This Teen Retailer Stands Out

Teen retailers are feeling the pinch. Despite severe headwinds in this space, one retailer offers good long-term potential, and for one simple reason.

Mar 24, 2014 at 7:00PM

Teen retailers are having a rough go, but this should be expected for several reasons. One, the parents of teens aren't as likely to part with their cash as is in the past. Those hesitant consumers you always read about? Well, those are sometimes the parents of teens. Two, it's difficult for teens and young adults to find jobs of their own, which leads to less discretionary income than in the past. Three, competition has increased.

Based on these circumstances, teen retailers must be highly promotional to compete. This, in turn, leads to margin contraction and puts pressure on profits. This leads to  nervousness in the market and the stock falls. It's a vicious cycle.

Only the best management teams with strong social media exposure have an opportunity to thrive. Unfortunately, there aren't many teen retailers fitting this description, except one -- Urban Outfitters (NASDAQ:URBN). However, let's begin with another once-dominant teen retailer. 

Mota to the rescue?

Aro Bethany Mota

Source: aeropostale.com.

You have probably never heard of Bethany Mota. She's an 18-year-old fashion designer that has established an enormous social media following. Mota has 5.6 million YouTube subscribers, 2.5 million Instagram followers, and 1.3 million Twitter followers. She also recently launched her own fashion line for Aeropostale (NYSE:ARO) in December.

Since Mota's Instagram posts tend to generate approximately 300,000 Likes within a few days, Aeropostale investors are hoping that she can help revive the brand. While she might be able to help, remember her line was just launched in December and her merchandise accounts for less than 10% of what Aeropostale is offering. Then again, if the line is successful, then this percentage (and possibly her role with the company) is likely to increase. 

In regards to social media and its impact on teens, Instagram is growing faster than Twitter, and it now has approximately 69.5 million monthly active users, or MAUs. Therefore, it's imperative for teen retailers to establish a presence on Instagram for brand recognition purposes. A larger Instagram following leads to more potential customers, and when it comes to the teen market, if something is seen as cool, it's more likely to sell. It's a win/win. 

The biggest brand presence

Urbn

Source: urbanoutfitters.com.


Whether it's due to social media presence or something else, Urban Outfitters is resonating better with its customer base than Aeropostale and American Eagle (NYSE:AEO). Consider the following numbers. While Bethany Mota has an enormous Instagram following, Aeropostale itself only has 847,441 followers. This isn't bad, and it's more than American Eagle at 410,989, but it's not as much as Urban Outfitters with 1,258,102 followers.

Urban Outfitters' namesake brand saw fourth-quarter comps slide 9%. There are 230 Urban Outfitters locations versus 90 Free People locations and 187 Anthropologie locations. However, it would be relatively easy for Urban Outfitters to change that based on demand differences. Aerpostale and American Eagle don't have this option.

For example, Free People and Anthropologie (both Urban Outfitters brands) saw fourth-quarter comps increase 20% and 10%, respectively. You will be extremely hard-pressed to find these kinds of growth numbers anywhere in the retail space.

Comparatively, Aeropostale suffered a 15% comps decline in the fourth quarter. This included e-commerce. This is concerning since e-commerce often elevates comps numbers for a retailer. This is also weaker than what Aeropostale reported in the year-ago quarter -- a comps decline of 8%. Perhaps Mota's popularity and growing importance and role within the company can help change this down the road. It's a weapon that other teen retailers don't possess. 

Aeo

Source: ae.com.

American Eagle didn't fare much better, suffering a fourth-quarter comps decline of 7% versus a 4% comps increase in the year-ago quarter. Looking ahead, American Eagle expects a first-quarter comps decline in the high single-digits.

Over the past five years, Urban Outfitters has delivered top-line growth of 69.12%, whereas Aeropstale and American Eagle have delivered top-line growth of 6.83% and 11.66%. These trends haven't changed much over the past year, with Urban Outfitters delivering top-line growth of 7.39% while Aeropostale and American Eagle have suffered top-line declines of 10.69% and 4.08%.

The Foolish takeaway
Urban Outfitters' namesake brand might not be performing well, but the company has a lot of room for maneuverability. As long as it owns brands that are in high demand, it's capable of steering itself in that direction.

Aeropostale and American Eagle are strong brand names. Therefore, they're both capable of turnarounds. For Aeropostale, it has a great asset with Mota. However, neither retailer is performing well at the moment. As always, do you own due diligence before making any investment decisions.

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. 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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