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Hit or Miss: Teen Retailers Focus on Supply Chain to Fuel Positive Momentum

Teens were out shopping in the fourth quarter—but will that momentum continue into the first quarter and beyond?

Given the vagaries of the retail landscape, that can be a challenging question for any retailer to answer. Yet most teen retailers are expecting a decent year ahead, which would be a good turn of events as it was only a few quarters ago that one of the questions Wall Street was trying to figure out was: when will the tides change for teen retailing

A shift in sourcing

What’s expected to help them, as many noted in their recent earnings conference calls, is a greater focus on both the supply chain and sourcing side of the business at the backend, and on making the shopping experience more personalized at the frontend.

That’s music to Bill Lewis’ ears. Lewis, a director in the retail practice at consulting firm AlixPartners, said retailers in general, including the teen chains, “all need to make investments in speed and intelligence in their supply chains, as well as personalize a shopping experience that stretches over both e-commerce and stores.”

Of the top three publicly-listed teen retailers–Abercrombie & Fitch Co., American Eagle Outfitters Inc. and Urban Outfitters Inc.–all are taking a closer look at what they can do better to respond to consumer demands.

At Abercrombie, chief executive officer Fran Horowitz told Wall Street analysts that one of the firm’s key transformation initiatives includes increasing its “efficiency and speed-to-market capabilities throughout our concept-to-customer product lifecycle.” That would include how the company plans, buys, allocates and sells across channels and geographies.

“We produce in 18 countries so there’s a lot of ability and flexibility,” Horowitz said in a phone interview earlier this month after the earnings call. “We had the opportunity to evolve our merchant team and we are getting closer to the customer and as close to delivery as we can get. We’ve taken weeks out of the delivery cycle.” She explained that while some of that time is at the initial stages of the concept design, it’s really the focus on the consumer that has helped the company become smarter about what the teens want. That intelligence, in turn, allows Abercrombie to take more time out of the delivery cycle and get the right goods into the stores closer to the delivery date.

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Joanne Crevoiserat, Abercrombie’s chief operating officer, added that the initiative is part of a transformation process to prepare the company for accelerated growth. “It’s moving away from the old processes, making investments and how to do business in a new world of retail. It entails a supply chain where speed is an important component, and it’s about leveraging data analytics to better allocate by size and pricing.”

At Urban, Richard A. Hayne, cofounder, chairman and CEO, explained to analysts that the company over the last few years worked hard to increase its speed to the customer.

“We compressed the design calendar, switch to factories that can expedite production and, in many cases, held extra piece goods and trims so there is no delay in cutting. The result is faster turnaround time. so we can now adjust our assortments in season,” he said.

Hayne also said the production team can react better and get new product to the stores much faster than before. One example he gave was that “more than 50 percent of our apparel product is not yet ordered for the month of May.”

A shift in process

At American Eagle, Jay L. Schottenstein, executive chairman and CEO, told analysts that the company, which hit a milestone of $4 billion in annual volume and over $1 billion in jeans sales in 2018, is looking to grow complementary businesses “such as graphics, shoes and accessories. We are also focused on testing new categories our customers care about.”

The company is testing a rental service called American Eagle Style Drop in partnership with CaaStle, and recently opened a new sneaker shop in its New York SoHo store in partnership with Urban Necessities. The latter is part of a test of different store designs to explore different types of store experiences for its customers.

“And we’re challenging ourselves to see what type of special things that we can add within our stores. We [added] customization and personalization in some of the stores,” Schottenstein said.

A shift in product

As much as the retailers are focused on operations, they haven’t left fashion to the sidelines. Bottoms remains a strong category for all, while graphic tees, tops and footwear seem to be categories of growing interest for their customer base, and where retailers get to pick up some marketshare gains.

“That whole Abercrombie-Hollister-American Eagle situation is interesting. What Hollister has proven is that the teen retailers need to continue to push the envelope,” Gabriella Santaniello, founder of independent research firm A-Line Partners, said. “Hollister is the most advanced in its fashion merchandise. It has been changing with the trend, and is very unapologetic about it. That’s great even if it can be nerve-wrecking to take a fashion risk, but you learn to navigate that. They just added swim, which is a risk, and is taking another risk with Gilly Hicks.”

Hit or Miss: The Quarterly Wrap for Teen Retailers
Looks from Hollister for Spring 2019. Courtesy Photo

Gilly Hicks is the intimates brand that began at Hollister in 2008, but was then shut down as a retail operation in 2013 due to lackluster margins. The door was left open for inclusion at Hollister doors, and in 2017 Abercrombie elected to retest the concept. The product line is now available in all Hollister stores.

Intimates as a sector is seeing good traction in the teen space. American Eagle has its Aerie concept, which Schottenstein said “is a major growth vehicle for us for the foreseeable future. Our sights are squarely set on the first $1 billion as we continue to enter new markets and grow our customer base.”  The retailer’s marketing platform #AerieReal has resonated with teens and helped the brand gain momentum to the tune of a fourth quarter comparable sales growth of 23 percent, on top of a 34 percent gain a year ago.

As for the other examples of risk-taking, Santaniello cited American Eagle.

“Some of the merchandise has been rough, like in tops. For a long time they were resting on their laurels and doing what was safe, not pushing themselves to evolve,” she said. “The customer sort of left them, but American Eagle in the past two deliveries has been looking better. At the end of January, they came out with a floor set that was a little bit controversial for my investor world. They had monochrome outfits from head to toe, sort of Kanye West-ish. They were trying something different and not sticking to the Boho-look. I’m glad they are finally evolving and moving on.”

As for Urban, Santaniello said the company is the leader when it comes to shifts in silhouettes since they do a really good job of identifying fashion trends, whether it’s the wider-leg bottoms or the crop tops. The Urban and Anthropologie customers “want it now” and tend to adopt the shifts earlier than the rest of the marketplace, she said, noting that the company might be facing some challenges as competitors catch up to the trends. Santaniello also believes the current fashion trends are likely to stay current for a while, meaning that Urban will need to determine what the next new thing will be to keep ahead of the pack.

According to the analyst, “The whole teen space has got to move forward and take chances. It has to have some speed-to-market, and leave some open to buy so they can take some risk, test an idea, and then get back into it. It’s about being flexible and being able to react quickly.”

Even the two teen retailers in the action sport lifestyle space–Tilly’s Inc. and Zumiez Inc.–are learning how to adapt and be better at what they do.

Tilly’s posted a fourth quarter net income jump of 29.5 percent to $8.7 million, or 29 cents a diluted share, on a sales gain of 3.8 percent to $170.6 million. Ed Thomas, president and CEO, told analysts the company finished fiscal 2018 “with its strongest single-quarter comp sales results since the third quarter of fiscal 2011, and its best consecutive three-quarter run of comp sales results since becoming a public company in 2012.”

Hit or Miss: The Quarterly Wrap for Teen Retailers
A Tilly’s storefront. Shutterstock

While first quarter sales began at a slower pace due to the cold and rainy weather on the West Coast where Tilly’s has 95 of its 228 stores in California, the company is still in growth mode, with plans to open 10 to 15 new stores for the year. Priorities for the year include the launch of an expanded loyalty program; a buy-now, pay-later program, and same-day delivery from select stores, as well as a ship-to-store program.

At Zumiez Inc., CEO Rick Brooks cited to the company’s ability to make sure it has the brands and products its customers are looking for, along with service levels and having the right inventory level suited for a store site to fill demand. The company uses a localized fulfillment strategy.

Net income for the fourth quarter jumped 48.5 percent to $29.6 million, or $1.18 a diluted share, on a net sales slip of 1.2 percent to $304.6 million.

Hit or Miss: The Quarterly Wrap for Teen Retailers
A Zumiez storefront. Shutterstock