Note to American Eagle Outfitters: Forget the Numbers, Stay the Course

It's hard for a peddler of trendy apparel to admit that it took a turn into "uncool" territory. But teen retailer American Eagle Outfitters (AEO) is swallowing the pride that came with its admirable show against competitors Aeropostale (AERO) and Abercrombie & Fitch (ANF) last year and owning up to less-than-stellar first quarter 2010 numbers partly due to a misguided (and mismanaged) effort to appeal to an older customer.

Though comps were up 5 percent and sales increased 8 percent, those numbers exclude the hit AE took on its failed Martin + Osa concept which was responsible for a net income of only $11 million as compared to $22 million last year.

AE trotted out Martin + Osa in 2007, the same time it launched Aerie, a line of lingerie and loungewear. Aerie became an instant hit with young women who wanted cute underpinnings but didn't fancy the overtly sexy Victoria's Secret (LTD). Martin + Osa -- with its casual chic sportswear targeting 25- to 40-year-old women and men -- did not.

That's in part because AE pushed cross-merchandising heavily between its namesake stores and the Aerie shops. They co-exist online (along with 77kids) too. Many malls have both stores, so customers could get a coupon with their purchase at AE, walk a few doors down and redeem it at Aerie. But even when both stores aren't under the same roof, AE always keeps Aerie items on display in rounders or racks in the women's side of the store, thus binding the brands in the young customers' minds.

AE lost out on a huge opportunity with Martin + Osa. Many of the teens and tweens who shop at its stores are accompanied by a parent who holds the cash or plastic. While mom or dad waits patiently for junior to select just the right eagle-emblazoned polo or shorts, they could have been perusing fashion that didn't look like they stole it from their kids. A single rack of those slim-fitting Martin + Osa cardigans would have made many a mom happy. In their absence, she may just have picked up an AE boyfriend sweater -- and hoped no one would notice the big bird embroidered on the pocket.

Another mistake: the brand's Web site barely highlights its connection to AE or Aerie, you have to scroll to the bottom of the page to see the links out to the other sites.

The smart thing AE did was pull the plug in a hurry. Following an after-tax loss of $44 million in 2009, AE announced it would shutter all 28 Martin + Osa stores and its online business by the second quarter of 2010. That's admirable for a retailer of its size and scope. With nearly 950 stores and shipping to 75 countries, AE could have easily fallen prey to corporate slowness. Instead, the Eagle took flight for more promising territory, most notably with its recent expansion into Dubai and Kuwait.