Here's Why You Shouldn't Bet on a Turnaround at American Eagle

This year seems worse than last year for apparel retailer American Eagle Outfitters . The stock is already down 26% in 2014, and its recent results indicate that there might be no quick turnaround. The company posted yet another quarter of disappointing results as its revenue and earnings declined.

Moreover, it seems that management's turnaround initiatives are not working. In comparison, rival Abercrombie & Fitch seems to be successfully executing its strategies. Abercrombie reported better-than-expected first-quarter results, and its stock price has appreciated 14% this year. Also, it is quite possible that Abercrombie might be taking away market share from American Eagle with its moves.

Can American Eagle make a comeback, or will the resurgence of rivals hurt its business? Let's find out.

A woeful performance, but a hopeful future
American Eagle's revenue in the first quarter decreased 5% to $646 million from the year-ago period. However, profit took a massive beating, declining 86% from last year's quarter. However, the company is trying its best to arrest this decline. The purchasing habits of teens are changing, and American Eagle is trying to make the necessary adjustments.

According to Bloomberg, teens in the U.S. spend around $30 billion a year on purchasing clothes. So huge potential exists for retailers such as American Eagle. However, the downside is that teens aren't brand loyal, and they have been attracted to other brands such as H&M and Forever 21.

Also, the way teens shop has been changing. Instead of malls and retail stores, teens shop on the Internet now.  Consequently, American Eagle has upgraded its online site to include improved product displays and better navigation. In addition, it will also launch a new mobile app by this summer, equipped with better functionality and speed.

Some positives
American Eagle's buy online and ship-from-store pilot program has received a favorable response. The company rescued some sales with this program that it would have otherwise lost due to stock-outs.

American Eagle also aims to increase its profitability by moving ahead with its store closure program. It plans to shut down around 150 stores in the next three years. Management believes that this will provide the company with greater flexibility to respond to changing consumer shopping trends and reduce its expenses.

American Eagle plans to simplify its structure across all its business areas, which will eliminate redundancies and realign its team to be more effective. It also plans to expand internationally. The company cites strong profitability and low investment requirements for licensed stores globally and believes that there is strong demand for its brands in the international market. 

The company will also try to bring down inventories. It will be selectively reducing promotions, improving product assortment, and focusing on relevant marketing events to support a better overall pricing strategy.

A pressing concern
American Eagle is still looking for a permanent CEO, and this might be a reason why its impressive-sounding strategies haven't yielded results. On the other hand, American Eagle's rivals seem to be making the most of its weakness.

According to Buckingham Research Group analyst Jennifer Davis, American Eagle's collection was among the weakest among its peers. The company depended on its logo-centric clothes, which was the wrong strategy since young shoppers are now less interested in such clothes.

Rivals are marching ahead
This is where Abercrombie & Fitch is taking away share from American Eagle. As reported by the Wall Street Journal, Abercrombie has slashed the use of its logo in its merchandise significantly. It is currently testing almost all of its product lines without the logo to gauge demand.

In addition, Abercrombie is moving fast and is accelerating the design of its products to stay in touch with the ongoing trends in the industry. Abercrombie plans to sell its clothes through online retailers later this year, and this could result in more trouble for American Eagle. 

Even Aeropostale, which is down 60% this year, is trying to shore up its business after securing $150 million in financing from Sycamore Partners. Aeropostale will use the proceeds from the financing to diversify apparel production and processes. In addition, as part of the deal Sycamore's affiliate, MGF Sourcing, will purchase merchandise from Aeropostale annually. 

Bottom line
American Eagle is in bad health. The company doesn't have a CEO, and it is struggling to arrest the decline in its business. Meanwhile, Abercrombie and Aeropostale seem to be making positive moves and might increase their market share. So investors should stay away from American Eagle as there might be more downside in store for the stock.

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Sharda Sharma has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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