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Are Teen Retailers Finally Turning a Corner?

After a tough few years, several former stalwarts in the teen retail sector are showing signs of improvement.
An Abercrombie & Fitch store in San Francisco. Photo: Justin Sullivan/Getty Images News

An Abercrombie & Fitch store in San Francisco. Photo: Justin Sullivan/Getty Images News

At the end of 2013, things were looking pretty dour for the teen retail segment. Three publicly traded companies popular with American teens for decades — Abercrombie & Fitch, American Eagle Outfitters and Aéropostale  — had seen a sharp decline in sales and profits and, as a result, each lost more than a quarter of its value over the course of the year. Other former teen staples, including Delia's and Wet Seal, were faring even worse.

What went wrong? Simply put, teens' lifestyles had changed, and the brands that long catered to them had fallen behind. Trends are cyclical, and the American heritage and logo-heavy looks Abercrombie and its peers have been churning out since the '90s had fallen out of fashion in favor of more individual styles inspired by street and skate culture. Shopping habits had changed, too. Traffic at malls — where these brands do the vast majority of their business — reached an all-time low among teens in the fall of 2013. Adolescents weren't going to the mall for entertainment anymore; they were turning to the Internet and their smartphones. To add to the problem, unemployment in the age group had climbed, leaving them with less disposable income to spend on clothes.

On top of all of this, competition has grown stiffer, particularly from fast-fashion brands like H&M and Forever 21, which have become popular with teens for offering trendy products at cheaper prices. An acrylic-blend crew-neck sweater costs $58 at Abercrombie & Fitch; similar styles in pure cotton at Forever 21 retail for between $15 and $20. Off-price outlets like TJ Maxx and Nordstrom Rack have become increasingly popular with shoppers in the age segment, too.

But some observers are optimistic that the old stalwarts of teen retail are turning a corner — or a few of them might be, anyways.

American Eagle Outfitters has been the biggest success story in this category. It was also the first to take steps to revamp itself, starting with the dismissal of its CEO of two years, Robert Hanson, in January 2014. He was replaced by interim CEO and Executive Chairman of the Board Jay Schottenstein. "They were kind of the ones that read the signs first and started to change what they were doing," Kantar Retail analyst Tiffany Hogan tells Fashionista. As with most turnaround strategies, this one was multipronged: Key to its success was reducing inventory levels and markdowns, improving product quality, including its women's denim, and shutting down stores — in mid-2014, the company announced its plans to close 150 stores over the next three years. The retailer has also made some serious structural changes so that it can keep better pace with trends and its fast-fashion competitors.

Those efforts have paid off: The 39-year-old company reported record sales of $919 million in the third quarter, up 8 percent from the year before, with a 17 percent jump in gross profit. Compare that to two years before, when revenue was down 6 percent to $857 million, and gross profit had sunk 21 percent. American Eagle's board has been so pleased with Schottenstein's performance over the past two years, he was named permanent CEO in December.

Abercrombie & Fitch, which got a later start in the overhaul game, has yet to prove that it can turn itself around — but early numbers look promising. After 11 consecutive quarters of sales declines and increasingly vocal complaints from shareholders, the company finally parted ways with its loose-mouthed founder and CEO, Mike Jeffries, at the end of 2014. The company's new executive team — Executive Chairman Arthur Martinez, Chief Operating Officer Jonathan Ramsden and Chief Merchandising Officer Fran Horowitz — have ushered in a slew of creative, cultural and management changes. First to go were the shirtless in-store models and sexy ads Abercrombie and sister brand Hollister had become famous for. Hundreds of stores have closed over the past year, and the three things customers complained most about those stores — the loud music, the low lighting and the aggressive scent — have been stripped away. While Abercrombie's moose and lettered logos haven't disappeared entirely from shelves, the offering is discernibly different, with a shift towards more modern, minimalist styles designed to appeal to a broader range of (read: older) customers.

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The new Abercrombie & Fitch. Photo: Abercrombie & Fitch

The new Abercrombie & Fitch. Photo: Abercrombie & Fitch

Hollister's revamp has been more successful. Last quarter, the brand announced that comp sales were up for the first time in three years. Sales at Abercrombie's namesake label aren't back in growth territory yet, but they are declining less and less every quarter. The brand noted that women's tops sold particularly well in the autumn, but the men's business has some way to go. Fortunately, help is already on the way: Abercrombie hired away Club Monaco's head menswear designer, Aaron Levine, this past summer; his first designs will arrive on store shelves this year.

Not everyone else is seeing as much progress. In August 2014, Aéropostale parted ways with CEO Tom Johnson and brought Kurt Geiger, who served as CEO from 1996 to 2014, back on board. Instead of trying to keep pace with fast-fashion brands, Geiger says he and his team are focused on providing teens with a "uniform" of basics like jeans and T-shirts. "We sell real clothes to real teenagers," he said to investors in late 2014. "I still believe that while they strive for individuality in many ways, at 14 to 17 years old, they still want to be accepted by their friends and peers and there is still a uniform that they wear that makes them cool and [fit in]."

So far, that strategy is failing. Aéropostale posted a net loss of $26.4 million in its most recent quarter, with comparable sales down 10 percent. Shares of the retailer, which steadily declined to around $9 at the end of 2013, are now trading at a mere 22 cents; the New York Stock Exchange has threatened multiple times to delist the company. Last month, Aéropostale announced that it would be laying off 13 percent of its corporate employees, about 100 people.

"They have made the least amount of change that we can see," says Hogan. While its longtime competitors have removed or downsized the logos on their clothes, Aéropostale has not. Online, the brand frequently advertises storewide discounts of 50 to 70 percent off. "It doesn't send a great message to shoppers, that [its goods] are worth only 30 percent of what [they're marked]," Hogan says. "[It indicates to shoppers] that maybe they are not very good quality."

Aéropostale is by no means faring the worst. Delia's filed for bankruptcy at the end of 2014; Wet Seal followed suit one month later. The latter's assets were acquired by private equity firm Versa Capital Management, which installed Melanie Cox as CEO this past August. Her plan? To follow the success of labels like Free People and Reformation, and make over Wet Seal as a "California casual" brand. We'll see if it works. Delia's relaunched last summer as an online-only, tween-focused business.

All in all, it's still tough out there for teen retailers. "This is a sector that isn't as attractive as everyone thinks," Sucharita Mulpuru, retail analyst at Forrester Research, wrote in an e-mail. "[Teens] have less money than ever, there are more places for them to spread their dollars across, which hurts the incumbents even more; there are other places for them to spend their money and time, like their phones." Investors appear to share Mulpuru's skepticism: While American Eagle's sales are back on a growth trajectory, its share price is still hovering at end-of-2013 levels. Abercrombie & Fitch's shares are still down about a quarter from that same period.

And while these brands play catch-up, teens' shopping habits are continuing to evolve. One trend that should be particularly worrying to retailers? The growing popularity of secondhand retail and consignment shops online and off. According to Hogan, recent surveys conducted by Kantar show that younger shoppers are becoming more concerned about how and where their clothes are made and, as a result, are looking more to secondhand clothing providers. That's the thing about teens: they change quickly.