American Eagle results reflect mixed fortunes
Third quarter American Eagle results may be mixed, but they point to a company that is holding its own in a challenging market.
There are, however, some negative numbers, such as the erosion on the bottom line, that signal the company has much more work to do before it can claim to be back to full health.
American Eagle’s gross margin fell 1.2 percentage points to 39 per cent during the quarter, largely due to higher warehousing and shipping costs on online orders and increased promotional activity. Sales rose 2 per cent to US$960.4 million, but net income fell 16 percent to $63.7 million, partly due to a $14 million one-off charge.
American Eagle stores posted a comparable sales increase of 1 percent, reversing the declines of the last two quarters which represents a step up on preceding periods when growth was present but anemic. As positive as this is, it is not a cause for unbridled celebration. The uplift was delivered against the backdrop of a stronger period for apparel overall. This raises a question as to how much is down to underlying natural demand, and how much is attributable to the improvements American Eagle has made over the past year.
In fairness, a mix of both delivered the number. Categories like denim are performing well for American Eagle, with new washes and styles helping to drive sales. GlobalData Retail’s customer data suggests shoppers who visit to buy jeans are now buying more in other categories too – particularly in menswear.
An increase in cross-category shopping is comforting and partly alleviates concerns that American Eagle was becoming overly reliant on denim. As much as this is currently helping results, it makes the company’s sales growth dependent upon denim remaining in fashion – something that it is unable to control or guarantee. By using denim as a springboard to promote other parts of its offer, American Eagle is on the right track.
Along with a skew in category performance, American Eagle is also showing a disparity in channel results. The growth in stores is poor while growth online is much stronger. Given the interplay between shops and the website, it is arguably the overall numbers that matter. However, the higher costs associated with online fulfillment contributed to a margin decline this quarter. This was further exacerbated by heavy promotional activity, which was necessary to keep pace with the rest of the market.
Aerie proves positive
Away from American Eagle, Aerie continues to be a reliable source of growth. Its robust comparable sales uplift of 19 per cent this quarter was market-beating and underlines that it is still taking the share of other players. Usually, after such a long run of very high sales increases,one would be concerned about a softening as lapping comparatives become tougher. But that’s not the case with Aerie.
The brand has excellent growth potential from two sources. First, the customer base continues to grow as more shoppers discover and migrate over to the brand. Aerie’s positioning and stance remain aligned with consumer attitudes, and this is helping to enlarge its share of shoppers.
Second, the category extensions into products like soft knit tops and leggings are helping to increase average transaction values and are giving Aerie access to a more significant share of its shoppers’ overall spending.
Overall, American Eagle is in a reasonable position and the performance over the holiday quarter should be solid, marking a good end to a respectable year.
- Neil Saunders is MD of GlobalData Retail.