Most of the teen apparel retailers are having a tough time in attracting customers. The young generation is fickle minded and their tastes and preferences keep changing. Thus, they want merchandise which suits their changing fashion trends and the retailers who keep up with the pace are the ultimate winners.
American Eagle Outfitters (AEO, Financial) is yet another apparel retailer that is facing issues in selling its logo merchandise as teenagers do not demand it anymore. However, the retailer managed to register decent numbers recently. Its third-quarter numbers were ahead of Street’s estimates, sending its shares higher.
Analyzing the quarter
Revenue slipped marginally to $854.3 million, over last year’s quarter. This was much higher than the analysts’ estimate of $846 million. Sales were driven by 23 new stores opened during the quarter. However, same store sales declined 5% during the quarter. This was mainly due to an overall decrease in foot traffic because of growing popularity of online shopping.
Also, the retailer lowered promotions during the quarter, which helped the top line grow. But higher prices resulted in lower units of the transaction, as demand fell. Further, lower promotions also resulted in an expansion in the gross margin. Margin expanded 200 basis points to 36.9% during the quarter. Not only lower discounts, but also factors such as inventory control and better merchandise selection resulted in higher gross margin.
The earnings of the company rose to $0.22 per share from $0.19 per share in the prior year. The bottom line was in line with the analysts’ estimates. Moreover, the company has formulated a cost cutting plan in order to boost the bottom line. It plans to shut 150 stores in North America in the next three years, which will help in reducing costs.
Restructuring efforts
Along with cutting down its costs, the apparel retailer has undertaken some other measures to revive its business. It plans to implement fast fashion strategies in some of the stores in order to compete with fast fashion retailers such as Zara and Forever 21. Also, it plans to launch new products and wants to slowly phase out its logo products as customers are shifting away from it.
Since people have shown great interest in online shopping, the retailer feels the need for omni-channel retailing. Its store traffic has been declining. Therefore, it rolled out the “buy products online and pick up in store” service. Further, it plans to start with “reserve online and pickup at store” service which will improve customer interest. It has also been able to improve the delivery time by 50%.
Moreover, American Eagle is eyeing expansion in the international market and will be adding 3 new stores in London. These factors together should help the retailer grow.
Summing it up
Although the company is facing a number of problems, it was able to put up a decent quarter. Also, its efforts to restructure the business and boost its top line and the bottom line look interesting. Its plans to bring in new products, expand its international presence and control costs should help the company grow. However, a weak outlook disheartened the investors. Thus, staying on the sidelines and waiting for clear signs of a turnaround is the most prudent thing to do.
