the softness in the men’s business which is also industry-wide. When times are tough, it is women and children first and men last…. INVEST & GROW TWEENS FIX MENSWEAR INVEST & GROW LADIES Mens Ladies Tweens Weak Medium Strong Business Strength Medium High Market Attractiveness Low 2

Entering the Tween market avoids past mistakes made by American Eagle and its competitors….

Skewing merchandise to mature market didn’t work

Non-logo’d and fashion-focused merchandise were too serious and did not meet the consumers brand desires or aspirations

Tween line would not cannibalize existing business unlike the Gap and Abercrombie have experienced with some of their spinoffs

3

AE’s menswear contribution is declining and Tween merchandise would complement the already growing ladieswear category- a combination responsible for The Gap’s recovery and Abercrombie’s core focus… 3

The Tween market strategy builds on existing market presence….

Tween Merchandise replaces slow selling goods on the sales floor

Tween inventory requires less square footage thus maximizing sales per square foot

Launching Tween goods in existing stores reduces costs and leverages the loyalty and trust of existing customers

3

American Eagle must stabilize menswear, invest in and grow Ladies and Tween merchandise and, if successful, consider spinning off Tween focused stores…. PROFIT TIME Horizon 1 Horizon 3 Horizon 2 Stabilize menswear If successful, consider spinning off Tween focused stores as competitors have done Long-term Immediate Short-term Invest in and grow Ladies and Tween merchandise

What can AE expect to see as a result of pursuing the Tween Market?

Assuming:

- continued growth in sales (6.5%)

- continued management of growth in COGS and SG & A (9% and 2.5% respectively)

AE can expect an average of 2% annual growth in gross profits and a recovery in EBITDA with an average 1% annual growth

Pursuing the Tween Market will help sustain 6.5% annual growth in Sales for the next three years….

Continued cost management at 9% annual growth in COGS will lead to growth in Gross Margin…. 2002-2003 Source: Annual Report

Holding SG & A growth at 2.5% will result in EBITDA recovery…. 2002-2003 Source: Annual Report

To combat the declines that AE is experiencing, the mandate for the AE Board and Management is to authorize the pursuit of the Tween Market

Next steps?!

Appendix- Logic Framework Status Change Question 1 st Support Message Main Message 2 st Support Message 3 st Support Message American Eagle has experienced continued growth in sales, store count and overall square footage Despite that growth, American Eagle has seen declines in key financial measures such as ROE, Comparative Store Performance (COMPS) and gross margin What must American Eagle do to combat those trends? American Eagle must enter the Tween market This strategy avoids past mistakes made by American Eagle and its competitors - Merchandise Mix - Has worked for competitors - Builds on existing market presence Audience: Board/Senior Management at American Eagle Audience: Formal; friendly; action bias; primary decision maker. They know they need to take some type of action but previous measures have proven to be missteps Goal: Reach agreement on the seriousness of the situation and get approval for launch into Tween Market. American Eagle is well positioned to succeed in the market

Competitive Forces

Core Strengths

Business Strength vs Industry Attractiveness

The market is attractive - 4 million kids enter their tweens every yr. - 19-and-under group is 78.2 million > 77.8 million baby boomers - 12 and under spent $27.9 billion of their own money and influenced another $248.7 billion