Barron’s: 02/18/2013
MC3.03 - Compare the disadvantages and advantages of different modes of transportation as means for distributing products to different world markets.
Summary
The teen retailer, American Eagle Outfitters, is currently experiencing a turnaround that might drive its shares up by about 50%. The growth in earnings averaged 75% per quarter which may be linked to the company’s new CEO Robert Hanson who joined in January 2012. Its stock is not considered expensive at 12.7 times fiscal ‘14 estimated earnings of $1.58 per share and is second to Abercrombie & Fitch, with its current stock price of $51.29, in this retail sector targeted at teens or young-adults. AE operates over 1,000 stores, mostly in malls, and a successful online store which is accountable for 14% of its sales. Management aims to raise the store count to 1,255 by the end of 2013 with 20 overseas, six in Mexico, and six in popular cities like New York and L.A while closing and remodeling some. The company recently struggled with raw material and manufacturing costs during a financial crisis. Hanson claims the company also has two years worth of work ahead to ‘fortify the brand’ and ‘sharpen the inventory investment’ since there was a lot of inventory waste in the past. To control inventory more successfully, it has begun shipping merchandise from its Asian factories to the U.S. by air rather than boat. This method is costlier, speedier, but maintains better merchandise assortment by pre-empting major markdowns. Management aims to continue online growth too, hopefully reaching 20% of sales.
Connection
American Eagle is no longer just a brand for Americans today. As the company’s top management has changed, the new CEO Robert Hanson has developed a better idea of how the brand’s products should be distributed among different countries. American Eagle has recently made the switch from delivering its products from factories in Asia by boat to delivering by air freight. This mode of transportation has both its advantages and disadvantages which are each mentioned briefly in this article. For one advantage, it is certainly much faster to deliver these products by air because it’s simply quicker than shipping by water and therefore the merchandise will reach the retailer a lot sooner. This also maintains a better supply of inventory since the major markdowns can get packaged up and sent off to another destination to be sold elsewhere. The sooner the retailers remove these old products, the sooner they can replenish their merchandise inventory and this in turn will attract more customers. Shipping by water is often quite disruptive to marine environments that the ships pass through but at the same time, shipping by air can also contribute some serious environmental damage by polluting the atmosphere; both modes are disadvantageous in terms of damage to the global environment. Another disadvantage to the air freight shipping mode is the expensive costs of it. However, if the merchandise meets the market faster, it is probably well worth it for the company as they have the ability to achieve higher earnings in a shorter period of time. This mode of product transportation is especially better for companies that have an online store. American Eagles has customers in 77 different countries - more than the number of which actual stores are in - who are demanding their orders and the shipments need to be delivered to them on time if they want to provide the best customer service. By making the switch from water delivery to air freight delivery, companies are making the better decision when it comes to distributing their products to foreign markets.
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