By  on November 15, 2006

Keeping a finger on the pulse of the ever-changing teen customer has helped American Eagle Outfitters achieve an enviable string of over 30 months of positive comp-store sales gains.

Susan McGalla, president and chief merchandising officer for the $2 billion specialty store chain, said this year's summit theme, "Reengineering Retail," was very much a hallmark of her company and one of the primary reasons for its success.

"In our point of view," she said, "reengineering is constant. It never ends. You'll hear me speak interchangeably about innovation, which happens to be one of our five values that we take very seriously at American Eagle. As an industry, we keep pushing ourselves to think big and long term, and that takes innovation."

McGalla said that as "a growth-oriented company," AEO is not afraid to look out as far as 2010 or even 2020. That long-term view toward growth is one of the reasons the retailer this year launched two new concepts, Aerie and Martin & Osa, and has plans for a third, undisclosed concept on the drawing board. "It's been a momentous year for our company. We're no longer just a brand and a company. We've grown up into a corporation," she said.

Juggling these various businesses requires AEO to have a solid understanding of its core competencies. "We know what we're good at, we know what we're not good at. We know what we know, we know what we don't know," she said.

And viewing everything through that "filter" is essential for the company as it ponders its future growth.

"We're $2 billion and looking at approaching $3 billion, and how do we get to $10 billion? Getting big means staying small in the right ways," she said.

As AEO continues to grow, McGalla said it is paramount to maintain "a maniacal focus on the customer. When you walk into the door everyday, you have to turn into that 20-year-old mind-set." Servicing this demographic is a "slippery slope," she acknowledged. "They change their minds all the time. They're smarter, quicker, faster, more sophisticated than they've ever been." And that requires middle management to be "entrepreneurial" in order to keep up.For a time three years ago, AEO lost sight of its objectives and business suffered as a result. Calling it a "painful" lesson, McGalla said the company found out what could happen when it lost that "connection with our customer."

She said the downturn came as a result of becoming "a little bit too enamored with what some other people were doing in the marketplace." Instead of being "inspirational" for its core 15- to 25-year-old customer, AEO "got caught up in being aspirational. Our customers want us to tell them what to wear, and we weren't being clear."

Looking back on this "bump in the road," she said, taught the retailer that although businesses tend to "hang onto ideas," they need instead to look to the customer for a "report card" and be willing to abandon ill-fated strategies. "So we went back to the basics," McGalla said. By employing research to determine customer demand, AEO got back on track. Focus groups, mall "intercepts" and endless visits to high schools, college campuses and vacation spots provide the company with a "dose of reality you can't underestimate."

In 2003, research showed that customers look to AEO for "leadership. They want on-trend designs. You have to be relevant in terms of newness, you have to inspire them." A strong relationship between quality and value is also key. "So every decision we make filters through these things that we know are part of the fiber of our being."

Lesson learned. Since that stumble, AEO has posted 34 consecutive months of positive comps, she said. "The day that you believe that you're mature is the day you think you've got it all right. And we're just not that good. Things change, they evolve, and part of the process in our company is looking back and having a very thick skin about what we can do better."

McGalla said the company spends "day and night thinking about our girl and guy. We talk about them in the first person. They're not our customers, they actually have names and lifestyles. We know what they think about every day. When there are macro trends out there, we look at the AE girl and guy and how they're going to perceive what they want from us." With stores around the U.S. and Canada and a Web site that services shoppers in almost 50 countries, she said, "we have to think of all of that and how we make it uniquely American Eagle."She then showed slides of some macrotrends in fashion and how these looks will be "American Eagle-ized" for holiday by the New York design team working with the company's "merchant and marketing filter." These include striping and layering, oversized sweaters and trenchcoats, among others.

By speaking to the customer, she said, potential problems are avoided. "They always make us smarter, and this is terrific for us."

One example was how AEO handled the skinny jean. "Jeans are the foundation of the American Eagle brand, and we take that leadership very seriously," she said. But instead of rushing out and filling the stores with that product immediately, the company sought out its customer. "We went out to our girl and said, ‘What does this trend mean to you?' She said, ‘I like it, I'm seeing it in the mags, I'm seeing it on the celebs, but I'm not sure it's going to look good on my body. And I don't want all the jeans in my wardrobe to be skinny jeans.'" So AEO offered a range of styles for back-to-school.

"The bottom line is that we didn't overreact to this trend. We listened to her, and it's a success story for us."

This "360-degree customer focus" is not only reflected in the stores but also on AEO's Web site and in its marketing efforts. "Whenever they see our name, it's a reflection of who we are," she said.

Knowing that its customers love entertainment, AEO partnered with AMC theaters during the last back-to-school season to help promote its new denim collection. Some 90 percent of the jeans for both men and women were brand new, McGalla said, and AEO needed to find a compelling way to get kids into the stores to test them. So by offering shoppers a free movie ticket for trying on the jeans, the retailer succeeded in getting hundreds of thousands of kids to come in and try on the jeans. "And many of these try-ons were followed by a purchase," she said.

Technology is also essential to the young shopper, and AEO considers its online presence a "silent assassin." The firm has moved to make its Web site "more than just a place to buy product. It needs to be a destination for the whole brand. These kids are impatient, they don't have a lot of time. So to build on that, we're laying on exclusive content — personalization, so they do feel like an individual when they come onto our site — and it really is evolving to become a site that's much more than just shopping."Young people are also socially conscious, she said, which prompted the company to launch the AE Foundation in 1999. "They told us they wanted to be highly in tune with education, underserved youth and the environment. Based on that feedback, we focused on Jump-start, Big Brothers Big Sisters and the Student Conservation Association."

Turning to the retailer's new Aerie division, McGalla said this subbrand of intimates and dormwear for women arose out of the company's desire to respond to customer needs. "We've offered intimates and dormwear for over seven years, and what she was telling us is that she wanted to walk into an environment that felt private, that she could have fun in, that she could come in with her girlfriends."

The result was two standalone Aerie stores and an additional 10 units where the collection is merchandised side by side with an American Eagle store and shares an entrance.

To promote the new brand, AEO worked with the CW network to produce a series of 30-second "episodes" in which six real-life Aerie customers are featured in unscripted chat sessions during the programs "Gilmore Girls" and "Veronica Mars."

"They happen to be wearing our clothes, but they don't talk about the clothes," McGalla said. Instead, they discuss the shows and how they relate to their lives. This partnership, she said, "blurs the lines between education, content and retail. Today, with the world of TiVo and kids fast-forwarding through the commercials, the needs of the future are going to be quite different."

So far, McGalla said AEO is pleased with the results it has achieved with Aerie but that there are no plans to expand the brand into men's wear. "We have dormwear for men, but it seems to exist best in the environment with the sportswear. They're not quite the same shopaholics with the same shopping patterns," she said.

In response to a question, McGalla said the company is also pleased with its attempt to reach an older customer with the Martin & Osa brand. "Our first stores opened in August of this year, and we're committed to it. But we're learning from it. It's a laboratory for us."Other growth opportunities include growing the Internet to a $1 billion business, expanding internationally and launching a third concept, which McGalla said will "leverage our core competency — that's young, fun, sportswear-related.

"We are so proud of our 34 consecutive months of continuous comp-store growth, and there are a lot of worthy competitors out there," she concluded. "It's not an uncrowded space today, but it's about being the best, about being connected with the customer and about execution. I think whatever segment we pick, it's about being world class."

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