An Ugly Time for Fashion as Spinoff Chains Struggle
Friday, July 10, 2009
Opening more stores wasn't enough for retailers during boom times. They wanted to create new forms of life.
Specialty chains spun off new concepts that targeted different demographics. Teen retailer Abercrombie & Fitch spawned Ruehl for postgrads, while rival chain American Eagle created Martin + Osa with casual clothes for young professionals. J. Crew launched Madewell, a sort of hipster little sister. Aeropostale had a rock-inspired chain called Jimmy'z.
But now their fledgling concepts are struggling in the face of the worst recession in decades. At best, they have become distractions to the companies' already embattled management. At worst, they are a drain on earnings -- and some are shutting down altogether.
"It's hard enough for new brands to gain traction in a new environment let alone in the worst recession in decades," said Todd Slater, an analyst with Lazard Capital Markets. "In downturns, many new initiatives are sidelined."
Last month, Abercrombie announced it will close its 29 Ruehl stores, including one in Tysons Corner Center. Jimmy'z went dark back in February. Some analysts wonder if American Eagle will pull the plug on Martin + Osa. And J. Crew executives have admitted missteps in fashion and pricing at Madewell.
Retailers are under enormous pressure to reinvigorate sales and slash costs. June sales at stores open at least a year -- a key industry measure of health -- dropped 4.7 percent compared with last year, according to data released yesterday. Specialty retailers took one of the biggest hits, with sales at Abercrombie plummeting 32 percent in June, the worst performance of any retailer yesterday.
During flush economic times, retailers embraced new concepts as a way to increase sales. Many chains had already saturated shopping centers with new stores, so if they wanted to win new customers, they had to create new concepts for them to shop.
"One thing everyone's afraid of is [a chain's] maturity," said Brian Tunick, an analyst with J.P. Morgan.
Some spinoffs have taken off. Victoria Secret's collegiate-inspired Pink stores are considered one of the most recent success stories. American Eagle followed suit with Aerie, which also has experienced solid results. Retail experts consider Gap's launch of Old Navy in the 1990s one of the greatest hits ever, though the chain is struggling now.
But dismal sales have forced some retailers to think twice. Many are retrenching by shutting down stores, slashing staff and marking down prices. And investors have little patience for money-losing concepts.
"Later Jimmy!" read the headline for a research report by Jefferies analyst Randal J. Konik. "Other retailers should follow suit."
Aeropostale's reputation for bargains has helped it deliver one of the few strong performances during the recession, and it was the first to jettison its money-losing concept in February. Jimmy'z had 11 stores with an L.A. rock vibe targeting 18- to 25-year-olds. The company cited macroeconomic conditions in closing the brand, which it had launched in 1995.