Even The Mighty In Teen Fashion Retail Are Stumbling

|
Includes: GPS, URBN
by: Daniel James

Summary

Earlier this month, the Gap came out with uninspiring results.

Now, Urban Outfitters too is suffering.

If even the outperformers of the industry are struggling, it may be wise to stay away from it altogether.

At the risk of reiterating the obvious, the teen fashion retail industry has been in trouble for some time now, and there are precious few signs of any improvement. Stocks like Aeropostale and Abercrombie & Fitch have been getting creamed for some time now, following weak results. However, when even companies that have previously outperformed, such as the Gap (NYSE:GPS), are starting to falter, things must be getting really bad. Urban Outfitters (NASDAQ:URBN), a company that has largely weathered the downturn better than the competition, recently threw off a profit warning, spooking the industry and sending shares skidding.

Tough customers

Teens are a notoriously fickle demographic in terms of spending behavior, and fashion retailers are among the hardest hit as far as shifts in consumer behavior are concerned. Several factors are contributing to the slowing sales among these companies.

Obviously, the rise of e-commerce has done little to help brick-and-mortar fashion retailers. Often, shopping online is easier, and in many cases, it's also cheaper. Last year, online shopping during the holiday season reached such massive volume that it clogged up shippers like UPS. This year, in anticipation of the surge, UPS will be hiring 73% more people for the season than last year, planning to employ some 95,000 for October through January.

During the crucial back-to-school shopping period, spending is expected to drop by 0.7% year-over-year, as sluggish wage growth is leaving consumers with less money to spend on discretionary items. There is also another trend that is damaging the teen fashion business. Due in part to electronic forms of communication, malls are being used less and less as a place to hang out, which is putting a serious damper on traffic.

Earlier this month, I wrote about a significant slowdown at the Gap, a company that has over the last few years managed to weather the downturn in the industry considerably better than its rivals. Now, even the Gap seems to be succumbing to the trend. In the second quarter, sales grew by 3%, compared to 8% in the previous year, while comp store sales were flat for the period. The same process now seems to be taking place over at Urban Outfitters.

Profit warning

Last month, the company reported that it saw negative comp store sales at the beginning of the third quarter. Now, it has said this process has continued into the rest of the quarter so far. Due to these slowing sales, gross margin deleveraging could lead to a negative impact on earnings for Q3.

After two quarters of lower earnings, the news of a further decline in margins should not come as too much of a surprise, but the news still sent shares skidding around 14%. Although sales are still holding up pretty well at its Free People and Antropologie brands, its flagship chain is struggling, with the most recent numbers showing a 10% decline in same-store sales.

Several high-profile gaffes also aren't helping matters. After sparking outrage, the firm was forced to pull a shirt reading "Depression", as well as one that depicted a drunken Jesus. Furthermore, a t-shirt with the Kent State logo and red splotches on it also did little to amuse the public. While it is clearly trying to be edgy in an attempt to lure younger consumers, it seems to be missing the mark from time to time.

Conclusion

Things are getting worse and worse in the teen fashion space. Although some of the companies active in the industry have been crumbling for some time, it now looks like even the star performers are feeling the pinch. After the Gap came out with disappointing results earlier this month, Urban Outfitters has now followed suit with a profit warning for the next quarter, as slower sales may affect margins and earnings. Investors would be well advised to consider staying away from the industry for now.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.