Winds of change challenge American Eagle after departure of CEO
January 23, 2014 9:33 PM
The eagle icon of American Eagle Outfitters looms over the South Side Works.
By Teresa F. Lindeman / Pittsburgh Post-Gazette
American Eagle Outfitters took nearly a year to find its most recent chief executive, so his abrupt departure this week set off a round of selling as well as speculation on what comes next for the teen clothing chain based on Pittsburgh's South Side.
Some analysts hinted that there might have been personality conflicts at the company and questioned the wisdom of parting ways with CEO Robert Hanson after just two years, even as they wondered what qualities the company would look for in his replacement.
Investors reacted to the unexpected news by sending shares down almost 8 percent to $13.19 on Thursday, the first trading day after the announcement that Mr. Hanson was out, effective immediately.
Investor alarm may be unwarranted -- "There is no big crisis we can see here, as there are at other teen retailers," wrote Topeka Capital markets analysts Dorothy S. Lakner in her report -- but there's little doubt that American Eagle faces challenges.
Jay Schottenstein, American Eagle executive chairman and now the interim CEO, needs to adapt the retailer to be where teens are shopping -- online and off -- and to present a new creative vision for the company's fashion.
A fall 2013 survey by Minneapolis-based Piper Jaffray & Co. found teens experiencing "general spending fatigue," especially in fashion. There wasn't anything compelling that they needed to buy, the survey found.
And they are shopping in different ways. "We are also observing trends that imply teens are browsing regularly on their mobile devices, shopping less frequently and engaging with brands 'on demand' on their own time," wrote Steph Wissink, co-director of research and senior research analyst at Piper Jaffray.
Mr. Hanson planned to respond to that shift in part by trimming the store fleet. He also was investing in omnichannel projects meant to make it as easy to buy American Eagle's merchandise on smartphones as in stores.
Still, sales had not been strong in recent quarters and the company, like its most similar rivals Aeropostale and Abercombie & Fitch, has been criticized for producing uninspiring fashion.
"We believe Mr. Hanson realized that the teens' interest in preppy New England aesthetic had waned and instead fast fashion had taken a more important role in the teen's wardrobe," wrote analyst Richard E. Jaffe, from Stifel. Fast fashion typically refers to chains such as Forever 21 and H&M that respond quickly to changing trends and get goods into stores with very short lead times.
That might not be the direction that American Eagle needs to go, although it does need more innovation, said Thomas A. Filandro, senior retail analyst with Susquehanna Financial Group in New York.
"The heyday of the logo-based product is no longer," he said.
Mr. Filandro is still bullish on the company, in part because it continues to generate strong cash flow. But he's also relieved that, if the American Eagle board felt that it had to part ways with Mr. Hanson, it did so at a time that it could convince Roger S. Markfield to postpone his planned retirement.
Mr. Markfield, executive creative director, joined American Eagle in 1993 with the vision of building a powerhouse business like The Gap had become. By most standards, he succeeded.
Now though, the company's need for fashion innovation and for new ways to create the lifestyle brand experiences that appeal to teens may inform the hunt for a new CEO. Analysts are interested in seeing what Chad Kessler, who is set to join American Eagle Feb. 3 as chief merchandising and design officer, will bring to the executive offices.
Ms. Lakner mentioned that his arrival would provide additional support for Mr. Markfield. Others hinted that Mr. Kessler could be a potential CEO candidate.
Mr. Kessler was most recently at Urban Outfitters, which sells an eclectic fashion mix that some see as a better fit with changing teen tastes. Wall Street seemed to like working with Mr. Hanson, who was praised for having an open communications style, for cutting where needed -- he closed the 77kids business and decided to close the Warrendale distribution center in favor of a more modern version in Hazleton -- and for understanding the international opportunity.
The company did not explain why he was leaving and analysts offered different ideas.
Ms. Lakner said, "The mutual decision to part ways stems from disappointment with AEO's 2013 performance after a strong 2012 and perhaps, in our view, a conflict of personalities."
Wells Fargo analyst Paul Lejuez said the departure raises the question of whether the board wants to go down a different path. "And now that it seems Hanson was on a pretty short leash, it may make it tough to attract the right talent to fill that spot (lots of pressure on a new CEO)," he wrote in his report to investors.
Teresa F. Lindeman: firstname.lastname@example.org or at 412-263-2018.
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