There are 43 million teens in America, and each one of them spends $4,000 a year. Of this figure, better than $1,150 is spent on apparel. OK, granted, some of these kids are able to buy $400 boots and go to St. Lucia in the winter with their friends, but still, those are staggering numbers. On average, every single American kid spends $1,150 per year on teen fashion.
And as the economy starts to improve, this number will go up. For the last three years, teenagers' unemployment has risen from 15% to 23%, and their discretionary spending (the money mom and dad eye-rollingly hand to them) has gone down. Cotton prices spiked sharply a year ago, and Chinese labor costs continue to gambol, not tiptoe, upward. Still, the American teen will spend more and more on clothing, shoes and sportswear in the coming months and years.
Because of this trend, we see teen apparel as a hot sector for acquisition in 2012. The early signs are apparent with TPG Capital's recent offer for Billabong International Ltd., subsequent sweetening of it and the would-be acquiree's rejection of it. Financial sponsors are showing interest in certain diamonds in the rough, as well as experienced winners that can keep on winning. With a careful look at the field and applied due diligence, backers can help some teen retailers keep up with the changing market. And as The Rolling Stones song goes, even if you can't always get what you want, you might find you get what you need. Here are some of the categories and players we see as poised to benefit from going private.
Undervalued concepts. There are some iconic brands -- such as Aeropostale Inc. and American Eagle Outfitters Inc. -- that, even though currently bruised by the recession, hold the winning combination of high customer loyalty and a fundamentally sound organizational structure. In general, some retailers in this segment will need to take steps to guarantee success once the economy improves -- including tweaking product lines and the in-store customer experience, size of the store fleet, multichannel outreach and international growth. But they'll probably be in it for the long haul.
High-growth youth lifestyle brands and retailers. Certain names in the action sports and street segments, like Zumiez Inc. and Buckle Inc., have done really well in grabbing market share, even during the recession. They're perfectly positioned for further growth -- though they've already come a long way toward realizing their ambitious goals for brick-and-mortar expansion. Other companies may be limping as a whole but sequestering particularly sought-after brands in their portfolios -- and some may even have sufficient core strengths themselves to be promising investments. Billabong is a great example. The core Billabong clothing brand is undervalued, and the company holds several hot brands, such as RVCA, Element and Dakine, in its portfolio.
Niche brands and boutique retailers. Though small, some new brands and concepts -- like Obey Clothing, owned by One 3 Two Inc.; Shiekh Shoes Inc.; and Active Ride Shop, owned by ASLU LLC -- have served as significant drivers in high-growth segments (action sports lifestyle) or niche areas (urban). With strategically applied investment and due diligence, these could prove to be opportunities for substantial growth.
E-commerce and direct-to-consumer concepts. As teenagers become ever more fascinated by the online world, they buy more of their clothing online too: 7% of total teen apparel sales were made online in 2005; that figure grew to 15% in 2011. Using e-commerce to drive in-store as well as online sales will become increasingly important in capturing market share. The most successful retailers will be those that, like Karmaloop LLC, have been able to develop creative models that integrate sales, social media and crowdsourcing.
Despite the fashion risks and leverage challenges, many brands in the teen sector are still extremely attractive. Though a number of the teen outlets we've been looking at drastically shaved their own profit margins by hyperpromoting during the 2011 holiday season, the sector is still home to some sparkling opportunities. And while competition in the teen space is stiff, the teen sector is full of diamonds in the rough, just like a clichéd teen movie.
Michael Dart and Jay Agarwal are retail strategists in the private equity and strategy practice at Kurt Salmon, specializing in due diligence services for financial sponsors, retailers and other companies.