3. seeing decline.
terms of revenue and profit in recent years, it is
important to remember that it has remained profitable. In order
to better understand the company's
performance, it must be looked at in the context of the US
apparel retail market as a whole, as well as the
performance of its closest competitors, namely A&F, Gap,
H&M, and Inditex. When AEO's performance is
analyzed in this light, the picture does not appear as gloomy as
a cursory glance at the numbers may suggest
and, in some instances, the company has outperformed the
market and/or its peers. This, however, suggests
that what really drives AEO's performance is its own strategic
decision making, and the company must be wary
of the effect of markdowns, both financially and on its brand
image.
ng 2013 and erratic performance in recent
years have caused the company and its
management to undertake some soul searching and acknowledge
the need for change. The company has been
forced to take stock, analyze its practices and react. In early
2014, CEO Robert Hanson abruptly left the
5. American Eagle Outfitters: shrinking giant
...............................................................................................
........................... 6
What is American Eagle Outfitters?
...............................................................................................
.................................. 6
American Eagle Outfitters: a brief history
...............................................................................................
...................... 6
American Eagle Outfitters financial results
...............................................................................................
....................... 7
American Eagle Outfitters: Financial performance FY2010-2013
.................................................................................... 9
Robert Hanson's turnaround plan brings short-term results
......................................................................................... 9
American Eagle Outfitters: Financial performance FY2014
...........................................................................................
10
Markdowns reducing profit margins
...............................................................................................
............................ 10
AEO must target the trend of affordable fashion
...............................................................................................
......... 10
Not all performance factors are within AEO's control
6. ....................................................................................... ........
.. 10
AEO's financial results in context
...............................................................................................
....................................... 12
Menswear and womenswear markets in the United States
...........................................................................................
12
AEO's own strategies are what really drives performance
......................................................................................... 14
AEO compared to its competitors
...............................................................................................
................................... 14
Supermarkets and discount retailers a growing force
...............................................................................................
..... 16
AEO reacting to need for change
...............................................................................................
....................................... 18
CEO Robert Hanson resigns
...............................................................................................
.......................................... 18
AEO exits the childrenswear market
...................................................................................... .........
............................... 19
Strategic store closures and openings
...............................................................................................
7. ............................ 19
Renewed focus on e-commerce
...............................................................................................
..................................... 20
Improving brand image
...............................................................................................
................................................... 20
Conclusions
...............................................................................................
........................................................................ 23
AEO must limit markdowns and return the brand to its former
glory .............................................................................. 23
Appendix
...............................................................................................
............................................................................ 24
Definitions
...............................................................................................
....................................................................... 24
Sources
...............................................................................................
.......................................................................... 24
Further Reading
............................................................................... ................
.............................................................. 25
Ask the analyst
...............................................................................................
............................................................... 26
11. graphic t-shirts, footwear, personal care products and
accessories. These products are sold under American Eagle
Outfitters and aerie brand names. The company has grown
rapidly to become a multi-billion dollar business on the New
York Stock Exchange (NYSE) and a leader in the field of
youth/young adult fashion.
As of February 1, 2014, the company operated 944 American
Eagle Outfitters stores and 122 aerie stand-alone stores.
The company also had 66 franchised stores operated by its
franchise partners in 12 countries and the company's online
retail operation ships to 81 countries.
AEO clothing has typically targeted the 15-25 year old
demographic and has long been seen as the go-to for young
adults seeking affordable fashion in the US. Operating in this
space puts AEO in direct competition with a number of
major apparel retailers such as Abercrombie & Fitch (A&F),
Forever 21, Gap, H&M, and Inditex.
American Eagle Outfitters: a brief history
The first AEO store opened at the Twelve Oaks Mall in Novi,
Michigan in 1977 and specialized in apparel and
accessories for the great outdoors. It was not until 1990 that the
company introduced the private-label merchandise for
which it has since become famous, and it was this move that
12. catapulted AEO to the point that it undertook an IPO and
started floating on the NASDAQ stock exchange in 1994.
1998 saw AEO commence online retail operations using the
portal ae.com and, in the following year, it opened its first
flagship store in downtown San Francisco. The dawn of the new
millennium signaled something of a growth spurt as
AEO opened its 500
th
store in 2000 and in 2001, saw revenues surpass the $1bn mark.
2001 and 2003 saw AEO open
stores in Canada and Hawaii, its first outlets outside mainland
US and, in 2006, the company launched a new brand,
aerie, aimed at women and specializing in underwear.
In the same year, AEO was ranked number one in the US in
jeans sales among 15-25 year olds above all other specialty
retailers. Furthermore, according to the company's website,
AEO was also named as the number one brand college
students cannot live without in 2006, demonstrating the fashion
retailer's success in attracting and retaining its key target
demographic.
In 2007, the company listed on the NYSE and, the following
year, it entered the childrenswear market by offering its
newly-established 77kids online. 2009 witnessed the opening of
14. SOURCE: Donna Alberico for The New York Times M A R K E
T L I N E
American Eagle Outfitters financial results
In terms of both revenues and profit, AEO has experienced
mixed fortunes in recent years, with growth for the financial
years ended in January 2012 and 2013 being bracketed by
falling revenues and net income in FY2011 and FY2014. The
results for FY2014 are of particular concern as they are far from
insignificant and follow what seemed to be the success
of CEO Robert Hanson's turnaround strategy. Table 1 shows the
company's revenues and net income for the period
2010-2014.
Table 1: American Eagle Outfitters Inc. revenues, net income
and growth FY2010-2014 ($m, %)
2010 2011 2012 2013 2014
Revenue ($m) 2,991 2,968 3,120 3,476 3,306
Growth (%) -0.8% 5.1% 11.4% -4.9%
Net Income ($m) 169 141 152 232 83
Growth (%) -16.8% 7.9% 53.0% -64.3%
17. 3000
3500
4000
2010 2011 2012 2013 2014
$
m
Revenue ($m) Growth (%)
SOURCE: Company Filings M A R K E T L I N E
Figure 3: American Eagle Outfitters Inc. net income and net
income growth FY2010-2014 ($m, %)
169
140.6
151.7
232.1
82.9
-16.8%
7.9%
53.0%
20. was brought in and tasked with returning AEO to growth.
Robert Hanson's turnaround plan brings short-term results
Hanson had overseen a period of growth at Levi Strauss & Co.
that had seen revenues grow by 8% during his tenure as
Executive Vice President and President of Global Levi's and
Randal Konik, an equity analyst at investment bank
Jefferies, described Hanson as heading up a management team
that was 'best-in-class' at AEO.
Hanson came in with a clear turnaround strategy that primarily
revolved around offering fashion items that were more 'on-
trend'. Hanson felt that AEO's product lines were failing to
attract shoppers, which in turn was necessitating heavy
markdowns. Upon assuming the role of CEO, Hanson stated that
he felt AEO required sharper styles in store so as to
negate the need for heavy markdowns. Furthermore, by
delivering products that meet the needs of fashion conscious
teenagers, AEO would be better able to compete with the likes
of A&F (particularly its highly successful Hollister brand)
and fast fashion retailers, such as Inditex's Zara and Forever 21.
Hanson's opinion was that some of AEO's 'store fleet' had
become tired and was in need of investment. The company
therefore earmarked significant funds for an overhaul of some
of its stores, some of which revolved around the idea of
21. improving operational efficiency. The most notable example of
this was the decision to set aside $250m to invest in new
point-of-sale (POS) and merchandise planning tech.
Improvements in these areas are often targeted by apparel
retailers
as a way of conveying what is and what is not selling well, as
well as reducing inventory. Inditex's Zara chain of stores
excels in this field, going so far as to cease manufacture of
unpopular lines.
Realizing the importance of e-commerce in an increasingly
omnichannel retail environment, Hanson also placed an
expansion of AEO's online retail operation at the forefront of
his plan. The company began construction of a new
distribution center in Hazleton, Pennsylvania to replace the
existing site in Warrendale, Pennsylvania, a site which the
company's 2014 10-K describes as 'not physically or
geographically capable of supporting the company's long-term
expansion goals.'
Hanson's turnaround plan worked in the short term, as revenue
for the financial year ended January 2013 increased
11.4% and net income grew 53% to hit $232.1m. Total
comparable sales increased 9% year-on-year, with positive
comparable sales in all quarters of the year.
For the year, AEO brand comparable sales increased 7%, aerie
23. AND IS NOT TO BE PHOTOCOPIED Page | 10
American Eagle Outfitters: Financial performance FY2014
AEO's revenue growth, increased net income, improved profit
margins and clear strategy impressed investors and,
during FY2013, the company's share price rose 41.1% to
$20.21. The optimism proved short-lived and, during the course
of the following financial year, the company's share price
declined by 28.3%. Although this was better than long-standing
rival A&F (declined 30.8% during the same period), that is
hardly a ringing endorsement. The reason for this sharp fall?
Disastrous financial results that saw revenues fall 4.9% and,
more importantly, net income plummet 64.3% as the
company returned to a policy of heavy markdowns.
Much of the good work of the previous year was undone in
FY2014 as Hanson's turnaround strategy stuttered and
external factors, particularly the freak cold weather in late
2013, took effect. Total comparable sales for the 52 week year
decreased 6% over the corresponding 52 week period in the
previous year, with negative comparable sales in all
quarters. AEO Brand comparable sales decreased 7% and sales
of the specialist women's aerie brand fell 2%.
Markdowns reducing profit margins
The issue that Hanson had most vowed to fight upon becoming
CEO, markdowns, also reared its head. What Konik
24. refers to as 'a promotional war zone' was in evidence with many
retailers seeing increased evidence of consumer
brinksmanship, i.e. consumers waiting for markdowns before
purchasing, resulting in a lower gross margin and a
scramble for a share of wallet. AEO's gross margin decreased
630 basis points to 33.7%, compared to 40.0% the
previous year and net income margin fell markedly from 6.7%
to 2.5%, an all-time low for AEO. The company attributes
510 basis points of this decline to markdowns, showing the huge
impact this trend is having.
While it is true to cite margin erosion as a key cause of net
income decline, it is also important to note that the volume of
clothing sold by the company actually decreased too. In its SEC
10-K filing for the financial year ended January 2014, the
company refers to store transactions falling in the 'mid single-
digits' and units per transaction falling by 'low single-digits.'
Although the company does not elaborate on this decline, it is
evident that the company's issues do not lie solely with
pricing and that there is an immediate need to boost sales
volumes by offering 'on-trend' fashion that appeals to the key
young adult market.
AEO must target the trend of affordable fashion
In order to appeal to its target demographic, AEO must prove
25. that it is capable of tapping into changing consumer trends.
The most obvious change in terms of the fashion industry is a
diminishing of brand/label importance. Young consumers
with little disposable incomes (such as the students AEO
primarily targets) have shown a shift away from brand
consciousness in recent years, eschewing it for fashionableness.
Nowhere has this been more evident than in Europe,
where discount clothing retailer Primark has expanded rapidly.
Primark specializes in cheap, fast fashion and operates over 250
stores across Europe. In April 2014, the chain – which
is owned by Associated British Foods – announced a surge in
half-year revenues and profits. Revenue for the 24 week
period ended March 1, 2014 for Primark was up 14%, to
£2,278m (approximately $3,561m), while a 13.1% increase in
operating margin contributed to a 26% rise in operating profit
for the same period (£298m/$465.8m). This clearly shows
that young adults are willing to forego expensive, prestigious
labels for cheaper garments provided they are 'on-trend.'
The bad news for AEO and its competitors across the Atlantic is
that Primark has announced plans to enter the US
apparel retail market in 2015, starting with an ambitious 70,000
sq. ft. store in Boston, thus expediting the already urgent
need for them to adapt and focus on affordable, on-trend
clothing.
28. and the company must be wary of the effect of markdowns, both
financially and on its brand image.
Menswear and womenswear markets in the United States
For all the talk of heavy discounting and falling volumes in the
US apparel retail market, the two sectors in which AEO
operates, menswear and womenswear, have actually seen
consistent growth, with the former outperforming the latter in
recent years. Consequently, AEO's revenue growth does not
appear to be closely linked to the market's overall
performance but is rather more dependent on the strategic
decisions the company's management takes.
Figures 4 and 5 show the recent performance of both the US
menswear and womenswear markets according to
MarketLine data.
Figure 4: US menswear market revenues and growth 2008-2013
($bn, %)
96.4 98.4
101.2
111.1
119.2
126.9
0%
32. n
Revenue ($bn) Growth (%)
SOURCE: MarketLine: Womenswear in the United States M A
R K E T L I N E
As these figures show, both the US menswear and womenswear
markets continued to grow even during the height of the
recession in 2008/2009. Where it has been consistent in terms of
uninterrupted revenue growth, AEO has been anything
but, with growth in FY2012 and FY2013 bracketed by decline in
FY2011 and FY2014. What is noticeable however, is that
in some of the years in which AEO did record increased sales, it
registered a higher increase than the market as whole.
In other years, its growth was lower and, in 2009, AEO saw
decline while the menswear and womenswear markets
continued to grow. Figure 6 compares the revenue growth of
AEO to that of the US menswear and womenswear markets
between 2008 and 2013.
Figure 6: Growth of AEO's revenues vs. US menswear and
womenswear markets, 2008-2013 (%)
0%
5%
34. AEO's fortunes, it seems that what AEO does in terms of in-
house strategy has a greater bearing. In 2012, Robert
Hanson assumed the role of company CEO and implemented a
turnaround strategy that primarily revolved around
offering fashion items that were more 'on-trend', improving
operational efficiency, and reducing markdowns. In the short
term, the company was highly successful in these aims,
particularly the latter as gross margin grew by 330 basis points
to 40.0% (36.7% the previous year). It is no coincidence that
the success of a more 'on-trend' product range with
something of a fast fashion feel came in 2012 when, in terms of
growth, AEO easily outperformed the market. In 2013,
when AEO returned to the damaging habit of significant
markdowns (gross margin fell 630 basis points to 33.7%), its
growth was lower than that of both the menswear and
womenswear markets.
What AEO risks by pursuing a policy of significant markdowns
is a devaluation of its brand. By reducing prices to shift
inventory, the company is contributing to consumer
brinksmanship as buyers will know there is a sale coming soon.
This
sends out a message that the company does not have great faith
in its product and pricing. AEO also risks inhabiting the
no-man's land between premium and cheap: if it continues to
discount heavily, it will lose brand cachet and a premium
35. image, but will still not be able to compete with large general
merchandisers and supermarkets such as Target and Wal-
Mart. AEO must therefore decide whether it wishes to compete
with such retail giants at the low end of the market, or
whether it wishes to retain a more premium image and compete
with 'on-trend' youth and fast fashion retailers such as
A&F, Gap, and Inditex.
AEO compared to its competitors
A look at AEO's recent results in isolation paints a somewhat
gloomy picture with the need for heavy markdowns
negatively impacting both revenue and profits. However, for a
truer picture of the company's performance, its results
must be compared to those of its peers. Figures 7 and 8 compare
AEO's revenue and net income growth to its closest
competitors and these show that AEO's performance is, with the
exception of FY2014, very similar to its peers.
Furthermore, even in FY2014, its performance is actually better
than that of A&F. Please note that to make this
comparison meaningful, AEO's financial years ended January
have been used for the previous year, i.e. January 2014 =
2013 growth as 2013 accounts for 11/12 of that period.
37. 40%
50%
60%
70%
80%
2011 2012 2013
American Eagle
Abercrombie & Fitch
Gap
H&M
Inditex
SuperGroup
SOURCE: Company filings M A R K E T L I N E
As Figure 7 shows, SuperGroup outperformed the market
significantly in 2011 and 2013, but it is important to note that
SuperGroup's revenues are much lower than the other five
retailers shown (roughly one sixth of AEO's), meaning that
any noticeable rise in sales will have a greater impact. When
compared to what is traditionally seen as its closest
38. competitor, A&F, AEO's performance does not seem as bad as it
perhaps does from a cursory glance at the financial
statements. A&F's growth in 2011 far outstripped that of AEO
but, once Hanson's turnaround strategy was implemented
in 2012, performance was similar, with AEO's growth slightly
exceeding that of its rival. The two continued to track each
other in 2013 with both seeing falling revenues. This explains
why AEO and A&F saw share price drops of 28.3% and
30.8% respectively during the course of 2013.
When compared to the so called 'big-three' of Gap, H&M, and
Inditex, AEO's performance also appears better than upon
initial glance. In 2011, only Inditex saw stronger revenue
growth and, in 2012, AEO outperformed all of its rivals.
However, as AEO returned to a policy of significant markdowns
in 2013, its revenues declined while Gap, H&M, and
Inditex all saw growth.
40. Gap
H&M
Inditex
SuperGroup
SOURCE: Company filings M A R K E T L I N E
As Figure 8 illustrates, an analysis of net income growth paints
a similar picture. Only Inditex saw stronger growth in
2011, while AEO was only bested by A&F in 2012. However in
2013, only A&F (77%) saw a bigger fall in net income than
AEO's 64.3% as both companies suffered from the effects of
heavy discounting, most notably A&F's '50% off our entire
inventory' sale during holiday season 2013. Interestingly, 2013
saw all of these retailers, with the exception of Gap,
record either decline (AEO, A&F), or growth of less than 2%
(H&M, Inditex, SuperGroup). Gap fared much better with net
income growth of 12.8%, but even this represented a significant
fall from the 36.3% registered a year earlier.
The erratic growth performance of these leading specialist
apparel retailers suggests that they are struggling to come to
terms with cautious consumers, and that their offerings may no
longer be quite what the majority of consumers are
41. seeking. However, with the combined menswear and
womenswear market in the US growing by 4.4% in 2013, there
is
growth to be gained, thus casting doubt on some of the
companies' claims of reduced spending and adverse weather
ruining the market. The question is: who is providing the great
threat to these specialist apparel retailers?
Supermarkets and discount retailers a growing force
With many of these large, global specialist apparel retailers
underperforming the market in 2013, other retailers must be
accounting for growth. In the US, the biggest threat to the likes
of AEO, A&F, and Gap is coming from large supermarket
and discount retail chains like Wal-Mart and Target Corporation
(Target), both of whom have become significant players
in the US apparel retail market.
In FY2013, 7% of Wal-Mart's revenues were derived from the
sale of apparel, while at Target, it was 19%. Interestingly,
these percentages have remained unchained in 2011, 2012 and
2013, but as both these companies have increased
overall revenues over that period, their apparel businesses are
growing.
43. from apparel sales by these companies (Wal-Mart's is over 10
time greater than AEO's total revenue) show that they are
serious players in the market.
Where these companies have excelled is in tapping into
changing customer trends and sentiment. Cost-conscious
shoppers have become less concerned about labels and more
interested in fashionable, affordable clothes and the likes
of Wal-Mart and Target have succeeded in satisfying this need.
Target in particular stocks a mix of well-known brands, such as
Converse, Dickies, and Levi's, and its own exclusive
Target labels like Merona and Mossimo. These are all
competitively priced as Target leverages its significant buyer
power. Wal-Mart does offer some well-known brands like Fruit
of the Loom and Wrangler, but also has a significant
number of own brands including George, Faded Glory (basic
menswear and womenswear and Wal-Mart's primary
clothing brand), No Boundaries (affordable fashion aimed at
AEO's core teenage market), and Simply Basic (women's
casualwear).
A quick look at Wal-Mart's offering reveals the problem faced
by the likes of AEO. A quick search conducted on the
supermarket chain's e-commerce site for the No Boundaries
brand reveals 239 items priced between $0 and $20, and
45. analyze its practices and react. In early 2014, CEO Robert
Hanson abruptly left the company with many observers linking
this to the financial results the company was about to announce.
AEO has also outlined plans for store closures and for a
more selective approach to store openings, as well as a renewed
focus on its e-commerce operation. Operating in a
saturated market has also forced AEO to devise differentiation
strategies revolving around social media engagement and
an ethical Photoshop-free' advertising campaign.
CEO Robert Hanson resigns
On January 22, 2014, AEO announced that CEO Robert Hanson
had left the company with immediate effect after only
two years in the role. It came as something of a surprise, as
Hanson had been described as part of a 'best in class'
management team, and his turnaround strategy had initially
borne fruit during 2012 as AEO greatly improved operational
efficiency and significantly reduced the number of markdowns.
Despite a disappointing 2013, Hanson had been expected
to remain in the role so his departure took the markets by
surprise. Upon announcement of the news, and the fact that
former CEO Jay Schottenstein would succeed him on an interim
basis, AEO's stock fell 4%.
AEO has remained tight-lipped on the reasons for Hanson's
departure, causing some observers to theorize that he was
47. AND IS NOT TO BE PHOTOCOPIED Page | 19
AEO exits the childrenswear market
AEO first entered the lucrative childrenswear market in 2008
when it launched 77kids with a view to improving its
merchandise mix. 77kids was initially an online-only concept
but, in July 2010, the first dedicated 77kids store opened in
Pittsburgh, Pennsylvania. The company continued to expand the
77kids concept and, by mid-2012, there were 21 stores
in the US. In the company's SEC 10-K filing for the financial
year ended January 2012, it discusses plans to open at least
one new 77kids store in the coming year.
However, the opposite happened, and AEO announced plans to
close or sell the entire 77kids store portfolio in May
2012. The concept had failed to take off in the way the
company’s management had hoped and, in FY2012, it recorded
a
net loss of $24m on just $40m of sales. Hanson, still CEO at the
time, decided the venture was therefore unviable and, in
what was a key part of the drive for greater operational
efficiency, sold the chain to Ezra Dabah, former CEO of the
Children's Place.
Strategic store closures and openings
In a bid to combat the fall in operational efficiency (as
evidenced by a big slide in gross and net margins during 2013),
48. AEO has implemented a strategy of store viability assessment.
The management has looked at the company's AEO and
aerie store portfolios and identified stores it feels are no longer
aligned to the company’s strategic goals. In its most
recent 10-K filing, AEO announced plans to close 15-20 AEO
stores and 25-30 aerie stores over the course of 2014.
The cut back on aerie stores has actually been in progress for a
couple of years and is part of a drive for a more
balanced merchandise mix, as well as improved profit margins.
In January 2011, there were 158 aerie stores but, by
January 2014, this had shrunk to 122. If AEO follows through
with its plan, this could be as low as 92 by January 2015.
It would be wrong, however, to assume that, in a bid to improve
profitability, the company is going on a store closure
spree. According to the most recent 10-K, AEO's retail square
footage will actually grow in 2014 as the company shifts its
attention to a new store format, namely the larger 'factory store'
format which it says is 'among our most productive
format.' So, in some locations, closed stores will be replaced by
this newer format and, with 25 such openings planned,
the number of AEO branded stores is projected to actually grow
in 2014.
One of the major issues AEO has encountered in the US is
market saturation. The US apparel retail market has a whole
49. host of established players such as AEO, A&F, Forever 21, Gap,
JCrew, and Urban Outfitters, as well as global giants
such as H&M and Inditex. With UK e-commerce sensation
ASOS now offering free delivery to the US within six working
days, Amazon stocking significant apparel lines, and Wal-Mart
and Target on the scene, the market is highly competitive.
This has been a key contributor to the need to discount heavily
that has damaged profits so much.
This is a problematic issue for AEO, which derived 89% of its
revenue from its home market in FY2014. In order to the
combat this, AEO is broadening its horizons and looking beyond
US borders.
Table 3: AEO's company operated non-US store portfolio as of
February 1, 2014
Country/Territory No. of stores
Canada 96
Mexico 6
Puerto Rico 6
China 4
Hong Kong 3
Total 115
51. accounting for 9.2% of the total online retail market. This has
led to apparel retailers establishing and continuously
investing in state-of-the-art e-commerce platforms.
AEO's e-commerce operations comprise ae.com and aerie.com,
both of which are what the company describes as
'online extensions of the lifestyle that we convey in our stores.'
Online retail is one area in which AEO is performing well,
although it should be noted that significant growth in this space
is part of a wider industry trend.
According to Forbes, AEO's online sales increased by 24% in
Q1 2013, by 11% in Q2 and by 17% in Q3 and although
the company does not break down revenue by distribution
channel, there is no doubt that its e-commerce operation is
experiencing significant growth. This is crucial in a market in
which people are increasingly moving towards purchasing
online. According to Forbes, A&F now derives approximately
25% of its total revenues from online sales, and Urban
Outfitters 8%. If AEO is to compete with these rivals, it must
target online sales. The company's strategy to invest heavily
in e-commerce and distribution capabilities is therefore prudent.
The company has particularly targeted its distribution facilities
and invested significantly in improving on what it describes
as 'not physically or geographically capable of supporting the
company's long-term expansion goals.' AEO will open a
52. new 1,000,000 sq. ft. omnichannel distribution center in
Hazleton, Pennsylvania in July 2014, and phase out its
distribution center in Warrendale, Pennsylvania in 2015.
Furthermore, AEO is rolling out a 'Buy Online Ship from Store'
program which will give stores order fulfilment capabilities and
allow for faster deliveries as customers in, say, California,
can have an order sent from a local store rather than wait for it
to be dispatched from the central distribution center
almost 3,000 miles away.
Improving brand image
One of AEO's key challenges is to improve its brand image and
somehow differentiate itself from the plethora of
competitors. Heavy discounting in recent years has negatively
altered consumer perception of the brand, and AEO has
lost market share to brands seen as more youthful and trendy,
most notably Forever 21. The company must therefore re-
establish itself as the go-to brand for fashion-conscious youths.
In a bid to do so, AEO has upped its social media presence and
has been successful in driving consumer engagement.
AEO's Facebook page has 9.6 million likes, which is more than
A&F, Gap, and Forever 21. At the time of writing, 57,586
people were talking about the page and over 240,000 had
checked in as having been there – showing that not only has
54. clothing marketing campaigns and these issues, it has
nevertheless been a controversial issue, and designers and
retailers have found themselves under increasing pressure
to act.
This pressure intensified in May 2013, when comments made by
A&F CEO Mike Jeffries to Salon magazine resurfaced.
In an interview, Jeffries stated: 'That’s why we hire good-
looking people in our stores. Because good-looking people
attract other good-looking people, and we want to market to
cool, good-looking people. We don’t market to anyone other
than that.'
These comments attracted a great deal of criticism as detractors
pointed out a lack of A&F clothing for larger females
and, just eight months later, AEO announced a marketing
campaign for its aerie brand that eschews the now ubiquitous
use of Photoshop, and uses models with breast sizes that
represent the range. The campaign is a clear attempt by AEO
to distance itself from the likes of A&F and to show that is a
more ethically sound company that cares about social
issues.
The company states that the campaign, called aerie real and
launched in January 2014, is an effort to promote more
realistic body images for teens. Aerie models are pictured
56. look like.' Nina Ippolito of online current affairs website
PolicyMic is scathing in her assessment stating: 'Unfortunately,
the resulting marketing campaign — while a tiny shuffle in the
right direction — represents meager progress at best. At
worst, it's a calculated attempt to use the idea of body positivity
for the sole purpose of selling teal and pink panties
printed with the phrases "spring breaker" and "true love." She is
not alone in this view but even these ardent critics do
acknowledge that it represents a step in the right direction and
that 'to be fair, photos from the American Eagle campaign,
which can be seen above, do seem slightly less airbrushed than
the majority of their retail-ad counterparts: Models'
stomachs have depth and their skin has texture. Necks and
abdomens haven't been hollowed out.'
While AEO has some way to go to convince some of its ethical
marketing credentials, it certainly represents a step in the
right direction and one which its rivals have not taken. This
gives AEO a platform it can build on as it looks to differentiate
itself in a congested marketplace and, if the company can take
this a step further (plus size models perhaps), it may be
able to attract a customer base keen to rebel against unrealistic
pressures created by the 'Photoshop culture'.
58. In a bid to remain competitive in such a market, many retailers,
AEO included, have resorted to significant markdowns as
they look to entice a frugal public into parting with its cash. In
AEO's case, this has had a negative impact. Although
revenues and profits have continued to grow for the most part,
the rate of growth has slowed and in the most recent
financial year, things took a turn for the worse.
In the 12 month period ended January 2014, revenues fell by
4.9% while net income plummeted 64.3% as the effect of
significant markdowns took hold. During that period, AEO's
gross margin decreased 630 basis points to 33.7% and its
net income margin fell markedly from 6.7% to 2.5%, an all-time
low. The company attributes 510 basis points of the gross
margin decline to markdowns, showing the huge impact this
trend is having.
What AEO risks by pursuing a policy of significant markdowns
is a devaluation of its brand. By reducing prices to shift
inventory, the company is contributing to consumer
brinksmanship as buyers will know there is a sale coming soon
and it
sends out a message that the company does not have great faith
in its product and pricing. Furthermore, AEO risks
inhabiting the no-man's land between premium and cheap. If it
continues to discount heavily, it will lose brand cachet and
59. a premium image, but will still not be able to compete with
large general merchandisers and supermarkets such as
Target and Wal-Mart. AEO must therefore decide where on the
apparel spectrum it wishes to position itself and a more
premium image would be a better option than trying to compete
with discount retailers and supermarket chains that enjoy
much greater buyer power over suppliers.
A premium brand will make AEO desirable to youths again and
reduce the need for the markdowns that have wreaked
havoc with its profit margins.
In a bid to rebuild its damaged brand image, AEO has upped its
social media presence and has been successful in
driving consumer engagement through these channels, showing
that the brand is finding some success with engaging a
young audience that puts social media at the forefront of its
social life. AEO has also sought to disassociate itself from
the highly criticized 'beautiful people' only image surrounding
the clothing industry. AEO has pursued a marketing
campaign that does not retouch images of models and which
uses models that it feels reflect its consumer base. This is
aimed at positioning it as more ethical than the competition and
although AEO still has some way to go to convince some
of its ethical marketing credentials, it certainly represents a step
in the right direction and one which its rivals have not
61. www.nytimes.com/2010/02/04/fashion/04CRITIC.html?pagewan
ted=all&_r=0
American Eagle Outfitters, Inc. – SEC Filings 10-K 2010-2014
http://investors.ae.com/financial-reporting/annual-report-10-
K/default.aspx
Urban Outfitters And American Eagle Top Retail Picks For
2014, Jefferies Says, Maggie McGrath, Forbes, Jan 2, 2014
www.forbes.com/sites/maggiemcgrath/2014/01/02/urban-
outfitters-and-american-eagle-top-retail-picks-for-2014-
jefferies-
says/
American Eagle Outfitters, Inc. – MarketLine Company Profile
Primark Sees Profit Up 26% In Last Six Months, Sky News,
April 23, 2014
http://news.sky.com/story/1247487/primark-sees-profit-up-26-
percent-in-last-six-months
American Eagle can't fly in a tough retail environment, The
Motley Fool, April 23, 2014
www.fool.com/investing/general/2014/04/23/american-eagle-
cant-fly-in-a-tough-retail-environm.aspx
Menswear in the United States – MarketLine Industry Profile
Womenswear in the United States – MarketLine Industry Profile
Abercrombie & Fitch – SEC Filings 10-K 2011-2013
62. Gap, Inc – SEC Filings 10-K 2011-2013
H&M – Annual Reports 2011-2013
Inditex – Annual Reports 2011 & 2012
Inditex Financial Data
www.inditex.com/en/investors/investors_relations/financial_dat
a
SuperGroup plc – Annual Reports 2011-2013
Wal-Mart Stores, Inc. – Annual Report 2013
Target Corporation – SEC Filing 10-K 2013
American Eagle CEO Robert Hanson Resigns, Matthew Rocco,
Fox Business, January 22, 2014
www.foxbusiness.com/industries/2014/01/22/american-eagle-
ceo-robert-hanson-resigns/
American Eagle Outfitters' Omni Channel Initiatives Should
Help It Remain Competitive, Forbes, February 28, 2014
www.forbes.com/sites/greatspeculations/2014/02/28/american-
eagle-outfitters-omni-channel-initiatives-should-help-it-
remain-competitive/
http://www.nytimes.com/2010/02/04/fashion/04CRITIC.html?pa
gewanted=all&_r=0
64. Girls Really Look Like." PolicyMic, January 21, 2014
www.policymic.com/articles/79647/american-eagle-won-t-
photoshop-models-but-this-isn-t-what-girls-really-look-like
Further Reading
American Eagle Outfitters, Inc. – MarketLine Company Profile
Abercrombie & Fitch Co. – MarketLine Company Profile
The Gap, Inc. – MarketLine Company Profile
H & M Hennes & Mauritz AB - MarketLine Company Profile
Industria de Diseno Textil, S.A. – MarketLine Company Profile
H&M Hennes & Mauritz: Collaboration with designers –
MarketLine Case Study
Inditex: Global fashion powerhouse – MarketLine Case Study
Supermarket fashion: a growing phenomenon – MarketLine
Case Study
Menswear in the United States – MarketLine Industry Profile
Womenswear in the United States – MarketLine Industry Profile
Apparel Retail in the United States – MarketLine Industry
Profile
http://www.salon.com/2006/01/24/jeffries/
http://www.policymic.com/articles/79647/american-eagle-won-
t-photoshop-models-but-this-isn-t-what-girls-really-look-like
66. methodology, ensuring a constant stream of new and accurate
information is added to MarketLine every day.
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Sheet1ActivityDescriptionImmediate
PredecessorDurationAReceive raw materials-0.5BBolt
cuttingA1.0CTransfer Machine (series of drilling and cutting
operations)A1.5D Transfer Machine (barrells)B1.4EBarrel
pinningD1.2FShackle groove cuttingB0.8GShackle
bendingF1.0HInset Shackle into bodyC, E, G0.4IInsert barrel
into body and test key setH1.4JPackaging of padlockI0.5
