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This Teen Retailer Stands Out

By Dan Moskowitz - Mar 24, 2014 at 7:00PM

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

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 ( URBN -1.37% ). However, let's begin with another once-dominant teen retailer. 

Mota to the rescue?

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 ( AROPQ ) 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

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 ( AEO -0.54% ). 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. 

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Aeropostale, Inc. Stock Quote
Aeropostale, Inc.
AROPQ
Urban Outfitters, Inc. Stock Quote
Urban Outfitters, Inc.
URBN
$32.32 (-1.37%) $0.45
American Eagle Outfitters, Inc. Stock Quote
American Eagle Outfitters, Inc.
AEO
$27.70 (-0.54%) $0.15

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