Time is ticking for troubled teen fashion rivals

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