Why It May Become Difficult to Walk Into an Abercrombie & Fitch, Aeropostale, or American Eagle

Abercrombie & Fitch (ANF 4.06%), Aeropostale (AROPQ), and American Eagle Outfitters (AEO 0.63%) have all now released their fourth quarter earnings which include full year earnings for fiscal 2013. All three teen apparel retailers saw significant year-over-year declines in their net sales.

These downbeat figures contrast with the National Retail Federation's recently pumped-up outlook for retail sales (which exclude automotive, gasoline, and restaurant purchases) for 2014 from 3.7% to 4.1% growth.

Despite the increasingly positive outlook for the retail industry, there are several reasons why it could be harder to find Abercrombie & Fitch, Aeropostale, and American Eagle Outfitters stores in the near future.

Credit: Michael Carter.

The common denominator within 2013 earnings
When it came to actual 2013 revenue figures, Abercrombie & Fitch saw a 9% year-over-year drop, Aeropostale fell 12%, and American Eagle Outfitters was down by 5%. .

Market reaction to the three teen brands' latest earnings differed due to expectations. Abercrombie & Fitch's stock rose more than 10% after its report. Meanwhile, Aeropostale and American Eagle Outfitters stock prices dropped 20% and 11%, respectively.

Furthermore, the holiday quarter proved to be disappointing for each brand. Inventory levels rose 24% at Abercrombie & Fitch and 11% at Aeropostale 24%.  While American Eagle Outfitters did see their inventory levels decline12%, they experienced an 89% fall in net income for the quarter due to heavy sales and promotions.  Likewise, Abercrombie & Fitch saw its net income plunge 58%, while Aeropostale went from a net loss of $671 thousand in the same quarter of FY 2012 to $70.3 million. 

Looking back at the year, all three brands saw in-store comp sales decline as online comp sales stayed flat or grew.

Credit: Company SEC Filings.

Why the physical locations are endangered
Before the Internet was created, there were pretty much two ways to buy new clothes -- in person or through mail order catalogs. The Internet made those catalogs obsolete years ago. It is slowly doing the same thing to the in-person shopping experience.

Online orders represented 25% of Abercrombie & Fitch sales in the fourth quarter of fiscal 2013. During the earnings conference call, management said it sees online sales becoming more of a dominant factor in the company's overall business -- the expectation being for revenue from online sales to increase another 20% in 2014.

Aeropostale and American Eagle Outfitters offered similar outlooks during their conference calls.

Aeropostale plans to take it a step further and offer exclusive styles and sizes in its online segment.  Similarly, American Eagle Outfitters already offers their full assortment to several fashion lines like denim online.  Furthermore, management at American Eagle Outfitters stated in the conference call the importance of making the online experience as good, if not better, than the store experience. 

In short, all three companies see the importance of online shopping based on recent growth trends and future expectations.

The severe winter was a popular explanation for slow sales at many retailers in recent months. However, this also highlights a key weakness for brick and mortar locations. If the weather isn't ideal -- whether due to snow, rain, or extreme heat -- mall traffic usually weakens and earnings suffer.

Historically, retailers could depend on seasonal trends and count on seeing a larger portion of their annual sales in the fourth quarter. However, the average percentage of annual sales retailers made in the fourth quarter dropped to just 26.6% this past year.

Overall, if these retailers continue to see the trend favor online sales, they can easily reduce store counts that stand at more than 1,000 for each.

Lack of mall traffic is hurting physical locations.  Credit: Mikerussell, from Wikimedia Commons.

Battling online competition

Last month, Amazon.comwas reported to be in collaboration discussions with 10 well-known retailers, including Abercrombie & Fitch. The idea, The Wall Street Journal reported, was that Amazon.com would feature products from the retailers on its website; clicking on the item would lead the consumer to the company's own website. If this program corresponded to a program, Amazon.com conducts with smaller retailers, the e-commerce king could share transaction revenue and charge for traffic.

However, there may be a bigger giant around the corner. Alibaba's IPO is approaching and this may attract many American customers to learn about the Chinese company and what it sells. Its Tmall.com segment already features more than 70,000 international and Chinese brands with retail storefronts.

What this could mean for Abercrombie & Fitch, Aeropostale, and American Eagle Outfitters is more competition online.  As both Amazon.com and Alibaba gain traction among consumers through the Internet, it will be tougher for any individual apparel retailer to stand out given the multitude of clothing options each provide which continue to grow.

In the end, these three companies may find it even tougher to survive online than in shopping malls.

Pressure from all sides
Teen apparel retailers are getting pressured from all sides. Weather, the promotional environment, competition, and fashion trends play huge factors in total sales. Teen apparel is within a retail segment where being dynamic is a requirement, not an option.

Ultimately, trying to find one of these stores in person may soon be a lot more challenging.