Capital Funding for Retail Business American Eagle

¶ … American Eagle Outfitters (or AEO) is a clothing retailer with more than one thousand retail outlets and a strong online presence. In January 2016, American Eagle announced fourth quarter sales of their brand clothing had increased by 4%; along with the announcement of these results, American Eagle Outfitters CEO Jay Schottenstein issued a statement noting that "despite a very challenging macro-environment, we had a solid holiday season, driven by positive results in both our brands" while "the online business was particularly strong" ("American Eagle Outfitters Provides Fourth Quarter Update," 2016). In terms of capital investment projects, however, it is crucial to note the most obvious fact: American Eagle Outfitters is a retail business, and capital investment for retailers is different from capital investment for other types of business model. The general public may very well register the success of a retailer by its visibility in expansion -- especially when we consider how regularly we may see a Starbucks location in urban areas, or a Walmart or McDonalds location in suburbia -- but while expansion is an important part of the continual growth of any retail business it is vitally important that new locations be able to generate a positive return on the investment. The failure of many retail businesses frequently comes from an unwise capital investment into expansion, believing that increased visibility is enough to build the brand, without properly considering whether the sales will justify the significant costs of real estate, construction, hiring, and so forth. Funding sources must follow profit.

Therefore the most responsible capital investment strategy for a business like American Eagle Outfitters would be the launch of a new product line for the existing retail outlets, not the launch of a new flagship store intended to advance visibility or prestige for the brand. When we compare American Eagle Outfitters with a comparable retail enterprise, such as The Gap, it becomes clear where there is a gap (so to speak) in the market. The Gap expanded its clothing line into children's sizes with a separate parallel retail brand called GapKids. American Eagle Outfitters has no such product line, but is ripe for expansion in that direction for precisely the same reasons that The Gap undertook it. Both Gap and American Eagle are popular brands with high school and college aged young people: it is a truism in retail that these popular brands can have a trickle-down effect on tweens and children, who want the equivalent product for themselves. This effect is noted in Lifestyle Marketing by Michman Mazze et al., (2003) which defines "trickle down" in precisely this manner, noting that "leather clothes at the turn of the twenty-first century are a fashion that trickled down from teens to tweens. Moreover ear piercing and make-up cosmetics are now used by tweens trying to emulate teens"; Michman Mazze et al. further claim that "tweens are highly influenced by the fashion cycle and the adoption process demonstrated by trickle-down, trickle-across, and trickle-up efforts," and observe that the phenomenon observable in GapKids has been embraced by such various clothing retailers like Nautica, The Limited (with the launch of Limited Too), and even Sears (with their "tween shop named Girl Identity") (141).

The risks of funding this strategy are immediately apparent. American Eagle has two brands, as Schottenstein noted: American Eagle itself and Aerie, which aims at 15- to 25-year-old female consumers but sells lingerie. This is a youth market business but designed to compete with (say) Victoria's Secret. This capital expansion would propose the launch of a third product line -- let's call it "Eaglets" -- for tweens and kids, to compete with GapKids. The launch of an entirely new product line -- and the reorganization of existing retail outlets to carry the line -- would require more than just the investment in designing and making the new clothing, but also in retooling existing infrastructure to carry and to advertise the new product. However there is a very useful fact working in favor of this proposal; as Michman Mazze et al. (2003) note "tweens are computer savvy and accustomed to the information world." Schottenstein's 2016 fourth quarter update for American Eagle noted the particular strength of the brand in online retail, and indeed a glance at the website indicates many American Eagle products -- such as the "Woolrich Duffel Bag," the only duffel offered by the retailer -- are "online only" products, not available in stores ("Topo Designs" 2016). Moreover American Eagle already has an existing smartphone app for retail. Therefore it would probably be the wisest capital investment strategy to launch "Eaglets" for tweens as an online-only retail at first, perhaps bolstered by advertising in existing retail venues. This would minimize cost but promote the new line, and if growth is significant than expansion into existing retail spaces could follow.