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Investment Overview for Aeropostale (NYSE:ARO)
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- Aeropostale Revenue per Square Foot: The revenue per square foot declined in 2011 due to the imbalance of fashion and print in Aeropostale's merchandise. This continued in 2012 further impacted by the weak holiday season. We expect this figure to decline in the near team and improve thereafter as the firm improves its product mix. We expect the figure to slowly reach $558 by the end of the Trefis forecast period.
However, if the issues with its product mix persist and revenue per square foot declines to $500 by the end of the Trefis forecast period, there can be downside of 10% to our Trefis price estimate. Conversely, if Aeropostale manages to outperform its peers like Abercrombie as it had been doing till 2010 and reach $620 by the end of Trefis forecast period, there can be upside of 10% to our price estimate.
- Aeropostale Stores EBITDA Margin: Aeropostale Stores EBITDA Margin declined massively in 2011 due to an increase in cotton costs. In 2012, better cotton prices did not help the retailer as it offered heavy discounts to attract store traffic. We expect a marginal improvement in the margins as Aeropostale moves to international locations. We expect the figure to reach 12.3% by the end of Trefis forecast period.
However, if the apparel market continues to be exceptionally promotional and margin's plummet further to 11% by the end of the Trefis forecast period, there can be downside of 10% to our Trefis price estimate. Conversely, if the macro-economic conditions improve,promotional environment ceases to continue, and the company expands successfully in international markets pushing the margins to 14%, there can be upside of 10% to our Trefis price estimate
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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.
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Although Aeropostale's Internet & Catalog business is more profitable (as a percentage of revenues) than Aeropostale stores, the high revenue per square foot and high number of Aeropostale stores means that the bulk of Aeropostale's value comes from the stores business.
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.
Internet & Catalog Orders profit margins more than Aeropostale stores
At nearly 37%, gross margins for the company's Internet & Catalog business was higher in 2010 than the 29% margins associated with Aeropostale stores. We expect that profit margins for the Internet & Catalog division will remain higher than the margins for Aeropostale stores.
The merchandise sold through Internet & Catalog Orders is sent directly to the consumer from the distribution center. As this merchandise does not go through stores, it incurs no store operating expenses and only very low SG&A expenses for the company. As a result, the margins on merchandise sold through this channel is nearly 1.3x than that for merchandise sold through Aeropostale stores.
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Continuing promotional environment in teen apparel market
At present, the U.S. teen apparel market is highly promotional, where each retailer is trying to outsmart the other with broader and deeper promotional levels. The trend is expected to continue until the U.S. economy recovers completely. Even as Aeropostale provides heavy discounts in order to attract the customers, lack of fashionable products has resulted in low store traffic.
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 plans to add 30 stores in Turkey withing the next five years. The retailer is emphasizing on its direct-to-consumer business by focusing on e-commerce, m-commerce and f-commerce channels. For fiscal 2012, Aeropostale planned more stores for P.S. for Aeropostale (30) than its namesake brand (18).
Lack of presence in Asia can impact Aeropostale's growth potential
The company does not have clear expansion plans in the Asian market particularly in China, which is becoming a focal point of the global apparel industry. Retailers such as Abercrombie & Fitch and Gap have entered the region and enjoyed the success of their initial stores. This means that Aeropostale is missing out on a chance to capitalize on a growing market.
Trefis Forecast Rationale for Aeropostale Stores EBITDA Margin
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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.
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EBITDA margin's for Aeropostale stores increased from around 21.7% in 2007 to 25.8% in 2009. The improvement in merchandise margin was primarily due to improved merchandise sell-through and lower markdowns. The figure fell slightly in 2010. Aeropostale registered a steep decline in margins in 2011 due to an increase in production costs, primarily due to an increase in cotton prices. An increase in promotions to drive sales took a toll on margin's in 2012.
Going ahead we expect the margins to improve slightly due to a combination of falling cotton prices and Aeropostale's focus on cost controls. However, continuing promotional activities in the U.S. apparel market is expected to weigh on the recovery process. We expect the figure to reach 12.3% by the end of the Trefis forecast period.
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Trefis considered the following factors for its forecast:
Supporting Factors:
- Improving cotton prices
- Cotton was at $0.84 per pound in July 2010 and peaked at $2.30 per pound in March 2011. The major factor behind the cotton price increase was the drought in the Hubei province of China, a major cotton producing area. This was followed by government restrictions on exporting cotton out of India to safeguard domestic supplies and a devastating flood in Pakistan.
- As cotton is one of the key input material for apparel retailers, a sudden spike in cotton prices resulted in an increase in the Average Unit Cost (AUC). Value based retailers such as Aeropostale were hit harder because they were not able to pass the cost pressures to their customers compared to others like Abercrombie. This resulted in a massive decline in margins.
- Cotton prices have declined thereafter, reaching to $1.01 per pound by the end of January 2012. The prices further came down $0.81 at the start of February 2013.
- This should help the retailer in easing some pressure off its margins.
- International expansion to benefit margins
- International expansion in markets which have relatively better macro-economic conditions is a long term strategy of Aeropostale.
- Aeropostale can realize a higher full-priced merchandise sale in international markets contrary to in the U.S. Additionally, the company can also pass cost pressures to customers more easily internationally, thus negating the margin pressures in the domestic market.
- As the contribution of international revenues to the company's net sales increases, We expect margin's to improve.
Mitigating Factors:
- Continuing promotional offers in the U.S. apparel market is expected to keep the recovery process slow
- At present the U.S. teen apparel market is highly promotional, where each retailer is trying to outsmart the other with a broader and deeper set of promotional levels.
- This factor is highly macro influenced, as brand loyalty diminishes due to weak macro-economic conditions
and high promotions for the consumer.
- Going by the current U.S. economy growth and projected growth ahead by the IMF, we expect the promotional scenario for the U.S. apparel market to continue. This will keep a lid on margin's going forward.
- Lack of fashion apparel leading to heavy discounts
- Bulk of Aeropostale's product offerings fall under basic apparel category, that have minimal fashion associated with them.
- The U.S. buyers are also extremely particular about the prevailing fashion trends. They look for the best deal in the market in terms of price, quality and fashion.
- Since Aeropostale has limited fashion apparel products, it relies on heavy discounts, which ultimately weigh on the margins.
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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.
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