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Teenage wasteland no more? Two names gain momentum

Retail rundown: URBN, AEO & ZUMZ

It's game on, fast fashion.

Following a years-long product struggle that sent middle- and high-school age shoppers out of teen retailers' stores in search of trendier clothing, there are early indications that two of these companies are finally getting a grip on all that teen angst.

On Monday, Urban Outfitters' younger-skewed namesake label ended a five-quarter streak of comparable-store sales declines, saying it's carried this momentum into the first quarter. The results follow bullish analyst commentary last week surrounding American Eagle's fourth-quarter performance, when the brand topped consensus earnings estimates and its own guidance.

While neither label is out of the woods yet, the two have emerged as pack leaders among the struggling teen set. Urban's 4 percent same-store sales gain and American Eagle's flat results substantially outperformed competitors Abercrombie & Fitch and Aéropostale, which turned in comparable sales declines of 10 percent and 9 percent, respectively.

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"In the midst of product and strategy turmoil among American Eagle's competitors, [it] seems to have bet on the right trends and looks for spring," Janney Capital Markets analyst Adrienne Yih-Tennant wrote in a note to investors.

Pedestrians walk past an Urban Outfitters store in New York.
Michael Nagle | Bloomberg | Getty Images

Through this trend-right product, which includes boho-inspired fashions and fresh denim looks, as well as controlled inventories, American Eagle has also been able to cut back on promotions—which have tended to be particularly aggressive in the teen space.

Since announcing its results last week, the company's shares have risen 11 percent.

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"Following two strong quarters driven by merchandise improvement, we believe the turnaround is sustainable and not a false start, " Stifel Nicolaus analyst Richard Jaffe wrote in a note to investors.

Analysts were less certain about the turnaround at the Urban Outfitters label, which has diluted strength at its secondary Anthropologie and Free People brands for more than a year. Jaffe said there is still work to be done at the label, which stumbled amid redundant merchandise and too much inventory.

Analysts did agree, however, that the brand's fourth-quarter results represented a significant shift for the retailer.

"Urban Outfitters has all three major concepts expanding for the first time since 2012," Evercore ISI analyst Omar Saad wrote.

Angst in the teen retail scene

"Combined with a favorable consumer backdrop and solid online positioning well ahead of peers, [it] appears to be well-positioned."

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Analysts are also optimistic about skate shop Zumiez, which reports fourth-quarter earnings on Thursday. Last week, Zumiez said it posted a same-store sales increase of 6.9 percent in February, marking 13 straight months of positive surprises, according to Retail Metrics.

Despite momentum at these three names, the story is markedly less positive at Abercrombie & Fitch and Aéropostale. Although Aéropostale pre-announced a smaller loss than it originally estimated for the fourth quarter, its more fashion-forward product offerings have yet to turn the tide. Challenges also remain at Abercrombie, where sales growth remains elusive despite leaner inventories and a pivot away from logo-driven merchandise.

According to Retail Metrics data, teen apparel retailers have posted seven consecutive quarters of negative earnings growth. Along with department stores, the segment is expected to deliver the weakest revenue growth for the fourth quarter, with sales off 3 percent each.