UPDATE: American Eagle Seeks To Grow By Opening Kids Stores

Teen retailer American Eagle Outfitters Inc. (AEO) on Thursday will open a store in a Pittsburgh mall with clothes for children and babies in a move that will increase its "77kids" product line beyond its limited website, moving more fully into the growing business of selling togs for youngsters and toddlers.

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. And adult retailer Gap Inc. (GPS) is in the midst of expanding its kids' and baby lines.

Teen and even adult retailers, running out of areas to open more of 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 don't make apparel purchases for themselves because of the still-soft economy. Even grandparents are buying up clothes for youngsters and infants, trying to help out their own children.

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, which takes its name from the year American Eagle started, 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. One 77kids will be right next to an American Eagle store. Another three will open by the end of this year.

The openings are timed to capture back-to-school business.

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.

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.

Gap stores are in the midst of receiving shipments for the retailer's Kid's and Baby's lines, including a fuller array of denims and even varsity jackets and lettermen sweaters. "Gap Kids and Baby Gap continue to be a priority and a business we want to grow," Gap spokeswoman Louise Callagy said.

Callagy said that while Gap doesn't break out sales for its different units, parents do feel an obligation to spend to keep their children well dressed. Clothes are bought as kids grow out of old apparel, for different seasons and special occasions and parents also want their children to look good in their own eyes and those of people they meet, Callagy said. "There is a real emotional component."

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

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