Time could be running out for American Eagle Outfitters Inc.’s contemporary concept, Martin + Osa, according to analysts.
This story first appeared in the January 15, 2010 issue of WWD. Subscribe Today.
Speculation about M+O’s future has intensified since Wednesday, when the teen retailer detailed its fourth-quarter earnings outlook at the ICR XChange Conference in Dana Point, Calif.
“The fourth quarter [of 2009] was extraordinarily disappointing for Martin + Osa,” said Citi specialty analyst Kimberly Greenberger, who estimated the brand might have lost as much as $40 million during the period, “causing management to rethink its commitment” to the brand.
Lazard Capital Markets retail analyst Todd Slater wrote in a research note: “Maybe it’s wishful thinking, but it seems to us that the writing could be on the wall for Martin + Osa.”
Slater said management appeared to have “pinned” the failure to translate the 7 percent rise in December comparable-store sales into better projected fourth-quarter earnings on a “meaningful deceleration at Martin + Osa relative to the first three quarters and, to a lesser degree, on aerie,” the retailer’s intimate apparel concept.
While Slater could only speculate on the magnitude of M+O’s impact, he said, “When a brand is eating up 15 percent to 20 percent of the annual earnings, it’s hard to justify reinvesting.”
Launched in 2006, M+O, which targets 28- to 40-year-old customers, has weighed down the teen retailer since 2007, when the unit lost $50 million, or 15 cents a share. In 2008, M+O cost the Pittsburgh-based firm 21 cents a share.
American Eagle chief executive officer James O’Donnell said Wednesday at ICR that even though the 28-door chain’s comps increased and the bottom line was strengthened overall, he is “still evaluating” plans for the concept.
Part of M+O’s problem has been merchandise and marketing, analysts said.
“The older customer AEO attempted to target with M+O proved hard to please and AEO has struggled with fit, design and building awareness for the new brand,” said retail analyst Liz Dunn of Thomas Weisel Partners. “Our sense from conversations with management is that they may be ready to make a decision on closing the division as soon as March 2010.”
Last year, AEO had set some tight benchmarks for the brand to reach by the end of fiscal 2009, including cutting its operating loss in half.
Pali Capital analyst Amy Noblin said, “It seems like a decision on M+O remains elusive,” and the retailer could provide a “more firm time frame” when it reports fourth-quarter earnings in March.
“The reality is that M+O had a lot of time to incubate,” Noblin said.
Meanwhile, she noted a “product turnaround at the core [American Eagle] business which should produce positive comps and a more meaningful margin recovery story” in fiscal 2010.
A closure of M+O would parallel the experience of other teen retailers that struggled to launch secondary concepts. Abercrombie & Fitch Co. is shuttering its Ruehl division, and Pacific Sunwear of California Inc. closed its more urban-oriented D.e.m.o. division in 2008.