As we enter the heart of the Christmas shopping season, teen retailers are beginning to lick their chops in anticipation of consumers opening their wallets without hesitation. Black Friday sales of $52.4 billion were a new after-Thanksgiving record and marked a 16.4% jump over 2010's sales figures. Cyber Monday, which is growing in importance, also climbed 22% to a new record of $1.251 billion in sales.
All of those represent encouraging figures for the teen retailing sector, even if I do have my doubts.
For one, I'm concerned that rising raw material costs will eat into margins more quickly than these retailers can pass along price increases to consumers without the fear of alienating what few loyal customers they have. While cotton prices have fallen recently, headwinds remain.
Secondly, discounts are running rampant throughout the sector. Aeropostale (NYS: ARO) was offering a storewide 60%-off sale on Black Friday, far higher than many retail peers. This speaks to the overabundance of inventory that many teen retailers are suffering through and is another reason I anticipate margins will suffer.
Finally, there's little loyalty from consumers. It doesn't matter if they shop at Aeropostale, Abercrombie & Fitch (NYS: ANF) , American Eagle Outfitters (NYS: AEO) , Gap (NYS: GPS) , or Guess? (NYS: GES) -- whoever has the best deal is typically who winds up with that consumer's business.
So let's take a quick glance at the very mixed results from Aeropostale, Guess, and American Eagle, which all reported results yesterday.
For Aeropostale, it was business as usual, with the company surpassing third-quarter estimates by $0.02 but flubbing its fourth-quarter guidance. Once again, the company blamed heavy discounting and slim margins for its topsy-turvy performance. Aeropostale has been working on lowering its excess inventory levels for months. It is making progress, but the going is definitely slow.
Guess?, like Aeropostale, also forecast a disappointing fourth quarter, well below what analysts had been looking for. But unlike Aeropostale, it also missed on its third-quarter results. Same-store sales fell by 3.5% over the year-ago period. The company noted a higher effective tax rate as the reason for the income shortfall. Even with the excuse, it's still not a very promising quarter or outlook.
American Eagle, a company I've often gotten behind because of its strong cash position and top-notch dividend, offered a significantly different outlook. According to results released yesterday, Black Friday traffic appears robust and should drive profits to a range of $0.40-$0.44 in the fourth quarter, which is marginally higher than the $0.39 that Wall Street was looking for. Still, I'd exercise skepticism in light of these results. Despite the optimistic outlook, one should note that American Eagle's merchandise margins fell a whopping 480 basis points over the year-ago period. Steeper markdowns and lower price expectations by consumers are likely to continue to plague American Eagle and the entire sector for quite some time.
Based on earnings reports released earlier this month, Abercrombie & Fitch caved into higher raw materials costs and a slowdown in Europe, and two weeks ago, Gap managed to report in-line results, but the truly damning figure was the 450-basis-point tumble in its gross margin.
The holiday season is just getting started, but I'm willing to stand behind my assertion yesterday that it's not going to be a jubilant season for teen retailers. Instead of unwrapping holiday profits, many may find lumps of coal in their stockings this year.
What's your take on these mixed, but generally downbeat results? Do teen retailers deserve a spot in your portfolio right now, or would you pass for greener pastures? Share your thoughts in the comments section below and consider adding these retailers to your free and personalized watchlist to keep up on the latest breaking news with the sector.
Add Aeropostale to your watchlist.
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At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He has been inside two of the aforementioned five retailers' stores in the past five years, and he considers that to be two too many times. You can follow him on CAPS under the screen name TMFUltraLong , track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Aeropostale and Gap. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that believes "free" is the correct price for the truth.
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