To Attract Investors, Four Questions Teen Retailers Must Answer

10/2/2014
Teen retailers are monitoring this year's back-to-school and holiday season results with an eye toward spring, when, depending on the outcome of these two crucial shopping seasons, some may choose to seek private equity dollars to implement new supply chain technologies, fund acquisitions in order to diversify assortments, or to otherwise fuel growth and create new value. Private equity firms, in turn, are closely monitoring teen retailers as potential investments.

To attract investment come spring, after back-to-school and holiday numbers are fully digested, they must be prepared to explain how, as teens continue to shed their allegiance to brands and spend their dollars elsewhere, they plan to recover lost sales, right-size their businesses and justify their portfolios.

Why have you lost sales, and how do you plan to recover them?
More specifically, who of your customer base remains, and how did you keep them? And as to those who left, who are they, where did they go and why? Retailers need to show investors clear plans for coping with the fact that the teen apparel market no longer revolves around an "it" product or brand, a trend that has left once-exclusive labels such as AÉropostale and Abercrombie & Fitch struggling to compete against the subtly branded mix-and-match apparel of fast-fashion retailers. To meet the new demands of adolescent and Generation Z shoppers, once heavily branded apparel producers are moving to assortments that focus less on selling entire outfits and more on catering to shoppers who aspire instead to create their own unique looks.

Investors want to see evidence that retailers know their audiences and have clearly articulated value propositions that resonate with them. Fortunately, new data analysis technologies offer teen retailers significant opportunities to refine—and diversify—their customer bases to maximize both foot and online traffic. Loyalty program data, for example, offers a great way for retailers to examine how their client profile has evolved over time, engage existing customers and determine what, if anything, they can do to woo back those they have lost.

How do you plan to right-size your business?
Right-sizing is just now being addressed by many teen retail companies. With increased competition from rapidly expanding fast-fashion retailers and the continued shift of sales to e-commerce, many retailers are left with bloated store fleets and overhead structures. Teen retailers will need to take on real estate optimization and cost-reduction efforts in order to deliver acceptable shareholder returns.

As leases come up for renewal, retailers must carefully assess the potential performance of each store to determine whether to renew. These decisions can be easy for stores that are not four-wall profitable; however, there may be cause to close even stores making money. Stores located close to one another can cannibalize sales, and retailers should evaluate whether a single store can yield greater profit than two if sales from the one are redirected and its overhead costs are eliminated.

How should we integrate bricks-and-mortar with online?
Critical to ongoing success is not just the balance of online and physical store presence, but the realization of omnichannel capabilities that offer a seamless customer experience no matter which shopping channel they choose. It's one thing to aspire to product location transparency; it's another to be able to match a teenager seeking shoes in a specific size and color to wear that weekend with a store or distribution center that has them in stock. New technologies, while not a panacea to teen retail woes, can help retailers create the end-to-end supply chain visibility required to be fast to market and greatly reduce planning time, resulting in both more efficient management of inventory and fewer markdowns.

While private equity investors can often assist with such investments, many want retailers to explain well thought-out plans for "operationalizing" omnichannel retailing behind the scenes. This omnichannel strategy requires that everything — from IT infrastructure to sales associate incentives — is expressly designed to support the seamless, integrated shopping experience.

How do you justify your portfolio?
Many retailers started sub-brands just before the 2008 market collapse, expensive initiatives that, if improperly managed, can create cannibalistic situations — most fail and must be reckoned with. Victoria's Secret's PINK line successfully added market share by targeting a younger clientele at a lower price point, but Abercrombie and American Eagle Outfitters, for example, have not been as successful with their Gilly Hicks and Aerie ventures. Retailers must determine how each of their brands will continue to resonate with shoppers and which should be included in the overall brand assortments, stand alone as sub-brands, or be eliminated entirely. Deciding what to keep in the brand portfolio, and why, and what to eliminate or divest, and when, can help teen retailers show investors that they are willing to take risks, or are open to cutting losses, in order to cater to modern teens' demands in this constantly evolving marketplace.

Prove your case — to the right fund
If holiday numbers drive retailers to seek private equity investment next spring, being able to explicitly answer the questions being asked by private equity firms will go far in attracting dollars. So, too, will understanding specific funds' particular needs: for an added edge, retailers should consider examining investors' portfolios, understanding where private equity funds seek to fill gaps, and positioning or adapting themselves as a potential fit. When it comes to drawing private equity funding, communication is the bottom line, and the more personalized — to both customers and investors — the better.


Greg Ellis is a director in the Private Equity and Strategy Practice of global management consultancy Kurt Salmon. He can be reached at [email protected].
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