Teen retailers American Eagle (NYSE:AEO), Abercrombie (NYSE:ANF), and Aeropostale (NASDAQOTH:AROPQ) have been steadily losing market share to fast-fashion competitors like H&M and Forever 21. This loss of market share has pushed top executives at these companies to both reconsider business plans and search for more effective ways to manage operations. In the past year, teen retailers have battled against declining same-store sales and plummeting share prices.

And they continue to struggle.

3 key ingredients for an effective retail store
In the teen retail and fashion industries, buyers choose the items that will be carried in a store based on what they expect to be popular with shoppers. After the buyers choose the merchandise that will appear in stores, planners will track the amount of inventory available in each store and bring in new products when they think inventory is needed. The buyers and planners are essentially responsible for making sure that stores are stocked with appealing items in proper quantities.

One way that companies can improve margins is to ensure that buyers and planners are keeping up with current trends and sending appropriate amounts of merchandise to each store. So, when sales fluctuate, as in the current case of teen retailers, buyers and planners are sent back to the drawing board.

Sales change and inventory responses
When sales increase or decrease, it is important for planners to take note and change inventory projections accordingly. But were inventories actually adjusted to keep pace with sales in the world of teen and fashion retail?

Urban Outfitters (NASDAQ:URBN), a fashion retailer in competition with teen retailers, did a great job last quarter adjusting its inventories to keep pace with sales trends. Urban Outfitters' first quarter sales figures fared much better than those of its competitors, as it was the only company with higher sales in the first quarter of 2014 compared to the same quarter last year. Urban Outfitters' sales increased 6%, while inventories increased 7%. 

During the first quarter of 2014, American Eagle experienced a sales decline of nearly 5% and responded by decreasing its inventories by a little over 3%. American Eagle's management also plans to reduce inventory levels further in the second half of the year. Even though inventories were not decreased by the exact percentage as the sales decline in the first quarter, the trend was caught and inventory was adjusted in the correct direction by a comparable percentage.

American Eagle is not alone in its inventory reduction; Aeropostale also reduced first quarter inventory and plans to reduce inventory purchases by double-digit percentages in its second and third quarter. Since Aeropostale's sales have been declining for the past several quarters, decreasing inventories will help the company reduce carrying costs and hopefully stay afloat.

Inventory adjustment at Abercrombie and Fitch
While many retailers seem to be making an attempt to more closely line up inventory with sales, Abercrombie appears to be doing the opposite. In last year's fourth quarter, Abercrombie's inventory increased a whopping 24%, but it experienced a sales decrease of 12%. In this first quarter Abercrombie did a little better job at controlling its inventories, but it still failed to catch the trend that other teen retailers caught.

Retailer

Change in Sales

(compared to Q1 2013)

Change in Inventories

(compared to Q1 2013)

American Eagle

-4.91%

-3.31%

Aeropostale

-12.47%

-3.94%

Urban Outfitters

+5.88%

+7.24%

Abercrombie and Fitch

-1.95%

+5.97%

Why the inventory adjustments are so important
While the relationship between a company's sales figures and its inventories is not the sole predictor of company success or failure, it can help paint a picture of what future quarters might look like.

When inventory and sales are following roughly the same trend, like American Eagle, Aeropostale, and Urban Outfitters, companies tend to fare better than those who ignore their sales trends because buildups of leftover inventory can cause major problems. Having the right amount of merchandise lined up for the season will save retailers from the nightmare of extra out of season clothes or blowout sales that cheapen the brand name and cut precious margins.

Abercrombie's excess inventory will catch up with the company
The past couple of quarters, Abercrombie has done a sub-par job of managing its inventories. This will force the company to make some difficult decisions on what to do with the extra merchandise down the road. While planners at American Eagle, Aeropostale, and Urban Outfitters seem to have caught on to the trend, Abercrombie may soon find itself in a hole.



Savanna Davies 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.