FEBRUARY 3, 2009
By NICHOLAS CASEY
The Wall Street Journal
After steep discounting on its tops, khakis and jeans ate into its margins last year, American Eagle Outfitters Inc. is trying to reengineer the way it produces clothes.
It hopes to recalibrate its costs with moves that involve everything from changing where a garment is made (fewer Chinese factories and more Indian villages) to how it's shipped (less use of air freight) to how it looks (no patterned pockets in many jeans).
Many retailers fear they will be forced into still more rounds of price cuts as the economy continues to sputter. "Eighty percent off is the new normal," says Allan Haims, a retail consultant and former president of Wet Seal Inc.
Other teen chain stores are also growing wary of slipping prices. Abercrombie & Fitch Co., which has tried markdowns since the holidays, says its brand would be harmed if it tarnished its high-end image with more price cutting. And Aéropostale says it's looking to timed promotions to drive traffic rather than lowering price tags for good..
Fire-sale prices please shoppers but they depress store margins. American Eagle's gross margins for its fiscal third quarter, ended Nov. 1, fell 6.4 percentage points to 41% of sales. Analysts believe that after the latest tide of markdowns during the holiday season, the margins at its 954 stores have declined further.
American Eagle hopes to cut its manufacturing costs significantly. Recently, the company began moving some production out of China, where wages are on the rise, and into cheaper labor markets in Cambodia and Vietnam, which are increasingly able to make hoodies and T-shirts in their factories. American Eagle is still moving cautiously in Southeast Asia, but it believes it can shave 4% to 8% from its per-garment production costs at its Chinese factories.
Next year about 10% of embroidering will be done in India, another new territory for the company. India "is really emerging for us," says Chief Executive Jim O'Donnell, who recently hired an agent there to scout the countryside for small operations that specialize in embroidery and bead sewing at lower costs than those in China.
But shifting to less costly production carries its own risks, says Kimberly Greenberger, an analyst at Citi Investment Research. China is still tops in manufacturing talent, she says, and "there are definitely quality issues that are coming up" in places like Vietnam and Cambodia.
Mr. O'Donnell concedes that "the countries have very limited infrastructure," but he says he's confident time will eliminate the kinks.
Historically, when hot-selling items ran out, American Eagle would "fast track" more, flying them into New York for about four times the cost.
This year, the company plans to use that option as little as possible, instead relying on shipping goods through Los Angeles and, buoyed by the recent drop in fuel prices, trucking them to distribution centers.
Even the way stores get their merchandise is evolving. In past years, distribution centers replenished each store's clothes garment by garment. This year, the company is bundling many of its lines in prepackaged kits that include a small, two mediums, two larges and an extra large -- a set that can go directly from the delivery truck to a display table.
American Eagle plans to entice its customers with brighter colors, hipper silhouettes and ruffles on women's tops for spring. But it's cutting out a few things it hopes its teen customers won't miss: the ribbon that lines the waistband of its khakis, for example, and the color pattern on the material used for its jean pockets.
Changing pockets and eliminating ribbon saves only eight to 10 cents a garment, the company says. But eliminating relatively invisible features allows designers to add hip, visible details -- like embroidery on the back pockets of denim jeans -- that are more likely to lead to sales.
While it seeks savings, American Eagle has to be careful not to cut too much. Swamped by low-end competitors like Old Navy, the specialty retailer realizes "we can't be the cheapest in the mall," says Mr. O'Donnell. "If they wash it twice and it falls apart, they'll say it's not a good shirt," he says. "There's a fine line between price and value."
American Eagle's choices make sense to Gabe Rosen. "I'm wearing khakis now and I had no idea" there was a ribbon on them, says Mr. Rosen, a 27-year-old employee at a Silicon Valley startup, who says he is more "sensitive to the outside look of my clothes."
It hopes to recalibrate its costs with moves that involve everything from changing where a garment is made (fewer Chinese factories and more Indian villages) to how it's shipped (less use of air freight) to how it looks (no patterned pockets in many jeans).
Many retailers fear they will be forced into still more rounds of price cuts as the economy continues to sputter. "Eighty percent off is the new normal," says Allan Haims, a retail consultant and former president of Wet Seal Inc.
Other teen chain stores are also growing wary of slipping prices. Abercrombie & Fitch Co., which has tried markdowns since the holidays, says its brand would be harmed if it tarnished its high-end image with more price cutting. And Aéropostale says it's looking to timed promotions to drive traffic rather than lowering price tags for good..
Fire-sale prices please shoppers but they depress store margins. American Eagle's gross margins for its fiscal third quarter, ended Nov. 1, fell 6.4 percentage points to 41% of sales. Analysts believe that after the latest tide of markdowns during the holiday season, the margins at its 954 stores have declined further.
American Eagle hopes to cut its manufacturing costs significantly. Recently, the company began moving some production out of China, where wages are on the rise, and into cheaper labor markets in Cambodia and Vietnam, which are increasingly able to make hoodies and T-shirts in their factories. American Eagle is still moving cautiously in Southeast Asia, but it believes it can shave 4% to 8% from its per-garment production costs at its Chinese factories.
Next year about 10% of embroidering will be done in India, another new territory for the company. India "is really emerging for us," says Chief Executive Jim O'Donnell, who recently hired an agent there to scout the countryside for small operations that specialize in embroidery and bead sewing at lower costs than those in China.
But shifting to less costly production carries its own risks, says Kimberly Greenberger, an analyst at Citi Investment Research. China is still tops in manufacturing talent, she says, and "there are definitely quality issues that are coming up" in places like Vietnam and Cambodia.
Mr. O'Donnell concedes that "the countries have very limited infrastructure," but he says he's confident time will eliminate the kinks.
Historically, when hot-selling items ran out, American Eagle would "fast track" more, flying them into New York for about four times the cost.
This year, the company plans to use that option as little as possible, instead relying on shipping goods through Los Angeles and, buoyed by the recent drop in fuel prices, trucking them to distribution centers.
Even the way stores get their merchandise is evolving. In past years, distribution centers replenished each store's clothes garment by garment. This year, the company is bundling many of its lines in prepackaged kits that include a small, two mediums, two larges and an extra large -- a set that can go directly from the delivery truck to a display table.
American Eagle plans to entice its customers with brighter colors, hipper silhouettes and ruffles on women's tops for spring. But it's cutting out a few things it hopes its teen customers won't miss: the ribbon that lines the waistband of its khakis, for example, and the color pattern on the material used for its jean pockets.
Changing pockets and eliminating ribbon saves only eight to 10 cents a garment, the company says. But eliminating relatively invisible features allows designers to add hip, visible details -- like embroidery on the back pockets of denim jeans -- that are more likely to lead to sales.
While it seeks savings, American Eagle has to be careful not to cut too much. Swamped by low-end competitors like Old Navy, the specialty retailer realizes "we can't be the cheapest in the mall," says Mr. O'Donnell. "If they wash it twice and it falls apart, they'll say it's not a good shirt," he says. "There's a fine line between price and value."
American Eagle's choices make sense to Gabe Rosen. "I'm wearing khakis now and I had no idea" there was a ribbon on them, says Mr. Rosen, a 27-year-old employee at a Silicon Valley startup, who says he is more "sensitive to the outside look of my clothes."
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