Teen retailers are showing signs of life

Any late '90s or early 2000s teen is familiar with the sense of "cool" they felt when wearing an Abercrombie & Fitch-branded tee, or while bopping around the mall with a Wet Seal shopping bag.

Fast forward roughly two decades, and these once high-flying teen retailers are showing signs that they're finally starting to recapture some of the mojo they lost to fast-fashion rivals.

An image from Wet Seal’s spring 2016 lookbook.
Source: Wet Seal

During the fourth quarter, three mainstays in the teen space — Abercrombie & Fitch, American Eagle and the Urban Outfitters brand — were able to dial back on promotions, and persuade shoppers to pay full price on more of their products. Wet Seal, which emerged from Chapter 11 bankruptcy last year, similarly boosted its margins over the past few months by selling more of its revamped merchandise at full price.

Together, these inflections signal a massive change among the teen set: Namely, that the category may not be dead after all. Still, it remains a far cry from where it was in its heyday, a result of both internal and macroeconomic headwinds. And as competition for its target shopper continues to intensify, these retailers will need to scratch and claw their way past their opponents to obtain greater market share.

"None of them are doing the volume they hoped to do," said Ron Friedman, national leader of Marcum's retail and consumer products practice. "The teenagers do not have dollars to spend like they used to."

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After the recent bricks-and-mortar demise of Delia's, Deb Shops and other competitors, roughly $1 billion in market share was up for grabs, said Wet Seal CEO Melanie Cox.

So Cox, the company's fourth leader in as many years, devised a way to revitalize the brand, and bring back the breezy SoCal image that dictated its popularity a decade ago. Her plan includes a refreshed logo, maintenance upgrades to its stores, and merchandise that is less bandage skirts and more knitted dresses.

"The number of conversations we've had about what sexy means today is mind-numbing," Cox said. "It's a little bit more subtle and a little bit classier."

The question, however, was how customers would respond to the change. Cox said the brand began rolling out its new product in stages, so as not to totally alienate the girl who had been shopping in its stores. Through these new product introductions and running fewer promotions, the company's margin rose 4 percent over the course of the past few months, Cox said. She took over as CEO in August.

"We thought we bought a lot of [the new product] and what was amazing was that we didn't buy enough," she said. "[The customer] is there and she is young enough that she will give someone a second chance."

Cox admits that it would be a challenge to bring the now privately owned retailer, which was acquired out of bankruptcy by Versa Capital for an undisclosed sum, back to the $600 million-plus in revenues it posted back in the 2000s. After all, it's nearly impossible to generate the same sales figures from a fleet of stores that's roughly one-third its previous size. And with limited cash, invoking major change on a broad scale is not financially feasible.

By using some of the undisclosed amount of funds provided by Versa, however, Cox said there is room to grow. Goals include refreshing its current stores later this year; piloting a new prototype early next year; and then expanding its store count.

"There's always market share to be stolen," she said.

Urban Outfitters margin improvement
Urban Outfitters margin improvement

Wet Seal isn't the only retailer channeling the California cool aesthetic for its rebirth. Abercrombie's Hollister brand has posted positive same-store sales for the past two quarters, ending a string of declines over the previous four years. Meanwhile, comparable sales at the company's namesake label posted another quarterly improvement, though they remained in negative territory.

Analysts credited improved product, which better balances its fashion and logo merchandise, as one of the key reasons behind the sales inflection. More notably, the retailer was able to boost its sales performance while dialing back on promotions.

American Eagle likewise boosted its fourth-quarter sales amid fewer aggressive promotions. And though the struggling Urban Outfitters brand reported a 3 percent comparable-sales decline, its full-price sales increased. Urban shares shot 16 percent higher Tuesday in response.

Still, questions remain as to whether the inflection in teen retail is real. Analysts point out that it will be tough for several of these retailers to drive sales back toward peak levels in an environment of fewer stores and more conservative spending by teens and their parents.

They also contend it will be survival of the fittest. Shares of Aéropostale, for example, once a key player in the space, are trading for less than 50 cents.

"We've had tremendous consolidation in the retail arena and I do think you'll probably have more," Friedman said. "I just don't see any way around it, especially when spendable dollars aren't that great."