American Eagle Soars Again

Analysts agree the retailer is back on track in both the eyes of its target market and financial performance. AE jeans rose from sixth place to third place this year to obtain a 10.9% dollar-volume share of market, while its key rival, Old Navy's share dropped to 13.2% from better-than-15% last year. Roger Markfield, vice chairman and chief merchandising officer, points out that AE's gains came despite Old Navy's advantage of close to 100 more stores.

"We expect to be the denim destination," he says, adding that in another survey, AE ranked among "the coolest brands out there." CEO James O'Donnell gives a large measure of the company's return to "cool" to a new fashion design team, but also points to an ongoing renovation of between 50 to 70 stores a year, along with increased use of focus groups and other vehicles for obtaining customer feedback.

In respect to its advertising and promotion expenditures, he said, "we're doing more with less." Toward that end, it announced a marketing relationship with Sony Connect music stores that will launch Nov. 26. AE stores will offer 10 free downloads from Connect music stores to customers that make a qualifying purchase at its stores.

By the end of this year, just 225 of the current 773 US American Eagle Outfitters units will remain to be remodeled. It opened 36 new AE stores in the US this year and closed five under-performing units. Plans call for a 5%- to 6%-sf increase a year, with some of that coming from expansions of existing stores to include new sections devoted to intimate apparel and personal care cosmetics.

AE units average 5,300 gross sf with 4,300 sf devoted to selling space, and, during remodeling many are expanding to approximately 6,000 sf. Regarding the expansion of intimates, Susan McGalla, EVP and chief merchandising officer, says, "this is very clearly a growth strategy for us. We're looking at not only real estate opportunities, but also looking at large sf spaces we currently have to see how best to use that space as it relates to intimates."

Intimates formats are in test at 12 AE stores. Two are side-by-side units, and 10 are expansions within stores. This month the company hired Kathy Volker, who has experience with Vanity Fair, Esprit and Danskin, to lead a team to build its intimates selection, a niche that AE execs believes few competitors are targeting.

Two additional decisions, aside from the direction for intimates, are imminent, according to O'Donnell. One is what to do with Bluenotes/Thriftys, the Canadian subsidiary AE acquired in 2001; the other is "pursuit of another US concept."

Despite generating its first slightly positive comp-store sales in nine consecutive quarters, Bluenotes is a sour note. "We're disappointed with its current results," O'Donnell says, "and are considering other alternatives that I'm not free to discuss." In a report for Lehman Brothers, Jeff Black, an analyst, speculates, "we believe there is a chance that the division could be spun off."

The company is also mum on the "new concept" it expects to unveil in spring 2006. Pressed to elaborate during a conference call, O'Donnell said, "several months ago we pursued two different concepts. One was a joint-venture that no longer exists, so we've chosen to do it organically." He said the news would come within the next 60 to 90 days.

Markfield added, "I've been working on it in my mind for a couple of years and on the actual format strenuously for the past six months. I think it's something that's not out there. I think it's something for the 21st Century the same way I felt about Gap in the 1970s and 1980s, and the same way I felt about American Eagle in the 1990s. I think this is very special and very big. We are very close to putting together a world class team for it."

Although the new concept won't have impact until at least 2006, Black says, "there is little question that AE has improved its relevancy to core consumers." He points to increases in both transactions-per-store and unit (sales)-per-store along with positive comps in both women's and men's lines, which represent about a 65/35 ratio of total sales. "We see room for about 100 more AE stores in the US," he says, "with growth beyond that dependent on the success of lifestyle malls."