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

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 (ANF), American Eagle (AEO), Urban Outfitters (URBN), Aeropostale (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 (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 (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.

Comments

[Hanoch:]

"the current unemployment rate for men and women between the ages of 16 and 19 is 21.5%"

This figure is not very useful unless you know the pre-recession unemployment rate. One would expect the unemployment rate in this demographic normally to be far higher than the overall unemployment rate.

May 25 08:53 AM

[Asian Tiger:]

Harry Lacheen: are you in retail business? I doubted.

The teens surely are higher in unemployment, they are in schools!

They will pull out all the money they have in pockets and buy A&F to show off in front of their classmates and friends.

May 25 10:21 AM

[Charles Pet...:]

Your comment is well taken, but the reason is not because they are in schools. Those teens in schools are not going to be included in a U3 teen unemployment figure that is being reported.


On May 25 10:21 AM Asian Tiger wrote:

> Harry Lacheen: are you in retail business? I doubted.
>
> The teens surely are higher in unemployment, they are in schools!
>
>
> They will pull out all the money they have in pockets and buy A&F
> to show off in front of their classmates and friends.

May 25 10:48 AM

[Fletcher Wh...:]

no mention of APP. Stock continues to be driven down, rightfully so, with some recent bad news and quarterly earnings. Good looking clothes at prices alot cheaper than the others ie Abercrombie. Good product, i wil buy if APP continues to fall.

May 25 12:28 PM

[captainccs:]

Aeropostale targets teens 14 to 17, most of who are below employment age. A recent discussion by management said the most of the kids go to the store with mom or dad. I don't think these kids are paying for their clothes, mom and dad are, and Aeropostale just had a rip-roaring quarter probably at the expense of Abercrombie & Fitch.

Lumping retail into single big pot is a mistake, even lumping teen retail into a single pot is a mistake. In retail it pays to classify by low cost (Ross Stores), in (Aeropostale) and out (Abercrombie & Fitch).

May 25 08:22 PM

[Stone Fox C...:]

TWB mentioned from shoppers weren't buying unless they had a discount. Guess ANF finally woke up that the typical consumer is now so used to getting a discount that they just expect it regardless of whether the price is market up or not. Its no longer a matter of having the most desireable product and brand, you've got to play the discount gimmick.

May 26 12:50 AM

[Jimmy225:]

here...here!!!! Painting with a broad brush can cost you a fortune in missed profits. Aeropostale is absolutely blowing up this year, and will probably continue for a long time. The Buckle is up 64% YTD and climbing. Do your research before you generalize.

On May 25 08:22 PM captainccs wrote:

> Aeropostale targets teens 14 to 17, most of who are below employment
> age. A recent discussion by management said the most of the kids
> go to the store with mom or dad. I don't think these kids are paying
> for their clothes, mom and dad are, and Aeropostale just had a rip-roaring
> quarter probably at the expense of Abercrombie & Fitch.
>
> Lumping retail into single big pot is a mistake, even lumping teen
> retail into a single pot is a mistake. In retail it pays to classify
> by low cost (Ross Stores), in (Aeropostale) and out (Abercrombie
> & Fitch).

May 31 01:50 PM