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American Eagle 'Down-Sizing' Into Kidswear

Kim Leonard
Pittsburgh Tribune-Review
October 23, 2008

Today's kids have a lot to say about what they wear.

A core team of 22 people at American Eagle Outfitters Inc. found that out as they spent a year studying the children's clothing market.

"We went across the country and talked to hundreds of moms, and hundreds of 8-, 9- and 10-year-old girls and boys," Chris Fiore of the South Side-based company said Wednesday.

"We went to their homes and to their schools, and picked their brains about what they like and don't like."

American Eagle will find out, starting today, whether it has hit on the right combination -- the first collection in its new 77kids by american eagle brand debuts for sale online only.

The first 150 designs for toddler boys and girls and older children are pioneers of sorts for the company's fourth clothing brand. The collection is American Eagle's first step into the $10.4 billion-a-year children's clothing-store market.

As 77kids gets rolling, American Eagle's year-old headquarters at SouthSide Works will be a center of activity.

While design and production work are run from a New York office, all marketing, merchandising and electronic commerce operations come out of the Hot Metal Street buildings. That even includes photography for the Web site, said Fiore, senior vice president for the brand.

American Eagle announced 77kids in January, just as most retailers were starting to hit on hard times.

The weak economy likely will dampen sales at first, said George Van Horn, senior analyst at IBISWorld Inc., a Los Angeles-based market research firm. Still, "the outlook over the next five years shows there are a lot of good reasons to get into this sector that they hasn't been exposed to before."

The 77kids brand targets ages 2 to 10, within a population segment that's projected to grow by at least 0.8 percent a year for the short term.

"We expect the share of first-born children to go up -- those are the kids who tend to get the stuff, and aren't prone to hand-me-downs," Van Horn said.

Fiore said he realizes the challenges of convincing parents and kids through computer screens to buy merchandise that will be judged by touch and fit. That's why, he said, the fashions come with trademarked guarantees for durability and softness.

"We did wash every item 77 times, and we photographed it and stand behind it. It's not just marketing gibberish," Fiore said, adding the results are documented on the site. Free shipping and returns are offered to spur sales, and an online "size wizard" and printable footwear chart ensure a good fit.

The brand name is a reference to American Eagle's 1977 founding date, and 7s are sprinkled throughout its promotions.

Seven "gotta have" outfits for boys and girls are modeled on the site, and the company is sending seven boys and seven girls who win a sweepstakes to Los Angeles with family members for a Nov. 14 Jonas Brothers concert. The 77kids site will play the concert two days later.

The clothing is priced for value, Fiore said. Although it differs substantially from American Eagle styles for teens and early 20s customers, "the basic DNA of the AE designs has been infused into the 77kids assortment."

That means lots of denim, with jeans for older kids priced at $19.50 to $39.50. Hoodies, T-shirts, jackets and cargo pants are in the mix, but so are sparkly dresses.

It's all designed to land in the common ground between the durable, safe, good-quality and value-priced clothing that parents want, and the cool, soft and stylish items -- sometimes based on their older siblings' or celebrities' fashions -- that children crave, he said.

Retail analyst Seth Jayson said the 77kids styles that he has seen resemble AE items. "That's a formula that has worked well for them, with AE and aerie," he said, referring to the company's dormwear and underwear brand.

The Martin + Osa brand for older customers has struggled, partly because prices were too high at first, said Jayson of The Motley Fool, which owns American Eagle stock through its Million Dollar Portfolio. He owns shares as well.

With the children's brand, "they really need to make sure they deliver the right value proposition to people who come in right now," Jayson said. "If you scare them now, it might end up choking the concept off."

Top retailers, such as Gymboree and Tween brands, have struggled in recent times, Jayson noted. And Talbots closed its children's stores this year.

American Eagle has said its online launch for 77kids is a way to gauge customers' tastes and to tweak styles before the first stores open late in 2009. Orders will be shipped from a distribution center in Ottawa, Kan.

The company's sales, like those of most retailers, have declined in the past year. American Eagle's stock has lost about half its value this year and closed at $10.26 yesterday, down 80 cents.

September same-store sales were down 6 percent compared to a year ago, although e-commerce sales were up 33 percent.

"The good news is, they are still making a lot of cash," Jayson said, "and I don't worry that a recession will sink them."





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