American Eagle Outfitters Inc. is headed to the Land of the Rising Sun.
Under a franchise agreement with Sumikin Bussan Corp., the company will open aerie and American Eagle stores in Japan, with the first slated to open in Tokyo’s Harajuku district in the first half of 2012.
The retailer noted that since opening its first stores outside of North America in Dubai and Kuwait earlier in the year, it has been “steadily pursuing” an international strategy, with agreements for stores in China, Hong Kong and Israel, “as well as plans for other countries.”
“American brands expanding to Japan have had a good degree of success,” said Morgan Stanley analyst Kimberly Greenberger. “The Japanese consumer, like the American consumer, is asking for and demanding more value.”
“There is tremendous opportunity for sportswear brands in Japan, both domestic and international,” said Sumikin president Gashun Amaya. “American Eagle Outfitters is increasingly popular among Japanese customers, who have experienced it in their travels to the U.S. and Canada, as well as online.”
“Japan is one of the most important international markets for retail and home to millions of fashion-conscious young people,” said AEO chief executive officer Jim O’Donnell. “Sumikin Bussan Corporation is the ideal partner for this region, given their extensive experience, industry leadership, and commitment to creating lasting value for customers.”
Compared with rivals like Abercrombie & Fitch Co. and Aéropostale Inc., American Eagle is a bit late to the international expansion game. As a result, the shift to international is logical for the Pittsburgh-based firm, which has a 934-store fleet in the U.S. and Canada.
Greenberger gives Abercrombie & Fitch credit for seeing an opportunity to expand abroad before other teen retailers. “Abercrombie learned a lot from its Fifth Avenue flagship [in New York],” the analyst said. “They discovered that the lion’s share of that business was done by tourists.” The retailer also realized it had a strong following in Japan after it shut down a reseller, who ordered A&F clothing to sell in Japan a few years ago.
While competitors were opening new locations abroad, American Eagle was embroiled with its struggling and now-defunct Martin + Osa division, as well as with working to fine-tune its aerie brand.
“They are still working on turning the aerie division to profitability. It’s a more manageable challenge now,” Greenberger said, adding that partnering with Sumikin will help the company navigate the Japanese retail market more easily than if it had decided to open stores on its own.
“The franchising model allows for more rapid penetration internationally…and a rapid expertise,” the analyst said, explaining that, on the downside, “the revenue and profit from franchising or licensing agreements is substantially smaller.”
Limited Brands Inc.’s Bath & Body Works and La Senza, as well as Gap Inc. and Coach Inc., use franchising to help grow their brands abroad. Of the 3,369 units open as of Oct. 30, Claire’s Stores Inc.’s portfolio included 398 stores operated under franchise or license agreements, spanning markets such as Japan, the Middle East, Turkey, Russia and South Africa. Others, like Urban Outfitters Inc., The TJX Cos. Inc. and Abercrombie, don’t franchise their businesses.
Japan’s economy has been soft this year and there are concerns it could backtrack financially in the new year. In the third quarter, its gross domestic product grew at an annual rate of 1.1 percent, up from about 0.4 percent in the second quarter but below the first-quarter rate of 1.2 percent, according to TradingEconomics.com.
Shares of American Eagle closed Tuesday at $14.77, up 1 cent or 0.1 percent.