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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 prices and high markdowns. In 2012, better cotton prices did not help the retailer as it offered heavy discounts to attract store traffic. This trend continued in 2013 due to low brand loyalty and an overall weakness in the U.S. retail industry. Aeropostale's EBITDA margins crashed to 6.9% in 2013. Going forward, we expect the margins to recover gradually and reach 11% by the end of our forecast period.
However, if the apparel market continues to be exceptionally promotional and Aeropostale's products fail to attract customers, forcing it to continue with heavy markdowns, margin recovery would become strenuous. If the retailer's margin's improve to reach on 10% by the end of Trefis forecast period, there can be a downside of about 15% 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 12%, there can be an 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 lifestyle 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 2008 and 2010, the revenue per square foot for Aeropostale stores increased from $553 to $628 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.
Aeropostale is a basic apparel retailer
Aeropostale mainly offers basic products such as logo printed t-shirts and hoodies, and jeans at affordable price points. The retailer is not known for offering fashionable and trendy products. One the of the main reasons why Aeropostale succeeded during the recession was because it effectively fulfilled buyers' need for cheap clothing. However, this did not work well for its brand image. Over the years, U.S. buyers built a perception that Aeropostale is a "cheap basic" brand. This has severely impacted the company's results post recession with consumers shifting their preference to fashionable products.
Proportion of fashion is low
While most of its products fall in the basic category, Aeropostale does have a limited proportion of fashion focused products. The main reason behind the retailer's struggle was the fact that the shoppers were not attracted towards the brand due to its lack of fashion content. 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 instance indicates that the company's long standing brand perception will prevent it from repositioning itself as a fashion retailer.
Teen apparel market its struggling
At present, the U.S. teen apparel market isn't at its best due to low consumer spending and high unemployment rate. Teenagers 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 last year year has left an average U.S. consumer with less to spend. Moreover, the unemployment rate in the teenage segment is high in the range of 21%-24%. Due to this,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.
Aeropostale has launched a couple of enticing collections
In December 2013, Aeropostale introduced an exclusive collection in partnership with Bethany Mota, an 18-year old established power player in the social media world. The collection featured a range of apparel, accessories and jewelry designed by Bethany reflecting her lifestyle. The company kept the starting price of this collection at $5 so that buyers do not find its products expensive, which was the case with Aeropostale’s previous fashion launches. Bethany Mota has a huge teenage fan base (close to 6 million subscribers of her YouTube Channel) and we believe that they will show some affinity towards these products. According to some interviews conducted with customers exiting from Aeropostale stores, a change from basic logo products to a more fashion relevant range was a pleasant surprise. The retailer even stated in its recent earnings call that this collection exceeded expectations and delivered high margins and average prices.
A more important launch for the company was its first ever Pretty Little Liars collection in partnership with Warner Bros. The TV show Pretty Little Liars has been a sensation among teenage viewers, becoming the most tweeted show in television history. Over 2 million viewers watch its weekly episodes and more than 4 million viewers watched its Halloween special. The collection featuring outfits based of the personalities of the show’s stars is designed by Pretty Little Liars’ costume designer Mandi Line herself. The collection’s prices are kept in $18-$72 range, which should resonate well with cost conscious teenage buyers. The company strategically coincided the collection’s launch date with the season’s premier, to leverage viewers’ excitement to enhance sales. This collection hit all of Aeropostale’s stores as well as its online channel late in January. Early trends have indicated that Pretty Little Liars products are going for high average prices and drawing significant social media attention and twitter following.
The retailer is consolidating its U.S. store network
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. At the start of 2013, the company had planned to close about 15-20 stores by the year-end, but it increased this figure to 30-40 half way through the year. In Q4 alone, Aeropostale shut down 29 stores and it closed another 18 in the first quarter of 2014. Over the next several years, the retailer plans to close a total of 175 stores in the U.S., which will bring the store count down to around 750.
It is also closing P.S. from Aeropostale mall locations
Aeropostale stores are mainly located in shopping malls, where foot traffic has been weak over the past several quarters on account of weak consumer confidence. In response, the retailer has decided to shut several of its under-performing stores to improve its overall store productivity. Interestingly, the company’s P.S. stores have been operating well in shopping malls despite lower footfall. Realizing that there is an opportunity to further improve performance, Aeropostale recently decided to shift its P.S. stores from malls to off-mall locations.
Recently, the company stated that it is planning to shut 125 mall-based P.S. stores this year in the wake of weak mall traffic. Although the idea is to shift the brand to more lucrative locations, the scaled-down presence increases the risk of customer shift to other brands. The company plans to grow the brand to over 500 stores eventually, but it is unclear how aggressively the retailer will expand P.S. outside shopping malls given that it does not have much cash at hand. Therefore, we do not expect P.S. from Aeropostale to turn into a meaningful business for Aeropostale in the near future. This can delay its recovery and make it a less attractive investment for potential buyers.
Trefis Forecast Rationale for Aeropostale Stores EBITDA Margin
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical expenses such as Cost of Goods and Services Sold, SG&A Expense and R&D Expense. EBITDA Margin represents divisional EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges and non-cash charges such as Stock-Based Compensation Expense.
Aeropostale's EBITDA (earnings before interest tax depreciation and amortization) margins stumbled from 25.7% in 2010 to 15.5% in 2011, primarily due to a sudden rise in cotton prices owing to floods in major cotton producing areas, that troubled the entire apparel industry. While many players recovered from the impact of cotton price rise in 2012, Aeropostale’s margins further declined to 13.9%, as it continued to offer heavy discounts across its product range. In 2013, low brand loyalty and sluggish consumer spending forced the retailer to usher heavier markdowns in order to sustain an adequate amount of store traffic. As a result, Aeropostale’s margins crashed to 6.3%.
While we do not expect Aeropostale to relive its glory days, we do expect marginal recovery in its EBITDA margins going forward. We forecast Aeropostale’s EBITDA margins to improve gradually from 6.3% in 2013 to 11% over the next five-six years.
Trefis considered the following factors for its forecast:
Back to Company Overview
- Store consolidation will reduce SG&A as percentage of revenues
- Since Aeropostale hasn’t been able to drive sufficient store traffic, it is shutting down stores that do not generate significant revenues in order to cut operating expenses.
- The company has accelerated the closure of its under-performing namesake brand stores to improve its overall store productivity.
- At the start of 2013, the company had planned to close about 15-20 stores by the year-end, but it increased this figure to 30-40 half way through the year. In Q4 alone, Aeropostale shut down 29 stores and it closed another 18 in the first quarter of 2014.
- Over the next several years, the retailer plans to close a total of 175 stores in the U.S., which will bring the store count down to around 750.
- Closing stores that do not generate significant traffic can help Aeropostale eliminate operating expenses associated with them.
- Since these stores generate fewer revenues than other Aeropostale stores, but account for similar store operating expenses, their closure will help the company reduce SG&A expenses as a percentage of net revenues.
- Over the past few years, Aeropostale's SG&A expenses as percentage of revenues have increased significantly.
- Top line growth will help Aeropostale gain operating leverage
- We expect marginal recovery in Aeropostale's revenues going forward driven by growth in online business.
- This can help the company gain some operating leverage.
- Higher AUR (Average Unit Retail) can Result in Better Gross Margins
- During its Q1 2014 earnings call, Aeropostale stated that its new fashion collections such as Bethany Mota, Live Love Dream, Tokyo Darling, and Free State have been performing very well.
- Due to the strength of these product lines, the retailer’s average unit retail registered its first growth in the last seven quarters despite a highly promotional environment.
- If the company is able to sustain its prices at this level, we can expect slight recovery in gross margins going forward.
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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