Aeropostale, Inc. (ARO), Abercrombie & Fitch Co. (ANF), American Eagle Outfitters (AEO): Teen Apparel Hits A Wall

News out of the teen apparel sector hasn’t been good of late, leading the industry’s top names sharply lower, including a 10% one-day drop at Aeropostale, Inc. (NYSE:ARO). However, Abercrombie & Fitch Co. (NYSE:ANF) and American Eagle Outfitters (NYSE:AEO) both felt the pinch, too.

It’s About Style, Most of the Time

Teens have plenty of trendy shops at which to shop. The key word is, of course, trendy. This demographic has notoriously fickle shopping habits. That said, there are basics that never seem to go out of style, such as jeans. In the basics space, Aeropostale, Abercrombie & Fitch Co. (NYSE:ANF), and American Eagle are core retailers.

While every teen-focused retailer, even those that sell basics, eventually makes a mistake on the fashion side, that’s just part of doing business. Jim Roumell and Ted Crawford of Roumell Opportunistic Value Fund (RAMSX) noted to me that the companies here often take turns as the trendsetter of the moment. While that can bring about investment opportunities, there is more going on right now than fashion misses.

Sale!

The biggest problem in the industry today is the lingering impact of the 2007 to 2009 recession. During that period, stores went into sale mode across the retail landscape. The goal was to keep customers coming in the doors.

While that has worked to some degree, the economy remains in a painfully slow recovery marked by still-high unemployment, particularly for teens. Thus, discounting has become the norm, not the exception.

Profit margins went from the high teens/early twenties before the recession at Abercrombie and American Eagle to the single digits. At lower-end focused Aeropostale, Inc. (NYSE:ARO), profit margins went from the low teens before the recession, jumped to the mid-teens coming out of the recession, and now are in the low single digits. While fashion is a big issue, margins are the industry’s problem right now.

Extreme

Aeropostale, Inc. (NYSE:ARO) took the biggest hit recently and is well off of its highs. However, the company has no debt and generates plenty of cash. It has to rework things, but it doesn’t need to rush a fix out the door. That could make now an opportunistic time to jump aboard a key industry player working to right the ship.