Teen retail's overlooked disadvantage

PacSun has filed Chapter 11. Aeropostale is teetering on the edge. Abercrombie & Fitch and a handful of other teen retailers are on the road to recovery, but sales remain well below the levels of their heyday.

Though brands that cater to teenage shoppers have grappled with many of the same issues as the broader industry — rock-bottom prices and the rise of Amazon, to name a few — one analyst argues this group of stores is up against an additional headwind that most other retailers don't have to deal with: a short selling window.

Teenage girls shopping
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Citi analyst Paul Lejuez recently told investors that when analyzing a company's value, one thing that's often overlooked is the length of time a brand can sell to a particular customer.

"Think about a player in the teen retail sector," he said. "American Eagle's target customer, for example, is between the ages of 15 and 25. That means [the company] has about a 10-year span to sell to its customer."

"This means that every 10 years (max) American Eagle turns over their customer base completely. This puts more pressure on them to consistently attract that 14-year-old to replace the 26-year-olds they are losing," he said.

Indeed, as early 2000s teens graduated from these labels, the stores struggled to remain relevant among a new shopper base that craved more fashion, and less logo.

Still, that's not to say broadening a brand's customer base is always the right decision. Lejuez pointed to Talbots and Tiffany as examples of how attracting a younger shopper can alienate a brand's core customer base.

Around 2010, he said, Talbots tried to attract a younger woman, who could not look past its reputation as her "mom's" brand. Meanwhile, Talbots' core demographic, women ages 55 and older, felt the brand had become too "young."

A similar situation occurred at Tiffany, Lejuez said. When the jewelry brand's low-price silver product became popular in Japan in the 1990s, high school students started to wear it en masse. But this soured the appetite of many its older, more affluent shoppers, causing Tiffany to pull back from the category in Japan.

"A very broad demographic range can sometimes point to the lack of focus of a concept, which is typically less appealing to the consumer base," Lejuez said.

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On the flip side, TJX — which has gained traction among millennial shoppers — and Lululemon — which is expanding its younger-facing ivivva brand — could stand to gain from expanding their selling windows, Lejuez said. He likened the strategy to that of Victoria's Secret's Pink label, which introduces shoppers to the brand at a younger age.

"While we can't say a broad age range should always correlate to a high multiple/enterprise value for a stock or vice versa, we do believe considering that selling window is important when looking at positives and negatives of a retailer."