American Eagle Tween Strategy

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


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%


For the Years Ended

ROE

COMPARATIVE STORE PERFORMANCE

C


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%


For the Years Ended

C


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%


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%


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


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


For the Years Ended

$ (in millions)


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


For the Years Ended

$ (in millions)


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

American Eagle Tween Strategy

Technology

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