Just How Deep Are Those Teen Pockets?

Youth-apparel chains are branching into ever-smaller niches

It's a typical summer day in the San Fernando Valley. Economic slowdown or not, the malls are swarming as teens with nothing but time on their hands and allowances in their pockets check out the scene. And, lately, no place has been packing them in more than Hollister Co. at the Westfield Shoppingtown Mall in Canoga Park, Calif. The new chain, an offshoot of Abercrombie & Fitch Co. (ANF ) that opened last year, is geared to the wanna-be surfer-and-skateboarder teens. "After they opened, everybody at school said: `What a great store, you have to see it!"' gushes 15-year-old Vanessa White, who's picked up 15 shirts and 10 pairs of pants there in the past four months.

Retailers across the country are betting big that there are plenty more buyers like Vanessa around. Despite the worst slowdown in the retail sector since the early 1990s, a raft of teen retailers are branching out into ever smaller slices of the highly segmented youth market. Nearly a dozen chains are launching new store concepts. Their target? Anyone from the 7- to 12-year-olds known as tweens in the marketing world, to the teenagers and young adults they imitate.

Largely, though, it is a teen fad. Pembroke Pines (Fla.)-based Claire's Stores Inc., which operates 3,000 teen stores under four names, is testing a chain called Velvet Pixies that will cater to preteen girls with name-brand clothes like MUDD and Esprit. Abercrombie & Fitch's Hollister is going after a slightly younger group than its preppy parent with lower prices. And City of Industry (Calif.)-based Hot Topic Inc. (HOTT ), which draws the MTV crowd, has started Torrid to offer trendy fashions for large-size girls age 15 to 29.

But just because everyone's doing it doesn't mean the mad rush to the segment is a smart move. On July 12, most retailers--including many aimed at youths--reported down year-over-year same-store sales for June, the seventh straight soft month for specialty stores. Abercrombie & Fitch, for example, saw sales fall 4%, while Pacific Sunwear of California Inc. experienced a 7% drop. But even as sales have softened, openings of specialty stores aimed at youths are growing at a 17% clip--more than double the rate of the specialty-apparel sector overall, according to Salomon Smith Barney. "Everybody is saturating their niches," admits Marla Schaefer, vice-chairman of Claire's Stores.

IRRESISTIBLE. The spin-off drive smacks of the overreaching that has such national chains as Gap Inc. hurting. It has posted four consecutive quarters of declining same-store sales, with overexpansion causing its Gap, Banana Republic, and Old Navy divisions to cannibalize sales.

Still, many retailers can't resist the fact that teenagers are the fastest-growing population group. Teenage Research Unlimited, a Northbrook (Ill.) market researcher, says that the number of teens will rise 7% by 2010, to 33.9 million, the largest teen market ever.

To avoid Gap's fate, today's specialty operators are casting smaller, more specialized nets. Stores are geared to particular teen styles and niches, or tighter age groupings. Hollister appeals to wanna-be surfers, for example, while the soon-to-be-opened mishmash chain draws the older sisters of girls shopping at parent chain Limited Too (TOO ).

Moreover, with their own growth limited, the parent chains say they have little choice. Abercrombie, for example, already has 275 units of what it believes can be a 400-store store. To prevent overlap, it gave Hollister stores a different look and aimed them younger. And by targeting mishmash to a slightly older crowd, Limited Too execs hope to steer customers there as they age.

But plenty of overlap exists. Hollister targets the same teens as Pacific Sunwear. And its d.e.m.o. division offers the same urban style as Claire's Mr. Rags unit. "There will be a shakeout," predicts Gerald R. Szczepanski, chief executive of teen clothier Gadzooks Inc. The chains need only look to their bigger cousin, Gap, to see what can happen when a good thing goes too far.

By Robert Berner in Chicago, with Christopher Palmeri in Canoga Park, Calif.

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