American Eagle Outfitters and Abercrombie & Fitch are learning that growing up is hard to do.
Despite contrary claims from management, the teen retailers could shutter their fledging contemporary apparel concepts Martin + Osa and Ruehl in the near future, according to analysts and consultants.
"Both of these concepts are rapidly entering the 'dead man walking' stage," said Craig Johnson, president at Customer Growth Partners, a consulting firm. "It's not a question of if they will shut down, but when."
In Abercrombie's fourth-quarter earnings call to Wall Street, Michael Kramer, chief financial officer, said sales at Ruehl fell in the second half of 2007 and he expects the chain to continue to struggle through the first half of this year. While management is working toward improving the quality of the merchandise, the retailer will slow the pace of new store openings until Ruehl is established as a proven concept.
"If you read between the lines, this sounds a lot like what Gap said six months before they shuttered Forth & Towne," Johnson said.
Ruehl, which launched in fall 2004, is not climbing the profitability curve as quickly as Hollister did during its first years in business. With similar merchandise at a higher price point than the core Abercrombie & Fitch brand, it has been hard for Ruehl to differentiate itself.
But Ruehl is closer to breaking even than American Eagle's Martin + Osa, said Kimberly Greenberger, retail analyst at Citigroup. She expects the 19-unit Martin + Osa chain to lose $55 million to $60 million in 2007, which is roughly a loss of $3 million a store.
"A lot of people on the Street would like to see Martin + Osa close," said Christine Chen, retail analyst at Needham & Co. Martin + Osa's main problem is merchandise, as women complain about the brand's lack of femininity, boxy cuts and high price points. As a result, the company has been forced into aggressive markdowns.
Meanwhile, it's been equally difficult for both concepts to gain traction with the 25- to 40-year-old demographic. "I am not convinced that casual apparel tops the list of spending priorities for recent college grads," Greenberger said. "They are looking for work clothes and furnishing their first apartments. The market for early-to-mid-20s casual apparel is much smaller than believed."
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