Yet teens continue to be an extremely lucrative market for these retailers. A recent survey from Piper Jaffray, “Taking Stock with Teens,” revealed that teens spend roughly 21% of their budgets towards new clothes. However, the survey also indicated that teenagers are spending less than the previous two seasons, which indicates that the amount of overall revenue generated by teens will decrease. This means that only the strongest teen apparel retailers will survive in this challenging, competitive environment. In addition, the back-to-school shopping season, which ranks second behind Christmas in terms of consumer spending, is fast approaching.
Let’s meet the losers
Recent quarterly earnings have revealed the losers of this sector – Abercrombie & Fitch Co. (NYSE:ANF) and Aeropostale, Inc. (NYSE:ARO), which respectively reported same-store sales declines of 15% and 14%. Both retailers blamed the weather and weak economic conditions for their declines, but I believe that waning demand for large logo apparel and the sluggish rotation of products were also major contributing factors.
The Piper Jaffray survey also included some interesting statistics regarding Abercrombie & Fitch Co. (NYSE:ANF) and Aeropostale, Inc. (NYSE:ARO). Abercrombie & Fitch’s Hollister brand ranked as the #1 brand no longer worn by males. For females, Hollister ranked third and Abercrombie & Fitch came in second. Aeropostale didn’t fare much better than Abercrombie, coming in at #1 for females and #2 for males.
Therefore, coming in at the top of that embarrassing list explains those steep same-store sales declines far better than generic comments regarding the weather and the economy. In other words, Abercrombie & Fitch Co. (NYSE:ANF) and Aeropostale are completely out of touch with their core teen market. Aeropostale, Inc. (NYSE:ARO)’s desperation to stay relevant has been apparent in its increased promotions, but neither its lower prices or fashions have generated higher sales.
Let’s meet the winners
Abercrombie & Fitch Co. (NYSE:ANF) and Aeropostale, Inc. (NYSE:ARO) have been left in the dust by two other retailers, The Gap Inc. (NYSE:GPS) and Urban Outfitters, Inc. (NASDAQ:URBN). In their most recent quarters, The Gap Inc. (NYSE:GPS) and Urban Outfitters, Inc. (NASDAQ:URBN) reported same-store sales growth of 2% and 11%, respectively. While those numbers merely seem average compared to other retailers, they are far better than the double-digit declines reported by Abercrombie & Fitch and Aeropostale.
The diversity of Gap’s portfolio, which includes Old Navy, The Gap Inc. (NYSE:GPS), Banana Republic and Athleta, has insulated it from the challenges of the teen apparel sector. Gap’s strength comes from its tiered pricing strategy, with Old Navy being the cheapest, Gap being a mid-range option, and Banana Republic being its premium brand. Therefore, the company is able to shift gears quickly by balancing between these brands in times of economic prosperity and despair. Gap has also branched out into yoga-apparel with its Athleta label, which is aimed at carving out a piece of Lululemon’s dominant market share.
Meanwhile, Urban Outfitters, Inc. (NASDAQ:URBN) has carved out a niche for itself with quirky kitsch apparel featuring classic video games and cartoon characters, which has proved popular with the younger “hipster” crowd. Urban Outfitters’ Free People brand, which is aimed at a young, hip female demographic, is also very promising. The brand posted 37% consolidated same-store sales growth (including direct-to-consumer sales) last quarter. Urban Outfitters has also invested heavily in e-commerce through apps that have social networking components, which fueled a 44% gain in direct-to-consumer sales last quarter.
Neither Gap nor Urban Outfitters completely rely on their teen apparel, which has insulated them from the main headwinds facing Abercrombie & Fitch and Aeropostale, Inc. (NYSE:ARO).
Privately-held Forever 21 is an extremely popular brand with the younger demographic, ranking third in popularity among teens according to Piper Jaffray. Forever 21 reportedly generates over $3.5 billion in annual revenue, which is nearly equal to annual sales at American Eagle Outfitters and slightly lower than Abercrombie & Fitch Co. (NYSE:ANF)’s.
A hidden gem
While those choices are fairly obvious ones for bulls and bears to trade, there is an apparel retailer currently under the radar of many retail investors – The Wet Seal, Inc. (NASDAQ:WTSL).
The Wet Seal, Inc. (NASDAQ:WTSL), which focuses on lower-end apparel for teens and young women, keeps its prices low and comparable to H&M. This approach has made it extremely popular with teen shoppers. Even though the company plunged into unprofitability late last year, it made a promising comeback during the first quarter. The company earned $0.03 per share, or $3.1 million, a big improvement over the net loss of $273,000, or break-even on a per-share basis, it reported in the prior year quarter. Revenue declined 5% to $140.4 million.
Same-store sales declined 2.9%, with its namesake stores declining 3.0% while its Arden B. chain rose 0.9%. Wet Seal’s namesake stores are focused on teen apparel, while Arden B. concentrates on young women.
Although The Wet Seal, Inc. (NASDAQ:WTSL)’s profit was merely in line with the consensus estimate and revenue missed completely, shares rallied more than 12% following earnings on May 28. That rally was apparently fueled by renewed faith in CEO John Goodman’s turnaround efforts, which include a fast-fashion (rotation) strategy and workforce reductions.
While these improvements are encouraging, I would like to see more improvement in operating margins, free cash flow and earnings per share before I consider this a worthwhile investment.
For the full year, Wet Seal expects same-store sales to rise to the mid-single digits, which would be an impressive reversal from the 11.1% decline it reported a year ago. If Wet Seal can hit those targets and improve its cash flow and margins, then I believe that it could be a hidden gem in the retail sector.
The Foolish bottom line
In closing, the teen apparel sector is a lucrative and dangerous market. The failures of Abercrombie & Fitch Co. (NYSE:ANF) and Aeropostale, Inc. (NYSE:ARO) serve as cautionary tales of relying too heavily on a single demographic. The success of Gap shows us that diversifying a company’s portfolio, just as investors should spread out their investments, is a sound business strategy in tough times. Urban Outfitters demonstrates that younger shoppers want humorous and ironic graphic tees, rather than large, bland company logos. Lastly, if Wet Seal can get its act together in 2013, then it could become a solid contender in the teen apparel market, drawing heavily on the appeal of H&M and Forever 21.
Teen shoppers are a fickle bunch, and the numbers don’t lie – creativity, fast rotation, and low prices are the keys to winning this battle.
The article Two Losers, Two Winners and a Hidden Gem in Teen Apparel originally appeared on Fool.com and is written by Leo Sun.
Leo Sun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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