Things should be looking good soon!..............this article just came from BARRONS 2/1/97...............GO CLAIRES !!
Goodbye, Grunge
For teens, it's cool again to be dressed up and that's awesome
news for some retailers
Lauren R. Rublin
Teen Retailers | The Teen Scene
he suit: tailored black-and-white hounds tooth, in a luscious
wool-and-cashmere blend.
The shoes: two-tone pumps, by Polo.
The earrings: her mother's. Genuine pearls, of course.
The model: Jacqueline P., age 13. (The ``P'' is for privacy, the quid pro quo for an
expert's guide to the teen scene.)
A junior-high student in suburban New Jersey, she's a sartorial snapshot of the
modern teen. Or at least of the kind of fashion plate that many of the nation's 37
million teens aspire to be. And that's inspired investors to take another look at the
merchants who seek to satisfy her generation's constantly changing needs.
The stocks of teen-oriented retailers - primarily mall-based chains, such as Wet
Seal, Pacific Sunwear of California and Gadzooks - were among the market's
hottest performers in 1996's first nine months. In the fourth quarter, however, they
abruptly unraveled, amid reports that holiday sales had faltered. But Wall Street's
bargain-hunters, lured by sharply lower valuations, are returning quickly to the teen
scene. And, thanks to the strong fundamentals of the ``juniors'' market - key among
them, Jacqueline and her well-dressed friends - a number of teen stocks are poised
to be winners again.
Grunge? Forget it. ``Generation Y'' girls have had it up to their finely plucked
eyebrows with flannel shirts and grubby jeans. No longer charmed by the
threadbare Seattle-garage-band esthetic, they now take their couture cues from
the stylish femininity of the 1995 movie Clueless and prime-time television's
sometimes clueless band of Friends.
``Young girls are looking like young girls again, and I think it's wonderful,'' exclaims
Gerald Szczepanski, chairman, president and CEO of Dallas-based Gadzooks.
With good reason: In the first nine months of the fiscal year that ended Friday, his
company's earnings jumped by 132%, to $4.3 million, or 47 cents a share. Sales
spurted as well, by a hefty 52%, to $83 million. And Gadzooks's shares, which
came public in October '95 at 14, were trading at above 60 (before a 3-for-2 split)
by mid-May.
Teen dream: Alicia Silverstone and two good buddies, a feather
boa and an ever-present cell phone.
The rekindled passion for fashion - be it soigne,
snowboard-inspired or 'Seventies redux - has breathed
new life into not just Gadzooks but the whole juniors
market. Benefiting equally from powerful demographics
and the demise of weaker competitors, teen-goods
retailers enjoyed double-digit sales and earnings gains, and
widening profit margins, for much of '96. The story and the
numbers proved irresistible to scores of growth-hungry
investors, whose enthusiasm ultimately lifted the shares to
unsustainable levels.
Wet Seal, of Irvine, Calif., for instance, began the year at 6
3/4; the stock peaked in September, at 41 1/8. Shares of
Philadelphia-based Urban Outfitters shot up 145%, to a
high of 27 3/8 (adjusted for a 2-for-1 split in June). And
Wall Street rolled out the red carpet for a collection of
teen-scene newcomers, including Abercrombie & Fitch,
Hot Topic and Delia's, all of which opened at big premiums to their initial offering
prices.
But investors today, let's face it, are as fickle as 14-year-old girls. Maybe more so,
in fact. First, the momentum crowd hoisted the group to huge multiples of earnings.
(Hello? In Abercrombie's case, the peak valuation reached almost six times last
year's sales.)
Then, the hot money departed.
Yet, just as everything old is new again in fashion (yes, it's time to exhume those
bellbottoms), investors, too, are recycling earlier themes. In the past 10 days,
analysts have raised their fiscal fourth-quarter and full-year fiscal 1998 estimates for
a number of Gen Y retailers, and a new group of buyers is checking out the goods.
While the stocks, in the main, never quite sank to levels that tempted traditional
value investors, so-called growth-at-a-price folks are backing up the vans.
``Christmas was difficult for a lot of retailers, and that probably is in the stocks,''
says Kenneth McCain, co-chief investment officer of Wall Street Associates, in La
Jolla, Calif. ``These retailers deserve another look.''
Gadzooks shot up about seven points, or 35%, to 26 1/2, on a handful of analysts'
upgrades. Wet Seal leaped 38%, to 20, in a little more than a week. Pacific
Sunwear, of Anaheim, Calif., a predominantly young men's chain that has been
making big inroads in juniors, rallied to 26 from a near-term low of 22.
Still, valuations in the sector remain relatively depressed for certain players. At the
high end of the spectrum, Gadzooks and Pacific Sunwear each are fetching 24
times fiscal '98 estimated earnings. Hot Topic, a Pomona, Calif., retailer of
music-related apparel, sports a price/earnings multiple of 23, Delia's, a juniors
catalog merchant, 31. Abercrombie, which suffered an involuntary 2-for-1 split
after a most auspicious initial trade, now changes hands around 21 times consensus
forecasts. (See the accompanying table.)
Wet Seal, on the other hand, was selling last week for 15.5 times estimated
year-ahead earnings, or 67% of the company's anticipated rate of growth. But
excluding its $6 a share in cash, investors actually are paying only 11 times earnings
for the retail operation.
Claire's Stores, a teen-accessories chain, has a multiple of 13. Urban Outfitters
and American Eagle Outfitters, both of which showed sharp declines in
same-store sales in December, similarly command below-market P/Es. Urban's is
13; American's, a paltry 8. The S&P 500, for reference, is priced at 18 times
estimated 1997 earnings.
As any veteran of Seventh Avenue will tell you, betting on juniors is only for the
foolish and the brave. Teen tastes change at warp speed, and today's hot label is
tomorrow's Marshall's markdown. Every so often, however, the market
miraculously gets it totally right, and the industry reaps a windfall.
The teen sector had its last heyday in 1988-90, when the late, great
Merry-Go-Round chain was on its final roll. To be sure, the current cycle could
prove a one-year phenom, but analysts, investors and merchandisers alike are
betting strongly against its premature demise. Rarely, they note, have the stars
aligned in such perfect order: the teen population, and its purchasing power, are
exploding, while the number of stores that cater to its peculiar demands has shrunk.
Introduce exuberant new fashions, and the ingredients are in place for an extended
run.
ccording to U.S. Census Bureau statistics, the nation's population of
10-to-19-year-old 'tweens and teens bottomed in 1992 at 35.2 million, after a
15-year decline. Each year since, this Baby Boom ``echo'' generation has grown by
1%-2.2%, and is projected to reach 40 million by the year 2000. What's more - to
the delight of marketers, at least - the ranks of the ultimate arbiters of ``cool'' are
expected to increase at twice the rate of the overall population until 2010.
In addition, today's teens
are major-league
spenders. Last year's
annual Rand Youth Poll,
conducted by the
Manhattan-based service
of the same name, found
that total discretionary
spending by consumers in
the shopaholic
10-to-19-year-old
bracket climbed to a
record $81.4 billion. (The
money comes from
allowances or jobs.) In
'95, the survey found, the
same group parted with
$74.9 billion, a 39.5%
increase over its
10-year-earlier outlay.
Teenagers' influence on
household purchases - say, what their parents buy at the grocery store - totaled a
far larger $206 billion last year.
Most teenagers, children of dual-income parents, owe their fatter wallets to the
largesse of Mom and Dad. But Uncle Sam, of late, also has put more change in
their pockets. After five years without an increase, the federal minimum wage rose
12% in October, to $4.75 an hour. Next September, it's slated to go up another
8%, to $5.15, and some states mandate even higher minimum pay.
Teens account for an estimated 31% of minimum-wage earners, and they tend to
spend their money as fast as they make it. ``The increase in the minimum wage has
not had an impact on our costs, because we give a raise to anyone we hire who's
good,'' Claire's Stores Chairman Rowland Schaefer explains. But the size of the
stores' average ticket is growing, in part because of customers' higher earnings.
``We were doing $7 a ring, and now we're doing $8-$8.25,'' Schaefer says.
``Shoppers are spending more money, and not just on one product. With each visit,
they're buying more things.''
In the past year, Claire's sharpened its focus on the teenage market, and scored a
big hit with sales of the ``Y'' necklace featured on television's popular Friends. The
fundamentals that attracted Schaefer and his team also beckoned Limited back to
juniors. The retail conglomerate, which still owns 84% of Abercrombie, is
revamping its troubled Express division to attract fashion-forward young women.
Equally excited about the sector's potential is Alan Miller, Edison Brothers'
chairman and CEO, who hopes to lead a slimmed-down version of the St. Louis
company out of Chapter 11 bankruptcy protection in the spring. Miller is banking
much of Edison's future on 5-7-9, its 290-store juniors division, which caters to
small-size teens. And he's got high hopes for Shifty's, a new juniors/young men's
concept featuring apparel, footwear and accessories.
``A number of things really encourage us about the teen market,'' he says. ``A huge
demographic boom is coming through in the next decade, and we've seen its impact
on stores like GapKids and Gymboree. Now those kids are walking the malls by
themselves, and it's obvious they have a lot of money. The strength of the economy
has generated a lot of wealth for Boomers, and you see it in their kids.''
Miller also foresees a slowdown in the ``dynamic'' growth rate of consumer
technology spending. ``Many kids now have computers, and will continue to buy
software and use the Internet,'' he says. ``But they're no longer going to get a
$2,400 computer for Christmas. Right now, I feel there are a lot of teenagers with a
lot of money, who are willing to spend it on apparel and footwear.''
So much for burgeoning demand. Supply, conversely, has withered. Although
precise numbers are unavailable, analysts estimate that 3,500-4,000 stores catering
to teenage customers, or roughly four per healthy mall, have closed their doors in
the past few years, casualties of debt-financed overexpansion, apparel-price
deflation or poor merchandising decisions. The massive consolidation first hurt, then
helped the lucky survivors. Initially it created a highly promotional retail
environment, as ailing operators slashed prices in a final bid to stay alive. The silver
lining? Once promotions ended, margins could expand.
The shakeout also put about $2 billion in market share, as well as acres of choice
mall real estate, up for grabs. Wet Seal has been particularly adept at filling the
void, and in the summer of '95 acquired the 237-store Contempo Casuals chain at
a fire-sale price of $1.2 million in stock and the assumption of $28 million in debt.
The debt has all but disappeared; at last count, the company had only $9.6 million
in long-term liabilities, a fraction of its $82 million in stockholders' equity.
The more enduring legacy has been a revitalized juniors business, which positioned
Wet Seal's money-losing operations to profit handsomely from the market's
turnaround last year. In the nine months ended Nov. 2, the company earned $8.2
million, or 61 cents a share, on sales of $270.5 million, compared with net of
$418,000, or three cents, on $163.4 million in revenues the previous year. For the
full fiscal year, analysts are eyeballing a buck a share in earnings, and think the
company could haul in $1.27 in fiscal '98.
Having tasted success, Wet Seal now is bidding to acquire 508 stores from County
Seat, which filed for bankruptcy protection in October. If it prevails, management
will convert the units into Wet Seal or Contempo stores. The price being offered
remains undisclosed, but County Seat has denounced it as ``grossly inadequate.''
Still, even a defeat wouldn't kayo Wet Seal's acquisition plans. ``I can't comment,''
says Edmond Thomas, Wet Seal's president and COO. ``We're in negotiations. If
we don't get these, we'll look elsewhere to expand.''
If more and richer customers, and far fewer stores to serve them, sound sufficient
to spark a rousing juniors revival, it would be wrong to minimize the electrifying
impact of a radical shift in fashion. The grunge look inspired by Nirvana (if you have
to ask, it's a rock band) that swept the teen market in '93 and '94 was not merely a
visual affront; kids who donned their fathers' flannel shirts were poison for
fashion-focused retailers. Wet Seal, whose 369 stores make it the largest pure play
in juniors, turned in grungy results during that grim era: a loss totaling $3.4 million
over the two years.
It's hard to pinpoint precisely when the pendulum started to swing, but by the
summer of '95, girls were shedding flannel. Then came Clueless, a witty celluloid
confection that improbably beamed a new but certainly not improved version of
Jane Austen's Emma into the heart of Beverly Hills, and onto the shapely body of
actress Alicia Silverstone, who favored tartan minis and feathered boas (but never
together, please). ``When my friends and I saw the movie,'' says Jacqueline, of the
now-famous houndstooth, ``we said, `I want her clothes.' ''
hatever. Before long, floral prints, bright colors, ``baby-T's'' and
retro-'Seventies styles were pumping up sales in the malls. The ``new look,'' notes
market researcher Irma Zandl, of the Manhattan-based Zandl Group, demanded
not so much the purchase of an item here or there, but a total wardrobe makeover.
As the Clueless crew might put it, for the stores, this was majorly, majorly cool.
Most industry observers agree that the coming spring's fashions are likely to be
evolutionary, rather than revolutionary, which won't be as much of a boon. So,
what will retailers be showing? ``We see another trend,'' is all that a tight-lipped Ed
Thomas, of Wet Seal, will say.
Michael Schultz, however, is considerably more forthcoming. The head of Urban
Outfitters' $25 million wholesale division, which supplies some 2,500 juniors
boutiques, he animatedly leads a visitor on a whistle-stop tour of the company's hip
loft showroom in Manhattan's garment district. Brace yourself for more of the Me
Decade: peasant blouses, mod-print polyester dresses and camouflage pants. Five
separate lines, so many possibilities. Some very retro: ``Hippie could work,''
Schultz muses.
Urban's autonomously operated wholesale business, which has shown steady
growth in recent years, racked up a sales gain of 331% in December. Ironically, the
company's much larger retail division, which buys from multiple vendors, blew the
key Christmas season. The 27-store chain, which gears its funky apparel and witty
novelty items to older teens and young adults, missed the boat on sweaters, which
were must-haves. It also got clocked on back-to-school, owing to fashion flubs
and distribution problems. After the market's close Jan. 7, the company reported a
December same-store sales decline of 12%, and warned that fourth-quarter
earnings would be below plan. The stock market wasn't amused.
These days, Urban trades around 12, less than two points above its 52-week low.
On a P/E basis, the shares are approaching their lowest valuation since coming
public in late '93. The company definitely has a jeering squad: Critics think its
quirky retail concept and sales-per-store have limited growth potential. But
Catherine DePuy, an analyst at Buckingham Research Group who has made
several prescient calls on the issue, thinks it's a buy at current levels.
``Among the teen-oriented
retailers, Urban Outfitters
is one of the most
consistent, profitable and
conservatively managed
companies I follow,'' she
says. The company earned
$10.4 million, or 59 cents
a share, on sales of $114
million, in the nine months
ended October. She
forecasts full-year net of
77 cents - too close for
comfort to the previous
fiscal year's 70 cents. But
with a helping hand from
Anthropologie, its
home-furnishings chain
now sporting eight stores,
Urban could net as much
as 95 cents in fiscal '98.
Management, including the
founder, owns 9.4 million,
or 53%, of the shares outstanding, and has kept the company's balance sheet
unblemished by long-term debt.
American Eagle Outfitters, of Warrendale, Pa., laid the Christmas season's other
serious egg. Originally a ``Gap-at-a-value''-style young men's chain (note that Gap
now has its own value outlet: Old Navy), the company lately has been showcasing
more fashionable young men's and juniors. A smooth transition? Not. In a warm
fall, the stores were dressed for winter. Come winter, they reportedly played it
ruinously straight, eschewing flare-leg pants.
hose missing inches of fabric (among other errors) sent $224 million in
market value up in smoke. At year-end, the company announced that
fourth-quarter earnings would miss Street estimates, and that same-store holiday
sales were running almost 17% below year-earlier levels. Analysts sliced their
numbers, and now expect American Eagle to earn 72 cents for the year, and $1.13
for the 12 months ending January '98.
Although DePuy terms the sales gaffe ``shockingly terrible,'' she considers the stock
a buy. The company has no debt, and 3% operating margins that beg for
improvement. ``This is not going to be the next Gap, but it's a great trade,'' she
says.
Apparently, insiders agree. Immediately after the company made its disappointing
earnings forecast, two officers bought a total 28,000 shares in a pair of
open-market purchases, at prices ranging from $8.75 to $8.88.
In the retailing business, merchandising missteps are an ever-present hazard. While
they helped ruin the Christmas quarter (if not the second half) for Urban and
American Eagle, other factors largely triggered the fourth-quarter decimation of
their competitors' shares.
A shorter Christmas selling season, and a later start to most school vacations, held
gains in same-store holiday sales to a lackluster 5% across the retail spectrum. In
the fall, the stocks began selling off in anticipation of the rough road ahead, and
their slide was quickened by the departure of momentum investors.
Aggressive-growth firms such as Twentieth Century and Driehaus Capital
Management were big holders of teen-retail issues at the end of September, but it's
a good bet their loads are considerably lighter now. (The official fourth-quarter
numbers aren't yet available.)
In hindsight (why is it always in hindsight?),
analysts also voice a common refrain: The teen
stocks, some then sporting multiples north of 40
times projected earnings, ``got ahead of
themselves'' last summer. Managements, often
the biggest holders, don't disagree. Says
Szczepanski of Gadzooks: ``When you're
looking at 45 times earnings, that's probably too
high for our business.''
But is 24 times earnings for a company such as
Gadzooks, with an estimated earnings growth
rate of 30%, too much? Is it an excessive price
for Pacific Sunwear, whose earnings are
expected to grow 25%? Maybe not, given the
sector's still-bright macro outlook.
Ken McCain, of Wall Street Associates, who has owned Gadzooks since its IPO,
remains a diehard fan. ``The company is supposed to report 38 cents a share for
this [January] quarter,'' he says. ``They've just done everything they said they were
going to do. Made every estimate, and exceeded it. Going back four quarters,
they've shown top-line growth of 56%, 47%, 55% and 53%, and brought it to the
bottom line with earnings gains of 80%, 100%, 64% and 50%.''
If the latest quarter ended on plan - ``We certainly don't expect to surprise anyone
negatively,'' Szczepanski says - earnings will show a slimmer year-over-year
increase of 41%. Then again, Gadzooks, with more than 180 stores jointly serving
juniors and young men, is a much bigger company than it was five quarters ago, and
its chairman has no wish to stifle its expansion.
Last year, the company added more than 50 stores, and this year it plans to
establish 55-60 new units (each, for reasons not entirely clear, incorporating half of
a Volkswagen Beetle in its decor). ``We think we can do 700-800 mall stores, and
we're looking at strip centers,'' he says. ``If they work, we could open up another
200-300 units.''
Within a few months, the predominantly South- and Midwest-oriented Gadzooks
will begin to move into one of three new regions: the Northeast, Northwest or
Southern California. Although, in retailing, start-up stores typically generate lower
sales and operating cash flow than more mature units, the Street expects Gadzooks
to turn in profits of $1.12 a share in the year ending in January 1998, and $1.49 in
fiscal '99.
Szczepanski thinks it is essential to mix juniors with young men's, ``so as not to
have all our eggs in one basket.'' (The young men's business, not unlike young men,
is an entirely different species.) For many years, Pacific Sunwear had its eggs in a
subset of young men's, namely, California surfwear. Then, last year, the company
made a big splash in juniors, ultimately settling on an uncluttered athletic look that
could prove the perfect antidote to the rest of the market's Mod Squad.
The women's business, plus the introduction of shoes, plumped up quarterly
earnings. Pac Sun (as it's often called) netted $4 million, or 49 cents a share, in the
nine months ended in September, versus $923,000, or 12 cents, a year earlier.
Sales ballooned to $105 million from $76 million, and monthly comp-store
increases had competitors drooling: Same-store sales inched up 2% last February
and 7% in March, but leaped 19% in August, 29% - that's not a misprint! - in
September and 24% in October. The company might find it impossible to beat
those comps this year; no wonder some investors have the stock on their short-sale
list for summer.
In the past two weeks, however, Pacific Sunwear has been a market winner.
According to analysts' published estimates - although unpublished ``whisper''
numbers supposedly are higher - it's likely to earn $1.07 in fiscal '97. Management
gets high marks from its competitors, but the stock, now trading within three points
of its earlier peak, is valued at levels that leave little room for disappointment.
In Wet Seal's case, a P/E around 15 allows more margin for short-term error, and
the longer-term outlook is sunny. The company, as noted, has positioned itself as
an opportunistic acquirer, and its 6% operating margins are well below the
industry's average of around 8.5%. ``If same-store sales continue to grow by 5% a
year, the company should move toward that average very quickly,'' says
Montgomery Securities analyst Tom Tashjian.
While Limited's plan to retake juniors has scared off some investors, industry
insiders don't expect a bloody fight. Limited, says one, historically has
test-marketed looks before committing to massive rollouts - not the best tack in a
market in which the average customer changes her mind more often than her
clothes.
In short, the companies hoping to stay in fashion with investors will have to get their
own fashions just right, while turning in results that justify their valuations. And a
nimbler chain such as Wet Seal seems dressed for success on both counts.
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