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Investment Overview for Aeropostale (NYSE:ARO)
- Aeropostale Revenue per Square Foot: Aeropostale was one of the strongest performers during the recessionary environment of 2008-2009 as it offered basic products at relatively low prices. However, as the economy started to improve, U.S. buyers switched to other fashion-forward retailers and Aeropostale remained focused on its logo business i.e. basic t-shirts, jeans and hoodies bearing Aeropostale logo. As a result, the retailer's revenue per square feet has been on a downslide since 2010. Due to the lack of fashionable merchandise, Aeropostale's revenue per square foot declined to $568 in 2011 and $548 in 2012. Although the company tried to boost its fashion offerings in 2013 with certain preppy products, customers responded negatively on account of drastic design changes and high prices. The company had to usher heavy markdowns to clear its inventory, which weighed heavily on its sales. With low store traffic and a steep decline in average unit retail, Aeropostale's revenue per square foot fell to $462 in 2013. Going forward, We expect this figure to remain flat this year and gradually improve thereafter to reach $500 by the end of our forecast period. Aeropostale's launch of new collections such as Bethany Mota and Pretty Little Liars, growth of P.S. from Aeropostale and international expansion are likely to help its same-store sales. However, if the company still continues to rely heavily on its basic offerings and its fashion launches fail to attract customers, limiting its revenue per square feet recovery to $475, there can be 5% downside to our Trefis price estimate. Conversely, if Aeropostale manages to get its products inline with customer preferences while keeps their prices under control, its revenue per square feet can improve. If the figure reaches $525 by the end of Trefis forecast period, there can be 5% upside to our price estimate.
- Aeropostale Stores EBITDA Margin: Aeropostale Stores EBITDA Margin declined massively in 2011 due to an increase in cotton costs and higher markdowns. In 2012, better cotton prices did not help the retailer as it offered heavy discounts to attract store traffic. The margins are likely to decline in the near term due to highly promotional retail environment. However,they can stabilize in the long-term as the company reduces its operating expenses with the consolidation of under-performing stores.We forecast the figure to reach 12.2% by the end of Trefis forecast period.
However, if the apparel market continues to be exceptionally promotional and Aeropostale's products fail to attract customers, it can result in higher markdowns. If the margin's plummet further to 11% by the end of Trefis forecast period, there can be downside of 10% to our price estimate. Conversely, if the promotional environment ceases to continue, the company expands successfully in international markets, and gets its fashion category inline with the customer preference, it can operate with fewer discounts. It this pushes the margins to 14%, there can be upside of 10% to our Trefis price estimate.
Aeropostale is a mall based specialty retailer of casual apparel and accessories. It designs, markets and sells its own brand of merchandise through its retail stores and the internet. Aeropostale provides customers with a focused selection of high quality, active oriented fashion at competitive prices. The average Aeropostale store is generally smaller than that of many of its mall-based competitors.
With its major brand Aeropostale, the company offers merchandise to young men and women belonging to 14-17 age group. Its other brand P.S. from Aeropostale offers casual clothing and accessories focusing on elementary school kids between the ages of 7 and 12.
Aeropostale's Internet & Catalog business is relatively young and does not contribute much to its revenues presently. However, this business has been growing rapidly following the online retail industry trend.
Aeropostale's Revenue per Square Foot and Number of Stores
Between 2007 and 2010, the revenue per square foot for Aeropostale stores increased from $545 to $626 and the number of stores from 828 to 1,012. The impact of the driver can be gauged by the fact that Aeropostale lost nearly 40% of its stock value in 2011 as revenue per square foot declined due to an imbalance in the company's product mix.
In comparison, revenues from internet and catalog sales increased from around $42 million in 2005 to about $217 million in 2012.
Edgy retail environment
At present, the U.S. teen apparel market is very weak due to low consumer spending and high unemployment rate. Teenagers are either depend on their parents for money or they earn themselves. Both the scenario's do not look good at the moment. The 2% payroll tax increase earlier this year has left an average U.S. consumer with less to spend. Moreover, the unemployment rate in the teenage segment is high 23.7% (July 2013).As a result,a number of retailers such as American Eagle Outfitters and Abercrombie & Fitch have struggled with their growth. The near term does not look good for the retail industry as the aforementioned aspects will continue to impact the U.S. buyers. However, some players such as Urban Outfitters and Gap have done well as they are fast fashion and value-for money brands, and have established a strong brand identity in the market.
Low proportion of fashion focused products
Although Aeropostale primarily offers basic products, it does have a limited proportion of fashion focused products as well. The main reason behind the retailer's struggle was the fact that the shoppers were not attracted towards the brand as they did not find prevailing trends in its products. As a result, the company had to offer high discounts in order to attract store traffic. Although Aeropostale tried a complete product overhaul as it added trendy products such as studded combat boots, lacy ruffled tunics etc., the customer response wasn't good. The changes were drastic and the prices were too high compared to what the company usually offers. This will continue to weigh on Aeropostale's revenue per square foot unless it adds some relevant fashion to its products.
Aeropostale's 3 long-term growth strategies
In its 2012 spring conference, Aeropostale's president Michael J. Cunningham, announced the three long term growth strategies of Aeropostale, which is international expansion, increasing scale of the direct business and growth in P.S. from Aeropostale.
Aeropostale has signed agreements with licensing partners to open stores in Columbia and Panama. Additionally, it recently entered the Mexican market and plans to add 30 stores in Turkey within the next five years. These markets provide good potential for value focused brands, which bodes well for Aeropostale. However, the company is missing out on a valuable expansion opportunity in the growing Chinese market.
The retailer is emphasizing on its direct-to-consumer business by focusing on e-commerce, m-commerce and f-commerce channels. Moreover, it plans to aggressively expand its P.S. from Aeropostale stores throughout the entire U.S. market. This brand has found good acceptance among the target customer segment and will help the company in the long term. For fiscal 2012, Aeropostale plans more stores for P.S. for Aeropostale (60) than its namesake brand (14).
Store consolidation in the U.S.
Like other players such as Gap, and American Eagle Outfitters, Aeropostale in also looking to close some of its under-performing stores to reduce its expenses and improve the revenue per square feet. For this year, Aeropostale planned about 15-20 store closures, but increased it to 30-40 stores after the end of the second quarter. We expect the retailer to follow this strategy for a few years, which will help it offset the decline in revenue per square feet and EBITDA margins.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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