The rest of the sector's sales fell flat, but specialty apparel chains including Hennes & Mauritz, American Eagle, Urban Outfitters, Charlotte Russe and Zumiez are performing ahead of the pack.

It's a question on everyone's lips these days: “What are the hottest up-and-coming retailers?” If you had the right answer, of course, you'd be banking a mint. But unfortunately there's no single, easy way to identify the top-selling retailers of tomorrow.

Instead, finding the smartest bets requires pounding the pavement and a little old-fashioned research.

In the specialty apparel realm, new concepts pop up all the time. But in this critical segment, a few brands are beginning to stand out from the crowd, posting stronger-than-expected sales in one of the toughest economic environments in recent memory.

Then there are the harder-to-quantify intangibles such as fashion sense and brand awareness. Are the latest retail concepts meeting the ever-changing and oh-so-fickle tastes of today's discriminating shoppers?

We think the following five up-and-coming retailers fill the bill quite nicely. They're on a decided growth path that can't be ignored. They're also trying to tackle different types of customers — from value-oriented buyers of women's clothing and accessories to college students to younger active teens.

Retailing analyst Dorothy Lakner of CIBC World Markets in New York is typical of the analysts who spoke up about our candidates, saying this about American Eagle Outfitters: “American Eagle has done a great job of homing in on its target market and creating a very distinct image for itself.”

That seems to be the common thread among this group of retailers. While they face significant challenges in the months and years ahead, they have refined their products and markets to the nth degree and seem poised to cement long-term relationships with their core customers…

HENNES & MAURITZ

Does 50 years of success in Europe guarantee H&M's future in the United States?

For a retailer that has been successful in Europe for more than 50 years, to say tackling the U.S. apparel market is a challenge is an understatement. However, experts say that Stockholm, Sweden-based Hennes & Mauritz (H&M) is on the right path.

H&M began in Sweden in 1947 as Hennes (Swedish for “hers”), and later bought Mauritz Widforss, a hunting and men's clothing store. The company designs inexpensive but chic women's, men's and children's clothing for the “hip and modish.” Half of its clothes are made in Europe, the other half in Asia.

H&M now has more than 776 retail stores in 14 countries (nearly 90% of its sales come from outside its Swedish base). In the United States, this amounts to 34 stores with about 1,800 employees in six northeastern states, primarily the corridor from New York to Washington, D.C.

A unique combination

“The response to our concept in the U.S. has been tremendous so far,” reports Peter Grauers, the company's U.S. manager, based in New York. “Our keys to success here are the same as they are in Europe — a unique combination of high quality, new fashions and affordable prices. Another edge is that we have our own designers who produce all of our lines.”

“I think the company is well-suited to large parts of the U.S.,” reports Lois Huff, vice president of Retail Forward Inc., based in Columbus, Ohio. “They may or may not eventually have a large number of stores in the U.S., but their real strength is that they are a change agent.”

H&M is sometimes called the “fast food of fashion” because it is trend-driven but offers lower prices.

According to Huff, the retailer emphasizes strong trend styling at reasonable prices, allowing for “throw-away” fashions. “Customers can be in style right now without breaking their wallets,” Huff says. “When things go out of style, they can purchase all new, because they are affordable.”

As such, H&M is changing the definition of fashion in the United States. Unlike some other retailers that have created a certain look and lifestyle image, H&M isn't banking on any one look. “It stands for having the right products from a trend-driven perspective and having them inexpensively,” continues Huff. That is, rather than adopting a lifestyle focus, H&M emphasizes a strong product focus.

“We have done a number of deals with H&M, and we continue to work with them,” reports Bob Michaels, president and COO of Chicago-based General Growth Properties. “We feel they are a very important player going forward in the major metro areas of the country.”

Michaels admits that it's always difficult for a retailer to enter a new market, whether you're talking about a U.S. retailer expanding into South America or Europe, or a European retailer coming here.

“There is a learning curve, but I think H&M is adapting extremely well,” he explains. “Based on their European experience, which is quite broad, I think they have a leg up in coming to the U.S. and understanding the U.S. customer.”

Facing a few challenges

H&M has slowed its expansion here a bit, according to Huff, because of the difficult domestic retail climate compared to Europe, which hasn't had the fall-off in apparel spending that the United States saw in the fourth quarter of 2001. “As such, the climate has been very challenging for them recently, especially since they entered via the New York area,” states Huff.

Another challenge for H&M will be understanding the fickle preferences of U.S. consumers. “As a northern European retailer, they have experience with one type of seasonal pattern, preferences for styles, and so forth,” explains Huff. “However, as they have expanded into southern Europe, this has been giving them good experience in understanding different seasonal patterns, style preferences and other subtleties in the different markets. This experience should also help them here.”

Northeast growth, for now

Based on its recent growth strategy, H&M opens about 100 stores a year worldwide. “In the U.S., we plan about 10 stores this year, all in the Northeast,” says Grauers. “We recently negotiated to open two stores in the Washington area.”

Grauers adds that H&M plans to concentrate on the Northeast for the time being. “We may eventually move to other parts of the country, based on whether a certain location would be a good strategic choice, such as a good location and a good mall,” he adds.

The company's approach is not to “figure out everything ahead of time,” says Huff. “It is a learning approach: ‘Let's go in and see what works and doesn't work.’”

It's a “conquer and move on” strategy that will include a few misses along the way. “I expect them to focus on the Northeast, get it right, and then begin to expand to other parts of the country,” says Huff. “This makes a lot more sense than what some other retailers from other countries might do, which is hit all the big cities in the U.S. at one time. There's just too much diversity for that to work effectively.”

AMERICAN EAGLE

This established retailer has an edge on the youth market, but challenges to its future growth are many.

By most accounts, American Eagle Outfitters Inc. has succeeded where many retailers have failed in recent years — wooing mature teens and young adults to its stores. The Warrendale, Pa., firm was founded in 1977 and designs, markets and sells the American Eagle brand of clothing to 16- to 35-year-olds. It also operates the Bluenotes/Thriftys specialty apparel chain in Canada, aimed at 12- to 22-year-olds.

Today, there are 632 American Eagle stores in the United States and 46 American Eagle stores and 112 Bluenotes/Thriftys stores in Canada.

First quarter 2002 sales were $464.3 million, up from $423 million in first quarter 2001 (which covered 14 weeks). The sales increase was 14.9% excluding the extra week. However, same-store sales were down 2.1%.

Merchandising prowess

“American Eagle has done a great job homing in on its target market and creating a very distinct image for itself,” says Dorothy Lakner, specialty retailing analyst for CIBC World Markets in New York. “They have accomplished this via improvements in its merchandise assortment and the marketing it uses to bring the brand to the attention of a wider customer base.”

“The company has done a good job of addressing the needs of the collegiate market,” adds Richard Jaffe, a retail analyst with UBS Warburg in New York. “They are very value-oriented, which is attractive to students of modest means.”

“Part of their improvement in profitability has been that they have improved their sourcing,” adds Holly Guthrie, vice president, equity analyst with Investec PMG Capital in West Conshohocken, Pa.

“We have had American Eagle here for two years,” says Cynthia Eichler, general manager for Foothills Fashion Mall in Fort Collins, Colo. “We worked diligently to bring them in, because they're a strong fit to our market, which is host to Colorado State University.”

Mall patrons have responded well to the retailer's merchandising efforts and window displays, which Eichler calls “very innovative.” She also feels positive about American Eagle's sales volume. “Clothing in general has struggled a bit,” Eichler notes. “But American Eagle has done well with us and shown an increase of almost 7% this year.”

Keeping its edge won't be easy

As it works to grow its business, American Eagle faces some tough challenges, particularly since the teen retailing market is a lot more crowded than it was five years ago. “As such, the challenge American Eagle faces as a teen retailer is to continue to distinguish itself in this more crowded market,” says Lakner. “It has been very successful at this in the last few years, but the challenge is whether it can continue to be successful.”

The company's growth has been so strong that many analysts tag it as a mature retailer. But with maturity comes the potential for market saturation. “Once they get to about 900 or 1,000 stores, they will be fully saturated,” says Guthrie. She feels the number of American Eagle stores in Canada could double, but the number of Bluenotes/Thriftys stores will remain constant.

The good news, says Guthrie, is that American Eagle's core customer base is expected to continue growing — the strongest growth segment in teen retailing for the next eight years will be the 19 to 25 age group.

“Once it reaches saturation in three years, growth will come from one of two areas,” suggests Guthrie. One is that the company regularly comes up with new products.

The second is acquisition. American Eagle has already proven what it can do on that front. “They have been very successful with Bluenotes/Thriftys since they acquired it two years ago,” she says.

URBAN OUTFITTERS

Can Urban Outfitters expand its base by moving from quaint college towns to sprawling suburban malls?

Selling clothes and furnishings to the young and impressionable college crowd has usually meant locating stores near college campuses. But now after more than 30 years in the business, Urban Outfitters has decided to take its concept a little more suburban — out to mall-land.

The chain started out in Philadelphia in 1970 as the Free People Store, catering to college students with its used clothing, ethnic apparel and housewares. It changed its name to Urban Outfitters in 1976, but didn't change its focus. Currently, it operates 49 stores in the United States, Canada and the U.K. selling casual clothing, accessories, shoes, housewares and gifts aimed at “metropolitan hipsters” aged 18 to 30 living near college campuses.

About 20% of its sales come from items for apartments — bedding, curtains, rugs, kitchen goods and decorative hardware. Another 20% comes from men's apparel, and the remaining 60% is women's apparel.

“They are unique in their fashion and their merchandising,” says Holly Guthrie, vice president and equity analyst for Investec PMG Capital based in West Conshohocken, Pa. “It is really an exciting concept. While some competitors focus on apparel exclusively and some on home goods exclusively, few mix the two. Urban Outfitters mixes both nicely.”

The company also owns 32 Anthropologie stores, which target women 25 to 45 years old with a mix of 65% women's apparel and 35% home items.

In all, Urban Outfitters employs 2,600 people and racked up sales of $348.9 million for the year ending January 31, 2002, an 18% increase over the previous year's sales of $295 million. Same store sales were up 3% in the same period.

Weaknesses become strengths

Analysts see two areas of strength for Urban Outfitters, which only two years ago were areas of concern. One is merchandising. “Urban Outfitters has a heritage and focus on ‘hippy, bohemian, grunge fashions,’” says Joseph Teklits, an analyst with Wachovia Securities in Baltimore. “Two years ago, the fashion winds were blowing in the wrong direction, with modern, ‘clubby’ fashions being in vogue.” When Urban Outfitters tried to go after that fashion trend, it didn't work. “It wasn't how the consumer saw them,” he says.

So Urban turned to its core niche. “The company's focus on urban lifestyle leads to a more ‘artsy’ product mix,” adds Guthrie. “One of the hottest fashion trends these days is the ‘bohemian’ look, which emphasizes feminine, lacy, sheer skirts and blouses, and this is one of their strengths.”

Urban's real estate location strategy is its second weakness-turned-strength. “A number of years ago, the company decided to expand to small college towns, instead of large metro areas, where they had previously been focusing,” says Teklits.

After a year and a half, the company realized that college traffic wasn't there during two big retail seasons — back to school and the year-end holidays. As a result, a few of its stores lost money their first year.

“Because of the fashion situation and the real estate situation, operating margins were dragged down pretty significantly,” says Teklits. “Today, fashion has changed, as it always does, and the company is now making the move to expand to malls.”

Guthrie, for one, thinks the move to malls is a good idea. “When college students leave for holiday break, they do most of their shopping in their home-town malls,” she says. “In addition, more and more kids are going to community colleges, and they shop at malls year-round.”

One of Urban Outfitters' first forays into the mall scene is at the King of Prussia's “Pavilion at the Court” concept, which consists of three levels of 200,000 sq. ft. each. Each Pavilion tenant has the opportunity for exterior exposure and access, as well as interior mall frontage which attracts walk-by traffic.

“Retailers who fit this bill are those who are used to free-standing or urban and strip center locations,” explains Lloyd Miller, vice president of leasing for the Kravco Co. in King of Prussia, Pa. The concept seemed like a natural for Urban Outfitters. “We began working together because we are both Philadelphia-based, and Urban Outfitters wanted to experiment with a ‘mall tester,’” says Miller. Urban's store opens this spring in two levels with 20,000 sq. ft. — the only two-level tenant in the building. “Because of their marketing savvy and name brand identification, they create their own traffic, so we believe they will be successful,” he adds.

Challenges

Urban Outfitters faces two potential challenges in the coming year. The first relates to its wholesale operations: Urban Outfitters expanded into wholesale in 1984 and now distributes clothing, housewares and gift items to more than 1,100 specialty and department stores, down from 1,300 a year ago. While retail sales increased from $275 million to $330 million this past year, its wholesale sales decreased from $21 million to $18 million.

A second challenge will be adjusting to the mall environment. “It will be a challenge to open its first mall store in the King of Prussia Mall in May,” says Teklits. “The perception has always been that their customer lives in downtown locations and doesn't shop at suburban malls. So it will be interesting to see how competitive an Urban Outfitters store can be in a mall.”

Teklits believes that, if the strategy works, it will be a lot easier for the company to open more mall stores than to continue renovating buildings in downtown locations.

Will the match work? “One issue is that they're not the boss now, so they have to get used to dealing with landlords and developers and being a part of the whole shopping center concept,” replies Miller. “They will have to deal with mall hours, holiday festival events, and so on.”

Also boding well for the company is its management team. “The fact that they hired Ted Marlow, who has vast experience with mall retailing, will help them tremendously,” suggests Guthrie. “He knows mall landlords and he knows how to operate profitably in malls.”

And Urban Outfitters already has some experience with non-standalone retailing — they have a store in the Broadway Market in Seattle, which is an indoor specialty center, not a traditional mall. The center has a mix of storefront retail, interior space and even some residential. “Urban Outfitters was already a tenant when we acquired the property and is a ‘mini-anchor,’” says Bob Baker, senior vice president and director of leasing for Madison Marquette Retail Services, based in Los Angeles.

The center is located in a unique, eclectic neighborhood called Capital Hill, known as the “Soho of Seattle,” that has not traditionally supported large national anchor tenants. “To date, Urban Outfitters has been an asset, and their sales volume has been good,” says Baker. “They have been a good tenant and very easy to deal with. In fact, we just renewed their lease and we are now working with them on several other potential locations for both Urban Outfitters and Anthropologie.”

Room to grow

While Urban Outfitters is relatively small compared to its competitors, it has enough sales volume to grow into new markets at a reasonable clip, say analysts. “Many competitors have 300 to 1,000 stores, so the company has the opportunity to grow significantly,” says Guthrie.

Another plus is its strong brand recognition among young age groups, which far outstrips its actual market share. “Their market share is in the single digits, but their brand recognition suggests they should capture more than 10% at least, and some surveys suggest 20%,” says Guthrie.

If it can capitalize on its brand and find success in its mall locations, future growth is all but assured.

“My current thinking is that Urban Outfitters is different enough that it will fill a void in some malls,” observes Teklits. “Frankly, consumers are a little tired of some of the other concepts in malls. Urban Outfitters might be just what the young consumer looking for the right thing will be attracted to.”

CHARLOTTE RUSSE

Once little-known outside California, Charlotte Russe aims to become a nationwide retail powerhouse.

Charlotte Russe started out in California in 1975 with a simple, yet potentially successful, concept: inexpensive apparel aimed at women aged 15 to 35 who preferred established fashion trends. By 1995, the San Diego-based company had 35 stores, primarily in Southern California, and sales of $70 million.

Then in 1996, Saunders Karp & Megrue, a private equity investment firm, and Bernie Zeichner acquired Charlotte Russe from its founders with plans to accelerate the chain's national expansion. The first part of the strategy came with the acquisition of 16 bankrupt Rampage stores in 1996. Rampage markets to women of the same age group, but who like to set fashion trends rather than follow them.

“Rampage is a nice complement to the Charlotte Russe concept,” says Candace Corlett, an analyst with WSL Strategic Retail in New York. “While Charlotte Russe is very ‘girly,’ Rampage is more unisex, cutting edge and trendy.”

In 1999, the company continued to broaden its product offerings by adding a third concept — Charlotte's Room, which features accessories, gifts and home decor for 11-to-17-year-old girls.

As of March 2002, the company had 4,500 employees in 160 Charlotte Russe stores, 42 Rampage stores and 10 Charlotte's Room stores in 28 states. First-quarter 2002 sales were $111.9 million, an increase of 20% over first-quarter 2001 sales of $93 million. But like a lot of apparel purveyors, same-store sales took a hit, decreasing by 12.1% in that period.

Strength in breadth

“The major key to our success is our broad assortment of merchandise, which allows us to have a broader appeal to women ranging in a wider age group than other retailers,” says Dan Carter, the company's CFO.

“Charlotte Russe is a smart company that merchandises well and knows how to build the market basket,” says Corlett. “It has a nice breadth of merchandise that particularly appeals to girls who have a bit of money to spend — 16- to 18-year-olds who are spending some of their own working money.”

The company has been particularly successful with its “disposable clothing” concept, according to Corlett. “Girls can wear it for a season or semester and then toss it,” she explains. “This is what high school girls love to do. The company has actually become a resource for everything from school clothes to prom night clothes.”

Corlett adds that Charlotte Russe has captured the “21st Century definition” of specialty store. “Not only do they have a special look, but they treat customers in a special way and create a very nice environment.”

In addition, Charlotte Russe has found success with its impulse marketing program. “They have a lot of token and trinket items for sale, making it difficult to get out of the store without buying many more things than originally planned,” says Corlett.

Richard Jaffe, a retail analyst for UBS Warburg in New York, adds: “Their use of domestic sourcing gives them a high level of nimbleness, allowing them to respond quickly to consumer trends.”

It doesn't hurt to have friends in high places and big believers who can make things happen, too. “We started working with Charlotte Russe when Bernie Zeichner took over,” says Bob Michaels, president and COO of General Growth Properties in Chicago. “I had known Bernie for years, and I had seen the concept in California and really liked it. We started talking about his vision for this concept and how he saw it in the context of the junior apparel players that were in the market. He felt he could bring something new to the equation that could drive sales and convinced us that there was a demand for the concept.”

The relationship developed from there. “We have done a number of deals with them over the last two or three years, and they have performed extremely well in our properties,” continues Michaels. “We currently have between 25 and 30 of their stores.”

Hi-ho growth

The company is planning 55 new Charlotte Russe and Rampage stores through September 2002. “We plan expansion at 30% a year, and then may drift toward about 25% a year growth,” says Carter.

Unlike some retailers, though, Charlotte Russe hasn't gotten its store count ahead of its sales velocity. “The company has been smart about not overextending,” adds Corlett.

Jaffe agrees. “The company is growing rapidly, and we anticipate it can continue to grow rapidly for several years, given the relatively small store base and the size of the U.S. market.”

But there's one big caveat — all fashion retailers must keep consumers coming back for more. As Jaffe sees it, staying ahead of a sophisticated and fickle customer will be the company's greatest challenge.

For now, though, at least one big retail industry landlord is happy. “Charlotte Russe is absolutely meeting our expectations,” concludes General Growth's Michaels. “We both understand that it must continue to be win-win, and we are constantly talking to them in our portfolio review meetings to expand the relationship and do more deals.”

ZUMIEZ

This action sports retailer is “zooming” around the country, under just about everyone's radar screen.

How long can a retailer with sales better than $500 per sq. ft. be a secret?

That figure comes straight from Rick Brooks, president of Seattle-based Zumiez. The company sells primarily branded, lifestyle-driven products focused on the so-called “action” sports of skateboarding, snowboarding and surfboarding. That includes apparel, footwear and accessories, along with the “hardware” that keeps these sports buffs on the move.

Founded in 1978, Zumiez today employs 1,200 people with 81 stores in 11 states, mostly located in the Rocky Mountain and West Coast states. Still, there are eight stores in New York, seven in Minnesota and Wisconsin, and the company is planning a series of stores in metropolitan Chicago this year.

Though Brooks won't release more specific sales data, he notes that “Throughout our 24-year history, measured on a full-year basis, we have never had a loss in same-store sales.”

So, how do they do it? “We believe that everything has to work together to maximize results,” says Brooks. “For us, this means staying on top of the trends.” The products must be right, with the hottest lines and the “cool” stuff.

Zumiez also features stores that fit the product — that is, the ambience of the stores' appearance works with the products the retailer is selling. “Our stores look chaotic by design,” explains Brooks. “They look like a kid's bedroom, and we have a lot of stuff going on all the time.”

Thankfully, the company appears to be more organized when it comes to investing lots of time, energy and money into training its employees. “We do far more than most of our competitors,” reports Brooks. “We are a sales-focused culture, and we make sure we have people and training that emphasize this.”

While some say today's young people aren't motivated, Zumiez finds the exact opposite. “They soak up whatever we teach them and do whatever it takes to be successful in a positive way,” he notes. Many of the company's management-level employees don't have college educations, but Brooks doesn't see this as a drawback. “They started out working at the stores and worked their way up through management. This is the only place a lot of them have worked.”

Finally, the culture reinforces fun, and this, according to Brooks, is why the stores have a low turnover.

“Our leasing people had some initial contact with them,” says Cynthia Eichler, general manager of the Foothills Fashion Mall in Fort Collins, Colo. “We have a fairly youthful market in Fort Collins, especially with Colorado State University. When we investigated, we decided they would be a good fit for us.”

How has Zumiez performed? Eichler's latest sales numbers for 2001 show that in the category of men's and women's wear, Zumiez ranked No. 3 and had the single-largest sales increase of any of her mall's stores at almost 39% for the year.

“They are a cutting-edge retailer in terms of their presentation and the people they hire,” says Eichler. “Their people are trained very well. At first, there were some reservations about whether they would have professional talent, but we have found them to be very professional in all of the conversations and interactions we have had. It has been a pleasure to work with them.

“Overall, the arrangement has worked out very well. I would assume that Zumiez is as happy to be here as we are to have them,” she adds. “They are an excellent tenant.”

Since that appears to be typical of other Zumiez locations, why is the company such a secret? Beats us. It seems they've been able to expand around the country right under most analysts' radar screens. None of the analysts we contacted had even heard of the company.

Zumiez's secret may not be kept hush-hush for long. The company is planning to open 25 to 30 stores this year and expects to keep up the same pace or higher for the next couple of years, according to Brooks.

William Atkinson is a Carterville, Ill.-based writer.