Demand is only half of the equation.

Everybody is watching retailers these days for signs of an economic slowdown. Is the current sales slowdown because of weather or increased consumer caution? Investors have been agonizing over these questions lately.

Now, there's more to fret about. Despite the slowing sales, specialty retailers are still planning to open new stores at some pretty fantastic rates this year. Square footage at specialty retailers is expected to increase about 11%, more than last year's 6.7% and the fastest increase in years, according to

Lazard Freres'

analyst Todd Slater. That kind of growth just "isn't rational," he says, especially if the economy really does cool.

Just take a look at some of the numbers (all of which come from annual filings with the

Securities and Exchange Commission

, when retailers normally outline their expansion plans for the coming fiscal year).

Abercrombie & Fitch

(ANF) - Get Report

plans to increase capacity 26% to 2.7 million square feet and to boost the total number of stores 36% to 340 (including 40

Abercrombie

stores and five new

Hollister Co.

test stores in addition to its main brand).

American Eagle

(AEOS)

plans to increase the number of its stores 19%, to 556.

Pacific Sunwear

(PSUN)

wants to increase the number of its main brand, outlet and

d.e.m.o.

stores 28% to 575.

AnnTaylor

(ANN)

plans to add 20% more floor space. And

Charlotte Russe

(CHIC) - Get Report

expects to boost its store count 31% this year.

Growth in Square Footage for Specialty Retailers

*estimate
Source: Lazard Freres

"For the last 24 months,

growth has continued to ratchet up," says Bob Michaels, president of

General Growth Properties

(GGP)

, a Chicago-based mall owner and developer with more than 130 malls. "And we'll see much the same thing in 2001, not only in an increase in the number of stores, but an increase in square footage, too."

(Malls are also growing in response to this demand; the

International Council of Shopping Centers

estimates 33.9 million square feet of new mall space will open between 2000 and 2002, a 17% jump from the 1997 to 1999 period.)

It's no surprise that some of the most aggressively expanding retailers target teens, of which there is currently a bumper crop.

Generation Y

, is so big that it has huge buying power and recently has propelled such entertainers as

Britney Spears and

N Sync to super-stardom. Marketers have been licking their lips since these kids were in diapers.

Growth Mode

"That clientele has money, and so retailers are in a growth mode," says Larry Fedorka, general manager of the

Garden State Plaza

in Paramus, N.J., which counts Abercrombie & Fitch, American Eagle,

Wet Seal

(WTSLA)

,

Hot Topic

(HOTT)

and several arms of the

Gap

(GPS) - Get Report

family as tenants.

Fedorka says he's seen absolutely no sign of a slowdown. "We are 100% leased and demand is growing every day," he says.

But overall, many of these same companies planning big expansions are having trouble on the sales front, thanks to those fickle teens. Abercrombie's fall from grace has been exhaustively chronicled, but it's not alone; American Eagle, Pacific Sunwear, Wet Seal and Gap have also disappointed recently. While fashion missteps and bad weather certainly had some impact on all these companies, there's another issue: What if there are just too many stores for Gen Y to choose from?

"This growth in supply is leading to, or will lead to, gross margin pressures," says Lazard's Slater. In other words, too much supply will prompt discounting to clear excess goods, which will kill margins and profits. "We need to see some supply takeouts" through store closures, he says.

This may all sound very familiar to those who remember the early 1990s and its attendant over-expansion. Amid a wave of bankruptcies, square footage at specialty retailers dipped 0.4% in 1995 and fell 2.4% in 1996 before starting to climb again in 1997. General Growth's Michaels says the current wave of growth is very different than what happened in the overexpansion of the early 1990s. "The expansion plans are being driven by the major branded retailers -- Gap, Limited, American Eagle," he says.

Different but Still the Same?

Slater isn't so sure things are that different from the early 1990s, except that this time out, many of the companies have pretty healthy balance sheets with less debt, so the process of taking supply out of the market may be very long. Slater expects some companies showing a continued deceleration in sales growth to announce they will put expansion plans on hold, and eventually start stripping out stores.

This is more likely to hit companies in competitive spaces -- hello, teen retailers! -- without a real sales niche. Hot Topic, for example, is one of the few teen retailers that has still managed to maintain stellar sales growth, thanks to its format focused on music-inspired apparel and -- a phrase to make every mother cringe -- body jewelry. For now, it has avoided the sales slump that has affected its competition.

No one has yet announced plans to pull back expansion; Abercrombie & Fitch says its expansion plans are on track. American Eagle, Gap and Limited didn't return calls for comment. Pacific Sunwear declined to comment on the issue.

But Slater wonders when the first retailer will blink and put its expansion plans on ice. When it does, the attention of investors may shift to the other side of the supply-demand equation.