By Neil Saunders
Last quarter AEO soared as key elements of its strategy came together. This quarter, AEO maintained the altitude it gained with another strong set of numbers. Not only are comparable sales positive in both divisions, but AEO also managed to translate this to a 37.2% increase in operating profit, and a 58.2% uplift in net income. AEO is a company firmly on the right flight path.
The brand’s stance on social and ethical issues has resonated with customers and generated a lot of goodwill from Millennials. While this alone does not make people buy products, it helps increase visibility.
Strong growth from Aerie is nothing new. However, a 38% uplift in same-store sales off the back of a 25% increase in the prior year is impressive. Aerie’s inclusive marketing and proposition continue to resonate with consumers, probably more now than ever. This is allowing it to take share from Victoria’s Secret and from troubled channels like department stores.
Some increase at Aerie is also due to greater traction in categories outside of lingerie, like leggings and yoga pants. Aerie has had little difficulty getting core customers to buy products, which are both well designed and reasonably priced. Although not a key focus for the early part of the quarter, outdoor lines like swimwear are looking strong in terms of design and price points. As much as Aerie remains, at heart, a destination for intimate apparel, it now has a rounded offer that is allowing it to capture a greater share of its customers’ spending.
Although growth is a lot lower than Aerie’s, American Eagle’s comparable uplift of 4% is credible, even if it does come off the back of soft prior-year numbers. The offer is resonating with customers in a way that it did not some years ago. Growth is coming from both stores and online. Several things are aiding American Eagle’s performance.
The first is the improved product offer, especially in jeans and bottoms. American Eagle has worked hard on styling and fabric innovation to produce denim ranges that are more relevant and interesting to customers. It has benefitted from the revival in denim and has been able to convert more of its existing customers into purchasers. With less than half of existing American Eagle shoppers buying jeans from the brand, there is more runway for growth. Other categories like tops have also benefitted from enhancements.
The second factor is America Eagle’s brand positioning. Like Aerie, the brand’s stance on social and ethical issues has resonated with customers and generated a lot of goodwill from Millennials. While this alone does not make people buy products, it helps increase the visibility of the brand. Marketing has also been fine-tuned and is more genuine. One example of this is the AE X ME campaign, which encourages customers to take fitting room selfies in store and share them with American Eagle, which uses them to select images for seasonal campaigns. This use of real people is attuned to current social trends and has generated a lot of interest among younger shoppers.
Finally, the loyalty and rewards program AEO Connected, which has now fully replaced AERewards, has proved popular. The new program is much simpler, is more engaging, and provides better rewards. It is attracting new members and is encouraging participants to spend more. This provides the icing on the cake in terms of sales.
Looking ahead, AEO will start to lap tougher comparatives, which may dampen growth. However, the company is now in a strong position to improve earnings and sales.
Neil Saunders is managing director of research firm GlobalData Retail.