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New Brands will Drive Growth

New brands (Aerie, Martin & Osa, 77Kids) do a better job segmenting their market and management has done grown them conservatively to reduce their risk to the economy. Martin & Osa especially has the most potential with only Banana Republic as its main competitor, which is driving GPS right now with its higher end merchandise.

In their flagship stores, AEO discounted heavily over the holidays, but did so to effectively clean out inventories and can go forward with lower carrying costs. Nevertheless, it was still able to uphold a fairly healthy 12% operating margin in its last quarterly, compared to around 10-11% with its competitors.

Plus, the discounting may help them take away market share from traditionally cheaper brands (Old Navy, ARO) with better quality and brand name and from more expensive ANF by offering a better price point.

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