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Teen Retailers: Trouble in Paradise?

Teen retailers have taken major hits in 2013, but there may be reason for hope

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Teen retail is having a brutal year. Revenues, profits and stock prices have all been hit hard. Abercrombie & Fitch (ANF), Aeropostale (ARO) and American Eagle Outfitters (AEO) have seen their stock prices drop by 25%, 30% and 19%, respectively, through Dec. 5.

What the heck is going on?

Is it possible that Zara, Forever 21 and H&M have permanently stolen their thunder? Can ANF, ARO and AEO get their mojo back? I’ll look at all the possible scenarios facing all three teen retailers in a very competitive teen market. By the end you’ll know if any are worth owning.

Teen Market Changing

Teens seem to be going anywhere where clothing innovation has a pulse, and lately, that hasn’t been the major teen retailers. Wendy Liebmann, CEO of WSL Strategic Retail says it best in a CNBC article from August: “There isn’t a lot of innovative clothing out there for anyone, and there are plenty of other places to buy clothes if you want.”

Consider Gap (GPS) for a moment. It was stuck in a major rut until 2012 when structural changes implemented by CEO Glenn Murphy and his team delivered better merchandise leading to same-store sales growth in seven consecutive quarters through the end of October. Since the end of 2011, Gap’s stock has doubled in value, compared to a 49% gain for the SPDR S&P 500 (SPY). Retail is a cyclical game. Some analysts are downgrading GPS stock, figuring a slowdown is ahead despite the fact its November comps were much better than analyst expectations. Gap stock will be fine.

And Gap’s not alone. As mentioned previously, Zara, Forever 21 and H&M have all seen revenues increase at the expense of teen retailers like Aeropostale who’ve been forced to sell more expensive fashionable items, moving away from its traditional logo business. Firms like Japan’s Uniglo continue to innovate their way into American pocket books. By 2020 Uniglo expects to have 200 stores open, most of which will be quite a bit smaller than its 89,000 square-foot 5th Avenue shop but still doing plenty of business.

When you take all the new retail options available in the U.S. from other parts of the world and combine this with an insatiable demand by teens for electronics, it’s obvious that something had to give — unfortunately, the 3A’s suffer the brunt of these changes.

Faint Hope

InvestorPlace’s Kyle Woodley believes ANF’s best option right now is to let CEO Michael Jeffries contract expire at the beginning of February and turn the page on a tumultuous 25-year run. That’s not a new idea, but this time there’s enough ammunition to give institutional investors like Engaged Capital the rope they need to finish the job.

Article printed from InvestorPlace Media,

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