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American Eagle Kills Martin + Osa


Though the brand is still fairly new, the spring cleaning was a necessity.

Given the amount of Martin + Osa merchandise hanging in my closet, I feel I owe a eulogy to the brand.

Simultaneous to its fourth-quarter and annual results yesterday, American Eagle (AEO) revealed that it's killing the Martin + Osa concept, which includes 28 stores and an online business.

Despite my attraction to the "traditional preppy with a modern twist" clothing, I can't say I'm all that surprised. Management rarely addressed the brand's performance and detailed numbers were nonexistent.

Originally, I believed the concept had potential to rival its nearest competitor, J.Crew (JCG). But marketing efforts were improperly executed. The store's merchandise in some locations isn't viewable from the outside looking in -- a deadly strategy for a new concept. And the website lacks the user-friendliness successful retailers -- including its flagship site -- possess. That alone can be a brand killer in an era of growing online shopping. (See Retailers Must Get On Board With Online Sales.)

In other words, the spring cleaning was a necessity. And I like that management isn't dragging its feet with the concept in hopes that some sort of miracle revival tactic lies ahead.

Launched at the end of 2006, Martin + Osa is still a new brand. It's difficult enough to manage an already successful and well-known brand in recessionary times. But jump-starting a brand that never caught on in the first place is nearly impossible. As a shareholder, I'd rather see management invest its capital into further improving its flagship business and Aerie concept, both of which have promising futures.

While fiscal 2009 performance wasn't stellar -- total sales slightly ticked upward and comps fell 4% on top of a 10% decline last year -- the fourth quarter showed slight improvement. Like most of the retail sector, trends at the end of the year indicated that stabilization is occurring and that the worst looks to be behind us. (See Retail Still Miles Away From Road to Recovery.) Fourth-quarter profits jumped 81% and first-quarter projections beat analyst estimates.

I do disagree with management's rosy outlook for and have a feeling that the concept may end up in the same place as Martin + Osa. But as a leaner company without the Martin + Osa arm, American Eagle remains a healthy company and quite competitive in the teen retail sector.

(ARO) has grabbed market share and done a great job playing the recession card as the lower-cost alternative, but AE boasts a far more dedicated and loyal customer base. Its Aerie business has little competition due to few alternatives other than Limited Brands' (LTD) Victoria Secret, which is targeted to a different audience anyway. And its new, faster merchandise-turnaround strategy reveals both management's ability to innovate according to consumer trends (higher turnover is an emerging trend) and the capability of its inventory system to quickly adapt to change.

Spiking more than 6% today, the market is bullish on American Eagle. And I concur.
Position in AEO.
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