American Eagle Seeks To Grow Sales By Opening Kids Stores

Teen retailer American Eagle Outfitters Inc. (AEO) on Thursday is opening a store with clothes for children and babies in a move that will increase its "77kids" product line beyond its website and into bricks-and-mortar.

The move mirrors fellow teen retailer Aeropostale Inc. (ARO), which found more success expanding last year to a younger demographic after failing at going after adults.

Teen retailers, running out of areas to open their traditional stores, have been trying to increase sales by expanding their customer base. After the U.S. has experienced what some analysts say is something of a baby boom, the opportunity is seen as ripe. Parents have to buy clothing for their growing children even if they do not make apparel purchases for themselves because of the still-soft economy.

The baby-to-young-teen market is roughly $34 billion, a slice of the overall apparel market, which has $190 billion in annual sales, according to NPD Group.

American Eagle can use a boost in business. Same-store sales have been struggling and the teen retailer indicated that pressures from markdowns will wear on its current quarter's results, with American Eagle earlier this month saying that second-quarter earnings per share would be on the low end of its projected range.

American Eagle also turned in a poor first-quarter performance, hurt by closing costs for its Martin + Osa chain, which was aimed at adults. Aeropostale and fellow teen retailer Abercrombie & Fitch Co. (ANF) all failed at attracting an older crowd to their attire and ended up, or are in the process of, shutting down their adult stores.

Kids and babies might be easier to connect with. "There are natural synergies," said Betsy Schumacher, chief merchandising officer for American Eagle's 77kids unit. "We like to be able to have a customer start with us at birth and stay right through college."

77kids started out a year-and-a-half ago as an online offering, with American Eagle preferring to go slow with its new line as its 4-year-old adult Martin + Osa stores were failing.

This month, 77kids will open five stores in malls, all where American Eagle Outfitters stores are already located. The openings are timed to capture back-to-school business. Another two will open by the end of this year.

Schumacher declined to disclose the online sales for 77kids but said the decision to go with stores was based on the successful reception the line received over the Web. The website also served as a way to experiment so that the stores will be well turned out, Schumacher said.

"We got to see what styles were popular," she said.

77kids will feature clothing for infants, designed along the lines of American Eagle's own casual preppy look, featuring plenty of denim, fleece and graphic tee-shirts. In contrast to what Aeropostale is doing--going after youngsters age seven through 12 with its P.S. from Aeropostale stores--American Eagle is targeting all kids, from newborns on up.

While Aeropostale declined to provide sales figures, the company said in its first-quarter earnings call in late May that the P.S. stores are doing well, having exceeded expectations for the period.

American Eagle Outfitters' 77kids stores will be around 5,000 square feet, around 800 square feet less than an American Eagle Outfitters store, but they will include treat stations, mazes and areas where kids can be disc jockeys.

At the same time, "We will be very competitively priced," Schumacher said. American Eagle's pricing typically falls between low-priced Aeropostale and upper-end Abercrombie & Fitch.

As the teen retailers said when they created their adult concept stores, the move into kids is key to their further success. "Kids is an important part of our overall growth strategy," Schumacher said.

In this case, American Eagle may be correct, said Dorothy Lakner, retail analyst at Caris & Co. "The stores are very funky and colorful, and we've just been through something of a baby boom. As the kids grow, you have no choice but to buy clothes for them, even in a recession, even if parents don't buy clothing for themselves."

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

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