Private Equity Gets Deeper Into Retail

It hasn't been a great year for many teen retailers. Consumers are holding on to their cash in the mall and splashing out on the bigger purchases -- cars, appliances, etc. -- that they put off in 2012. If a brand was already a bit weak, the impact has been devastating. Aeropostale has been especially hard hit, with sales down and the stock taking a 25% hit over the last 12 months. Today, the retailer got something of a reprieve, with Hirzel Capital Management announcing an increase in its stake in the business, which rose to 6%.

Private equity takes Aeropostale on
Hirzel is by no means the first courtesan to come calling to Aeropostale. Back in September, Hummingbird took out an 8% stake, driving the stock up. Hummingbird is indirectly owned by Sycamore Partners, which purchased Hot Topic earlier in the year, and made a bid for failing Billabong. The push by firms into the teen market has led many analysts to believe that the sector is currently undervalued.

Sycamore certainly seems to think so, and some have forecast that its Hummingbird position will later lead to a bid for the business. The company used a similar tactic -- taking out a big stake before making a bid -- last year, when it took over Talbots.

In a world of losers, who's winning?
Many companies in the teen sector are suffering. Aeropostale rival American Eagle is down 16% over the last 12 months, with year-over-year sales dropping 6% in the third quarter. Both companies are having a hard time transitioning from the "Kids will buy every goofy T-shirt we make" mentality to the "We need to actually design things" mind-set.

One company that's had some real success this year is Urban Outfitters . The company owns its self-titled brand, along with the Free People and Anthropologie businesses. While the businesses joined in the mall choir, singing "Here Comes a Bad Christmas" in its recent earning release, its previous quarter was excellent. The company's Free People and Anthropologie brands both had big comparable-store sales jumps over 2012.

What it takes to stand out
Aeropostale's woes aren't going away just because it has some new big investors. The company is making a transition from logo-wear to more fashionable pieces. More and more, retailers are realizing that they can't just rest on the power of their brand, because popular brands change so quickly.

Instead, Aeropostale is going to have to introduce more fashion items. At first, the company simply needs to be able to chase trends quickly, but eventually, it's going to have to start setting the trend. Companies that have been unable to move to the front of the pack have fallen behind, and Aeropostale won't be any exception. The company's last quarter was weak, but there's still some hope for a strong end to the year. If that doesn't come through, expect a bid to take the company private sometime next year.

Next year's winner
While teen retailers are having to struggle just to keep up, not everyone is in the same boat. With the overall market storming to new highs in 2013, it may seem like all the best businesses have already risen to the top -- but a few big winners are still out there. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our free, in-depth report, simply click here.

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Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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