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Back-to-School Will Test Mall-Based Teen Chains

Mall-based retail, particularly specialty apparel, had been experiencing a downturn long before the Covid-19 pandemic was a glint in the eye of the American consumer. Now, retailers in that category such as Zumiez, Tilly’s and Buckle are still among those trying to stand out in a sector that has been trying to crawl its way back since stores and shopping centers started reopening over the summer. But as the three retailers look to forge ahead into the fall, back-to-school (or a lack thereof) is expected to be a headwind that brings yet another element of uncertainty to the apparel sales landscape.

In the second quarter, Zumiez, which operates 720 stores across the U.S., Canada, Europe and Australia, took the lead among these specialty apparel retailers, with total net sales increasing 9.6 percent to $250.4 million from $228.4 million and $300 million in cash and other funds plus no debt. Denim-focused Buckle isn’t too far behind, with sales for the 13-week quarter increasing 6 percent to $216 million, compared to net sales of $203.8 million for the prior year quarter.

Tilly’s, like Zumiez, caters to young people with active lifestyles with a large selection skateboarding, snowboarding and surf-centric brands. Yet unlike its competitor, the 239-store company reported net sales declines of 16 percent to $135.8 million.

E-commerce continued to thrive in the second quarter for all three brands, with Zumiez seeing a 122.2 percent jump, Tilly’s bumping up an even better 128 percent and Buckle almost doubling at 99 percent.

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Thus far, the back-to-school season hasn’t been kind to either Zumiez and Tilly’s despite the former’s successful second quarter. With much of the merchandise geared toward teenagers, both retailers see back-to-school as the second-most important shopping season of the year as young students compile their new wardrobe for the fall.

As the third quarter began, Zumiez experienced a sales slowdown, with management warning that “total third quarter-to-date sales for the 37 days ending Sept. 7, 2020, were down approximately 14 percent, compared with the same 37-day time period in the prior year ended Sept. 9, 2019.” By channel, the company’s open store comparable sales decreased 10.7 percent, while e-commerce sales rose by 27.4 percent.

Total sales in all categories were up, Chris Work, Zumiez chief financial officer, noted during an earnings call, with the exception of footwear. Work lamented the lack of inventory in the shoe category. “We feel very good about the makeup of our inventory, but we certainly would have liked to have had more of it specifically in categories like hardgoods and footwear,” noting the struggle to get product after canceling $100 million worth of production when the pandemic first hit and shut down stores.

Looking at the weekly cadence of Zumiez’s August results, they sequentially improved each week, Work said. He said he continues to believe that there may be opportunity for a prolonged back-to-school season that seeps into September and October.

“What we’re seeing generally is that where [students have] gone back in person, those regions are performing the strongest with kind of a positive low-single-digit comp. Where [they’ve] gone back in hybrid with some in-person and some remote learning, we’re seeing kind of a down low-single digit,” Work said. “And where [they] are going back purely just remote has been down over 10 percent, so we’re definitely seeing the bigger challenges there. The other piece for us is just the belief that this will continue on to September and October as we continue to expect to see some demand here into the next couple of months, and I think what it means to the future is we just have to continue to be super nimble.”

Tilly’s is seeing much of the same in terms of back-to-school sales through August, with total net sales decreasing 35.6 percent, net sales from stores down 46.3 percent and e-commerce sales up 40 percent. The month has historically accounted for about half the company’s third-quarter sales due to the ramp for back-to-school merchandise.

Like Zumiez, Tilly’s said the week-by-week August results continue to improve sequentially, from a more than 50 percent sales drop in week one to a nearly 40 percent drop in week two. The sales losses improved in the third and fourth weeks respectively to 24 percent and 14 percent, but on a whole, the retailer says it is “more likely than not” that third-quarter net sales will be “meaningfully below” last year’s $154.8 million.

However, the retailer is leaning into omnichannel, according to Thomas, noting that Tilly’s “just recently identified five or six stores across the country to be utilized as hub stores for additional e-commerce fulfillment, while in-store activity remained significantly reduced.”

And the Gen Z-friendly chain broadened its assortment in the quarter, introducing a rash of new brands, including BDG by Urban Outfitters, women’s Nike, Free People Movement, Lukas Sport [ph], Fjallraven, and several new skate brands, Thomas noted.

Inventory remains healthy going into Q3

Despite the uncertainty, Tilly’s president and CEO Ed Thomas noted that the teen chain’s inventory status was in great shape. Tilly’s already has planned third-quarter inventory receipts for stores well below last year’s levels.

“It’s probably never been as clean as it is. There’s always going to be some spots in the inventory, maybe a product or so that is such a great sell that you’re not going to have enough, but that’s not been caused by anything related to the recent environment at all,” Thomas said. “What’s been difficult is to forecast what our store sales are going to be going forward because of all the volatility in the environment, and we’re somewhat in more of a chase mode for certain inventory than we normally would be because of that. But so far, so good.”

Zumiez CEO Rick Brooks highlighted the retailer’s “robust full-price selling across all geographies” as gross margin was 36.3 percent, a 250 basis point increase year over year. With that in mind, the company hasn’t had to subject itself to markdowns since it started reopening its stores in May.

Similarly, Buckle’s strong inventory positioning in its second quarter enabled the apparel retailer to actually increase its average price point from last year as it relied less on markdowns.

Buckle, which caters to a wider demographic of men, women and children, doesn’t typically generate as big of a back-to-school audience as Zumiez and Tilly’s. In an earnings call, Buckle president and CEO Dennis Nelson wouldn’t comment on the potential impact of back-to-school sales delays or August sales trends, citing that the company doesn’t comment on forecasts of future sales.

Store survival and mall malaise

Though retail is slogging through Darwinian tumult, Zumiez sees this shakeout as an opportunity to take market share. “We believe in the long run that the rationalization around retail and malls is going to be good for us and will…really help us drive share [and] consolidation for us as we’re positioned I really believe to win our segment of this consumer world,” Brooks said.

Still, the retail chain is looking to right-size its presence in the “over-malled” U.S. landscape. Work said Zumiez is positioned to exit 75 percent of its bottom 20 percent of stores in the next three years, and 80 percent in five years. “That gives us this kind of comfort level around how we can maneuver in this cycle,” he added.

But international represents a whole different can of worms, Brooks warned, and is much better shape than America’s mall malaise. “I think, to a certain extent, we believe that the malls’ international markets reflect and represent the future of how maybe U.S. malls are going to look,” he added, “relative to not only rationalizing the square footage, but relative to what the different kinds of tenant mix might look like in U.S. malls as they go through the rationalization process.”

Meanwhile, Tilly’s is cautiously looking at brick-and-mortar in the U.S., with Thomas describing physical stores as a “moving target” these days.

“We’re going to be pretty careful and make sure we understand the co-tenancy that if we’re going to go in to a particular location who’s going to survive and who won’t,” he said, regardless of whether a real estate opportunity is located in a traditional shopping center or an off-mall location. “But we’re going to continue to open stores. There’s no question about it, and I would say that it’s going to be still be a combination or a continuation of our strategy of opening off-mall and mall stores both.”

Additional reporting by Jessica Binns.