Top teen clothing stores try on new business models

If Japanese retailer Uniqlo is looking for more space in American malls, there may be sites opening up soon. Same for UK clothing chain Topshop and Swedish retailer H&M, both of which have been expanding in North America.

Hundreds of spaces that for years have been clubs for teens looking for preppy clothes, maybe with a flashy logo, could be available for lease as clothing retailers such as American Eagle Outfitters, Abercrombie & Fitch and Aeropostale reconsider what kind of square footage they need.

The mall-based chains that for years ruled the nation's high school wardrobes are trying to overhaul their merchandise delivery systems to serve a smartphone-enabled generation that wanders easily between digital and mall shopping. That means not just helping them shop by phone but also delivering new styles faster and at prices teens are willing to pay.

"We continue to research this customer," said Abercrombie CEO Michael S. Jeffries in a recent conference call with analysts. "I continue to believe we are taking the brands to a place that is more relevant."

No one could accuse the chains of not taking the issue seriously, even if they might have been a little slower than some would like.

JPMorgan analyst Brian Tunick calculated that between 2007 and 2013, both off-price chains and fast-fashion retailers — a category that includes names such as Forever 21, H&M, Uniqlo and Zara that offer inexpensive fashion that is changed frequently — made significant gains.

Meanwhile, the American teen retailing chains were following the example of some of those international players by opening stores aggressively in countries around the world. They've done well enough that most plan to continue to add stores abroad.

Yet they still were trying to figure out how best to manage the massive chains that they had built across North America, as teen spending slowed along with the Great Recession and rising unemployment. Of late, there haven't been any major fashion trends to drive sales, either.

Now their answer to the real estate question seems clear: More stores aren't always the way to add sales.

In mid-May, American Eagle said it had identified 150 stores to close in North America in the next three years and is closely watching 300 more that have leases coming due. Roger S. Markfield, chief creative officer, said during a conference call to discuss first-quarter earnings that foot traffic has been down for all retailers in the malls.

Tunick's mid-May report to investors noted even before American Eagle's store closure program was revealed that Abercrombie had closed 260 locations since 2011 and Pacific Sun had closed 230 stores in that period. Aeropostale is expected to close up to 300 locations in the next few years, including a number of its P.S. from Aeropostale stores, he said.

The pullback isn't done. Abercrombie recently said it is on track to close 60 to 70 stores this fiscal year through lease expirations. Susquehanna Financial Group analyst Thomas A. Filandro pointed out in a report that more than 500 of Abercrombie's store leases are up for renewal through 2016.

Thirty percent of store supply could come out of the teen market over the next three years, according to a report last week from Jefferies analyst Randal J. Konik.

If teen clothing retailers are finding they need less physical space, the timing may not be bad for the shopping center industry. After hitting a low point in 2010 and 2011 as the recession played out, regional malls now have an average of 93 percent of their space filled and shopping centers overall are at 92 percent, said Jesse Tron, a spokesman for New York trade group International Council of Shopping Centers.

"We're back to pre-recessionary levels in terms of occupancy," he said.

At the group's annual trade show last month bringing together real estate brokers and retailers in Las Vegas, Tron said activity had picked up since the recession when people seemed to be hiding out in their booths. He noted 94 percent of sales in the U.S. are still through physical stores, with the remaining 6 percent coming through digital channels.

The industry's new focus on "omni-channel" retailing — a term that refers to seamlessly integrating online and offline stores — may bring store closures, but Tron noted there are other retailers, like Uniqlo and H&M, adding locations while some online-only merchants are finding they want physical spaces to raise their profile and give customers a different shopping experience.

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