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Teen Retail: Old Guard May Not Cut it in New World

originally published on August 22 2014

Teen retailers have been in a death spiral for years now, yet recently the street has decided that fewer bad results are the new good.

Take American Eagle (AEO), for example. Comps declined 7% this quarter and gross margins were down ONLY 40 basis points. Most surprising, the company issued guidance that was right in the range of consensus estimates as opposed to the massive guide downs we have been trained to expect. That was enough to bring back hopium for a second-half story and catapult the stock higher. Warning ahead on this one. Take a look at the track record of guidance vs. actual results before you get excited here.

The other teen retailer on the move is Aeropostale (ARO). Finally, the company got rid of its CEO after years of execution missteps. This long overdue change at the top became less exciting to me when the company announced it would bring back its former CEO Julian Geiger. While Geiger ran ARO quite successfully years ago, I would argue the old guard may not cut it in the new world. Yesterday after the close ARO reported another painful quarter with comps -13% and guidance below the Street. That was enough to erase the euphoria from last week surrounding Geiger’s return to the company.

Bottom line on these stocks is stay away. With fast fashion changing the landscape (although retailers will deny this) the market-share losses will only accelerate. I have one recommendation for every investor who believes the teen space will make a comeback. Walk into the new Topshop flagship on Fifth Avenue when it opens this fall. When you exit the store, you will also exit these stocks.

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