We need a concise term for the teen/young adult retail consumer. Tweens has been taken and is pre-teen plus teens so let's agree to call the long and clumsy mid-teen through young adult market teensup for expediency.
The day logoed hoodies died
It's been almost two years in the making, but it's clear the death of the logo on teensup apparel is here. Even the tweens are not as impressed with the cool factor wearing an Abercrombie & Fitch or Aeropostale logo bestows.
Aeropostale was the canary in the coalmine; it took a little longer for Abercrombie & Fitch and American Eagle to roll over.
American Eagle and Abercrombie reported quarterly results August 21 and August 22, respectively, and business is not good if you are selling distressed denim, logoed hoodies, and graphic tees stuck in a past where these used to be hot fashion items. Teensup are finally tired of paying Abercrombie and Aeropostale for the privilege of being the company's billboard with ubiquitous logos splashed across much of the merchandise.
As far back as Q4 2011, it was obvious that yawn-worthy denim, logoed hoodies, fleece, and tees were piling up on the shelves higher and deeper every quarter and only moved out at giveaway pricing. Same store sales and margins have been in a death spiral since 2011. This was a company turning in same store sales up to 10% and revenue growth in the high teens in 2009-2010.
By Q2 2013, same store sales were the worst in two years at -15% and net sales continued to decline down 6%. In spite of heavy discounting, there were fewer items sold per ticket and fewer transactions overall. Even at discount pricing, traffic was down. They lost $0.43 per share and guidance was for more of the same -- Q3 losses are estimated at $0.21 to $0.26 per share.
Mr. Johnson has yet to find a fashion to follow and believes it's a macro-consumer issue in spite of other retailers seeing positive sales trends.
Our business was pressured by a challenging teen retail environment with weak traffic trends and high levels of promotional activity. Our results were particularly disappointing given the level of change we have registered with the Aéropostale brand in recent periods.
Since Aeropostale is merely a follower of fashion, they were the first casualty with cheap non-cachet branding. It took longer for American Eagle and Abercrombie to lose their customers for the brands.
Abercrombie & Fitch gets punched in its perfect six-pack
The mighty Abercrombie, famous for its perfect half naked models with cut and ripped abs, didn't escape the hit. Even sex couldn't save them and Q2 was the culmination of string of disappointing quarters that finally crashed the price after a run up in 2013. Investors weren't impressed by Q2 and the decreasing revenue and earnings and in spite of the big push to trim costs, operating margins were down.
"We have also made excellent progress on our profit improvement initiative during the quarter, and we now expect savings from this initiative to exceed $100 million annually"
Throughout the conference call, management used buzz words to project enthusiasm: pleased, excited, encouraged, optimistic, and excellent. Results were none of these.
Sluggish moving inventory and negative same store sales are the problem and it's not operating efficiency that's going to fix Abercrombie. They need to know what sells — easy to say but hard to do. Comparable sales in the second quarter of 2013 were -10%, keeping with their recent unhappy history of negative same store sales. All the ANF retail concepts including Abercrombie & Fitch, Hollister, Kids and abercrombie were in the red in the second quarter and the first quarter was even uglier:
First quarter 2013 comps
CEO bullet points from the conference call
In the face of such devastating results you might think management would be taking a long hard look at what they are doing. That didn't happen at least this quarter.
I think that from the top, there is a weakness in the young teen business
I've read quite a few research reports this past quarter talking about how good our stores look, and I think they are right
When times are difficult it's easy to start throwing this group or that group under the bus for having executed poorly. I don't think that's the right thing to do from a cultural point of view, but more importantly, I don't believe it
I've been around this business as you know, long enough to know that sometimes however good a job you are doing, there are factors beyond your control
Sometimes they are in your favor and sometimes they are against you and they tend to even out over time.
Jeffries indelible vision of how great the business was and is keeps him from acting on the bad numbers while he continues to believe it's an external problem that will sort itself out. Instead of taking a hard look at the current state of Abercrombie he will stick with business as usual and keep rolling out new stores with slow sales to satisfy growth. It might work out eventually if all things old become new again, but that can take a long time. What was conspicuously missing from the call was any discussion of looking at teensup trends now and making some fundamental changes to their inventory.
Former Abercrombie consumers are probably spending more dollars at the trendier Forever 21 , Brandy Melville , H&M and Uniqlo looking for the cheap fashion basics and then adding a pricey pop with a Michael Kors bag.
Things are different than when Jeffries was a boy. There is this thing called the Internet with Instagram, Facebook and Twitter that shares ideas fast. Phone cameras and texting mold lives and tastes. There are countless teen blogs devoted to fashion ins and outs that transmit what consumers want at the speed of light. Instead of reading research, Jefferies should look at and listen to his potential customers in their natural habitat. They are not looking for overpriced sweatshirts and Abercrombie logos.
Fly like and eagle—or not
The last amigo, American Eagle, has had flashes of success over the past two years but hit the wall in the first quarter of 2013.
In the second quarter of 2013, total net revenue decreased 3% and comps were down 6% after an impressive string of quarters in 2012 with mid-to-high single digit comps. The run came to a screeching halt in the first quarter of 2013 when AEO turned in disappointing decreasing revenue on negative 5% comps. It looked like management was getting the style right, but the CEO admitted in the recent conference call they are wide of the mark.
We didn't deliver the trend relevancy, innovation and value. And that's where I think we fell short in the second quarter, when we should have been innovating more aggressively in core and core fashion, and we didn't. I think we probably could have read those results a little bit more self-critically and made adjustments.
It's a good start. He takes the blame for the miss, but still holds fast to the idea there is a core and being true to the core will save the business. The core is denim, tees and fleece and AEO's thinking is they missed on prints, color and washes when it may be a Richter Scale 8 shakeup happening beyond core denims. Since 70% of their business is core fashion and basics, caution is warranted but the first half of 2013 should be telling them something is fundamentally wrong.
The three amigos ruled teensup fashion for years, but there's a whole lotta shakin' going on in retail and they need to shake off the dust and cobwebs to get ahead of the competition.
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The article The Three Amigos Shoot Themselves in the Foot originally appeared on Fool.com.
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