By Carter Harrison
After a good run of sales growth, this was the quarter in which American Eagle stopped climbing and started to descend. Fortunately, the pace of descent is fairly shallow and was mostly driven by store closures which a very small uplift in overall same-store sales could not offset. Even so, the results are a slightly disappointing end to what had been, to date, a reasonable fiscal year.
A new store design allows Aerie to operate from smaller standalone stores. This proved successful across 2016 and the company will roll out up to 50 of these in new markets across the upcoming fiscal year. Aerie has also been effective in using popup shops to drive brand awareness.
In addition to topline softness, the bottom line also took a battering with net income falling by a third over the prior year. This is the result of impairment and restructuring charges related to AEO’s overseas businesses, and unfortunately overshadows the improvements made to operating profits thanks to better inventory management and lower discounting levels. Given that further restructuring charges are on the cards during the upcoming fiscal year, we believe the progress made at operating level will continue to be diluted.
Away from the balance sheet, the divergence in performance of AEO’s two brands is starker than ever. While Aerie continues to power ahead, American Eagle posted negative same-store numbers.
Aerie is a much younger brand and is still benefitting from its expansion into the market. However, we believe that its fresh take on lingerie – especially in the sense of using ordinary women as models and its body-positive advertising – is still striking a chord with consumers and is allowing it to take custom from other players. This is not the only factor that is driving success, as under the headline story Aerie is doing many things to bolster its turnover.
Foremost among these is a new store design, which allows Aerie to operate from smaller standalone stores. This proved successful across 2016 and the company will roll out up to 50 of these in new markets across the upcoming fiscal year. Aerie has also been effective in using popup shops to drive brand awareness. The New York pop-up, opened on Spring Street in early December, was a triumph in customer engagement and in communicating the brand experience of Aerie. Looking ahead, we expect Aerie to undertake more of this type of brand marketing. Finally, Aerie has also been quick to adapt to relevant fashion trends with, for example, its bralettes proving a popular item over the second half of the year.
If Aerie is the new and fresh brand, then American Eagle is its much older sibling which is suffering from the problems of maturity. To be fair, American Eagle has done a good job in reinventing its proposition and is in a much better place than many of its teen apparel peers. However, the latest results also demonstrate that it needs to work much harder in what remains a very tough market. In our view, this is especially the case on menswear, where collections over the holiday period were boring and failed to inspire customers. We also believe that the final quarter “We All Can” marketing campaign, while clever, fell a little flat and failed to connect with shoppers in the way it should. This is something American Eagle needs to remedy if it is to cut through in a crowded market.
Carter Harrison is an analyst at GlobalData Retail.