Teen Retailers Face Challenging Back-To-School

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Teen apparel retailers are finding decent grades hard to come by heading into the back-to-school shopping season.

"Given the relatively weak data coming from the teen apparel space for the second quarter, it suggests the back-to-school selling season could be even more challenging," said Ken Perkins, president of Retail Metrics.

Here's what's happened in the past week:

American Eagle Outfitters ( AEO ) raised a red flag on Aug. 5 by lowering its earnings outlook for its just-ended second quarter, right as the back-to-school selling season kicked off.

It said traffic was weak and sales and margins were below expectations amid disappointing sales in the women's category. Same-store sales dropped 7% from a year earlier.

On Thursday,Aeropostale ( ARO ) warned its second-quarter sales fell 6% overall and 15% at stores open at least a year. It also lowered earnings guidance for the quarter.

A Slow July

The same day, action-board retailerZumiez ( ZUMZ ) and teen apparel chainBuckle ( BKE ) missed analysts' forecasts for July same-store sales.

Overall, says Perkins, retailers' July sales were soft. He's sticking to his prior forecast for a 2% to 3% rise in same-store sales for the back-to-school season, which runs from the end of July through mid-September, with the potential to be "slightly below." Comps rose roughly 3.5% last year at this time.

Recent announcements from the teen space signal a change in where back-to-school budgets are being spent, says Michael Niemira, chief economist at the International Council of Shopping Centers.

"The teen retailers are likely to see some weakness," he said. "That business seemingly is shifting toward the discounters, which suggests the consumer is more inclined to think about basics and not fashion."

He cautions not to focus too much on the second quarter, given signs the economy has firmed in the past couple of months. "That would mean we should be more upbeat about back-to-school," he said.

Niemira is sticking to his forecast for a "relatively decent" season. He sees a 3.1% rise in July through September sales at family clothing, shoes, book and electronics stores, down from last year's 3.6% gain.

"Over the long haul, that's not bad," he said.

Consumer Pressure

The pace of consumer spending is lackluster, says Niemira. Aggregate same-store sales growth for 125 stores that he tracks has run a sluggish 1% to 1.5% the past few quarters.

"It is a highly competitive retail environment, which is reflected in the fact you've seen ads related to back-to-school showing up earlier, around the July Fourth holiday," Perkins said. "That goes to show you retailers are competing for a slowly growing spending pie."

Because income growth of mid- and low-income consumers has been "almost nonexistent," apparel sales have been soft over the past year, he noted. That's left consumers with little discretionary income, and apparel spending has been "getting crowded out" by increased sales of items like home furnishings.

Footwear Still Fancied

Despite American Eagle's warning, said Perkins, "I expect other retailers to be relatively strong in comparison, particularly those that have more footwear and accessories offerings." He cites retailers like athletic footwear and apparel retailersFoot Locker ( FL ) andFinish Line (FINL) as among those being strong.

Others are less sure.

"We have been cautious overall on back-to-school for some time, but even more so now that we see what is happening in the last week or so," said B. Riley & Co. analyst Jeff Van Sinderen. "Our channel checks are coming back negative. We believe that apparel, especially juniors (and) girls, is going to be challenging for back-to-school. There will be more weakness revealed among the retailers that sell to the back-to-school demographic."

Don't expect parents and kids to splurge on school supplies, either, says Perkins. He doubts giant discountersWal-Mart Stores (WMT) andTarget (TGT) will benefit as much from supply purchases as they usually do. But they may do better than office supply stores likeStaples (SPLS), he adds, and could see a "modest boost" from tablet and smartphone sales.

Overall, it will be a "promotional" period, with retailers competing for a back-to-school spending pie that isn't growing, he says.

Perkins says consumers will shop for back-to-school late and closer to their needs -- in the last two weeks in August and the first two weeks in September.

When they shop, they'll go into stores with strict budgets and shopping lists and look to buy merchandise only if it's on sale.

Where are the bright spots? Van Sinderen saysUrban Outfitters (URBN) is one of his top picks for back-to-school. The main Urban Outfitters brand features merchandise and styles that are generally on trend and differentiated from other youth retailers, he says.

The retailer, which also operates the Anthropologie and Free People chains, is expected to be a standout performer in the third quarter, says Greg Harrison, senior research analyst at Thomson Reuters. Analysts polled by his firm expect Urban's third-quarter same-store sales to rise 6.6% from a year earlier.

Analysts also predict thatWet Seal (WTSL) will see a 5.5% jump in Q3 same-store sales at its youth-oriented stores, which sell trendy clothing and accessories.

The big spenders are likely to be households with annual income of $100,000-plus, according to a July 19 ICSC-Goldman Sachs survey. They plan to spend 35% more than the U.S. average, says Niemira.

"That's a big difference relative to last year's survey, which showed they planned to spend 10% to 15% more than the average," he said. "It suggests the higher-end households will be where the action will be."

In terms of shopping venues, discounters are expected to see a greater share of spending than last year, says Niemira.

Brian Sozzi, CEO of Belus Capital Advisors, says the American Eagle warning suggests teens may not gravitate to traditional teen favorites like American Eagle, Aeropostale and Pacific Sunwear ofCalifornia (PSUN). They may spend elsewhere, like department storeMacy's (M), which he expects to have a good back-to-school. Macy's strategy of localization and store investment has helped it outperform some peers in its group.

The online channel, including brick-and-mortar retailers' businesses on the Web, is also likely to see a bigger portion of spending, says Niemira.

Online back-to-school dollar sales are expected to increase 3% vs. a year earlier, with price and convenience being the main motivators, according to a survey by research firm NPD Group.

Marshal Cohen, chief industry analyst at NPD, expects retailers to have a "pretty decent" season. He sees "nice healthy growth" of about 3% in back-to-school sales in August and September.

"What that tells me is the consumer is willing to go beyond the necessities," he said.

It's a sign the consumer is feeling a little more comfortable and is willing to spend, he adds.

Apparel, footwear, school bags, accessories and sports equipment will be among the season's hot sellers, says Cohen.

In footwear, basketball sneakers fromNike (NKE) will be the shoe of choice for teens, predicts Sozzi. You can find the Nike shoes at retailers such as Foot Locker andDick's Sporting Goods (DKS).

Tablets and smartphones will likely be key categories, adds Perkins.Best Buy (BBY)will be "pulling out all the stops" to devote space and advertising for these products.

He sees retailers' inventories in "pretty good shape" as they head into the back-to-school season. So he doesn't expect fire sales due to excess products on hand, though retailers will offer planned markdowns.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AEO , ARO , BKE , FL , ZUMZ

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