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Teen Apparel Retailers Swoon in 2011

Stocks in this article: ARO URBN GPS AFN AEO

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Trefis) -- Teen apparel retailers endured a nightmarish 2011.

Starting with the jump in cotton prices to the economic slowdown in U.S. and Europe, different combinations of negative factors ensured that investors remain bearish on the teen apparel stocks throughout the year.

Aeropostale (ARO) was the biggest loser among these companies, losing nearly 40% of its stock value since January 2011, followed by Urban Outfitters (URBN) and Gap (GPS).

Abercrombie & Fitch (ANF) stood strong until November, when it got smacked after its European growth began showing signs of tapering, closing out the year 15% below its value in January 2011. American Eagle Outfitters (AEO) was the only gainer among teen retailers in 2011, ending the year with a meager increase of 7%, thanks to a late surge after a promising third quarter and holiday sales results.

Below we look at the major hurdles and silver lining for teen apparel retailers in 2011, and how prominently we expect each of these factors to impact teen retailers going ahead in 2012.

See our full analysis for Abercrombie & Fitch here ; Urban Outfitters here ; Aeropostale here ; American Eagle Outfitters here ; and Gap here .

Cotton Prices:Cotton was at 84 cents per pound in July 2010 and peaked at $2.30 per pound in March 2011. The major factor behind the cotton price increase was the drought in the Hubei province of China, a major cotton producing area followed by government restrictions on exporting cotton out of India to safeguard domestic supplies and a devastating flood in Pakistan.

As cotton is one of the key input material for apparel retailers, a sudden spike in cotton prices resulted in shooting up of Average Unit Cost (AUC). Value-based retailers such as Aeropostale and Gap were hit harder because they were not able to pass the cost pressures to customers compared to others like Abercrombie, and resulted in a massive decline in their margins.

Though cotton prices began to decline after March 2011, teen apparel retailers are still struggling with high AUCs majorly due to inventory hangover.

Inventory levels will be one of the major factors to watch out for teen apparel stocks this quarter because ultimately the pending inventories will decide how long a company will take to realize the benefit of declining cotton prices.

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