American Eagle has logged three consecutive quarters of declining revenue

American Eagle has logged three consecutive quarters of declining revenue

Retailer American Eagle Outfitters stunned the industry when it announced the sudden departure of its CEO, Robert Hanson, earlier this week. Despite industry pressures and a tough year in the teen retail space, observers have voiced their disappointment at the departure of a chief executive they saw as amongst the best in retailing.

Teen apparel retailer American Eagle Outfitters yesterday (23 January) revealed its CEO had left the company after less than two years in the role.

Executive chairman Jay Schottenstein, previously chief executive from 1992 to 2002, will fill the gap on an interim basis, while the company begins the search for a replacement.

The firm gave no reason for Hanson's departure, but the news has sent a ripple of astonishment and disappointment across the retail analyst and investor community.

Extensive experience
He was appointed into the role in January 2012, succeeding the retiring Jim O'Donnell. He joined following a 23-year career with Levi Strauss where he served as global president of the Levi's brand for his last two years. It was in this role that he led a US$3.5bn business across retail, e-commerce and wholesale channels in the Americas, Europe and Asia.

Hanson's considerable knowledge and experience of the apparel retail industry was in no doubt when he joined American Eagle Outfitters, at which point he was quick to implement a strategy designed to turn the business around.

The year before Hanson joined, the retailer has succumbed to heavy promotional activity in order to keep sales up, but margins were declining and earnings per share had fallen.

Hanson therefore spent much of his tenure restructuring the business, with a focus on making it more accessible to shoppers through digital channels. This included the closure of a distribution centre in favour of a "more e-commerce friendly" operation, as well as expanding the group internationally, entering markets like Mexico and the Philippines.

Unsatisfactory performance
It is fair to say that American Eagle's performance hasn't improved much since he joined. The firm has had a run of poor results, logging three consecutive quarters of declining revenue. Last month, the company described its third-quarter financial performance as "unsatisfactory" after recording a slump in earnings.

But despite this, analysts seemed willing to give Hanson time to improve things.

"While we acknowledge that the company's absolute performance in 2013 was disappointing, on a relative basis American Eagle meaningfully outperformed its core competitors within the teen category in what has widely been discussed as an increasingly difficult retail environment," said Barclays Capital analyst Matthew McClintock.

"We believe that the investment community has a favourable opinion of Mr Hanson, who outlined a reasonable strategic plan for the company that we believe remains achievable over the longer term, despite near-term industry pressures."

McClintock wasn't the only analyst to express his surprise at the news. Many had attended the 2014 ICR XChange Conference last week, at which Hanson presented -and after which many said no indication had been given as to any potential management changes.

"Given that Mr Hanson had been with the company for only two years, had aggressively begun to shift the business model and was only last week presenting at the ICR conference, we are stunned," said Brean Capital analyst Eric Beder. "We believe Hanson was among the best CEOs in retailing and we wish him well."

RB Capital Markets analyst Howard Tubin concurs.

"This development comes as a surprise to us. Mr Hanson had only been at AEO for two years. He had been implementing meaningful and positive changes to the business. We are a fan of Mr Hanson and he was, generally speaking, liked by Wall Street."

Unexpected departure
Why Hanson has left the company has not been made clear by American Eagle, but it could be said that his departure couldn't have come at a worst time for the group given its recent run of results.

However, for Beder, the fact the company reiterated its fourth-quarter guidance on the announcement yesterday suggests "current performance was not an issue".

"We thought that Mr Hanson had created a more reliable and stronger business model than ever before. We believe the product offerings for the company are solid and the next six months of buying are already in the books, which should allow for the company to rebuild after a tough FY14."

Other analysts though, believe the company's performance could indeed be one of a number of reasons for Hanson's swift departure.

"After presiding over a successful 2012, the company's fortunes changed in 2013 and business took a turn for the worse," said Tubin. "While AEO is in the same boat as most other youth oriented retailers, the board may have blamed Mr Hanson for the recently weaker performance and asked him to leave."

Indeed, along with others operating in the teen apparel retail sector, American Eagle has struggled. But while many teen retailers like Abercrombie & Fitch have taken a hit over the past year, American Eagle has been particularly damaged.

Teen apparel has become one of the weakest retail segments as young consumers curb their spending.

According to Ken Perkins, president at research firm Retail Metrics, among the challenges are competition from fast fashion chains that are increasing their footprint, as well as high teen unemployment and a very limited spending pie.

But Hanson was seen as an industry specialist with a strong background, just the kind of person that American Eagle now needs to find again if it wants to turn things around.

Another possible explanation for Hanson's departure, Tubin suggests, could be related to his choice of management.

"Roger Markfield and Fred Grover, two long-time creative leaders are/were set to retire from the company shortly. Mr Hanson was in the process of remaking the senior leadership of the creative organisation. He recently hired Chad Kessler to serve as chief merchandising and design officer for the American Eagle brand. Perhaps the board did not like the creative direction Mr Hanson was steering the company toward, and asked him to leave."

Replacement search begins
Nonetheless, where his departure leaves the company now is not clear. Analysts believe the move could be a negative signal for American Eagle's 2014 outlook and initiatives. It also, they suggest, puts its primary competitor, Abercrombie & Fitch, in "transition mode" while it searches for a new CEO.

McClintock adds: "Many investors had viewed AEO's dominant asset as its best-in-class management team of the three A's. After today's event, we think investors' perception of management may likely be lower and we expect a potential shift in sentiment to the downside."

FBR & Co analyst Andrew Schmidt, concludes: "If the board had confidence in initiatives and execution, we believe that the CEO's departure would likely not have occurred."

Aside from the reasons for Hanson's sudden departure, the next question on everyone's lips will centre around who his replacement is likely to be. In addition to fighting for customers, American Eagle may now find itself also fighting for talent.