With revenues sliding steadily since 2012, there is a limit to how
long investors will wait. Euromonitor International ponders whether the
troubles of teenage fashion brands Abercrombie & Fitch, American Eagle and
Aéropostale will bring private equity firms on the prowl.
It is of no surprise that many teen clothing brands are having a hard time.
The third-quarter results of the once too-cool-for-school retailers
Abercrombie & Fitch Co, American Eagle Outfitters Inc and Aéropostale Inc
were just the latest in a string of disappointments for investors.
Abercrombie’s sales fell 12 percent to 911.5 million dollars and now the
group has begun a search for a new CEO following the retirement of Mike
Jeffries; American Eagle slipped marginally to 857 million dollars and
Aéropostale recorded a drop of 12 percent to 453 million dollars.
Any analysis of how these brands got into trouble will undoubtedly focus on
the so-called fast fashion brands. While teens used to flock in droves to
buy logo-heavy apparel, the internet and social media have made clothing
trends instantly accessible. Teenagers are now more likely to head to H&M,
Forever 21 and Zara to find the latest fashions.
No quick fixes
With no sector being hotter than retail for takeovers, it’s going to take a
lot to turn these brands around. Companies such as Talbots, Hot Topic, and
Nine West have all seen buyouts or major investments over recent years.
Euromonitor International envisages that, if they don’t freshen up their
look, it will not be long before these three teen chains are next on the
short-list as possible private equity targets. The decision by the
controversial chief executive of Abercrombie to retire last week could
signal openness to a buyout of the teen retailer. With strong brand names,
little or no debt and a lot of cashflow, companies like Abercrombie,
American Eagle Outfitters and Aéropostale are all very attractive and would
make a lot of sense for private equity buyers. What’s more, a deal between
Aéropostale and Sycamore Partners would certainly not be out of the
question, following a 150 million dollar credit facility secured from the
private equity firm in May this year.
It would be tempting to suggest an easy fix for the teen brands could
involve making a start on selling teen goods in a fast fashion way. After
all, group CEO Jose Manuel Martinez Gutierrez at German retailer Esprit has
done just this, taking a cue from Zara with his new strategy to get the
product to market as quickly as possible. But embracing fast fashion is no
quick fix for such old well-established brands and those at the top should
be careful not to damage their brands’ positioning through excessive price
cuts.
Fashion alignment and social media key
Indeed, bigger more structural changes are what are needed for these teen
brands. Given that all three brands remain dependent on the US,
reconnecting with their core demographic in this market remains vital in
the short-to-medium term, until international expansion gathers pace.
Fashion alignment and social media engagement will be key on this front.
Aéropostale has already been employing a number of initiatives that are
showing some encouraging improvement after the return of Julian Geiger as
CEO. These include the restructuring of the organisation by category, as
well as a reduction in the number of sub-brands. The company’s smartest
move to get customers into the store has been its strategy to partner with
stars like American video blogger Bethany Mota in the social media.
We also remain optimistic that there is progress on the horizon for
American Eagle Outfitters and Abercrombie, which are both showing signs of
being in the early stages of a turnaround. American Eagle has found great
success with its Aerie adverts, which feature models without airbrushing.
Company executives say the group wants to promote more realistic standards
for its teenage customers. The firm also stands to gain from the
introduction of its Denim Distressing Campaign, letting consumers have a
more hands-on role in designing their jeans. Meanwhile, across state in
Ohio, Abercrombie continues to make progress on its fashion products, not
to mention its omni-channel initiatives.
Time is running out
Nevertheless, time is running out for these three teen players. The
question now is whether each one can turn sales around quick enough before
running out of cash. If trends do not improve by the second half of 2015
they will need to raise additional capital, which could prove difficult.
Only time will tell for certain. But while retailers consider their next
move, private equity firms are sure to be poised to pounce.
Natasha Cazin, Senior Analyst at Euromonitor International
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