Aeropostale’s Recession Strategy Pays Off

Aeropostale (NYSE:ARO) is a specialty retailer that sells casual apparel and accessories targeted toward teens and young adults and competes with 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.

Here we discuss some of the factors that helped the company to boost revenue per square foot during the recession, as well as factors which may become a threat to its sales outlook.

Going forward, we expect Aeropostale revenue per square foot to further increase as the company has added significant market share and brand value during the recent economic crisis. During our forecast period we expect it to grow at an average annual growth rate of around 2%, reaching the $700 mark by the end of our forecast period. However, if the average annual growth rate is 100 basis points above our forecast, the revenue per square foot would reach the $750 mark by the end of our forecast period, meaning an upside of around 5% to our current price estimate for Aeropsoatle’s stock.

Successes in Recent Downturn

Sound marketing strategy

Aeropostale has successfully connected with its target audience, primarily consisting of young adults in the age group 14-17 years, by positioning itself as an energetic brand with trendy products at compelling prices. It had its promotional stratgey in place well before the recession hit.

In additon to this, the brand followed a simple approach of  aligning its merchandise with prevailing general fashion trends, to readily give customers what they want. This  enabled it to gain popularity during the  recent economic downturn as consumers reigned in spending and stuck to basic fashions. The company did not try to set new trends and try really hard to convince people to adopt them, like some of the more upscale brands like Abercrombie & Fitch. ((Aeropostale Grabbing Share of Market & Mind Amid Downturn))

Aeropostale was committed to operational discipline

The brand’s commitment to operational discipline, especially around inventory management and average unit costing has helped the brand to improve its merchandise margins and revenue per square foot. The company has been able to considerably reduced lead times, achieving faster turnaround on smaller orders.  This has enabled it to reduce inventory markdowns, which impacts merchandise margins. For example, it can now restock a popular graphic T-shirt within 30 days. ^[1]

Potential Pitfalls

Lack of international expansion

The majority of Aeropostale stores are in the U.S., with some stores in Canada. The company’s lack of  presence in the growing Asian market makes it susceptible to U.S. economic cycles. As a result, a slowdown in consumer spending in the future may not be offset by sales from other regions.

Many of its competitors like Gap and Abercrombie & Fitch are accelerating their expansion plans in Asia, which means Aeropostale may miss out on the chance to capitalize early on the growing Asian market – or be a late comer when it decides to expand.

See our full analysis of Aeropostale.

1. Tug-of-War in Apparel World [↩]