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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 and $438 in 2014. Going forward, We expect this figure to decline further this year and increase slowly thereafter. We expect the figure to reach $462 by the end of our forecast period, supported by recovering average unit retail, store consolation and growth in online revenues. 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 $440, 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 $475 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 and another promotion rich year got the company to 2.1%. However, from here on, we believe that the company will be able to improve its margins with slightly lower promotional activities and reduction in expenses related to under-performing stores that are being closed. Going forward, we expect the margins to recover gradually and reach 12% 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 only 11% 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 15%, 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 has lost nearly 90% of its stock value since 2010 as revenue per square foot has declined drastically 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 $220 million in 2014.
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 with certain preppy launches along with the introduction of a couple of fashion collections for women, 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 is preventing 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. While adults are preferring to save money instead of running after impulse purchases, unemployment rate in the teenage segment remains 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 Zara and Forever 21 have done well as they are fast fashion and value-for money brands, and have established a strong brand identity in the market.
Aeropostale's average unit retail is finally improving
Due to its limited fashion variety, Aeropostale usually relies on deep discounts to attract customers, which weighs heavily on its average unit retail. Between 2010 and 2013, the retailer’s average unit retail declined at an average annual rate of more than 6%. However, the company has seen a turnaround in this metric in 2014. 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. The 3% increase in this metric had a small offsetting impact on the retailer’s comparable sales decline in Q1. In Q2 2014, Aeropostale’s average unit retail increased by 6%, but it was overpowered by 14% decline in number of transactions and 5% decline in units per transaction. These improvements continued in the remaining two quarters and the company reported 5% improvement in the metric in 2014.
While store traffic at Aeropostale continues to decline at an alarming rate, a turnaround in average prices should provide some respite. It is often said that Aeropostale needs to be more fashionable to ensure the revival of its growth, and the retailer is trying to do so, in fact. Its efforts to integrate more fashion collections in its portfolio are finally showing some promise. Aeropostale’s average prices are increasing, which should have a greater impact on its RPSF once the traffic starts recovering.
Lately, the retailer has managed to sell its fashion products at full prices or small discounts, which suggests that buyers are welcoming the newness in Aeropostale’s product offering. Hence, it is possible that more buyers will return to Aeropostale stores in the near future, which could complement its improving average unit retail. However, given the level of dislocation in the business, regaining buyer confidence will be a challenging task for the new CEO.
The retailer is consolidating its U.S. store network
Aeropostale stores are mainly located in shopping malls, where foot traffic has been weak over the past several years on account of weak consumer confidence. Moreover, shoppers have abandoned the brand’s basic logo products in search of more fashionable merchandise offered by other retailers such as Gap Inc and Urban Outfitters. Since the company hasn’t been able to drive sufficient store traffic, it is shutting down stores that do not generate significant revenues in order to improve productivity.
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 2014, Aeropostale reduced its store count to 860 from 1,100 a year ago. In the coming years, the retailer is targeting an overall store count of 750
Closing stores that do not generate significant traffic can help Aeropostale improve its RPSF. Since these stores generate fewer revenues than other Aeropostale stores, but account for similar store space, their closure will help the company reduce its square footage at a faster rate than its revenue decline.
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.
Last year, the company stated that it is planning to shut 125 mall-based P.S. stores 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 Internet & Catalog Orders 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% and went further down to 2.1% in 2014.
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 2.1% in 2014 to 12% over the next five-six years.
Trefis considered the following factors for its forecast:
Back to Company Overview
- Average prices are increasing
- Due to its limited fashion variety, Aeropostale usually relies on deep discounts to attract customers, which weighs heavily on its average unit retail.
- Between 2010 and 2013, the retailer’s average unit retail declined at an average annual rate of more than 6%.
- However, the company saw a in this metric in 2014 as it improved 5% driven by good response to new product launched.
- While store traffic at Aeropostale continues to decline at an alarming rate, a turnaround in average prices should provide some respite.
- Aeropostale’s average prices are increasing, which reflects a drop in the level of promotional activities.
- This in turn, signals an imminent margin recovery.
- Business rightsizing
- Aeropostale is in the process of consolidating its store network in the U.S., in order to reduce its expenses related to stores that do not account for significant traffic and revenues.
- At the same time, it is looking to shift its P.S. brand from malls to off-mall locations where they can generate better revenues.
- The company even plans to eventually grow this concept to over 500 stores, which clearly indicates that ultimately Aeropostale will have a higher proportion of better performing stores in its network, which paints a pleasing picture for margin recovery.
- Margins may have bottomed out
- There was a time when Aeropostale's EBITDA margins were in the 25% range.
- Since then, heavy discounting alone has pummeled the company's margins.
- We believe that at 2.1%, they may have bottomed out and even slight improvement in performance at this point shall reflect as increase in 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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