GO
Loading...

Is less bad good enough for teen retailers?

Teen retailers haven't given young men and women much of a reason to shop in their stores over the past few years. But if the segment's second-quarter earnings results are any indication, the Abercrombies and American Eagles of the world are finally starting to turn a corner—albeit, a small one—with their target demographic.

Although experts emphasized the category still has a lot of work ahead to have any hope of once again becoming a go-to for teen shoppers, it delivered a number of positive surprises in the most recent quarter, with Abercrombie & Fitch, American Eagle and Urban Outfitters beating on the bottom line.

Experts were most encouraged by the segment's more trend-right merchandise, a strong kickoff to the back-to-school season, and better-controlled inventories—which could reduce the number of storewide discounts in the second half.

An Aeropostale store
Susana Gonzalez | Bloomberg | Getty Images
An Aeropostale store

Still, headwinds remain. Customers still prefer fast-fashion stores, which are expanding their store counts as teen stores trim theirs, and the environment is still highly promotional. Comparable-store sales are down 5.3 percent—the worst of any retail segment, according to Retail Metrics.

"At each of [the teen retailers] there is marginal progress," said Craig Johnson, president of Customer Growth Partners. "The one commonality they all share is that the brand concepts are much less relevant to the way kids shop and live today."

Read MoreHere's the bright spot in a tough retail quarter

Almost across the board, analysts cited improvement at all four major teen sellers, and applauded steps such as Abercrombie's plan to exit the logo business in North America by spring 2015, and American Eagle's plan to shift away from its denim-heavy assortment to more soft dressing trends, such as the red-hot "athleisure" category.

Experts also sounded a bullish note on Aéropostale's Bethany Mota and Tokyo Darling sub-brands, and Urban Outfitters' comments that it is seeing little resistance to slightly higher prices on new items at its struggling namesake label.

Still, analysts cautioned that while things look better on the selling floor, it will likely take time for teens to respond to the changes. Following Abercrombie's results on Thursday, Stifel Nicolaus analyst Richard Jaffe said in a note to investors that "change is underway, but 3Q is likely to prove challenging as consumer acceptance of the change is expected to take time."

Read MoreThink mobile sales are hot for back-to-school? Wait for Christmas

At Aéropostale, Jefferies analyst Randal Konik said "the relative outperformance of fashion product and newer sub-brands is encouraging, just not enough yet to set the company on a path towards better financial results."

And although experts had mostly positive reads on Aéropostale's recent announcement of the return of CEO Julian Geiger—who is largely credited with making the brand a mainstay among the teen set—Wells Fargo analyst Paul Lejuez emphasized the retailer is a different company than it was in 2010, when he was last there.

"Basics and logo product [Aéropostale's bread and butter in Geiger's former tenure] no longer produce the margins they once did, as competition has intensified," Lejeuz said.

Along with better merchandise, there were other small signs of trouble abating for the teen set. Namely, analysts cited the category's pared-down inventories, which indicate there may be less of a need for broad-based promotions in the back half of the year. Back-to-school sales are also off to a strong start, and a reduced store count among the category's key players should help the segment in the long-term.

According to Retail Metrics, third-quarter earnings for the group are expected to turn positive with 27 percent growth, which would mark the first positive quarterly earnings growth for the segment since fourth quarter 2012.

Johnson said the true test for the strength of teen stores will come once back-to-school sales—and the sales tax holidays that give them a boost—are in the rearview mirror.

"You've got to talk about the entirety of the quarter, not just at the peak of the back-to-school season," he said.

Read MoreScreen-obsessed teens threaten apparel retailers

Despite their improvements, teen retailers still have a lot of ground to cover if they hope to recover the market share they once had. Although Abercrombie topped estimates in the second quarter, it guided its same-store sales forecast lower for the full year. Urban Outfitters' said its ultra-lean inventories are leading to more out-of-stocks than usual, which could limit significant improvement in near-term comparable-store sales, Jaffe said.

Morgan Stanley analyst Kimberly Greenberger sounded a cautious note on American Eagle because of its denim-heavy assortment, while Aéropostale guided to another double-digit dip in same-store sales for the third quarter.

According to data from Customer Growth Partners, the three A's have lost about one point of market share since 2007, equating to about $2.5 billion in lost annual sales in 2014 dollars. Over the same period, he estimates both H&M and privately held Forever 21 have roughly tripled their sales.

"They're all crying out for a radical reinvention," Johnson said.

By CNBC's Krystina Gustafson

Contact Retail

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    To learn more about how we use your information,
    please read our Privacy Policy.
    › Learn More