After fantastic 2005, teen retailer American Eagle is off to a great start to 2006, continuing it’s upward trend, beating Wall Street estimates and putting up some solid numbers for Q1: net sales increase of 14%, comp sales up 9% and net profits up 16%.
CEO Jim O’Donnell attributes the success of the quarter to “successful merchandising and design, as well as the solid execution across our company.” Initiatives undertaken in 2005, such as the AE “All Access Pass” customer loyalty/reward program seem to be paying off in 2006 with AE President Susan McGalla saying that the “new enrollments are exceeding our expectations and the first two redemption periods were encouraging.”
As far as the merchandise itself, McGall goes on to say that for the Women’s end of the spectrum, “comps were best in graphic tees, tanks, shorts, capris, jeans, flip-flops and intimates, while womens skirts, wovens and accessories were below our expectations.” Adding, “Mens produced a positive low double digit comp with the strongest results in graphic tees, jeans, shorts, polos, flip-flops and boxers. Within mens, we continued to see a planned downtrend in woven shirts.”
Accessories will be helped by the future launch of the AE sub-brand, aerie. aerie is the new intimates sub-brand from AE, with all stores having a full aerie store-in-a-store concept, launching in September. Results from the initial “bra test” in 100 stores have been encouraging, with a lot of positive feedback regarding merchandise assortment and trends in this area. McGalla says, “the number one bra that we thought was going to be number one wasnt number one.”
As a male in his mid-twenties, I do not know much about an intimates department geared towards girls age 15-25. But I do know that AE seems to be swinging for the fences lately and I have no doubt that this launch will prove successful, turning into a gold mine for AE.
More about the aerie brand from this February article in WWD: American Eagle’s Strategy for ‘aerie’ intimates.
The other concept that they are excited about is the Martin + Osa store concept, debuting in four cities this Fall. CEO O’Donell describes it as “a unique, specialty lifestyle brand, targeting 25-40 year olds.” With merchandise that is geared towards an older demographic in style, design and price, I think that this store will wind up doing extremely well for AE. You have an entire generation of shoppers who are growing up and outgrowing AE, now get them to stick with you through the years. At the same time that AE is building/developing a lifestyle brand, they are also branding these customers for life. Smart move and I am excited to see this shop concept.
More information on the Martin + Osa concept from WWD, “Martin + Osa Mall Bound: Signs First Four Leases“.
The last area that AE repeatedly touched on is the improvement in sales in remodel stores. Remodel stores are gaining square footage through re-design and expansion, in some cases they are relocating within the same mall. In this area, AE did this remodel last year and the payoff is huge. The new store layout is larger, spacious, inviting, and fun to shop - it is a complete turnaround from the cramp quarters they once occupied.
To this regard, AE says that the average store profitability jumps 70% in the first year after remodel - 70% ! This is fantastic news for investors, as AE looks to remodel 68 stores this year alone. Retail Design Diva had a fantastic article on this a few months ago: You Know Improved Store Design Helps Increase Sales, But Would You Believe 46%? As the trend over the past few years was to reduce visual merchandising and the importance of store design, it is nice to see a company spend so aggressively in this area and be so vocal about their success. AE has even upped their 2006 capital improvement estimates from $175m to over $215m.
It is a good time to be American Eagle. They are poised for a very good year and will be a mall retailer to look out for going through the rest of 2006. Look for them to lead the way through the mall with their commitments to good design, value and aggressively seeking out opportunities to develop itself as a lifestyle brand.
More information on Q1 results here and here
Full transcript of the conference call here from Seeking Alpha.
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