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Abercrombie & Fitch Co. (ANF), Aeropostale, Inc. (ARO): Can Retailers Stay Relevant?

I am not completely convinced that teenagers are going to be migrating to new fashion trends in the immediate future. I can certainly agree that shopping patterns could change due to changes in public sentiment. I don’t believe that fashion retail is as fickle as our internet social networks.

Courtney Reagan from CNBC states that retailers could face some challenges:

Teens are often the hardest consumers to grab with shopping tastes as fickle as their moods. However, with the crucial back-to-school season approaching, strong momentum is necessary now to be best positioned to grab these key dollars, especially in apparel. As a season, back-to-school shopping ranks second behind the Christmas holidays in terms of consumer spending.Piper Jaffray’s survey results reveal teenagers do plan to spend, albeit less than in the last two seasons, so grabbing those dollars will be more challenging this time around.

Abercrombie & Fitch Co. (NYSE:ANF)

My take on retail

Analysts on a consensus basis still expect Abercrombie & Fitch Co. (NYSE:ANF) to grow earnings by 7.8% next quarter, which was based on the guidance that has been given by the management team. Following that, Aeropostale, Inc. (NYSE:ARO) is anticipating a 3.2% decline in year-over-year revenues in the next quarter, with American Eagle Outfitters (NYSE:AEO) expected to grow earnings by 7.30% in the following quarter. The teen fashion retailers aren’t expected to perform too badly in the following quarter, and while the Piper Jaffray’s survey results should lead to some concern, we have to remember that the management teams of these respective companies have a stronger idea as to what is going on in their respective fields. That being the case, analyst estimates are based on the management team’s guidance. Therefore, our best bet at predicting how the back-to-school season will perform should be based on the quarterly earnings that are provided by analysts.

Aeropostale could be in trouble

According to Piper Jaffray, Aeropostale, Inc. (NYSE:ARO) ended up landing on the list of brands that are no longer worn. Aeropostale, Inc. (NYSE:ARO) could be in some serious trouble because the company did expect a decline in year-over-year performance in the second quarter of 2013. Investors should stay on the sidelines of Aeropostale, Inc. (NYSE:ARO). Over the past 3 years, the company’s revenues have remained essentially flat. Without any growth in revenues, paired with a 33% decline in gross margins, you can more or less blame the lack of performance on the weak retail strategy the company currently exhibits.

Not all retailers are doing that awfully. On the contrary, Abercrombie & Fitch Co. (NYSE:ANF) still appeals to teenagers. This was clearly proven in the fourth quarter of 2012. Abercrombie & Fitch Co. (NYSE:ANF) was able to report $147 million in net income in the fourth quarter of 2012 versus the $35 million it reported in the year ago period. The increase in profits didn’t come as a result of sacrificing revenues. In the fourth quarter, the company reported $1.47 billion in revenue, a good boost from the $1.32 billion in revenues it reported a year earlier. So, overall the company was able to increase profits and sales, which means that Abercrombie & Fitch Co. (NYSE:ANF) is fairly safe from both a margin and sales standpoint. The winter holiday season is the most valuable season in determining the performance of a fashion retailer, and should be watched closely asg a leading indicator of future performance.

American Eagle Outfitters (NYSE:AEO) grew its revenues in the fourth quarter of 2012 to $1.11 billion from $1 billion in 2011. The company grew its net income from $51.2 million in the fourth quarter of 2011 to $94.78 million in 2013 for the same period. The company’s growth in both revenue and net income indicates that, like Abercrombie & Fitch Co. (NYSE:ANF), consumers on average are willing to pay a higher price, and buy more of the company’s clothing.

Retail strategy is effective

These specialty retailers are generally located in mall locations, making them the primary shopping destination for teenagers. Getting a lease at a shopping mall is fairly expensive, and it comes at a first come, first serve basis. Abercrombie & Fitch Co. (NYSE:ANF), American Eagle Outfitters (NYSE:AEO), and Aeropostale, Inc. (NYSE:ARO) have leases in some of the most prominent shopping locations in the world.

Source: Macerich

These teen retailers have to compete for teenagers that come from households with an average income of $73,000 (population sample is 934,000). This means that an every-day-low pricing strategy cannot work. However, these high-end fashion retailers have to appeal to this younger customer demographic by being both expensive, stylish while offering a unique shopping experience. This is exceedingly difficult to accomplish, and it is unlikely that new clothing retailers will be able to push these company’s out of existence. In all likelihood, these companies have staying power, regardless of how consumers feel about the brands. Dollar-per-dollar, these three companies provide the most luxurious shopping experience for the younger teenage demographic.

Conclusion

The teenage retail experience is unquestionably here to stay. The guidance that these companies provided was particularly strong between Abercrombie & Fitch Co. (NYSE:ANF) and American Eagle Outfitters. I wouldn’t lose hope, based on survey results alone. After all, it is the teenagers from the most affluent families who will be making buying decisions. The only luxury shopping experience for younger teenagers can be found at these high-end shopping malls. Once you walk into these malls, you soon realize that Abercrombie & Fitch, Aeropostale, Inc. (NYSE:ARO), and American Eagle Outfitters are the biggest games in town.

The article Can Retailers Stay Relevant? originally appeared on Fool.com and is written by Alexander Cho.

Alexander Cho has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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