Currently the fastest-growing segment of the US population and with an estimated spending power of $155bn, the teen sector is bringing in profits for a new breed of retailer, the Philadelphia Inquirer reported.

Mainstream major publicly held players include American Eagle Outfitters Inc, Abercrombie & Fitch Co, and Pacific Sunwear of California Inc, all of which feature a preppy or sporty look. Farther out on the fashion fringe are Hot Topic Inc, Gadzooks Inc, Buckle Inc, delia*'s Corp, and Too Inc, operator of the Limited Too stores.

Too caters for the pre-teens, the seven and eight year-olds being coaxed away from Barbie to body glitter. Too was spun off by The Limited Inc in 1999.

Strong comp earnings
"There are a lot of reasons to be looking at this space," said Jeffrey Klinefelter, an analyst at US Bancorp Piper Jaffray in Minneapolis. Aside from the long-term demographics, Klinefelter said, there are some short-term considerations. Last year's weak results mean teen specialty retailers should deliver strong comparative earnings this year. He also said the sector traditionally outperforms the Standard & Poor's 500 in the first quarter, and lags in the fourth.

The teen-apparel sector was nearly wiped out in the early 1990s by several major bankruptcies, including those of Merry-Go-Round, Edison Bros. and Petrie Stores. But out of the wreckage, a group of small regional retailers rose to fill the void.

After 30 years in the teen business, Philadelphia-based Deb Shops suffered through three money-losing years in the 1990s. But it survived, relying on cash reserves, and its 270 stores around the US are now catering to the children of the former teenagers who bought bell-bottoms when the company was young.

Last year, US teenagers spent $129.6bn, up from $74.9bn in 1995, according to the Rand Youth Poll. Monthly spending by 13-to-17-year-olds who shop regularly was $381, and nearly half of that went to clothing, according to a survey by element, a New York youth marketing firm. Teens have money to spend, thanks to part-time jobs, savings, allowances, and gift certificates - the last are critical to teen retailers in the post-holiday period. But the major source of financing is still the parental chequebook.

Clothes come first
Dorothy Lakner, a retail analyst with CIBC World Markets in New York, said: "Even as the economy is slowing down, teenagers are less likely to stop spending on clothing," she said. "It's very important to them while they are forming their identity during these years. They're much less likely than their parents to stop spending, because they don't have the obligations their parents have."

Many retailers in this sector create a "community" through a catalogue or web presence that incudes editorial content and databases that go beyond the more traditional retail experience.

"Teenagers are probably more computer-savvy than their parents, and they took to this idea of seeking out a community on-line," Lakner said. "Teens are social. They want to be with other kids. The company that can deliver this 360-degree experience is in a strong position."

dELiA*s, primarily a web and catalogue business, recently opened 31 stores in malls while Alloy Online Inc remains a catalogue and web retailer, without the overhead of operating real stores.

Alloy's Web site runs quizzes and chat rooms, heavily influenced by entertainment, romance, and the pursuit of cool, and sprinkled with more straightforward commercial areas focused on makeup and clothes.

The site "grew from e-commerce roots into a much broader community," said Sam Gradess, Alloy's chief financial officer. "Teens don't draw as sharp a distinction between shopping and socialising as adults do."

Web winners
Executing a successful web strategy can give added velocity to winning merchandise and can possibly position the duds better, said Kevin Umeh, chief executive officer of element, the youth marketing firm. "This is such a connected generation," he said. "Trends spread rapidly. If do your homework and spot the trends early, then the 'viral' effect can take over quickly and you can make a lot of money."

But the emphasis on trends works both ways. Steven Richter, who covers the teen apparel sector for Tucker Anthony Capital Markets in Boston, said the absence of a must-have item is hurting teen retailers right now. "In the last couple of years we had discernible trends - cargo pants, nylon pants, khakis. There were some clear winners," he said. "That's lacking right now."

But even with all the newcomers catering to teens, Richter said there seemed to be enough business to go around. Ironically, a hidden danger in this business is success itself.

Richter said that Old Navy, once a darling of the teen set, has fallen out of favour. "It became so popular there's nowhere to go but to cool down," he said. "'Kids started seeing the brand on a lot of middle-aged people. You don't want to see that."