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Ask teens to identify their favorite specialty store at the mall and the result will likely be a more spirited debate than will likely be heard in their high school social studies classes.
As they’ve demonstrated repeatedly over the last few years, teens’ fashion tastes are not only hard to pigeonhole, but are also fickle. With the final quarter of the retail year now under way, the big winners in the specialty store sweepstakes appear to be multibrand outlets like Pacific Sunwear of California and Hot Topic, which have products that are both differentiated from the competition and in tune with the preferences of their customers.
Reflecting on PacSun’s 79 percent increase in third-quarter net income, which was accompanied, respectively, by increases of 24.7 and 11.7 percent in sales and comparable-store sales by the company, Greg Weaver, the firm’s chairman and chief executive, commented: “We seem to be gaining market share with the help of multiple brands, and also feel our private brands are on target.”
In a phone interview, Weaver noted that its broad-based brand assortment allows it to move quickly when trends begin to have a marked impact.
“This is a great place to be, where your hat is not hung on one brand,” he said. “Teens are not loyal to brands for life and our business is about managing brands. So if a brand becomes weak, we plan it down, and if it is terrible, we plan that out the door. That is not the flexibility vertical companies have today, where if kids cool on the brand, the store becomes an uncool place to shop.”
PacSun’s brand mix includes Billabong, Globe, Roxy, Hurley, Dickies, Fox Racing, Burton, Quiksilver and Vans, as well as its own private labels.
“We love PacSun,” said Jennifer Black, a retail analyst with Wells Fargo Securities. “It should be one of the shining stars this holiday.”
She said the company’s ability to identify an emerging trend in fleece versus sweaters early in the season benefited its third-quarter performance and should continue to bode well.
Few teen specialists have fared as well, recently. Abercrombie & Fitch managed an 8.7 percent profit increase despite a 5 percent drop in comps in the third quarter, and American Eagle Outfitters last week said its profits for the period were down 11.7 percent on a 7 percent drop in comps. Aeropostale and Hot Topic are scheduled to report their earnings for the third quarter today.
As reported, a number of teen specialists — American Eagle, A&F and Aeropostale among them — lowered third-quarter guidance after a difficult, balmy September, only to lift them up again after temperatures dropped and sales rose in October. Even with the late upward adjustments, analysts concede that teen retailers as a group aren’t growing as effortlessly as they have in the five years before this one.
“Right now, the trend for teens has been more surf and skate,” said Allison Malkin, managing director at Integrated Corporate Relations, an investor relations firm based in Westport, Conn. “Right now, that look and image is really big.”
Amy Wilcox Noblin, a specialty retail analyst with Banc of America Securities, said PacSun and Hot Topic are succeeding because they are destination stores for signature trends.
“They have been sheltered from the slowdown because when you go buy their products, whether it is surf or music related, they do not have as much competition,” Malkin said. “No one else does it the way they do.”
She said PacSun, with sales of $580.8 million for the first nine months of the fiscal year, is benefiting from aggressively going after the young women’s business.
Referring to A&F, American Eagle and Gap, Angela Selden, managing partner at North America Consumer & Industrial West for Accenture’s retail industry group, said: “It is pretty clear to me that some of the big brands for the teen market are starting to suffer from lack of differentiation. The fact they have moved into a space so much similar in its merchandise offerings marginalizes them in the minds of teens.”
That may have contributed to a 25 percent drop in teen spending on apparel, accessories and footwear between fall 2001 and fall 2002.
“We believe teenagers are feeling the brunt of the economic downturn, as indicated by lower fashion spending level as well as lower employment rates,” wrote Jeffrey Klinefelter, senior research analyst at U.S. Bancorp Piper Jaffray, in releasing the data.
In the recent past, no segment of apparel retailing other than luxury has grown more vigorously than teen retailing. Girls between the ages of 13 and 17 spent an estimated $13.1 billion on apparel in 2001, up 12.5 percent from the year before, according to Marshal Cohen, co-president of NPDFashionworld. Total apparel spending was $165 billion, down 4 percent.
“The teen market is the only market running fairly robustly ahead,” Cohen said, noting that it represented 16 percent of apparel spending in 2001 compared with 14 percent in 2000.
A decade ago, there weren’t nearly as many specialty stores whose sole focus was on the teen. At that point, only Limited Brands’ Express division and Gap were truly teen mainstays.
Now the competition is fierce. According to J.P. Morgan Chase & Co.’s Brian Tunick, at the close of 2000 there were 23.3 million square feet of teen mall-based specialty store space — more than seven-tenths of a square foot for each of the 32.4 million teens in the U.S. Teen retail space is expected to increase to more than 38 million square feet by 2005. These saturated conditions have contributed to the squeeze on existing specialty store concepts and have also pressured them to develop new nameplates to bring variety to their expansion plans.
“There is opportunity for retailers to emerge and take over that space, especially given the trends in apparel to be much more edgier, unique and fashion-oriented,” said Accenture’s Selden.
She cited Urban Outfitters, PacSun and Hot Topic as having the right formula for creating a lifestyle orientation by incorporating clothing with items such as shoes, accessories and home accents.
“To be a one-stop shop for their interests and taste can lead to a bigger basket size and increased shopping frequency,” she said. “The real opportunity is to become the destination for that share of the wallet of the teen customer and to do that, you need to become this lifestyle-oriented format.”
Banc of America Securities’ Noblin said a list of dominating teen retailers today should also include the three A’s: A&F, American Eagle and Aeropostale.
“For AE, they have been struggling lately because they are caught in the middle between A&F and Aeropostale. A&F has been lowering its prices to remain competitive and Aeropostale is clearly the dominant low-cost player in a soft environment and they continue to enter more of AE’s market,” she said. “Aeropostale is growing by going into populated teen states like Texas and California and, on the comp side, by it being a new brand, by marketing within a new market. As the teen landscape becomes more overstored and is becoming a sea of sameness, this is a new brand in a lot of markets.”
A&F, she said, has tremendous brand equity and loyalty, but is hurt from a price standpoint within the teen space. As a result, they brought down their prices in most key categories by about $10.
Certainly, teen girls tend to be mall cruisers who, on a given weekend, may browse in far more stores than they buy in.
A survey of 500 teens by Zandl Group, a New York–based trend and consulting firm, revealed that two-thirds of teen girls still do most of their shopping in specialty stores, and their favorite destinations include Wet Seal, Forever 21, American Eagle Outfitters, Express, Deb Shops, Gap, Hot Topic, Rave, Old Navy, Aeropostale and Abercrombie & Fitch. However, three of those same stores — A&F, Gap and Old Navy — were also identified as stores losing popularity with teens in the last six months.
Gap in October recorded its first monthly comparable-store sales increase in 2 1/2 years and followed that feat with its first quarterly profit improvement since the first quarter of 2000. Gap’s overall sales for the quarter were up 9.3 percent, to $3.64 billion, as comps advanced 2 percent. Gap comped down 2 percent, while the Banana Republic and Old Navy divisions saw same-store sales rise 1 and 6 percent, respectively.
However, Gap isn’t leaning on teens to bring it back to its historic heights. As reported, with its “For Ever Generation” slogan, the Gap division is clearly focused on teens’ older siblings and even parents.
Kyle Andrew, vice president of Gap marketing, told WWD in August: “We understand we’ve alienated teenagers [but] we want to go after people who knew us and loved us.”