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American Eagle CEO Departure: the Tip of the Iceberg?

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In what may be just the beginning of a major shakeup in the teen specialty sector, Pittsburgh, PA-based teen specialty retailer American Eagle Outfitters, Inc. surprised investors Wednesday when it announced that CEO Robert S. Hanson will be stepping down after only two years in the job. Hanson joined the company in 2011 after more than two decades at Levi Strauss & Company. His future plans have not yet been revealed.

Chairman Jay Schottenstein was named interim CEO while the company searches for a replacement, and Roger S. Markfield has agreed to postpone his retirement to continue in his current role as vice chairman and executive creative director.

Although the announcement was an unexpected one, it is no surprise that the denim-based teen apparel sector dominated by American Eagle, Aeropostale and Abercrombie & Fitch has been going through a very rough patch of late. All three companies’ stock prices dropped about 30% last year as their brands lost share to the likes of fast-fashion retailers Forever 21 and H&M and more fashion-forward brands like Urban Inc.’s Urban Outfitters and Anthropologie.

There is increasing talk that changes at American Eagle’s competitors may also be in the works. At Aeropostale, activist shareholder Crescendo Partners is putting pressure on the board to put the company up for sale as sales and earnings continue to plunge. Pricier Abercrombie and Fitch, despite protests from some shareholders and customers, renewed its contract with CEO Mike Jeffries, though at a lower compensation level. Jeffries has recently been under fire for explaining Abercrombie’s refusal to stock large sizes by stating that the company intended to only “market to cool, good-looking people.” The pricier brand has seen sales decline for the past seven quarters.

American Eagle reported a profit of $24.9 million in the most recent quarter, a huge drop compared to $78.6 million in the year-ago period. Revenue was $857.3 million, a decline from $910.4 million a year ago. The company reported earlier this month that total revenue for the holiday selling season fell 2 percent and same-store sales dropped 7 percent.

Hanson spent much of his time at American Eagle working to restructure the business to be more accessible to shoppers through digital channels, and to expand internationally. He told analysts at an investment conference last week that the macroeconomic climate was rough but admitted that some of American Eagle’s problems were self-inflicted.

“The first thing we want to talk about was execution because we did not execute as we should have in 2013 and we would attribute at least half of our underperformance to weak execution,” he said. “That’s across the assortment. Because in this business, product’s everything.”

Teens are eschewing basic and logoed merchandise in favor of more fashionable styles with which they can express their individuality. They are also increasingly seeking value, which has exerted tremendous price pressure across the sector. Analysts expect fourth quarter and fiscal year earnings at most major retailers to end up at the low end of expectations after the incredibly promotional holiday season of 2013 that was dominated by markdowns and discounts as all retailers, not only those in the teen apparel sector, fought for market share.

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