These three chains have a lot in common: they compete for the same demographic through roughly the same number of mall-based stores, have very healthy balance sheets, and all stopped reporting monthly sales after January 2011.

However, there are some major differences: Abercrombie enjoys the most pricing power, with gross margins nearly double that of its rivals, as well as generating the highest percentage of sales from International operations (18.6%). American Eagle has been touted as the biggest bargain among the three, as it trades at 10.2 times free cash flow, the cheapest among U.S. retailers that sell clothes to teenagers, and holds the most cash relative to its market value. Aeropostale has been the strongest and most consistent performer over the past decade and significantly outperformed its rivals throughout the recession.

All three recently reported fiscal 2010 results, and below we take a look at their operating performance for last year as well as over the long-term to determine who deserves the crown as the king of teen retail.

Based on the National Retail Federation’s (NRF) annual St. Patrick’s Day survey, the average consumer will spend $33.97 this year on St. Patrick’s Day merchandise, up 3% from $33.05 in 2010. Overall spending is expected to rise for the second straight year, projected to jump over 20% to $4.14 billion, driven by young adults looking to attend private parties or celebrate at bars and restaurants.

“Eager to shake off the winter blues, consumers will look to St. Patrick’s Day as their first spring related celebration, meaning great things for the economy, retailers and restaurants,” said NRF President and CEO Matthew Shay. “As a non-gift giving holiday, retailers will need to make sure they have the best assortment of merchandise, aiming to attract celebrants looking for decorations, holiday food and even apparel.”

Because Easter falls almost three weeks later than last year, there will be intense competition for consumers’ dollars as March is expected to be a slow month overall. For example, Aeropostale has a special St. Patty’s Day collection for girls and guys, Target is featuring 98 holiday items such as ornaments, shot glasses and costumes, and 99c Only Stores is featuring “St Patrick’s Day Party Must-Haves.”

Despite its reputation as a big beer-drinking holiday, surprisingly St Patrick’s Day ranks last in off-premise beer sales for each of the 11 US holidays tracked by Nielsen, with sales of 48.6 million cases at grocery stores and similar locations in the two weeks leading to the holiday in 2009. That compares to 63.4 million cases for the Fourth of July, the category leader. However, bars and restaurants should see strong sales as 31.2% of consumers said they would attend a party at a bar or restaurant, compared to just 19.1% who will attend a private party.

More than half (52.4%) of all consumers surveyed expect to celebrate in some way, with over 80% saying they will wear green and a third indicating they will make a special dinner. And almost all young adults pretend they’re Irish for a day, as more than three-quarters of 18-24 year olds will celebrate – almost all (89.0%) will wear green and over 40% of 18-34 year olds will celebrate at a bar or restaurant, with adults 25-34 years old expected spend the most ($41.30).

“Inexpensive, fun celebrations surrounding St. Patrick’s Day will make it easy for consumers of all ages to take part in the festivities,” said Phil Rist, Executive Vice President, Strategic Initiatives, BIGresearch. “March is typically one of the slower months of the year in terms of consumer spending, but we expect this year’s celebration to provide a nice boost for companies who are in the business of promoting the holiday.”

Once the darling of the teen retail scene, Abercrombie & Fitch has fallen on hard times since the start of the recession. Missteps including fashion flops and their refusal to markdown prices have driven U.S. consumers to lower-priced rivals American Eagle Outfitters and especially Aeropostale. The company has acknowledged its past mistakes and is working to address the problems, but A&F still has a long way to go before it regains the title as king of teen retail.

In the fourth quarter of 2009, Abercrombie said total sales decreased 4.6% to $936 million, while same-store sales dropped 13%. This was the 9th consecutive quarter of same-store sales declines, and came on top of last year’s Q4 which saw comparable sales plunge 25%. Net income declined 30% to $47.5 million ($0.53 diluted eps) from a year ago and was down 78% from the 4th quarter of 2007.

Extremely strong international growth during the quarter of 86% helped somewhat offset continuing U.S. weakness, which saw a 12% sales decline. Though the company only operates 28 stores outside the U.S. out of a total store base of 1,096, the international segment made up 15.3% of total sales in Q4. Expect that share to keep increasing, as CEO Mike Jeffries stated on the conference call “International expansion is firmly in our grasp and as I’ve said before it is the future of our brands.”

Abercrombie completed the closure of its 29 RUEHL branded stores, which had been under-performing other segments and unprofitable since inception. The company also said there are an additional 230 domestic locations, skewed toward A&F and Kids stores, which are under review for closure in 2010.

While A&F’s brand cache has lost some of its luster domestically, they have been able to maintain a premium brand status with foreign customers. This is most evident in the runaway success of the three international flagship stores, which currently have annualized volumes of around $200 million in aggregate, while the tourist-heavy Fifth Avenue flagship in New York remains the most productive store with annualized volume in excess of $100 million.

For the full fiscal year 2009, total sales declined 15.9% to $2.93 billion on top of a 7.1% drop in 2008, while same-store sales decreased 23% after a 13% fall last year. The company managed to eke out a profit of $254k ($0.00 diluted) compared to net income of $272 million in 2008 and $476 million in 2007.

The past two years in retail have been characterized by steep markdowns and heavy promotional activity, but Abercrombie was extremely late in acknowledging the consumer was unwilling to pay up for their aspirational brands. However, the company has changed its tune in recent quarters as seen in gross margin reductions – Jeffries explains:

“While we have never and do not ever plan to be a promotionally led business, we are getting better at figuring out something that was completely alien to us 18 months ago. We believe that AURs will need to continue to go lower in the spring but we also know that how we deliver that lower AUR is very important, both in terms of its effectiveness and in terms of protecting the brands. This must be done without sacrificing quality.”

Even with a decline of 6% in the direct-to-consumer business in 2009, e-commerce sales now represent nearly 10% of total sales. The company has embraced social media and mobile commerce, and Jeffries expects these platforms to drive continued growth in the future:

“We have some exciting social media and marketing initiatives in the pipeline that I believe will help our business. We are actively seeking new ways to effectively engage our customers through these medium. Having recently launched on Facebook, Abercrombie & Fitch has already 775,000 fans, Hollister over 340,000. We recently released an iPhone application and continue to invest in our mobile commerce platform. For the future, we are investing in some new initiatives that we believe will provide a significant boost for our direct to consumer business and beyond.”

Abercrombie finally broke a string of 20 consecutive months of same-store sales declines in January, though easy comparisons to the year-ago period and gift-card redemptions representing nearly 10% of total sales for the month surely played a large role.

All in all, Abercrombie’s performance in 2009 can only be characterized as awful. However, we are seeing much better fashion product in the stores, and considering every month in 2010 will be compared to a double-digit comp drop in 2009 results will no doubt show improvement this year. The company is taking meaningful steps to address its mistakes and we believe they are on the right track to returning to growth. But we are skeptical they are anywhere near winning the hearts and wallets of consumers, and don’t expect them to regain their former glory anytime soon.

Back-to-School season officially kicks off this weekend with sales tax holidays in Georgia and Mississippi, to be followed by 13 other states throughout August. Most states offer exemptions on clothing, school supplies, books, computers and peripherals up to a certain dollar amount. This year, many states grappled with the balance between giving consumers a break and further weakening their own perilous financial situations. As a result of economic conditions, Washington D.C., Florida, Maryland, and Massachusetts decided not have tax holidays for back-to-school this year.

The National Retail Federation (NRF) is forecasting total back-to-school sales of $17.4 Billion, a decrease of 13.2% from last year, while America’s Research Group expects a decline of 8.5-12% on top of a 5% drop in 2008. The NRF projects average spending per family with kids aged 6-17 to drop by 7.7% to $548.72, which would be the lowest since 2006:

The NRF expects large spending declines in all categories except for electronics, which is expected to be the one bright spot, as total spending is expected to increase 4.1% and spending per family to be up 10.7%. The NRF expects total spending declines per category of: -18% for clothing and accessories, -19.8% for shoes, -21% for school supplies. In its own survey, Deloitte said that 81% will pare back on clothing, 49% will spend less on shoes, 32% will spend less on supplies, and 30% will spend less on backpacks and book bags.

The recession is still weighing heavily on the minds of American families, and though the economy is starting to show signs of stabilization, consumers are still spending extremely cautiously. Worries about unemployment, debt, and investment losses as well as high gas and food prices will continue to shape consumer buying behavior.

According to a survey of moms with kids aged K-12 conducted by OfficeMax, by far the most important buying factors are durability, price, and value. Products that are environmentally friendly are becoming more mainstream, as 34% of respondents said they would buy more eco-friendly products this year, while Deloitte said 41% will buy more “green” products this year and 31% will seek out “green” retailers.

We expect those stores that have been out-performers since the start of the year to continue to shine. Off-price retailers TJX and Ross Stores have taken market share from traditional department stores as consumers continue to trade down. Teen retailers Aeropostale and The Buckle have so far been immune to the recession, and should continue their impressive run. Dollar stores like Family Dollar and Dollar General should draw a decent chunk of the school supply business. And of course Wal-Mart will draw more shoppers than any other with its unbeatable prices and broad merchandise offerings. Most traditional department and apparel/accessory stores will continue to struggle as they have over the past year. Value-oriented names such as Kohl’s and J.C. Penney will outperform their peers, but most likely still post negative year-over-year comps.

Shoppers are also craving convenience, and drug stores will be the largest beneficiary as they have broadened their merchandise mix  beyond health and beauty products to include school supplies, small electronics, and even groceries. According to the NRF, the number of families planning to shop at drug stores is 18% higher than last year. Nielsen is forecasting a slight rise in sales of school supplies to $2.17 Billion, and James Russo, Vice President, Global Consumer Insights, said “The winners this season will be retailers who offer strong discounts and appeal to the consumer’s desire for savings and value. Look for gains from supercenters, dollar stores, drug stores and to a lesser extent, club and grocery stores.”

Retailers have been preparing for back-to-school season by clearing out merchandise and preparing lean inventories with the expectation of reduced volume. They also started promotions early, with retailers including J.C. Penny, OfficeMax, and Staples all moving towards social media campaigns this year to complement their traditional media presence. While the use of social media by teens has exploded over the past few years, retailers should take note of the fact that parents are making more of the buying decisions this year. According to America’s Research Group, just over half of American parents are trying to get their children to wear what they wore last year, and they are flexing their parental muscle in the matter, with children’s influence on buying decisions dropping by at least 20% compared to last year.

With Labor Day falling a week later than last year, retailers are hoping early promotions jump-start the extended back to school season. However, the OfficeMax survey finds that 41% of moms buy the essentials right before school starts, filling in items as needed, while 31% buy everything right before school starts. Only 28% said they would stock up on items through the summer. The NRF had similar findings, as the majority of families won’t begin their shopping until 3 weeks to 1 months before school starts.

While there are signs the recession is easing and consumer confidence is starting to slowly creep up, economic conditions are still having a large impact on consumer buying conditions. Most retailers will continue to struggle with year-over-year comp declines as they will be up against tough figures from last year when consumers had stimulus checks in their pocket. With expectations so low for back-to-school, we most likely won’t see substantial improvement from retailers until the holiday season.

For the 33 retailers we track that report monthly sales data, overall net sales for June were $34.144 Billion, a 2.6% decline from June 2008.  On a comparable same-store basis, sales were down 4.7% from the prior period vs. a gain of 2.1% last June. The optimism we saw back in April when things seemed to be improving for the most part has disappeared, as just about every retailer mentioned how tough the retail environment is, and how the frugal consumer has really changed the landscape. Things aren’t expected to pick up through the summer, but the hope is that an early back-to-school season will bring at least marginal improvement starting in September.

Read the rest of the report here.

Over the next week we will be highlighting sub-sectors including teen, luxury, and off-price retail, as well as wholesale clubs, so stay tuned…

The company has been the clear standout among teen retailers, as rivals Abercrombie & Fitch and American Eagle Outfitters have struggled to retain brand loyalty – both have posted negative same-store sales results for 13 consecutive months and 6 consecutive quarters.  As a matter of fact, besides stellar performer The Buckle, you would be hard-pressed to find a better performing company than Aeropostale, not just in the teen retail or apparel segments, but in the whole retail industry.  And this is not just a recent phenomenon:

So what’s their secret?  Well, actually it’s no secret at all – top executives have been very open about their formula, both in interviews and on conference calls.  The core idea is to give shoppers what they want at prices they can afford – Aeropostale doesn’t consider themselves a trend-setter, but rather a fashion follower.  Instead of worrying about what’s on the shelves of their competitors, they look at what’s on the backs of their target consumers.  As CEO Julian Geiger put it:

“We genuinely listen to our customers and give them what they want more so than our competitors. We do not superimpose on them what we think they should wear. They tell us what they want to wear.”

Price and promotion have been extremely important as well.  While Geiger credits a the recent success to a focus on fashion rather than an obsession on price, luring frugal shoppers certainly hasn’t hurt.  The company’s price point is about 50% less than Abercrombie and 30% less than American Eagle.  They perfected their promotional merchandising strategy long before the recession hit, with pre-planned sales signs and two-for-one deals throughout the stores.  However, besides 4th quarter mark-downs late last year, they have been able to expand gross margins in 10 out of the last 11 quarters:

The company is not resting on its laurels, either.  At a time when most retailers are shutting brands and scaling back growth plans, such as Abercrombie’s RUEHL, Aeropostale is launching a new brand – PS – aimed at the tween market.  While the Aeropostale brand is fairly narrowly targeted to the 14-17 yr old demographic, PS will cater to 7-12 yr old kids.  With plans to open 9-10 stores this year as well as an e-commerce site, PS hopes to capture a piece of the estimated $14 Billion tween market, with the goal of eventually opening up to 500 stores.

While store sales growth has been exceptional, e-commerce growth is the channel that could really drive growth in the future.  While the company didn’t launch online operations until late 2005, they posted internet sales of $79.1 Million in fiscal 2008, which was 85% higher than the prior year.  This will be an important outlet not only for growth but for reaching customers more directly through promotional and direct marketing campaigns.  One example is the “Teens for Jeans” charity project launched earlier this year, where over 200,000 teen customers donated “gently used” jeans to their homeless peers.  Campaigns such as this not only boost the company’s profile, but provide better viral publicity than advertising ever could.

Past performance doesn’t guarantee future success, and the company realizes there is a long line of faded teen retail stars and customers’ tastes can change overnight.  They are among the most diligent users of market research, and have leveraged the internet to communicate directly with their best customers to solicit feedback on new styles.  With the wind at their back, look for the company to continue to succeed no matter what the environment.

“You really have to look back in time. Nothing in retail happens quickly. We have been willing to look at ourselves and realize what we like about ourselves and what we don’t and make appropriate changes. It’s about a balance of assortment and store design. What you see now is the cumulative affects of adding fashion merchandise to our assortment, while maintaining a promotional stance.” – Aeropostale CEO Julian Geiger, interview with TheStreet.com in May 2009

• Redbook Research reported that adjusted same-store sales at over 9,000 general merchandise stores were -4.4% for the first week of June vs. a year ago
• ICSC Research reported that adjusted same-store sales for 75 large retail chain stores were -0.8% from the year ago period and up marginally from last week.  They expect overall June sales will be down 4-5% vs. a 4.6% drop in May.

While there is hope that things will pick up and the economy will continue to improve, even the most optimistic economists admit that the unemployment rate will continue to climb and most likely reach double digits by the end of the year.

On the housing front, foreclosures continue to be a problem as the pain has spread to even the most credit-worthy borrowers – the portion of prime mortgages that were seriously delinquent from the 1st to the 4th quarter of 2008 more than doubled, and the pace continues to accelerate.

Add on the fact that gas prices have climbed for 41 straight days, and now sit at $2.62 from a low of $1.62 at the end of last year.  While this is still well below the $4+ that people were paying at the pump last summer, it’s a worrying trend heading into the demand-driven summer season.

The combination of these 3 factors, along with the fact that same-store sales will have to be compared to last year’s stimulus-fueled spending will continue to make it a tough road ahead for retailers.

Below is a summary of YoY comparable same-store data for 34 retailers that reported monthly sales in May.  Some notable out-performers have been Aeropostale, Buckle, Ross Stores, and Pricesmart:

ICSC Research

Management would like to have you believe that this performance isn’t too shabby considering the state of the consumer and compared to the results of their competitors:

“The market conditions, from our perspective, continue to be challenging. With that said, I think our performance in Q1 was respectable. None of us like to produce results in the quarter below last year. I don’t think any business would ever want to produce results below last year but with the conditions in which we are operating in, I think it was respectable and versus a lot of our competitors, I was pleased with our performance in the first quarter.”

If we look at their recent sales performance against a couple of the competitors we talked about last week, minus Aeropostale since they are a clear out-performer, this statement seems to hold up:

However, if we look back a little further, you can see that the idea that their performance is a result of economic conditions becomes a little hard to believe.  I wonder what their excuse was back in 2005 & 2006:

This is not a recent phenomenon – growth has been stagnant for quite awhile now:

With improving consumer sentiment, there is hope that overall retail sales are in a bottoming process.  In April, Old Navy reported its first positive same-store sales results in over 2 years.  However, if we look at same-store sales by brand we can see it will be at least a few months before this is any reason to cheer:

The one consistent bright spot for the company has been their direct-to-consumer business, which surpassed $1 Billion in total sales for 2008.  Gap was an early entrant into the online channel, and have more than doubled their direct sales since 2003:

While Gap certainly has had some struggles over the past few years, they also have a pristine balance sheet with almost no debt and about $1.8 Billion of cash.  However, in an extremely tough retail environment with intense competition, there will need to be drastic change to return to the days when we’re all humming Old Navy tunes in our heads…

While they are the smallest of the three, Aeropostale has shown stronger top line growth throughout the decade.  More impressive has been their strong same-store sales performance over the past 18 months:

Abercrombie & Fitch has struggled the most as they were hesitant to cut prices in order to “protect the brand.”  Some comments from the Q1 conference call tell the story:

The first quarter was clearly a difficult one for us with the challenging economic environment, we continue to face a headwind where the consumer is reluctant to spend on premium brands. There is a price consciousness dictating shoppers’ purchases today, unlike anything I have seen before.

We are actively planning for meaningful reductions in our average unit retails, while remaining committed to protecting our initial mark-up percentage and providing quality product.

As cost-cutting continues for the rest of 2009, the growth in store openings will likely slow as it has already started to level off over the past 6 months:

Aeropostale has also outperformed on a sales per average square foot basis throughout the years:

As the least expensive of the 3 premium brands, Aerpostale has been able to not only outperform relative to their peers, but continue to post record top and bottom line results in the toughest retail environment in decades.  They also got a late start on their e-commerce business, and while online sales in 2008 showed growth of 85% over the prior year, that channel still makes up only 4.2% of total sales.