Teen Retail: Sell in May, and Go Far, Far Away

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 |  Includes: AEO, ANF, ARO, BKE, URBN, XLY
by: Bullish Bankers

We all know consumption is the most prominent victim of this recession. Not only do we have to deal with soaring unemployment and tightening credit, but also the behavioral shift in America of spending less as a percentage of income. Obviously these factors are going to disproportionately hurt the sub sectors with the highest priced goods, or those considered the most discretionary such as luxury cars, high-end women’s clothing, etc. One sub-sector that will surely feel tremendous pain, however, is teen retail.

It is common knowledge the national unemployment rate is expected to reach 10% or higher in the foreseeable future. This is well known, and priced in to most retail stocks. When you break unemployment down by age, however, a very grim signal for teenage spending in particular emerges. According to the U.S. Bureau of Labor Statistics, the current unemployment rate for men and women between the ages of 16 and 19 is 21.5%, over 141% higher than the current overall national unemployment rate of 8.9%.

Teen employment has many factors going against it. Rising minimum wage, as many of us learned in Econ 101, increases the price of labor for firms, who therefore hire fewer employees. Teens are much more likely to be working minimum wage jobs, and therefore disproportionately affected by this change. This compounds with the layoffs among unskilled laborers, factory jobs, construction, and other types of jobs which are also entering the competition for these minimum wage jobs.

“The weak economy is combining with high mandated wage levels to create the perfect storm of unemployment for less experienced and less educated groups like teenagers and adults without a high school degree,” said Kristen Lopez Eastlick, Senior Research Analyst for the Employment Policies Institute.

Higher unemployment for teens means less sales for the likes of Abercrombie & Fitch (NYSE:ANF), American Eagle (NYSE:AEO), Urban Outfitters (NASDAQ:URBN), Aeropostale (NYSE:ARO), and others that cater to this fashion fickle demographic. Abercrombie has been the worst performer in the lot over the past year, falling over 64% while the Consumer Discretionary SPDR (NYSEARCA:XLY) fell approximately 34%.

ANF believed its stores should continue to charge teenage girls $70 for a cotton shirt during the downturn, in order to not dilute the brand’s “image.” The company announced it would reverse this strategy after its first quarter earnings (or, in this case, loss) report last Friday. After CEO Mike Jeffries vowed not to lower prices last year, he is now saying we can expect “meaningful reductions” in prices due to a “headwind where the consumer is reluctant to spend on premium brands.” A little late, Mr. Jeffries? Revenue for the retailer fell 24% in the quarter, and same-store sales plummeted an astonishing 30%.

There is large concern that mid/high-end teen apparel may face longer-term turmoil, even post-recession, as frugality and austerity become the new trend. The cultural shift toward bargain-hunting, and the appeal of self-sacrifice is here to stay, even for those not significantly affected by the recession. It’s what makes eating at McDonald’s no longer looked down upon, and what makes $4 lattes at Starbucks lose their luster.

Certain teen retailers will do well of course, but it will certainly be tougher. Expect retailers like H&M, which has been touting its “Cheap Chic” theme for years, to continue to thrive. Up and comer The Buckle (NYSE:BKE) has managed to grow sales strongly even through this recession, with its differentiating styles, allowing it to set itself apart from the preppy onslaught of ANF, ARO and AEO. It’s technically a regional play, but its expansion into the Northeast market could prove to be very lucrative. Teen tastes are impossibly difficult to predict, of course, which is why I am hesitant to recommend even the most resilient teen retailers. After the recent run-up in most of these stocks, I’d suggest abiding by the old Wall Street adage: “Sell in May, and Go Away.” Go far, far away.

-Harry Lacheen

Disclosure: None.