3 Reasons Why Teenagers Aren't Buying Clothes

Sales are down for American Eagle, Abercrombie & Fitch, and Aeropostale, the nation's top teenage apparel companies. What's even worse is that these double-digit sales declines appear to have happened overnight.

Feb 10, 2014 at 10:46AM

Sales are down across the board for some of the more traditional retailers that cater to teenagers. The most obvious reason for the decrease is the economy -- or rather the increase in unemployment. The lack of funds in the household makes fashion about as important as the new cast of "Dancing With The Stars." It may be deeper than that, however.

Weak traffic and declining sales growth
American Eagle Outfitters (NYSE:AEO) recently fired its Chief Executive Officer, Robert Hanson, due to declines in traffic. According to the company's 10-Q, third-quarter results were "negatively affected by a competitive retail segment, with high promotional competition and tepid consumer spending."

This is a common theme among teen retailers over the past 6 months -- weak store traffic and declining sales growth. Net sales at AEO decreased by 6%, and gross profit decreased a staggering 21%. The company attributes the decline to an increase in delivery costs and heavier markdowns.

In the most recent company report, Abercrombie & Fitch (NYSE:ANF) describes itself as "rooted in East Coast traditions and Ivy League heritage, the essence of privilege and casual luxury." This may be the root of Abercrombie & Fitch's troubles as teens find cheaper alternatives to the same "Ivy League" fashions elsewhere. In the third quarter, net sales decreased 12% and the net operating loss was $35.4 million compared to operating income of $133.3 million last year.

Net sales at Aeropostale (NYSE:ARO) decreased an unbelievable 15% in the third quarter, compared to the same period last year. The driver was a decrease in comparable-store sales -- surprise, surprise -- which also decreased 15%. Net income decreased by 5%, which delivered an EPS of ($0.33) compared to $0.30 last year.

Why this happened
Unemployment is high for everyone, but the teenage unemployment rate was 16.3% in July, far above the national rate of 7.3% at the time. The other issue is "cheap fashion." Forever 21 and H&M are known for selling trendy clothes at low prices -- discount retailers like Wal-mart and Target are able to source the same manufacturers. A shirt that's $80 at Abercrombie may be $30 at Forever 21; it may even be $20 at T.J. Maxx, or just $10 online. Teenagers are more familiar with the Internet and trust it more than their parents because they grew up on it.

The final, and perhaps scariest, issue for the industry as a whole is that clothing may not be the hallmark of fashion it used to be. Smartphones, headphones, gaming systems, and sneakers are far more important than they were just 10 years ago. These have become the new teenage status symbols; the new ways to signal one's identity.

The Foolish bottom line: things are deteriorating quickly
Clearly, there are myriad factors influencing how teens spend their money. When the economy is down, teenagers feel it, but the economy has been down since 2008. We'll have to wait until the next earnings report to see if the third quarter was just an anomaly or a signal of a new trend. If this is a new trend, it may be the start of a beautiful opportunity to short the industry.

As teenage retailers fall apart, which companies are taking over the sector?
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

B Bryant 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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