Just when the apparel retailers were struggling with hike in cotton prices, the U.S. economy started showing signs of weakness. This resulted in customer becoming very choosy, which echoed through a decline in comps across the board. The promotions which started as an alternative to woo customers, resulted in excessively fierce competition in the domestic market, with each retailer outsmarting the others with bigger promotions.
The result: Teen apparel retailers which were already wincing with high input costs were left with lesser Average Unit Retail (AUR) too, resulting in further dent into their margins.
The market remains full of promotional activity and we expect the status quo to remain the same unless the economy recovers fully. Though the U.S. economy is showing the signs of recovery, the process has been painfully slow, which may remain a troublesome issue for teen retailers in 2012.
Slowing European and Chinese Economies
This was a major factor behind the decline of Abercrombie and somewhat of Gap. While Abercrombie continue to grow strongly till November banking on astounding European growth rate, the company's stock was smacked by nearly 20% after its European growth began to taper off. Gap, which was banking on Chinese operations to provide some respite from declining domestic business, found itself wrong-footed, when China deliberately slowed its economy down to control surging inflation.
Going ahead both European and Chinese economy seem to be on a tight rope. While Germany showed some improvements recently, other major markets such as Italy are still struggling with macro-economic pressures.
This was a major factor behind the decline of Aeropostale and Urban Outfitters. A lack of balance in offerings forced Aeropostale to offer more depth and width on its promotions, thus exacerbating the margin decline further. On the other hand, a lack of freshness in Urban Outfitters' merchandise caused its women apparel inventory to swell massively.
Direct business was the only silver lining for teen apparel retailers in 2011. While performance in brick and mortar stores started to crumble, direct business in the form of e-commerce, m-commerce and lately f-commerce stood out as a real growth driver. The increase in direct business not just helped teen retailers in increasing their sales but also provided respite in margins, as direct sales carry higher margins compared to that of retail sales. The apparel companies also seem to have understood the importance of direct business with the growth of direct channels featuring on the top of teen apparel retailers' strategies.