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Teen Retailers Saddled With Excess Inventory on Slow Sales

Teens are increasingly shifting their spending toward electronics over apparel, and the retailers that accommodate them are battling against excess inventory as a result of sluggish sales.

Same-store sales have tumbled at the teen sector’s top retailers, Aeropostale, Abercrombie & Fitch and American Eagle, as these companies struggle to compete with fast fashion giants like H&M and Forever 21, and try to stay afloat amid slower store traffic.

A Wall Street Journal report this week looked at inventory in relation to sales at the three retailers, and said while inventory levels at the 200 publicly listed retailers has reached equilibrium, things have been moving in the opposite direction in the teen sector.

Naturally, if inventory and sales are on par, companies are holding more inventory than they are selling. If sales growth exceeds inventory growth, there’s a shortage. And if inventory rises more rapidly than sales, there will be leftover goods to discount, and margins will suffer.

Sales and inventory growth at the 200 public retailers were both 3.5% in the fourth quarter of 2013 compared to sales growth of 4.1% and inventory growth of 4.6% in the same period the previous year, WSJ reported.

But at teen retailers, sales rose 0.5% year-over-year in the fourth quarter of 2013 and inventory was up a sizable 8.9%, according to data gleaned from David Berman, manager of retail-focused hedge fund Durban Capital. Meanwhile, sales growth in 2012 was 4.8% while inventory growth was 1.8% in the corresponding quarter.

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Many teen retailers reported suffering from excess inventory in last week’s earnings statements.

Net sales at Aeropostale were down 12 percent and according to WSJ, the retailer said it would reduce its inventory purchases by double-digit percentages in the second and third quarters.

American Eagle posted a comparable sales decline of 10 percent in its first quarter 2014 and a total merchandise inventory decline of 3 percent.

At Urban Outfitters, another youth brand which operates Anthropologie, Bhldn, Free People, Terrain and Urban Outfitters brands, sales increased 6 percent and inventories were up 7 percent and things were especially poor at the company’s more teen-focused namesake, which saw net sales dip 12 percent.

Abercrombie & Fitch, which has been doing its level best to stay afloat, from changing leadership to cutting prices and shutting stores, said it statements (which will be released this week) will reflect inventory increases of 24 percent for the fourth quarter compared to a 12 percent decline in sales, and according to WSJ, “That’s one gap investors don’t want to fall into.”