Aeropostale Should Focus on Growing its Internet & Catalog Channel

Aeropostale (NYSE:ARO) is a specialty retailer that sells casual apparel and accessories targeted toward teens and young adults.  Aeropostale’s primary competitors include American Eagle (NYSE:AEO), Abercrombie & Fitch (NYSE:ANF), Gap (NYSE:GPS) and Urban Outfitters (NYSE:URBN). Aeropostale designs, markets and sells its own brand of merchandise through its retail stores as well as through the Internet and catalogs sales channel, which accounts for 16% of our price estimate. We estimate that the Aeropostale stores constitute around 78% of our $54.78 price estimate for Aeropostale’s stock, which stands well ahead of the current market price.

Aeropostale Has Fared Well Relative to Peers

January has been a good month for retailers with YOY comparable store sales for the month across the retail industry increasing by 4.4%, nearly 2% higher the Wall Street forecast according to Retail Metrics as reported by Investors Business Daily. ^[1] Specialty apparel chains did especially well with comparable store sales for this group increasing by 6.4%. However, teen apparel retailers reported a decrease of 0.7%, which could be due to various factors including high teen unemployment. ^[1]

Aeropostale’s comparable store sales for January have been better than most peers in the teen segment, though room certainly exists for improvement. The company’s comparable store sales for the month increased by a modest 1% while net sales for the month increased by 7%, largely driven by growth in its Internet and catalog orders. For the 4Q, comparable stores sales are down 3%, but net sales were up 5%, and for the fiscal year 2010, comparable store sales were up 1% while net sales were up 8%.  ^[2]

These results provide insight into the growing role of the e-commerce channel in the apparel industry. We show the e-commerce sales of apparel retailers under ‘Internet & Catalog Orders.’ We have discussed its growing role in earlier articles. We wrote these articles on Urban Outfitters and Abercrombie discussing this channel: Direct Sales Boost Specialty Retail Stocks, Urban Outfitters Growth in Stores, Internet & Catalog Business to Lift Stock, Abercrombie & Fitch Sees Upside From Internet & Catalog Orders.

By our estimates, the Internet & catalog segment accounts for around 20% of Abercrombie’s business, 24% for Urban Outfitter and 32% for J. Crew. As this channel makes up 16% of our estimates for Aeropostale, the company has room to expand this business relative to its peers.

See our full estimates for Aeropostale.

Internet & Catalog Business a Key Channel

Aeropostale’s Internet & catalog revenues increased from nearly $50 million in 2005 to $130 million in 2009 driven by growth in online sales with increasing Internet penetration. In 2010, we expected it to increase to around $180 million and then increase at an average annual growth rate of nearly 20% during our forecast period reaching $500 million by the end of our forecast period.

However, it increased to around $280 million in 2010. Going forward if it increases at an average annual growth rate of around 25%, reaching around $1.2 billion by the end of our forecast period, it would mean an upside of around 23% to our current price estimate for Aeropostale’s stock.

Starting from next month teen retailers Aeropostale, American Eagle and Abercrombie & Fitch have decided to discontinue reporting monthly sales data, and provide quarterly updates only. They feel this would disencourage investors to make short term investments, instead helping them to focus on the long term objectives of the company. ^[3]

1. Retailers Blow Out Jan Sales Forecast As More Upbeat Shoppers Brave Storms [↩] [↩]
2. Aeropostale Reports January Sales Results [↩]
3. No Quarter on Sales for Teen Retail [↩]