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Analyst Says Teen and Tween Retailer Failures to Persist

It’s little secret that teen retailers have been hurting in recent years, one after another biting the dust, some leaning on bankruptcy as a crutch to restructure. But the bankruptcies thus far, it seems, could just be the beginning of the sector’s plight.

Michael McGrail, COO of financial planner Tiger Capital Group, said lenders should listen up.

“While we have already seen filings from the likes of Cache, Wet Seal, dELiA*s and Deb Shops, this is likely just the beginning of a larger trend,” he wrote in an article for ABL Advisor. “Amid dwindling sales at many (but not quite all) tween and teen-focused chains, the sector is positioned for further consolidation and additional filings.”

And Aeropostale could be the next one up for a filing. The retailer said last week that it’s considering a sale since its sales have been steady on the decline and down 16.1% in the most recent quarter. Aeropostale also announced in January that it would cut 100 corporate jobs—13 percent of its workforce.

For the fourth quarter ended Jan. 30, ailing Abercrombie & Fitch reported comparable sales only slightly in the positive, up 1 percent. By brand, net sales at Abercrombie were down 3 percent to $509.4 million and Hollister was up 1 percent to $603.6 million.

Abercrombie executive chairman Arthur Martinez was pleased with the results considering last year’s issues with currency, weather and foot traffic, and the company spent last year moving to a branded structure, evolving its assortment and focusing on customer empowerment at the store level.

At American Eagle, things were a touch better. Comparable sales were up 4 percent for the quarter ended Jan. 30, compared to flat comp sales in the prior year period. Profit increased 3 percent to $388 million. The company’s focus this year will be on what it called “continuous merchandise improvements,” and elevating efforts toward customer acquisition.

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Efforts from the three A’s could be in vain, however.

Shopping patterns have shifted across the board and among teens especially. Whereas they might have spent more on in-trend brands and clothing in general in the past, those dollars are now increasingly going to entertainment and food.

In today’s market, according to McGrail, it doesn’t take much of a reduction in store profitability to “reach a point of no return.”

Teen and tween retailers who deal with their cash flow constraints early on have the best chance of staying viable as they’ll be better positioned to renegotiate or terminate real estate that’s no longer desirable.

But, “When companies fall into insolvency, options are more limited with respect to lease mitigations,” McGrail said. “Without significant cash on hand, such chains have no choice but to file for bankruptcy.”

And without loans or capital from elsewhere, most won’t make it through the pricey bankruptcy process.

“The tween and teen market is made up of some of the most finicky consumers. They know what they want and are not swayed by their parents’ choices in fashion,” McGrail said. “They migrate fast and are difficult to lure back once they have moved on. Decreasing comparable store sales is the clearest indication that a migration could be taking place. Comps need to be tracked closely as the first sign of changing trends.”