Wednesday, September 10, 2008


Martin+Osa is a new retail concept by the teen retailer American Eagle Outfitters (AEO)

The M+O concept is aimed instead at an older demographic 25-40. The theme of the clothing is "refined casual". The design of the clothes by San Francisco designer Deborah Hampton are clean and simple but with subtle detailing and fine tailoring. The clothes use luxurious fabrics such as silk, organic cotton and cashmere but are priced reasonably, about the same as J-Crew.

My wife and I are big fans of M+O and we also are AEO shareholders. I have personally visited 4 of the 28 M+O stores. The store designs themselves are quite impressive. The store is made of hard wood and the front is simply a wall of wood with a minimalist blue glass stripe running through it. The store (and the clothes) smell of freshly chopped wood.

The changing rooms which are about as big as my old college dorm room (to allow for baby strollers) have high ceilings and a button where you can call the extremely helpful sales staff. The customer service at M+O is similar to what you would receive in a luxury boutique. They give out free Fiji Waters just for visiting the store. (Recently J-Crew has copied this tactic.)

I have mentioned that I love the store and the clothes. But how is the brand being received by other customers. To answer this question, I went through a lot of the reviews at . This was slightly painful since Yelp divides their reviews by store (in some particular city) and not by brand. So I had to go through and search for each store. I managed to find 13 stores that had at least one review. There are 65 reviews in all and 33 of them are from the San Francisco Store. I think this is where Yelp originated. The reviewers choose a star rating from 1-5 and then submit a written review. I have constructed a table below showing the average rating for each store and the number of reviews. The weighted average review is shown at the bottom and is 4.24 stars out of 5. That is excellent, I think, for a still developing brand. Consider that some reviewers hate the store for whatever reason and give it 1 star. Most people love the store and give it the highest rating. To really get a feel for the customer response to M+O, I suggest you click on the store link and read the reviews yourself.

To summarize the reviews, everyone loves the stores and appreciates the excellent service. Most people like the clothing. Most appreciate the quality of the clothing. It is not cheap but you get good value for your money. Some people feel the clothes are a little boring, the opposite of flashier J-Crew. However the store concentrates on basics and casual clothing. You won't find glittery golden dresses or animal print shirts at M+O. If you are looking for clothes to build a solid wardrobe, M+O does this very well.

Store Number of stars
(out of 5)
Number of reviews
San Francisco Store 4.3 33
West Los Angeles Store 4.5 6
Glendale CA Store 4.0 4
Newport Beach, CA Store 3.5 4
Burlington, MA Store 4.5 4
Skokie, IL Store 4.5 3
McLean, VA Store 4.0 3
Schaumberg, IL Store 4.5 2
Santa Clara, CA Store 3.5 2
Raleigh, NC Store 4.0 1
Las Vegas Store 4.0 1
Austin, TX Store 4.0 1
Dallas, TX Store 5.0 1
Total Number of Reviews 65
Weighted average 4.24

Ok, so this sounds great so far. Beautiful stores, great service, high quality, fashionable clothing at a reasonable price. But are these stores going to be profitable? This is after-all an investment blog not a fashion blog. These stores are expensive to build and those large dressing rooms increase rental costs. High quality salespeople must be paid better than the teenagers they hire to run AEO stores.

Well, they are getting there. Like any startup, the brand stumbled a bit at first. The first few clothing lines were a little dull and underwhelmed most shoppers. Naturally, its started with no brand recognition and the opaque store-front keeps many from seeing inside. Some people think it is a spa or something. The retail sector of course is terrible right now and this demographic in particular has been hit very hard from the housing bust. So sales per square foot (the key gauge of success for a retailer) was pretty low at first. This caused many on Wall Street to declare the brand a failure. Few people on Wall Street think this brand is going to succeed and many have been calling for AEO to write it off and be done with it.

However not all is lost for M+O. Each clothing line has gotten better since the first one. Same store sales have been growing at 21% (last quarter) and 55% (the quarter before that) from this low base last year. I think they are starting to hit their stride.

There are a few reason why SSS are improving so quickly. First, as I mentioned, the clothing lines continue to improve steadily. The other main reason is that customers who purchase clothing are happy with their purchases and return to the store even as new customers come in. Making customers happy and getting them to make repeat purchases is the crucial thing for any retailer. Since I am a regular M+O customer I know why people come back. First of all the clothing is of excellent quality. As a guy, I'll admit that when shopping, I didn't always inspect the stitching on pants, marvel over the fabrics, or note the quality of the seams. But when you take your M+O clothes home, you notice these things over time. I'll bet women notice this even quicker. You notice not only the quality of construction but the subtle design details. You begin to appreciate the difference between this brand and the mass produced junk that is sold at most places at slightly lower prices. For example a pair of shorts that I bought at Target the other day split at the seams, the first day I wore them. They cost $15. I can buy M+O shorts on clearance for about the same price. J-Crew and Banana Republic produces some good quality clothing at similar prices but M+O offers a different aesthetic. They do their niche, "refined casual" better than either of the other two in my opinion. But what really sets them apart is the quality of the shopping experience. Try going to the tiny J-Crew stores with a baby stroller. It is not very fun. I think over time M+O will retain their customers and slowly build up a loyal following.

American Eagle Outfitters CEO Jim O'Donnell says that their goal is to reach four-wall break-even by the fourth quarter of this year, 2008. He says that this will occur at sales of $375 per square foot. Last quarter he said that they were basically on track for somewhere between $350 and $375. Four-wall break-even means breaking even when you exclude the overhead of clothing design and brand development costs. O'Donnell has said that they intend for the brand to fully break-even by 2010.

So it appears that if things go as planned that the investment in M+O will take a long time to pay off. The good news however is that this could be a very durable brand. The clothing styles are classy and classic and are not likely to go out of style. Polos and denim have attained a permanent stature in American fashion. So they might have a long period of profitable growth ahead of them fueled by steady cash flows from the now saturated AE brand. It is said that there is little barrier to entry in retail. While that is true, it will be difficult to replicate something like M+O without a lot of capital and a lot of patience, two things that are in short supply right now in the business world.

M+O is starting to advertise heavily in a few cities: Chicago, San Francisco and LA. I have seen the first billboard here in Chicago. This should have the effect of driving higher traffic to the stores and if the product is right, this should lead to higher sales even in this miserable retail environment. I will be watching this closely.