As I was standing on the NYSE floor yesterday, talking about teen-retail disappointments on CNBC, I had a realization. I have been a broken record for the past several years, repeating a constant theme: Stay away from the teen space. Indeed, for years now -- and despite what the companies have told you -- teen retailers have perpetually remained in a vicious cycle of bloated inventory, fashion misses and a consumer that won't consider shopping at the mall before "50% off" signs appear.
Last night provided only the most recent example. American Eagle (AEO) reported a comparable-store sales decline of 7%, as anticipated, and guidance was well below what the Street is seeking. Expect negative high-single-digit comps for the foreseeable future, as well. With inventories up in the high single digits, too, we can put two and two together: These numbers clearly equal more margin degradation. In the fiscal fourth quarter, American Eagle's gross margin declined 900-plus basis points year over year, and such numbers are clearly not behind us.
So be careful. The sell side may tell you to be optimistic about the back half of the year, "when" inventories are in better shape, and "when" margins should bottom out. But I ask, why should you believe in a back-half story?
Here are five reasons you should avoid the back-half story trap.
1. The teen space is still well over-stored. Yes, companies are closing stores, but not nearly enough capacity is being taken offline.
2. Don't listen to the 'shift-online' excuse. Growth in Internet shopping this holiday season did not make a dent in comps declines at bricks-and-mortar stores. By the way, teen retailers will now be disclosing less information about online penetration and growth. That should tell you something.
3. Fast fashion is kicking teen booty. For years now, I have been jumping up and down telling investors that the likes of H&M, Zara and Topshop are about to conquer the U.S. These stores have already conquered Europe. In a fascinating remark, Urban Outfitters (URBN) has suggested that it doesn't believe the landscape has changed. Fast fashion, they say, is nothing new. Really? From what I can see, fast fashion is just getting started in the U.S. -- for example, H&M only launched online stateside last year. I call that a landscape change.
4. Lead times are not the issue. Another favorite go-to phrase for the teen space is "shorter lead times." American Eagle has been talking about this for a while. Urban Outfitters and Abercrombie & Fitch (ANF) are now telling you this will make the difference. Sorry, guys, but product and flexibility make the difference. The main culprit for three years of misses has simply been less-than-stellar execution, in addition to fashion misses.
5. The teen space can't seem to manage expectations. Guidance, in general, has been way off the mark.
While you may be tempted to fall into the back-half recovery trap, think back. Did you not hear the same thesis repeatedly over the past several years? It's déjà vu all over again.