American Eagle Outfitters
2004-2006
Prepared by Andrew Jenkins, Rotman School of Management, University of Toronto 2003
American Eagle (AE) Logic Outline
Status: AE has experienced continued growth in sales, store count and overall square footage
Change: Despite that growth, AE has seen declines in key financial measures such as ROE, Comparative Store Performance (COMPS) and gross margin
Question: What must AE do to combat those trends?
Action: AE must enter the Tween market (approximate ages 8-12)
1. The market is attractive2. American Eagle is well positioned to succeed in the market3. This strategy avoids past mistakes made by American
Eagle and its competitors
S
C
Q
A
1
2
3
AE’s aggressive expansion in overall square footage and number of stores have been the key drivers for Sales and EBITDA growth in the past five years…
AE Net Sales
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03
For Years Ended
$(in millions)
Source: Annual Report
AE EBITDA
0
50
100
150
200
250
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03
For the Years Ended
$(in millions)
S
AE and its major competitors have seen highly positive 5YR Cumulative Average Growth Rates with the exception of The Gap….
5 YR Percentage Growth In
Company Sales EPS
American Eagle 29.75 33.73
Abercrombie & Fitch 25.06 32.80
Pac Sun 30.10 22.75
The Gap 17.31 -1.31
S
Source: Multex Investor
Despite growth in Sales, AE has seen declines in ROE and Comparative Store Performance (COMPS)….
ROE and COMPS
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03
For the Years Ended
ROE
COMPARATIVE STORE PERFORMANCE
C
Source: Annual Report
AE Gross Margin has also declined despite continued company growth….
AE Gross Margin
34.00%35.00%36.00%37.00%38.00%39.00%40.00%41.00%42.00%43.00%44.00%
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03
For the Years Ended
C
Source: Annual Report
AE’s and its major competitors have performed poorly with returns to shareholders over the past five years….
Comparative ROE
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03
For the Years Ended
PAC SUN
GAPABERCROMBIE
AMERICAN EAGLE
C
Source: Annual Reports
AE and it’s major competitors have also seen declines in gross margins….
Comparative Gross Margin
0.00%5.00%
10.00%15.00%20.00%25.00%30.00%35.00%40.00%45.00%50.00%
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03
For the Years Ended
PAC SUN
GAP
AMERICAN EAGLE
ABERCROMBIE
C
Source: Annual Reports
What must American Eagle do to combat those trends?
Q
American Eagle must enter the Tween market because….
1. The market is attractive
2. American Eagle is well positioned to succeed in the market
3. This strategy avoids past mistakes made by American Eagle and its competitors
A
1
2
3
The Tween Market is attractive because it is the fastest growing and largest market segment….
• 4 million kids enter their tweens every year
• 19-and-under group is 78.2 million > 77.8 million baby boomers
• 12 and under spent $27.9 billion of their own money and influenced another $248.7 billion
Source: USA TODAY 2000 & DSN Retailing Today 2002
1
American Eagle is well positioned to face the existing market forces in the Tween market….
Suppliers:
Low
Rivalry:
MODERATE
Buyers:
Strong
Substitutes:
Low
New Entrants:
LOW
AE’s Unique Brand difficult to duplicate
AE’s Economies of Scale takes time to achieve
Unlikely to launch their own unique brand
Large market with large amount of choice
Many competitors in the marketplace but AE has desired brand at value prices compared to competitors
2
By building on its core strengths in the specialty retail sector, AE will succeed in entering the Tween market….
BRAND = BIGGEST STRENGTH
VALUE PRICING ADVANTAGE VS COMPETITORS
MARKET POSITION - #3 WITH 28% MARKETSHARE
2
AE’s focus on Ladies and Tweens will offset the softness in the men’s business which is also industry-wide. When times are tough, it is women and children first and men last….
INVEST & GROWTWEENS
FIX MENSWEAR
INVEST & GROWLADIES
Mens
Ladies
Tweens
WeakMediumStrong
Business Strength
Medium
High
Mar
ket
At t
ract
iven
ess
Low
2
Entering the Tween market avoids past mistakes made by American Eagle and its competitors….
• Skewing merchandise to mature market didn’t work
• Non-logo’d and fashion-focused merchandise were too serious and did not meet the consumers brand desires or aspirations
• Tween line would not cannibalize existing business unlike the Gap and Abercrombie have experienced with some of their spinoffs
3
AE’s menswear contribution is declining and Tween merchandise would complement the already growing ladieswear category-a combination responsible for The Gap’s recovery and Abercrombie’s core focus…
AE Merchandise Mix
0%10%20%30%40%50%60%70%80%90%
100%
Jan-01 Jan-02 Jan-03
For Years Ended
Women Women Women
Footwear Footwear Footwear
Men Men Men
3
The Tween market strategy builds on existing market presence….
• Tween Merchandise replaces slow selling goods on the sales floor
• Tween inventory requires less square footage thus maximizing sales per square foot
• Launching Tween goods in existing stores reduces costs and leverages the loyalty and trust of existing customers
3
PROFIT
TIME
Horizon 1
Horizon 3
Horizon 2
American Eagle must stabilize menswear, invest in and grow Ladies and Tween merchandise and, if successful, consider spinning off Tween focused stores….
Stabilize menswear
If successful, consider spinning off Tween focused stores as competitors have done
Long-term
Immediate
Short-term
Invest in and grow Ladies and Tween merchandise
What can AE expect to see as a result of pursuing the Tween Market?
Assuming:
- continued growth in sales (6.5%)
- continued management of growth in COGS and SG & A (9% and 2.5% respectively)
AE can expect an average of 2% annual growth in gross profits and a recovery in EBITDA with an average 1% annual growth
Pursuing the Tween Market will help sustain 6.5% annual
growth in Sales for the next three years…. Forcasted Net Sales for AE 2004-2006
0200400600800
1,0001,2001,4001,6001,8002,000
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
For the Years Ended
$ (in millions)
2002-2003 Source: Annual Report
Continued cost management at 9% annual growth in COGS will lead to growth in Gross Margin….
Forecasted Gross Profit for AE 2004-2006
520
530
540
550
560
570
580
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
For the Years Ended
$ (in millions)
2002-2003 Source: Annual Report
Holding SG & A growth at 2.5% will result in EBITDA recovery….
Forecasted EBITDA for AE 2004-2006
180
185
190
195
200
205
210
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
For the Years Ended
$ (in millions)
2002-2003 Source: Annual Report
To combat the declines that AE is experiencing, the mandate for the AE Board and Management is to authorize the pursuit of the Tween Market
Next steps?!
Appendix-Logic Framework
Status
Change
Question
1st Support Message
Main Message
2st Support Message 3st Support Message
American Eagle has experienced continued growth in sales, store count and overall square footage
Despite that growth, American Eagle has seen declines in key financial measures such as ROE, Comparative Store Performance (COMPS) and gross margin
What must American Eagle do to combat those trends?
American Eagle must enter the Tween market
This strategy avoids past mistakes made by American Eagle and its competitors
- Merchandise Mix- Has worked for competitors- Builds on existing market presence
Audience: Board/Senior Management at American EagleAudience: Formal; friendly; action bias; primary decision maker. They know they need to take some type of action but previous measures have proven to be misstepsGoal: Reach agreement on the seriousness of the situation and get approval for launch into Tween Market.
American Eagle is well positioned to succeed in the market
- Competitive Forces
- Core Strengths
- Business Strength vs Industry Attractiveness
The market is attractive
- 4 million kids enter their tweens every yr.- 19-and-under group is 78.2 million > 77.8 million baby boomers- 12 and under spent $27.9 billion of their own money and influenced another $248.7 billion