Friday, January 23, 2015

Millennials Shift Fashion Direction

If you follow the habits of millennials, and wonder where they’re shopping these days, a half dozen or so previously successful youth-oriented fashion retailers who have been experiencing plenty of turmoil recently are asking the same question. Some are attempting to regroup or redefine - and some have already lost the battle.

Among those latter are Deb Shops, which is currently liquidating all 287 stores, and Body Central, which closed all 265 locations just this month. Then there’s Wet Seal, whose namesake stores and Arden B division recently showed consecutive comp store sales declines of 10.1% and 4.1% respectively. With few exceptions, Wet Seal’s quarterly sales comps have been in the red since 2009. Last year, the company announced that it would phase out its Arden B operation; earlier this month, it announced that it would be closing 338 stores, about two-thirds of its remaining units; and as of this writing, Wet Seal finally announced Chapter 11 bankruptcy.

Aeropostale, another teen retailer without much identity, has been around for decades but was never able to establish itself as a frontrunner in the category. Aeropostale’s sales have declined from $2.3 billion in FY 2011 to $1.6 billion in FY 2014 - its worst year, when it experienced a 15% drop in comp store sales. The fact that during that time frame it added nearly 100 stores only exacerbated the problem. Last month, the company announced it would be closing 75 stores in the current Q4, following 23 closings in Q3. More closings are likely if Aeropostale is going to have any chance of righting the ship.

Even former Wall Street darlings have hit a wall: first Abercrombie & Fitch, then American Eagle Outfitters. Although there were several marketing blunders along the way that didn’t help, the most detrimental impact on Abercrombie’s business came from its non-promotional pricing strategy. There was a time when teens had to wear that label regardless of cost, but as less expensive alternatives came into vogue, teens were quick to shift allegiance. Habitual customers still frequented their stores, and Abercrombie continued to turn a respectable profit, with operating income as a percent of sales holding in the mid-to-upper single digits. But last year that number dropped to 1.7%, only $81 million in the black against sales of $4.1 billion. As a result of the company’s misfortunes, Abercrombie announced two years ago that it would be closing 180 stores by 2015. Only a small portion of those stores have closed so far, so look for the pace to increase this year.

Abercrombie’s downturn came at a time when price-sensitive teens began opting for similar fashion at a reduced price in the form of American Eagle. For several years AE became the affordable copycat. But last year total revenue took a dip, although a modest one, for the first time since 2009, and comp store sales declined 6.0%. As a result, AE closed approximately 70 stores in 2014, with another 80 closings scheduled by 2016.

What happened? It appears that fashion-forward teen shoppers have become increasingly less label-conscious and more price-conscious (don’t forget, this particular group needs to save a few dollars in order to upgrade to the newest iPhone). They’ve forsaken the Abercrombie’s and Eagles. But they still want cool clothes. The answer for winning over millennials is affordable fashion, a trend that complacent, image-dependent mall-based merchants like A&F never saw coming. Who’s the beneficiary? Fast fashion, that’s who!

New-school fashion retailers such as Forever 21 and H&M have been rapidly rolling out stores while offering wide selections of trendy, affordable fashion - some might even view them as juniors “category killers”.

Forever 21, a private company, has grown from a single California unit in 1984 to an international chain of more than 480 store locations. Forever 21 is now the fifth largest retailer in the US; the average Forever 21 store is 38,000 square feet. H&M is a Swedish-based firm with more than 3,000 stores worldwide, and more than 300 in the US. This rapidly-growing chain increased its store count by more than 50% between 2009 and year-end 2013, and expansion plans call for a 10-15% increase in stores per year, with China and the US representing the primary growth targets. Typical stores range from 20,000 to 25,000 square feet.

Other fast-fashion retailers are on the horizon. Although Zara entered the US back in 1989 with a New York City location, this Spanish retailer has experienced difficulty growing in the US - its form-fitting European sizing had limited appeal on this side of the ocean. However, it appears this obstacle has been overcome as more and more Zara locations in excess of 20,000 square feet are popping up in major US markets.

Another new entry is Japanese retailer Uniqlo. After a brief hiccup with three poorly-located store openings in New Jersey in 2005 and closed two years later, it rebooted with a Soho store in 2006, resulting in much better traction: Uniqlo now has 21 stores in the Northeast and San Francisco Bay area, and is scheduled to open 18 new locations this year (including one in Boston). Stores average approximately 18,000 square feet, with flagships significantly larger. Uniqlo’s goal is to open 200 US stores by 2020.

Smart, aware millennial shoppers are hungrily seeking fashion and value, and stores like Forever 21, H&M, and Uniqlo are riding the wave of that desire. Let’s see which fast-fashion players are left standing after the wave passes.
Bob Sheehan, Vice President of Research

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