How Has the Digital Age Affected Apparel Retailers?

Recent years have been hard for teen retailers, with some even filing for Chapter 11 bankruptcy, such as Quicksilver in September 2015, Pacific Sunwear in April 2016, and Aeropostale in May 2016. Others have hobbled along, including Abercrombie & Fitch (NYSE:ANF), and Gap Inc (NYSE:GPS). These once sought-after brands, among high school kids in the US, have been blighted as a result of their over-reliance on the footfall at shopping malls, and the rise of fast-fashion brands, such as H&M and Zara. Moreover, these companies have failed to adapt to the rise of social media platforms, where teenagers currently spend a majority of their time.

Facilitated by the convenience of constant access, 92% of teens today go online daily, including 24% who are online constantly, according to a study conducted by Pew Research Center. Over half of the teens (aged 13 to 17 years) go online several times a day, aided by the presence of smartphones, which is available to nearly three-quarters of teens.

This digital adeptness has immensely affected the areas where teenagers meet, where they shop, and what they spend their money on. From 2005 to spring 2016, of the total amount spent by teenagers, the percentage expended on key fashion categories of clothing, accessories, and footwear has fallen from 45% to 38%, according to Piper Jaffray’s teen spending review. Meanwhile, the spending on video games has more than doubled during the same period, rising to 8% of the total expenditure. The growth in the use of technology has distributed the income of teenagers. Furthermore, they are more likely to ask for smartphones, tablets, or wearable technology as presents, instead of clothing.

Teens are also prioritizing experiences, which are shareable on social media. According to Piper Jaffray’s survey, their favorite app is Instagram. As per the report, teens now spend 22% of their income on food, up from 7% in 2005, particularly in Instagram-friendly locations. A study by Harris Group found that 72% of millennials prefer to spend their money on experiences, rather than material things. This trend is forcing companies to adapt. For example, Macy’s is using miniconcerts, yoga classes, and cafes to draw customers, while some of Urban Outfitters‘ (NASDAQ:URBN) stores feature bars or restaurants. According to the Harris poll, factors prompting this behavior, of greater distribution of photos, is due to craving for recognition, and a “fear of missing out,” which is driving their desire for experiences. Irish fast fashion brand Primark has engaged teens by transforming its stores into a shareable experience. The retailer encourages shoppers to upload pictures of their purchases on to its website. Further, it offers free wifi and changing rooms large enough to fit two shoppers, in order to be more selfie-friendly. This has led them to garner 10,000 images on to its site.

This trend has also prompted a rise in e-commerce, with Amazon (NASDAQ:AMZN) being favored by 41% of the teenagers for online shopping. This figure has grown from 31% in Spring 2014, and 35% in Spring 2015. In 2015, while online sales grew in the mid-teens, sales of traditional brick and mortar stores grew at a measly 1.4%, according to research conducted by JPMorgan. This has induced many retailers to focus on their e-commerce platforms. An example in this category is American Eagle Outfitters (NYSE:AEO), which, like other apparel retailers, has gradually shrunk its store count, and focused more on its high margin e-commerce channel. A soft and gradual reduction in its brick-and-mortar footprint, as opposed to a large closure in one go, is a good decision as it would not result in a steep fall in its sales. The company’s digital sales registered a 20% growth in FY 2015. This lends credence to its decision to develop its omni-channel presence by investing in digital marketing, and improve its website and mobile app. During FY 2015, the company invested $29.1 million in developing its e-commerce capabilities, and is expected to spend more in FY 2016. The direct business continues to perform well for the company, contributing to 30% of the company’s revenues in Q1 2016 and has been a major driver in its sales growth, specially since the mall traffic has been soft.

Have more questions about American Eagle Outfitters? See the links below:

• Growth In Aerie Helps American Eagle Beat Estimates
• How Will American Eagle Perform In The Second Quarter Of Its FY 2016?
• How Has The Merchandise Mix Of American Eagle Changed Over The Last Three Years?
• Why Will American Eagle’s Aerie Brand Be A Key Growth Driver In The Future?
• Why Are We Bullish On American Eagle?
• What Can Move American Eagle’s Stock Down In The Next Couple Of Years?
• What Is American Eagle Outfitters’ Revenue & Net Income Breakdown In Terms Of Different Operating Segments?
• How Has American Eagle Outfitters’ Revenue Composition Changed In The Last Five Years?
• What’s American Eagle Outfitters’ Fundamental Value Based On Expected 2016 Results?
• Where Will American Eagle Outfitters’ Revenues Come From In The Next Five Years?

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