Youth Retailers Rebounding in 2015…or Not?

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\"youth_2015_driscoll\"What’s happening in the tumultuous youth market? The way youth retailers are faring reflects the typically fickle trend-sensitive nature of this market. Based on recent earnings reports, I think Aeropostale could derail this year. While their international opportunity is real and growing, they could shutter half their stores … and they wouldn\’t be missed. Express? I think the outlets will help. American Eagle is the furthest along to success.

My vision for two years from today is that Abercrombie will be half its size in the U.S. and Aeropostale may be potentially shuttered in the U.S. with international franchises still generating profits. American Eagle glides into profitability and Urban improves, and then encounters the typical fashion trends risks that have been a part if its uneven history.

The first two weeks of March saw a number of youth retailers report 4Q results and provided 1Q and 2015 guidance. Generally, business is stabilizing and improving, but we aren’t out of the woods yet. With the mean EBIT margin for the last 12 months for youth retailers down 450 basis points to 7.6%, this group has a long way to go to restore profitability. And top-line growth will be elusive if at all. This is not a growth industry; it is a sector fighting for survival!

One might think the U.S. economy gaining traction would be a plus, but it is attracting international invaders and the retail landscape is likely to get even more competitive in 2015/2016 with the steady influx of new Zara\’s, H&Ms, TopShops and Uniqlos (to name a few). U.S. youth retailers continue real estate rationalization, but there are just too many stores. Aeropostale, with nearly 800 domestic locations could easily be halved and still we question its raison d\’être in today\’s marketplace. Whatever happened to the optimum store fleet of 500 or so stores for a specialty banner? And that was before ecommerce migration!

Over the next few years we see U.S. youth retailers closing hundreds of stores in an effort to restore profitability, while growing their ecommerce and frequently their outlet businesses. Top-line growth, if achieved, will come from new global markets.

Basic retail isn’t so basic in the connected, disrupted world of 2015.

Brand building, social media, solidifying the core value proposition is the mantra we heard retailers recite during the litany of 4Q investor calls. Reducing promotional activity while connecting with clients is integral to a sustainable profitable business. Brand messaging easily stales requiring a vibrant social media effort that spans mobile, web and in-store—all brand touch points. The brand lives socially and in the customers mind. The store experience counts. These efforts require increased IT and marketing spend and will mitigate margin recovery in an increasingly competitive market. Retail economics are in flux and we see retailers\’ focus shifting from gross/EBIT margin percentage to gross margin dollar (already happening at department stores and mass merchants).

Year over year traffic gains (albeit off 2014’s weak traffic counts) at American Eagle, Express and Urban Outfitters are encouraging. Positive consumer responses to fashion product at these banners is another plus. All three spoke to positive 1Q comp trends. These brands offer a value proposition that surpasses merchandise and includes lifestyle relevance (which is what I would argue Forever 21 and H&M do not offer). When they have the right product, the formula wins.

The rest have a fight on their hands as new exciting brands continue to hit the U.S. shores. The new normal, it’s a tsunami!



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