There still isn't much good news coming out of the teen apparel industry, which has become one of the toughest in the retail sector. The decline in sales has been ongoing for some time now, and the latest quarter was no exception. Two of the major players in the space, American Eagle Outfitters (NYSE:AEO) and Aeropostale (NYSE:ARO), both posted severely disappointing numbers, which once again had investors scurrying for the exits. Why are these two chains performing so badly?
One of the main reasons is a steep and extended decline in mall traffic. Malls have traditionally been the stronghold of retailers that cater to the teen demographic, as this is where teens used to hang out. This is no longer as true as it used to be. According to a Piper Jaffray report, teen mall traffic has declined by around 30% over the last decade, a process that has accelerated since 2007.
Furthermore, for the first time in 13 years, teens spent more money on eating out than on clothes. In 2013, an average of 21% of teen expenditures went to clothing, while food, events, movies, and music were good for around 33%. Also, gadgets and electronics now account for a considerably higher percentage of teen expenses, and overall it seems as if teens simply don't care as much about fashion.
This has had serious consequences for all retailers that are dependent on mall traffic, but apparel stores have been among the hardest hit. While some retailers have managed to weather the troubling industry conditions better than others, most chains have suffered.
American Eagle Outfitters' first-quarter report was fairly disastrous. Earnings tanked by some 86%, with earnings per share of $0.02 down from $0.14 last year. Revenue, meanwhile, was off by 5%, while comp-store sales dropped by 10%. As a result of the chain's poor performance, management announced it will be closing some 150 North American stores over the next three years, which is expected to provide between $10 million and $15 million in cost savings starting in 2015.
Aeropostale is another one of the teen retailers hit hard by the decline in mall traffic. The company's first-quarter report sent shares down more than 20%, as a widening quarterly loss had investors worried about the future of the company. The company lost $0.98 per share for the period versus a $0.16 loss last year and a projected loss of $0.72. Comp-store sales declined by 13% versus a 9.3% decline forecast by analysts, while revenue fell 12%.
While management of both companies blamed a weak macroeconomic backdrop and a tough consumer-spending environment for the drop in sales, there is clearly something else going on here. The products offered by these chains seem to have simply fallen out of fashion with teen shoppers. As such, aside from cost-cutting initiatives, these companies should focus on updating their clothing lines to fit better with current fashion trends. This is no small feat, as teen preferences can be extremely fickle.
The Foolish takeaway
The teen-fashion retail industry is in bad shape, and there are no signs of improvement for several major chains. With mall traffic on the decline, and a tangible shift in teen spending habits, Aeropostale and American Eagle Outfitters posted some fairly disastrous numbers for their first-quarter reports. While cost- cutting efforts and store closures will provide a boost to their bottom lines, both badly need to update their product offerings to better suit quickly changing teen apparel preferences.
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Daniel James 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.