American Eagle Outfitters (AEO), Abercrombie & Fitch Co. (ANF): These Apparel Retailers Are Having a Tough Time

It hasn’t been long since analysts Lorraine Hutchinson, Paul Alexander, and Jessica A. Lebo of Bank of America warned that competitors need to start paying attention to privately-held retailer Forever 21. Forever 21 is growing at a terrific pace, and the fast-fashion retailer is becoming a major threat to the rest of the industry.

No one knew that the warning would turn out to be prophetic, but the woes of the following three companies are proof. American Eagle Outfitters (NYSE:AEO), Abercrombie & Fitch Co. (NYSE:ANF), and Aeropostale Inc (NYSE:ARO) together are called the “3As” in the U.S. apparel market.

They are all faced with similar problems and seem to be heading toward a worrisome future because they are all losing their target customers. Their target customers — teens — are no longer enamored by logo-centric clothing and are moving to cheaper, fast-fashion outlets like H&M, Zara and Forever 21, as well as well as Urban Outfitters.

The headwinds
Teens and the young millennial generation are now spending more money on electronics and less on fashion. In general, spending on cars and homes is threatening apparel sales. One of the big problems that the 3As face is a narrower clientele than that of H&M and Gap, which draw shoppers of all ages. Teens want to be fashionable, but they don’t want to spend a lot of money, and fast-fashion works very well for them. That’s why retailers like Forever 21 are performing well.

The playing field is more crowded than ever, as international fast-fashion rivals are aggressively expanding in the United States and are putting pressure on pricing. H&M saw sales increase of 10% during the first half of 2013, and the company also launched a U.S. e-commerce site. Uniqlo is planning to open six more stores in the U.S. this fall, with a goal of having 200 by the end of 2020. Forever 21’s sales rose 82% in the period of 2007-2012. All of these events are only adding to the woes of the 3As.

Another common factor was the weather. Unseasonably cold weather struck across the country in the first quarter and in the beginning of the second quarter, weakening demand for T-shirts, shorts, etc. For apparel retailers, if their seasonal items don’t sell well, this has a very big impact on the underlying business.

In addition, teens are facing lower employment levels this year, according to Challenger, Gray & Christmas, and their parents are grappling with higher payroll taxes, gasoline prices and a slow job recovery. This has forced them to move to fast-fashion retailers in a bid to save money.