NEW YORK (TheStreet) -- News that Wet Seal (WTSL) filed for Chapter 11 bankruptcy protection has left analysts and investors casting a nervous eye on the teen retail sector to see who might be next. They're particularly jittery about retailers with weak balance sheets who waited too long to start shuttering stores in the overcrowded niche.
Wet Seal isn't the first and won't be the last to enter the bankruptcy dungeon. In December, both Delia's and Deb Shops filed for bankruptcy protection.
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A host of other retailers, ranging from Aeropostale (ARO) to Body Central (BODY) , have been frantically hunting for ways to deal with falling sales and rising store closures. Even companies with good balance sheets, such as Abercrombie & Fitch (ANF) , have been closing poorly performing stores. It all comes down to how quickly they can shut stores and how much cash they have to weather through the retail storm.
Teen apparel retailers have been struggling with a seismic shift in the taste, lifestyles and "pocketbooks" of young customers, for several years.
During the go-go years leading up to the 2008 financial crisis, retailers were on a tear, opening stores in popular malls -- and not-so-popular malls -- across the country. Back then, retail chain CEOs puffed out their chests at retail conferences, boasting of 1,000-plus stores in their companies.
"In their minds, they had to keep expanding," even if the new stores were in weak locations, recalled Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking services firm. "They expanded where they shouldn't have expanded."
All of this was fine when the economy was soaring. Sure, sales were slower in the weaker malls, but hey, they were still profitable, CEOs would argue. But once the music stopped in the financial meltdown of 2008, shoppers disappeared, and those sluggish sales turned into big declines that put the companies' financial health in jeopardy.
"Expanding into bad real estate pulled them downward," said Davidowitz.
Also, the surge in e-commerce took a toll on sales at bricks-and-mortar retail sites.
"U.S. retailing was over-stored and over-malled, and in the teen space, there was a lot of excess supply," said Adrienne Tennant, managing director and senior analyst at Janney Montgomery Scott LLC.
Around the same time, a host of other problems were also dragging down sales. First, teens' tastes had changed. Suddenly, teens who used to loyally shop for the latest sweater or dress to wear on that big date, were now saving their money for iPads and sneakers. "Every teen is into gadgets -- iPads, iPhones -- they love gadgets," while clothing, aside from sneakers, has been put on the backburner, said Davidowitz.
Second, teens have less money these days. Many of the part-time jobs they used to get at McDonald's or small retail stores aren't there. "The person in their old part-time job is 44 years old and supporting a family," said Davidowitz. "Teen unemployment is close to 30%."
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