Small Biz Lessons: What Abercrombie Did Wrong


NEW YORK (TheStreet) -- Teen clothing retailer Aeropostale (Stock Quote: ARO) is one of the rare companies growing in this weak economy. How?

The New York-based company has posted record earnings growth, and sales through the month of July were up by double digits. It's a good bet the company's winning streak will continue through the back-to-school shopping blitz.

Aeropostale's winning formula of trendy-enough clothes at hard-to-beat prices is setting it apart from rivals American Eagle Outfitters (Stock Quote: AEO) and Abercrombie & Fitch (Stock Quote: ANF). The company's success offers lessons for small businesses trying to compete for critical back-to-school dollars.

This year, penny-pinching parents are making every dollar count. A recent National Retail Federation survey found that families of school-aged children plan to spend 7% less on supplies than they did last year. Respondents also said sales or coupons had influenced about half of their buying decisions.

Whether you're a small business or a big chain, the only way to grab new business these days is to compete aggressively on price and offer special deals, such as Aeropostale's recent "buy one get one free" T-shirt promotion. Shoppers need to feel they're getting a deal.

Aeropostale "is constantly in promotional mode," says Morningstar (Stock Quote: MORN) retail analyst Brady Lemos. The company's price points -- $10 for a T-shirt, $20 for a pair of girl's jeans -- resonate with budget-conscious shoppers.

The company's reputation as a low-priced option has paid off big time. In the second quarter of 2009, same-store sales jumped 12%. In contrast, same-store sales at American Eagle fell 10%.

Abercrombie & Fitch provides a cautionary tale for companies that refuse to discount. The chain has tried to maintain a high-end image in the face of a brutal recession, a tactic that has alienated bargain hunters. Abercrombie's same-stores sales dropped 30% in the second quarter.

"Aeropostale is the value player in the teen retail space," Lemos says. "Customers are trading down, and Aeropostale is taking sales from its competitors."

But being cheap isn't enough to draw in fashion-conscious teens. You have to maintain the right mix of clothing.

"Their merchandising has been on target," says Lemos. "You need some newness to get customers into the stores, but once they're there, you also need the basic jeans and T-shirts."

Parents pay for the majority of teen clothing, so a retailer needs to factor in their needs as well. Go too trendy, and you risk turning off the parents. Err on the conservative side, and kids stay away.

"Teens are very fickle consumers, and what's cool will change in a few years," Lemos says. "When family budgets loosen up, it's likely teens will again clamor for Abercrombie jeans--and parents will be more likely to hand over their credit cards.

Aeropostale is hedging its bets by expanding its market to younger children. The company has launched a new kid's concept, P.S., but it's too soon to say whether that move will pay off. Despite the popular belief that parents will scrimp for themselves while continuing to spend on their children, kids' retailers have seen the same sales slump as everyone else. The Children's Place Retail Stores (Stock Quote: PLCE) and Gymboree (Stock Quote: GYMB) recently reported same-store sales declines of 9% and 1%, respectively, in the second quarter.

On thing is clear: Aeropostale will need to keep innovating to maintain momentum after the economy recovers. Otherwise, the company risks becoming "so last year" to its teen customers.

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