This past week and a half saw all of The Big Three teen clothing retailers post a second consecutive quarter of year-over-year losses, further fueling the short selling spree on these companies' shares.
Abercrombie & Fitch Co. (NYSE: ANF), American Eagle Outfitters (NYSE: AEO), and Aeropostale Inc. (NYSE: ARO) have been suffering blows to their top line since the tail end of the recession, fueling short-selling activity that has further threatened these companies' stocks.
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This is particularly disappointing because at one point these three companies were ahead of the curve when it came to teen fashion...Teen Retail's Shift from Industry Leader to Short-Selling Target
Between 2003 and 2008, teens loved to have the names of these companies prominently adorning the clothes they were wearing. Aeropostale led the pack, averaging yearly growth of 20.9%, whereas both A&F and American Eagle grew at about 16% a year.
Now ARO, which not surprisingly has garnered the most attention from the short sellers, has seen the most struggles. After seeing its yearly double-digit sales growth figures freefall in 2010, the company has failed to pull those growth numbers back up, and in 2013 saw sales plummet 12.5%. This last year was particularly punishing for ARO, which posted its worst year of sales since 2008. It posted losses of $141.8 million.
ARO continued that collapse with two consecutive quarters of year-over-year revenue declines in 2014, with a 12.5% drop in sales in the first quarter and a further 12.7% decline the next quarter.
Similarly, ANF was down 8.7% in 2013 and posted consecutive quarterly revenue declines of 2% and 5.8%. AEO was down 4.9% in 2013 and has thus far in 2014 suffered a dip in revenue to the tune of 4.9% and 2.3% in the first and second quarter respectively.
There are no signs that things will get better for these former retail winners. There are going to be many more joining their ranks.
Here's where these three retailers went wrong - and how to tell when other retailers are doomed to be short-selling targets as well...Three Factors That Lead to a Retailer's Demise
No E-Commerce Presence to Offset the Death of In-Store Sales: Teen clothiers have been falling prey to trends that have been plaguing department stores like JCPenney Co. Inc. (NYSE: JCP) for a number of years now, namely that physical retail and brick-and-mortar operations are losing out to the shift in consumer payment habits.
"This is not a good time to be invested in physical retail," said Money Morning Defense and Tech Specialist Michael A. Robinson. "The balance of power has shifted to e-commerce."
Showroom traffic in retail stores has experienced year-over-year declines of 5% every month over the last two years, according to ShopperTrak, as e-commerce activity keeps climbing.
Failure to Adjust to Shifting Tastes of Targeted Demographic: The fashion tastes of the teenage shopper are difficult to pin down, and while in the first half of the decade this demographic would proudly wear clothes with the store's logos emblazoned on them, this is no longer the case.
In an earnings call yesterday (Thursday), ANF Chief Executive Officer Mike Jeffries commented on how consumers have become less receptive to the insignia-laced clothing and revealed that his company is looking to wind down such product offerings.
Today's teen is more favorable to a greater sense of individuality, ditching the logos and opting for nondescript clothing to mix and match. This new style is heavily influenced by the rise of social media.
"These young consumers are shopping by seeing what's on Instagram, Facebook, Twitter - they're sharing on a constant basis, it's always around them," Marcie Merriman, a consumer-engagement consultant at Ernst & Young, told The Washington Post. "So if what's in the stores is not changing as fast as what's happening around them, you're going to lose them."
Letting Competition Undercut Big-Name Retailers: Just compare the prices of a company like ANF to an equally trendy clothier like the Swedish multinational H&M, and it becomes clear why they have blazed two different trails over the last five years.
A pair of jeans for men and women at ANF will set back the average teen shopper a pretty steep $78. H&M's most expensive jeans are as much as $49.95, and as cheap as $14.95.
And in the last five years, while ANF has averaged annual sales growth of 4.4%, its Swedish counterpart has averaged annual sales growth of 7.7%. And when ANF saw its big dive in sales this year, H&M still continued to grow at 6.5%.
In that same period, H&M has grown sales an average of 16.2% a year in the United States.
More on short selling: The conventional approach to trading is to buy low and sell high, but what the conventional approach doesn't account for is that there are two sides to every trade. Wall Street has made quadruple-digit gains by taking the other side of the trade, and Money Morning Members can learn how, too, with The Absolute Beginner's Guide to Short Selling...Tags: $AEO, $ANF, ARO, how to short a stock, retail short, retail short selling, short selling, short selling retail
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