The Internet is the New Battlefield for Teen Apparel Retailers

With retail profits taking a hit due to a combination of rising production costs and a decline in sales due to the weakening economy, the Internet has emerged as the new battle ground for teen apparel retailers Aeropostale (NYSE:ARO), Abercrombie & Fitch (NYSE:ANF) and American Eagle Outfitters (NYSE:AEO).

Aeropostale in particular posted a sharp decline of 14% in its Q2 comparable store sales, which is an important metric for analyzing retail sales. American Eagle posted flat Q2 comp store sales while Abercrombie’s grew by 9%. Abercrombie’s strong results were based primarily on better promotions and a balanced mix of fashion and print. However, one theme that stood out for all companies was the double digit increase in Internet sales. We expect the momentum to continue for the latter half of the year and the growth of e-commerce to dominate for most retailers.

Below we take a look at why the online business holds so much importance in the present scenario and how the Internet battle among the teen apparel triad is shaping up.

The Growing Role of Web Sales in Fashion

Improvement in gross margins

Rising raw material costs along with heavy promotions due to intense competition have resulted in a decline in margins across the apparel industry. Shrinking margins are the primary reason behind the decline in stock prices for most of the apparel retailers.

As the online business carries nearly twice the margins when compared to retail, companies are looking forward to enhancing e-commerce sales to fight margin pressures.

Lower setup costs compared to retail stores

The set up of e-commerce channels requires significantly lower capital expenditures compared to the traditional retail stores. In the midst of the current economic crisis where cost control is a high priority, online businesses rather than retail makes more sense while entering a new market.

Additionally it also provides retailers much needed room to invest in promotions of their products, which is important for the survival in the intensely competitive teen apparel market.

How Competition in Online Sales is Shaping up

Promoting the online segment has been at the core of the business strategy for most retail players including Abercrombie & Fitch, American Eagle Outfitters and Aeropostale. A&F has set aggressive goals of reaching $1 billion in e-commerce sales primarily as a result of increased promotions and online stores on Facebook. ^[1]

American Eagle is putting all its efforts to promote the Back-to-School Social Media Photo Campaign in a bid to help drive sales. ^[2] The struggling cheap teen retailer, Aeropostale is also counting on Internet sales to help it come out of the current crisis. It has launched several key initiatives such as adding loyalty programs for its subsidiary, P.S. from Aeropostale ^[3] and developing the android app to help grow its mobile business ^[4].

All of these programs have resulted in the Internet becoming the hotbed of competition among the teen apparel retailers, and we expect this rivalry to only intensify going forward. We will be keenly following the performances of the online business for the next quarter as it will be detrimental for the future course of the major apparel retailers.

We are currently reviewing our estimates for the apparel names.

You can see our full analysis for Aeropostale | American Eagle | Abercrombie & Fitch

1. Abercrombie targets for $1 billion in internet sales, Aug 26, 2011 [↩]
2. American Eagle Outfitters Launches Back-to-School Social Media Photo Campaign, July 21, 2011 [↩]
3. Aeropostale adds loyalty program to PS from Aeropostale [↩]
4. Aeropostale launches android app to increase m-business [↩]