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Tales From the Fickle Teen Fashion Market

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Next week -- Thursday at 4:15 p.m. EDT, if you're really interested -- teen retailer Aeropostale (NASDAQOTH: AROPQ  ) is going to report its second-quarter financial results. The company has been hammered recently, as poor sales have dragged the stock down 2.5% from 12 months ago. Today, the business got more bad news as the stock was downgraded by KeyBanc and given a price target of $10 -- it currently trades just under $13.

Next week's announcement doesn't provide a lot of hope, either. Last week, Aeropostale announced a decrease in net sales and comparable sales. The pre-earnings announcement was an update to the company's previous guidance for the second quarter. It's unlikely that a bunch of good news is going to come out next week, so what kind of plan does the retailer have to get things back in the black?

School's back from summer
The back-to-school season is a big deal for teen retailers. Last year, families spent an incredible $30.3 billion on supplies for sending their children to school. As a result of that high, analysts are split on this year's demand. One camp calls for lower sales due to leftover supplies, while the other looks for the growth to continue. As a middle ground, researchers from Customer Growth Partners think that there will be growth but that it will be very slow.

Aeropostale is going to update back-to-school expectations next week, but it's a safe bet that it's going to be along the lines of "more promotions to gain market share." That was the basic message relayed in the company's update last week. Weak traffic and "a challenging retail environment" pushed year-over-year comparable sales down 15% in the second quarter.

For the back-to-school season, the damage may already be done. As teens return to school, they'll be looking for clothing that fits in with that of their peer group. As comparable-store sales drop, Aeropostale loses market share to companies like Gap (NYSE: GPS  ) and Urban Outfitters (NASDAQ: URBN  ) . Both companies have had comparable-sales increases over the past few quarters, and have succeeded where Aeropostale failed.

Moving into the fast lane
As part of an attempt to get back in the good graces of its customers, Aeropostale is undergoing a brand reimagining. The company is pushing its trendy options, and focusing on something that has helped Gap in its recent revival: time to market.

Teen fashion doesn't have the longest-lasting trends in the world, as you may have noticed. That means that the difference between having an item on the shelves in a month and having the same item arrive in two months can be crushing for a business. Aeropostale is trying to shorten that time so that the products in stores are more in line with the current trends. The company is actually making a double move, by introducing more trendy pieces and increasing their prices at the same time to recover weak margins.

Gap's recent success -- comparable sales rose 6% at the brand's stores in the second quarter -- has come from the retailer moving beyond the trend chasing and into trend leading. The company announced a new initiative to refocus on its jeans and basic shirts, which means that the brand will hopefully be insulated from fickle changes in fashion.

Urban Outfitters posted a 9% increase in year-over-year comparable sales last quarter, but the business has relied more on trends. Aeropostale could take a page from Urban Outfitters' book, as the recent increase in sales has come on the back of lots of operational work. Urban Outfitters has worked to reduce its time to market by working with suppliers to get products quicker.

Right now, Aeropostale is still too new to the turnaround for me to be impressed. The business has a good plan, but it remains to be seen if teens will latch on to the new branding. Hopefully, the company will be able to use its new trendy products to support revenues and cut down on the constant promotional environment in stores, but I'm not holding my breath.

The classic retail space is in the midst of a massive change. The combination of online sales, changing economics, and increasingly selective consumers is making even strongest companies sweat. Only those most forward-looking and capable will survive, and they'll handsomely reward investors who understand the landscape. You can get closer to that understanding by reading about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free; just click here to read more.

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Related Tickers

9/27/2016 10:06 AM
AROPQ $0.04 Down +0.00 -2.60%
Aeropostale CAPS Rating: *
GPS $22.37 Up +0.14 +0.63%
Gap CAPS Rating: **
URBN $35.49 Up +0.48 +1.37%
Urban Outfitters CAPS Rating: ****