The junior apparel market has claimed another victim.
This time, it’s struggling teen retailer rue21, whose once-bright star fell remarkably quickly after an over-eager expansion effort following its 2013 takeover by private equity firm Apax Partners, and a late-2016 executive shakeup that left the company effectively rudderless.
In mid-April, the company announced on Facebook that it had plans to shutter almost 400 of its approximately 1,200 stores; and late Monday evening, the company acknowledged it had filed for Chapter 11 bankruptcy protection with the intent to reduce its debt and provide additional capital to restructure. Rue 21 did not respond to multiple requests for comment from Retail Dive.
As the struggling teen retailer sunk, the apparel industry barely raised a collective eyebrow.
That’s because retailers are filing for bankruptcy at a record rate — on track to hit an annual high since the 2008 Great Recession when 18 retailers resorted to Ch. 11 bankruptcy protection, according to data from AlixPartners consulting firm provided to CNBC. The apparel sector has been particularly hard hit — The Limited, Wet Seal, BCBG Max Azria and Payless have also gone under in just the past few months.
The past few years have provided a veritable storm for the struggling junior sector as encroaching online competition has hit both supply-chain dynamics and price point issues, while the ever-faster trend cycle of fast-fashion retailers means that slower-moving companies spend more time playing catch-up than they do innovating.
Yet in an increasingly crowded marketplace, companies that are neither cheap, nor fast nor innovative are falling by the wayside and being replaced by brands that are already adept at speaking to a digitally native — and easily bored — teen and tween consumer.
Rue21’s melting point
Trends aside, each company has its own set of problems. For rue21, poor timing came on the heels of enviable growth.
“Rue21 had a lot of tail winds in 2009,” Adheer Bahulkar, a partner in the retail practice of A.T. Kearney, a global strategy and management consulting firm, told Retail Dive. “While they had tough competition from Forever 21, Zara, H&M and new online competitors, their brand was hot, accessible and the product was trending with its core demographic. They were even one of the first to incorporate plus sizes.”
The company was one of hottest new stock listings in 2009, Bahulkar said, and by 2012 it had made it to No. 9 on Forbes’ list of America’s Best Small Companies. But then the company got greedy.
“The brand was indeed hot, but instead of correcting for the shift to online sales and the general decline in mall traffic, as everyone else had already begun to do, they overplayed their hand in 2009, stepped on the gas and decided to triple their store footprint,” Bahulkar said. While other retailers were beginning to cut down on new stores, and even close some doors, rue21 ballooned from 450 stores in 2009 to 1,200 stores today.
“Like so many retailers, rue21 is a story of too much leverage.”
Associate editor at Debtwire
“Like so many retailers, rue21 is a story of too much leverage,” Reshmi Basu, associate editor at Debtwire, an analytics company specializing in debt and finance, told Retail Dive. “The company’s capital structure can’t absorb the current meltdown taking place in retail. But still, rue21 has never been an easy trade for investors, even from the get-go. In 2013, the company went through a tough syndication process to finance its acquisition by Apax Partners due in part to earnings concerns coupled with inherent fashion risks associated with a tween clothing chain. The company couldn’t grow into its capital structure as it racked up a slew of earnings misses.”
Mall struggles didn’t help, either. “The company pieced together a string of quarterly same-store sales declines, due in part to declining mall traffic trends,” Basu said. “But despite these negative comps, the company looked to expand its store base.” Basu said rue21’s slew of management changes, including the departure of its long-serving CEO Bob Fisch, as well as its general merchandise manager Kim Reynolds, also contributed to its fall.
Then there were also less obvious issues. “Also boiling beneath the surface was rue21’s relationship with its supply chain, as we saw factors became increasingly nervous as its top line faltered,” Basu said.
The online issue
Those supply chain troubles played a part in rue21’s other major misstep — entering the online marketplace.
“While growing the store footprint was, in hindsight, unwarranted, it was their delayed focus on, and investment in, their online channel that exacerbated the situation,” Bahulkar said. “With an e-commerce launch in 2013, they were at least five to 10 years behind their peers in capturing online sales. So ironically, they ended up being a little late to their own party. Playing catch-up in today’s environment is tough, and requires big investments in talent and capability.”
Creating a successful digital strategy is a challenge for every brand in every industry, of course, but for rue21, it was a particularly intractable issue. “Rue21 was not analytical enough in terms of both their merchandising strategy or overall management vision related to e-commerce,” Sean Maharaj, a director in the retail practice of AArete, a global consultancy specializing in data-informed performance improvement, told Retail Dive. “[I]f rue21 were more nimble and agile, then they could have responded to market pressures more effectively and quickly.”
"Overall, the industry is suffering something similar to the housing crisis, and many other non-juniors retailers are reeling in the same fashion."
Director in the retail practice of AArete
The issue isn't specific to rue21 or junior apparel, Maharaj said. “This is where rue21 failed — the goal is to redeploy resources to other investments, like e-commerce platforms, where initial costs can be significant. Overall, the industry is suffering something similar to the housing crisis, and many other non-juniors retailers are reeling in the same fashion,” he said.
According to Maharaj, investment in e-commerce became more of an afterthought as the company spent resources diversifying its offerings instead of focusing on digital.
“The slow online adoption, coupled with not meeting changing fashion trends, is a bad recipe," he said. "But then they also tried to break into home items and men’s fashion at a sensitive time. It’s pretty common for retailers to hold out under the belief that e-commerce is only a fad. But, as we’ve seen with Best Buy and Wal-Mart and others, this is a force that needs to be reckoned with."
Take a look at the recent news from Bebe, he added, which last month announced it will shutter all of its stores by the end of May. "[Bebe] admitted that selling online will absorb its entire brick and mortar presence," he said. "With nearly 3,000 closures in 2017 through April, it will be hard to continue to buck the online trend any longer.”
The fast-fashion threat
Competition by other brands targeting the same demographic is also a big problem, and one that slower-moving stores such as rue21 have been ill-equipped to deal with.
“With the advantage of 20/20 hindsight, perhaps the biggest mistake made by rue21 leadership was not adequately responding to the fast-fashion competitive threat posed by leaders like H&M, Zara and others,” Ray Hartjen, director of marketing for RetailNext, a business analytics group, told Retail Dive.
"It was a slow death spiral, and it’s nowhere near over yet."
Director of marketing for RetailNext
“Over the past decade, those leaders have seen their sales growth more than double that of apparel categories as a whole," Hartjen said. "And that growth, in turn, fueled additional tightening of the thumb screws on aggressive pricing and sourcing strategies, increasing the pain felt by industry laggards like rue21. It was a slow death spiral, and it’s nowhere near over yet.”
What’s next for junior apparel?
Analysts have been furiously speculating about which companies might be next as the Grim Reaper of retail cuts her swath through the sector.
“The watch list for store closures includes brands that have been slow to adapt their shopping experiences to the changing needs of shoppers,” Hartjen said. “Media has speculated about the relative health of big brands like J. Crew and Claire’s.” To wit, when credit rating firm Fitch Ratings posted their “Bonds of Concern” list in January, Claire’s Stores, Sears Holdings Corp., Nine West Holdings, 99 Cents Only Stores and Gymboree all made the list alongside rue 21.
It’s anybody’s guess who’s next for the apparel chopping block, Maharaj said, but he suggested that Justice or Hot Topic could be candidates for trouble moving forward. “I think Justice is at risk in the same way that Bebe, rue21 and Wet Seal were,” he said. “I think their footprint is not as big, but they compete for a junior audience in a similar fashion. They rely mostly on physical outlets like their competitors, and if foot traffic continues to tank then they may find themselves in the same boat.”
Declining consumer interest in brick-and-mortar isn’t just about new online stores, either. It’s also about a new kind of consumer who’s changing the landscape. “The teen apparel market is contending with the characteristics of a new generation of shopper — one that has defined its purchasing behavior while retailers were busy fighting fires with the global financial crisis,” Katie Smith, senior retail analyst at EDITED, a retail technology company, told Retail Dive. “It’s a consumer group who favors experience over owning things, and that’s problematic for a retailer who isn’t attuned to that.”
"Any retailer who focuses too heavily on discounting or who doesn’t consider a truly integrated digital experience will struggle to connect with Gen Z."
Senior retail analyst at EDITED
This consumer is digitally native and resilient to advertising, which creates new challenges the industry has to quickly face, she said. “Some stores are doing better than others, such as Aerie, American Eagle Outfitters’ lingerie line, which has a replenishment rate of 38%,” she said, noting that American Eagle Outfitters’ main line replenishment rate sits at 10%. “And Abercrombie & Fitch has updated its look to better suit the less logo-centric teen shopper.” But Smith notes that other retailers are struggling. “Any retailer who focuses too heavily on discounting or who doesn’t consider a truly integrated digital experience will struggle to connect with Gen Z,” she said.
Understanding where and how this new generation of junior consumers shops is critical, Maharaj said. “The junior consumer is even more inclined to shop online with smart phones, due to the influence of social media,” he said. “In fact, they are highly influenced by social media, while being more fickle when it comes to styles and fashion. By the time you’ve predicted or caught onto a trend, it could be too late to get it to market.” The nature of the junior market’s target audience combined with intense social media influences and higher-than-normal online adoption have exacerbated the problems the junior retail apparel industry has faced as compared to other industries, Maharaj said.
It’s also unlikely the pressure will ease anytime soon. “We fully expect the market to continue to be challenging for apparel retailers,” Bahulkar said. “Retailers who are still over-invested in the traditional retail mindset, or under-invested in direct-to-consumer capability, and those who do not have a unique customer proposition, are likely to find it the hardest to survive.”
Yet Bahulkar still thinks there may be a chance for rue21 and brands like it to find a path forward. “Hopefully, it’s not entirely too late for rue21,” he said. “We’ve seen brands in similar situations make some tough decisions, drastically reduce their footprint and complexity, and return to what is their unique customer value proposition. However, there is usually a very narrow window of opportunity to do this, and brands need to be bold, move fast and make the changes needed.”
There will almost certainly be a culling, too, as some brands fall by the wayside. “I think for junior fast fashion, you’re going to see a major consolidation amongst remaining players,” Maharaj said. “Ultimately, you’ll buy online or you’ll shop at Forever21 or H&M. And those outlets will ultimately need to bind themselves close to food and entertainment outlets or they’ll suffer from limited foot traffic too. But, I do think their vertical integration, fashion-forward mindset and price point will continue to keep them relevant.”