As same-store sales in the specialty segment decelerate, teen retailers are looking to bolster market share with concept launches aimed at serving twentysomething career-bound customers.
On deck is Martin + Osa from American Eagle Outfitters, which is set to roll out after Labor Day, while financial sources say Urban Outfitters is tinkering with an upscale, boutique-style concept that could launch within a year.
The drive for a slightly older customer follows similar moves up the age ladder by specialty chains such as Gap with its Forth & Towne concept and Abercrombie & Fitch with the Ruehl chain.
Wall Street is closely watching the teen channel and the entire specialty segment as companies in this market reach a saturation point. The specialty retailers are also challenged as department store retailers such as Kohl's, J.C. Penney and Federated Department Stores muscle in on their turf. Of the retailers tracked by WWD, the specialty segment had an average same-store sales gain of 2.2 percent in July while the department store channel rose 3.2 percent.
July comps at Aéropostale dropped 1.9 percent, off a 1.1 percent decline in June. At Hot Topic, comps decreased 7.2 percent, which followed a 3.4 percent decrease in June. At Pacific Sunwear, same-store sales dropped 10.6 percent in July, which is off a 2.7 percent decline in June. Standouts in the segment included American Eagle with a 7 percent comp gain in July and Bebe Stores with a 10 percent increase.
The push into capturing twentysomethings and continuing to serve them as they age makes perfect sense as a strategy for the teen retailers to pursue. Analysts say it's easier for a retailer to grow with its core customer than for an older retailer to grow younger. Also, analysts describe the 20s demographic as largely untapped.
Dana Telsey, chief executive officer and chief researcher at the Telsey Advisory Group, calls the segment the "Gen-Y Grad." These post-collegiate consumers are searching for more sophisticated, trendy items as they enter the workforce and begin a new stage in their lives, Telsey said.
"U.S. birth rate data indicate the teen population will narrow over the next five years, making room for retailers to expand into the young adult market," said Jeff Klinefelter, senior research analyst at Piper Jaffray."The 16-to-18 age group is growing faster in the last couple of years. These retailers have already exploited the teen sector, and the next logical step in portfolio management is to hit the early-20s demographic," he said. "There is no one out there doing a great job at servicing this age group."
Currently, the teen sector represents more than $11 billion in annual sales, up nearly fourfold from $3 billion in 2000, Klinefelter said in a research note. Harris Interactive has estimated that youths aged eight to 21 spend approximately $172 billion annually on all goods and services, with total dollars spent growing substantially with age.
While the teen demographic continues to be one of the largest consumers of apparel, footwear and accessories, many of the retailers in the sector are approaching domestic saturation, and teen retailers' total square footage growth is expected to slow between 2006 and 2010.
And now that many teen specialty retailers have gone far beyond the 400-store mark, they are crowding key markets, which results in a decline in same-store sales, Telsey said. American Eagle Outfitters has 870 units; Aéropostale has 683 stores; Hot Topic, 663; A&F, 850, and PacSun, 811, for example.
"These cautionary demographic and square footage undertones are prompting teen retailers to explore expanding into young adult concepts, following traffic and spending tied to their teen customer," Klinefelter said in the research note.
Abercrombie & Fitch, one of the first retailers to leverage the 20s demographic, opened Ruehl, which targets 22- to 35-year-olds, in fall 2004. Currently in 10 locations, the line focuses on the casual side of the sophisticated individual, explained Thomas Lennox, vice president of corporate communications at Abercrombie & Fitch.
"We don't care about what they do at the office, we care about what they do after work," he said, emphasizing Ruehl's merchandise as casual and casual sportswear, with nothing dressy.
Regarding American Eagle Outfitters' Martin + Osa concept, the first five stores are slated to open after Labor Day. Martin + Osa targets the 25- to 40-year-old demographic with a line of sportswear and activewear."We found that as our core customer graduates college and gets their first job they still love our brand, but want something a little older," a spokeswoman for American Eagle said. "There is a gap in that part of the market. No one is really targeting the 25- to 40-year-old."
The Martin + Osa line will rely heavily on denim, and while customers will not be able to find formal suits for the office, they can purchase a pair of khakis and a blazer.
The company expects to open about 15 stores in 2007.
Meanwhile, Aéropostale opened its Jimmy'Z stores last summer, which target 18- to 25-year-old males and females with surf-inspired apparel, and PacSun is looking to launch a new concept, 1,000 Steps, to focus on the high growth of the footwear market.
For Urban Outfitters, its new concept could be something for the youthful misses' customer, drawing on key Anthropologie elements such as whimsical styles in an upscale shopping environment, while also addressing lifestyle and fit issues relevant to the demographic, according to analysts at Sanders Morris Harris.
"We believe the company has been working on its next concept for quite some time and that it could launch its fourth retail operation within the next 12 to 18 months," said Elizabeth Pierce, senior vice president and lead retail analyst at Sanders Morris Harris, in a research note. "Based on Anthropologie's strong customer relationship, we would not be surprised if the next concept targets a slightly older demographic."
The retailer has been struggling over the last few quarters in both its Urban Outfitters and Anthropologie chains as a result of missed fashion opportunities. The company last week posted a 16.1 percent decline in second-quarter earnings to $25.7 million on a 12.7 percent rise in sales to $285.6 million for the second quarter to July 31. Comps fell 2 percent at Anthropologie and 11 percent at Urban Outfitters.
One corner of the market putting a lot of pressure on the teen and specialty sector is the department store channel. Telsey said the primary competition for teen specialty retailers looking to enter the young adult world will be department stores — from Bloomingdale's to Nordstrom, which have slowly been increasing the amount of square feet they dedicate to the contemporary department.At this point, it's hard to predict who will succeed in serving the 20s demographic. "We think retailers successful in bridging the transition will create engaging store destinations and aspirational lifestyles, drawing on the emotional connection they've established [so far] with their customer," Klinefelter said.
Success will also depend on offering certain trend-right products, Telsey added.
This transition into the young adult sector is only in the early stages, and it can take up to two to three years before consumers will see it materialize in malls and affect merchandise, Klinefelter said.
Despite the current slowdown, the cycle of teen growth could return within the next few years based on demographics. "Today's six- to seven-year-olds will enter the teen market in 2013 and will support retailers past 2017," Klinefelter predicted. "That said, we do not expect retailers to abandon existing teen concepts, but to rather serve as managers of broader and more diverse retail portfolios."
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