Is a Turnaround in Sight for These 3 Teen Retailers?

American Eagle, Aeropostale, and Abercrombie continue to slide

Jan 6, 2014 at 8:24AM

Teen retailers American Eagle Outfitters (NYSE:AEO), Aeropostale (NYSE:ARO), and Abercrombie & Fitch (NYSE:ANF) have been going through a rough patch for a variety of reasons. Some of the reasons are common to all three, whereas others are company-specific. In hindsight, three things are common to all -- macro-economic headwinds, loss of target customers, and stiff competition from cheaper, fast-fashion outlets like H&M, Zara and Forever 21. Let's see how each of them have been performing and if there is value to be found in any of them.

American Eagle: The best of the worst
American Eagle posted rather tepid third-quarter results. Consolidated sales declined 5.8% year-over-year to $857.3 million. Consolidated comparable-store sales, or comps, including AEO Direct, declined 5% as compared to a 10% increase in the same period last year. The comps decline would have been far worse had it not been for year-over-year comps growth of 17% at AEO Direct.

In addition, competitive promotional activity lead to discounts and stiff competition, and this also had an impact on merchandise margins. Lower sales and  margin contraction resulted in declining earnings, which came in at $0.19 per share. This represented a decline of 53.7% from $0.41 in the prior-year quarter . On the latest earnings call and in the 10-Q, management projects a compounded annual growth rate for revenue in the range of 7%-9% and EBIT in the range of 12%-19% in the long run as they expect certain initiatives to bear fruit.

Despite a weak third-quarter, American Eagle continues to make progress with its international expansion plans. The company recently signed three new licensing agreements in Central and South America and Thailand to open multiple stores in these regions .

Moreover, American Eagle has strengthened its omni-channel strategy by launching a new mobile app that has been integrated with the AE Rewards program. In addition, the company has also launched product reviews through the mobile app, leading to higher customer engagement. Moreover, other initiatives such as "buy online, ship from store" have also helped it do better. Going forward, this can be an important growth driver because during the quarter, online sales including AEO Direct were up by 17%. This was on top of a 26% increase last year as investments in the omni-channel strategy are paying off.

In addition, during the quarter, the company opened 13 stores. The square footage grew by 2% on a year-over-year basis and as at the end of the quarter, American Eagle operated 1,064 stores across the United States and 61 international franchise stores. However, for the fourth quarter, the company expects a mid single-digits decline in comps and has projected earnings in the range of $0.26 to $0.30 per share.

The weak third-quarter was enough to send shares down. Year-to-date, all the three companies have seen big losses on the market with American Eagle being the best of the lot so far but things might get worse in the future as earnings are declining.

Losses widen at Aeropostale
Aeropostale, for instance, saw wider losses in its third quarter. Sales slipped 15.1% to $514.6 million due to weakness in certain core categories like graphics and fleece. As a result, consolidated comps declined by a huge 15%. Unlike American Eagle, e-Commerce comps, that include the the GoJane business, remained flat year-over-year.

Macroeconomic headwinds, weak store traffic, stiff competition, and muted spending by teenagers have pressured the margins to an extent that the company reported an adjusted loss per share of $0.29 for the quarter. Even during the extended Thanksgiving holiday weekend, comps decreased mid-single digits. Going forward, it is expected that the pressure on the margins would increase further. As a result, Aeropostale expects to report loss in the range of $0.24 to $0.32 per share in the fourth quarter of fiscal 2013 .

Based on internal assessments and also on the findings of several independent focus groups, Aeropostale has reached a conclusion that today's teens want more options, more personal interaction with brands, and more flexibility in how they access these brands. Aeropostale continues to aggressively respond to these changes, but a turnaround looks to be a long-drawn battle as the target customers would take time to know about the changes that are taking place at the company. This isn't going to happen at the flip of a switch.

Abercrombie looking to set things right, but will it succeed?
Abercrombie & Fitch has an additional problem on its hands apart from what the other two are suffering – a public relations nightmare. This resulted from the resurfacing of an old and controversial video featuring the CEO, and this irked the target customers.

However, the CEO's contract has been recently renewed and the exclusionary policies of not selling XL and XXL in women's clothing have been revoked . Abercrombie will expand its offering of sizes, colors, and fits for all of its clothing by spring 2014 in an attempt to reverse the continuously declining sales.

Abercrombie's net sales for the third-quarter declined 11.7% to $1.03 billion. This was primarily because of an 18% decline in domestic sales, which were partly offset by a 2% uptick in international sales. In addition, the performance also indicates muted spending among youngsters. In addition, direct-to-customer sales also increased by 10%, in spite of which, consolidated comps saw a decline of 14%.

Takeaway
Investing in these three apparel retailers is akin to catching a falling knife. The presence of cheaper options in the market has hurt their prospects and there seems to be no reprieve in sight. As a result, investors should be staying away from these three apparel retailers as there could be more downside in the future.

Fool contributor Renu Singh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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