Retailers such as Aeropostale (AROP) Pacific Sunwear of California (PSUN), Gap Inc. (GPS) and J.Crew are paying the price for failing to keep up with the changing fashion tastes of fickle teen consumers.
Aeropostale filed for Chapter 11 bankruptcy protection earlier this week and announced plans to shutter 113 of its 739 stores in the U.S. and 41 locations in Canada. The company, which has posted annual losses for the past three years, had positioned itself as a low-cost alternative to rivals including American Eagle (AEO) and Abercrombie & Fitch (ANF). Unfortunately, when the economy rebounded consumers returned to the pricier chains.
Anaheim, Calif.-based Pacific Sunwear declared bankruptcy last month but hasn't announced any store closures. Both retailers are struggling with debt and are dependent on traffic from malls, which has plummeted in recent years. Private equity firm Sycamore Partners loaned Aeropostale $150 million in 2014. At the time of its filing, Pacific Sunwear owed $160 million to Wells Fargo (WFC) and private equity firm Golden Gate Capital.
"When you add debt to a high-risk business (like retail) to start with, it is a toxic combination," said Howard Davidowitz, chair of Davidowitz & Associates, a retail consulting firm and investment bank, in an interview.
Changes in the fashion market also hurt Aeropostale and Pacific Sunwear. Their customers are increasingly flocking to fast-fashion chains such as Swedish retailer H&M and Forever 21, and Inditex's Zara, which are undercutting them on price. Discounters such as TJX are also taking business from them and other former teen favorites such as Gap and J.Crew.
San Francisco-based Gap, whose brands include Old Navy, has reported 12 straight declines in same-store sales, a key retail metric measuring activity at locations opened at least a year. The chain announced plans to shutter 175 locations last year and analysts say the retailer needs to close another 175 stores to bolster its bottom line. Unlike, Aeropostale and Pacific Sunwear, Gap has a "very clean balance sheet," according to Simeon Siegel, an analyst at Nomura Securities.
"This has been the year of retail bankruptcies," he said. "It used to be that the sector was healthy, and you just had underperformers. Now, you have a challenged sector with underperformers."
J.Crew is also struggling. During Fiscal 2015, the retailer reported a 10 percent decline in comparable sales, worse than the two percent drop-off in the year-earlier period. The company's veteran CEO Mickey Drexler recently sent out an email to consumers for their feedback on the look of its stores and website.
Retailer American Apparel, whose former CEO Dov Charney was fired after being dogged by sexual harassment allegations, emerged from bankruptcy earlier this year. Wall Street is pessimistic about the company's future. The company's stock is down nearly 90 percent this year and currently trades for under a penny.
Most chains who emerge from bankruptcy don't survive much past five years though there have been exceptions, such as Toys "R" Us and Macy's, according to Davidowitz.
The picture in the teen retail sector, though, isn't entirely bleak, Abercrombie & Fitch recently reported its first gain in same-store sales in more than three years, though analysts expect the chain to report a loss when it reports earnings later this month.
Even companies that are doing well now are going to faced increased competition to stay fashionable in the eyes of a demanding clientele.