NEW YORK — What a tough time to be a teen. The teen consumer, already famed for fickleness, appears to be entering a period of frugality.
This story first appeared in the October 24, 2002 issue of WWD. Subscribe Today.
With her closets already well stocked and no compelling fashion trend to drive her into the stores, she was in the malls less frequently and buying less during the crucial back-to-school season. Her parents’ stock portfolios are still absorbing vicious assaults, her baby-sitting clients have less money to go out and she’s having a hard time finding a job to make up the difference in her discretionary spending.
Teens generally account for 16 percent of all apparel sales, noted Marshal Cohen, president of NPD Fashionworld Consumer in Port Washington, N.Y., but their overall spending this b-t-s season dropped 20 percent, from $640 in 2001, and their clothing purchases declined the most, 23 percent.
That’s sent shock waves through the teen retail sector, which had managed to sustained high growth rates despite the first traces of an economic downtown last year and even the traumatic effects of the Sept. 11 terrorist attacks.
“After years of high comparable-store sales results, this group is going through a sales-productivity desert,” said Brian Tunick, a specialty retail analyst at J.P. Morgan Chase. “Right now we are projecting that third-quarter earnings for the group of teen retailers is going to be down roughly 5 percent this year compared to last year, which were also down 5 percent.”
Clearly, teens today are demonstrating that, while they may be more resilient in the face of economic ills than their older counterparts, they are not immune to them. Retail executives and those who track their actions have blamed much of the sales shortfall on lack of newness and duplication of merchandise within the mall, but clearly other forces are also at work.
Unemployment stood at 5.6 percent in September, but among teens it’s at nearly three times that level, rising to over 15 percent in August, according to Dana Telsey, retail analyst at Bear, Stearns.
There’s a circular element to the teen spending phenomenon as less spending leads to less hiring, Telsey observed: “The fact that retailers are cutting back on hours for part-timers and parents are using baby-sitters for less hours is giving teens less extra money to spend, which is one of the factors leading to weakness in teen spending.”
The slowdown in teen spending is likely to contribute to an expected “modest decline” in apparel purchases overall this year, she said. Apparel sales rose to $172 billion in 2001 from $155 billion in 2000.
So far, due to the sales declines in the critical months of August and September, a handful of teen retailers — including Abercrombie & Fitch, American Eagle Outfitters, Aeropostale, Charlotte Russe Holdings, Hot Topic and Wet Seal — already have warned Wall Street they will not meet their quarterly earnings projections for the third quarter.
The school year wasn’t yet a month old when Aeropostale on Oct. 1 warned investors that it would not meet its projections for either the third or fourth quarters. The New York-based specialty store, new to the public arena since its May initial public offering, said it had seen a “pronounced downward trend in mall traffic levels over the past few weeks.”
The company also reported that its transaction counts were down and described customers as increasingly driven by price. As a result, the firm accelerated its in-store promotional activity in the second week of September and found it necessary to do so again later in the month.
“Certainly parents are more concerned about the economy and the potential for war. Given that a majority of teen spending is enabled by their parents, it is bound to trickle down to the teen space,” said Kimberly Greenberger, a specialty retail analyst at Lehman Brothers.
Also more pressing is a lack of product and store differentiation in malls right now, Greenberger said, adding that retailers are not doing a good job of inspiring teens to spend at full price.
“If there is a hot apparel item a teen has to have, a parent will generally find a way to acquire it,” she said. “The marketplace is not that inspiring right now, making it difficult for everyone to compete.”
Looking ahead to the holiday season, Greenberger said she is expecting teen retailers to be increasingly promotional to get their share of the holiday dollar.
“If there is no product differentiator within the store, the only way customers perceive a difference is through price. A lack of differentiation means that retailers will be forced to compete on price. Therefore, we think the holiday season could be potentially as promotional as it was last year. To the extent we were looking for earnings recovery in the fourth quarter, that scenario could be at risk.”
A number of vendors share this perspective, although many are unwilling to say as much for the record.
John Meyer, president of Zinc, a Los Angeles-based better junior sportswear brand, believes that a teen will always shell out the cash for the right product but, at least among mall anchor stores, he’s not seeing it.
“If there is one group of consumers that is slightly recession proof, it’s the junior customer. The problem is that there is a lack of must-haves in the stores,” he said. “There is nothing there to catch her attention. The department stores all look the same, so she is getting bored. Nothing excites her in the stores.”
So, Meyer said, in order to entice the customer to get her shopping again, buyers need to take some risks.
“The buyer has to try newness, especially with this customer,” he said. “I was just in the stores and I see a sea of bohemian looks. That trend was over in April and the stores are still offering them. They need to clean up the floor — there is too much merchandise crammed in the junior departments — and offer something new.”
While short-term challenges have aggravated the once-lucrative teen spending picture, some of the difficulties can be traced back to the decades-old issue of overstoring, particularly acute among teen retailers.
Dana Cohen, a retail analyst at Banc of America Securities, said, “Teens get money from somewhere, so if their parents are nervous, they will pull back on their kids. But the pullback in spending is overlayed by the square-footage growth in this sector, which has a faster square-footage growth than any other area.”
According to J.P. Morgan Chase’s 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 and every of the 32.4 million teens in the U.S. Teen retail space is expected to increase to over 38 million square feet by 2005. These saturated conditions have contributed to the squeeze on existing specialty store concepts and, somewhat paradoxically, also pressured them to develop new nameplates to bring variety to their expansion plans.
Store expansion has slowed for most specialty stores but, although frequently discussed, the prospects for store closings are slight.
“It is really hurting the retail environment as more capacity comes on and the Hollisters compete with the Pacific Sunwears compete with the American Eagle Outfitters. There are so many stores opening up, catering to the same customers and selling the same product,” Tunick said.
“Teens feel some sense of control over price and style given their abundance of choice,” Cohen wrote in an August research report. “After all, if you can’t find it at the right price here, then it’s likely to be found next door.”
In recent months, teen retailers, in order to drive traffic and clear their racks, have become increasingly price competitive. Low-rise denim has slowed after a long run of popularity, and inventories of the western and peasant looks, which began to rise in the fall, need to be cleared.
Still, there are some bright spots. Pacific Sunwear, Hot Topic, Claire’s and tween specialist Too Inc. are seeing stronger comp-store results than others in the market, and executives at those stores, as well as analysts, have credited product differentiation for their ability to outperform.
Additionally, value-oriented discounters and off-pricers have become more aggressive in their pursuit of the teen customer — or at least have taken advantage of buying opportunities, further complicating the competitive playing field for the specialists. Tunick said specialty stores that cater to this niche are losing market share to the discounters and off-pricers. He noted that in 2001, the overall specialty apparel market, including teens, represented 56 percent of apparel spending at the mall, down from 62 percent in 1998. On the other hand, Tunick said value merchants, such as TJX Cos., Target, Kohl’s and Wal-Mart, saw their share of apparel spending increase to 37 percent in 2001 from 31 percent in 1998.
Embracing the concept of a “teen recession,” Richard Clareman, president of Self Esteem, a Los Angeles-based junior sportswear firm, noted that recent retail softness was bound to trickle down to the teens as their parents absorbed at least some degree of economic hardship.
“There is such an oversaturation of retailers in malls,” he said. “The cheaper stores like Forever 21 have put a damper on retailers like Rampage and Wet Seal, which have in turn put a damper on the department stores like J.C. Penney. [Teen] purchases are price driven and she is price savvy, so why wouldn’t she shop at the cheaper stores?”