Teentailers: Too Hot Not To Cool Down

Anyone with teens at home (I have two) knows there simply is no anticipating their clothing whims. One kid may be drawn to designer boutiques, while the next one prefers checking eBay (EBAY ) for vintage T-shirts or making the rounds of thrift stores, where bags of back-to-school wear are often sold by the pound.

Investing in "teentailers," such teen-focused retailers as Abercrombie & Fitch (ANF ) or American Eagle Outfitters (AEOS ), is nearly as bewildering. The five with market values of at least $1 billion this year returned an average of 57% through June 28 (vs. 2.6% for the Standard & Poor's 500-stock index). Yet I figure further gains will be more grudging, given the profit-growth outlook and a crowded market for teen apparel.

AT THE FLORIDA MALL IN ORLANDO, besides Abercrombie and American Eagle, I found Pacific Sunwear (PSUN ), Rave, Urban Planet, Billabong, Aeropostale (ARO ), Gadzooks (GADZ ), No Fear, dELiA's , Wet Seal (WTSLA ), Surf Zone, Hot Topic (HOTT ), and more. There were differences, naturally. Music blared loudest at Abercrombie; PacSun displayed the most frantic clearance signs ("Girls' tank tops 2 for $20"). Yet store to store, most striking was how many of the garments looked interchangeable. Two girls I spotted leaving American Eagle were Cristina Ortiz, 15, and Ciara Rosario, 16. Their favorite store? Cristina shrugged and pointed to her T-top, with Aeropostale's logo. "They always have a lot of sales," she said. Glancing back at American Eagle, she added: "There's not really much difference. They have the same clothes."

Not five miles away at the newer, tonier Mall at Millenia, which has many of the same teen stores, I heard a similar note of ennui. There, 19-year-olds Jamie Contractor and Rachel Streitfeld rolled their eyes at today's dominant style. "It's not that we don't like Abercrombie," Rachel said. "It's just that look -- like, 'Summer Girl' -- is really annoying. It's really cookie-cutter." They prefer the "wacky" thrift-store mix of Urban Outfitters (URBN ), with housewares and toys (action figures of Jesus, for $8, and Moses, $10). Yet the clothes, from Converse sneakers to $24 scoop-necked jerseys, on sale at $15, might also be found at many competing stores.

Teentailers aren't about to go bust. Abercrombie has a debt-free balance sheet and began this year to pay a dividend. American Eagle's board is weighing a dividend more seriously, too. But slower earnings growth is in store for the coming fiscal year, beginning in February. American Eagle's chief financial officer, Laura Weil, told me she expects profit margins to keep widening this year and next. "We know we can improve," she said. But quarterly comparisons will inevitably get tougher, a fact Abercrombie underlined recently when it warned against expecting much in margin gains.

Stepped-up sales of stock by insiders at some teentailers is hardly heartening, either. In the past 12 months, Abercrombie insiders sold 1.5 million more shares than they bought, with 47% of them unloaded in the past three months, according to Vickers Stock Research. At American Eagle, 75% of the 7.5 million shares sold in the past year were dumped this spring. Contrast this with PacSun. Its insiders sold a net 2.2 million shares in the past year, but 11% of that action came in the past three months. PacSun shares peaked in February.

Anyone with teens at home knows that, with all of the ups and downs of adolescence, they need unconditional love. Teentailers are just as volatile, but investors are better off loving them only when they are down.

By Robert Barker

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