On average, teen shoppers spend around $200 billion per year . However, top teen retailers like Abercrombie & Fitch (NYSE:ANF) and American Eagle Outfitters (NYSE:AEO) have been reporting dismal quarters, leading to sharp declines in share prices. But if some of the most popular teen retailers are losing traffic, then where are they all going?
The TJX Companies (NYSE:TJX) has had a great run this year, especially compared to teen retailers. Teens may be switching to retailers that offer deep discounts, which would help explain why TJX has been doing well. Let's take a closer look at what's driving this optimism around TJX.
Why TJX is gaining while others are faltering
The high teen unemployment rate in the U.S., which is about 26% in the 16-19 age -group, has hurt retailers catering to this sector. In addition, around 60% of teen spending is sponsored by their families. This might encourage teens to seek out retailers offering more value.
As a result, TJX seems to be gaining. It is positioned to offer the best of both worlds because teens can get trendy, up-to-date designer names at deeper discounts than those offered by big department stores and other retailers.
This is reflected in the third-quarter results that TJX recently released. Net sales grew 9% year-over-year to $7 billion in the reported quarter, beating the consensus estimate of $6.9 billion. The strong top line performance was fueled by comps growth of 5%.
The increase in comps resulted from TJX selling the right mix of products. On the back of robust top-line growth, adjusted earnings per share increased 21% versus the same quarter last year to $0.86. For the fourth quarter, TJX expects earnings per share to be $0.77 per share .
Going forward, TJX sees a lot of potential to grow its business through the online sales channel. After an eight-year hiatus, it relaunched its website to reestablish its e-commerce channel. TJX probably doesn't want to miss the online business opportunity given the fact that the U.S. has the second-largest number of digital buyers, at 155.7 million this year . This move could be a good growth driver as it would help TJX attract consumers who shop online.
Longer term, TJX's management is very confident of expanding TJX into a $40 billion business. It has performed very well even in a tough economic environment, recording both revenue and earnings growth.
Abercrombie and American Eagle continue to disappoint
In stark contrast, Abercrombie & Fitch and American Eagle Outfitters have both struggled as they seem to have lost favor with their target customers – teens.
The prospects of Abercrombie & Fitch were further damaged because of comments made by the company's CEO that alienated customers. No amount of damage control has reversed the subsequent decline, and it looks like Abercrombie is completely clueless about how to get things back on track. For the quarter that ended on Nov. 2, Abercrombie's revenue fell 12% to $1.03 billion.
Abercrombie expects that it will once again see a low double-digit percentage decline in the fourth-quarter at stores open at least a year . Abercrombie's outlook was weak as well. It expects adjusted earnings of $1.40-$1.50 per share for the current quarter, while analysts had predicted earnings of $1.55 per share.
American Eagle Outfitters, another teen apparel retailer, is in the same boat as Abercrombie. Its same-store sales were down 7% in the second quarter, on top of a 5% decline in the quarter before. Looking ahead, management expects a mid-to-high single digit decline in the third quarter .
American Eagle is trying to get back on course through international expansion. The company has planned six stores for Mexico this year, and it has also managed to successfully license stores in Israel, Japan, and Poland .
To make matters worse for Abercrombie and American Eagle in the domestic market, international fast-fashion rivals are aggressively expanding in the United States. As a result, they are putting pressure on pricing, thereby hurting the margins of these two teen apparel retailers.
Why choose TJX
In such a difficult scenario, TJX's business model of selling merchandise at deep discounts to keep traffic coming into its stores looks quite sound. Through lower-priced offerings, TJX continues to attract teenagers. Investors might find the company attractive as well since earnings growth is expected to continue at a fast clip going forward, and its renewed foray into the e-commerce market could turn out to be an important growth driver.
Fool contributor Sharda Sharma 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.