Aeropostale’s Margins And Outlook The Focus Of Earnings Thursday

Teen apparel retailer Aeropostale (NYSE:ARO) is scheduled to announce its Q1 fiscal 12 results on May 17th. ^[1] Earlier the company had reported solid Q1 sales results, with an increase of 6% in net sales and 2% in comparable sales for the quarter. See: Aeropostale Shows Come Back Intact, Headed To $23

With the sales results already disclosed, we expect Aeropostale’s margins to be the prime focus on Thursday. Going by the trends during the quarter, we expect Aeropostale to see a gradual improvement in its margins specially on a q-o-q basis. Additionally, we will also be keenly watching for Aeropostale’s initiatives on the 3 tiered long-term growth strategy, which the company had disclosed during its 2012 spring presentation. Aeropostale competes with the likes of Abercrombie & Fitch (NYSE:ANF), Gap Inc.(NYSE:GPS), Urban Outfitters (NASDAQ:URBN) and American Eagle Outfitters (NYSE:AEO) in the teen apparel space.

See our full analysis of Aeropostale

Margins remain in focus on Thursday

With the company’s net sales and comparable sales for Q1 already disclosed in its May 3rd sales update, the focus has now centered around margins. We expect Aeropostale to witness a gradual improvement in margins especially on a quarterly basis. It should start realizing the benefits from declining cotton prices. Cotton prices recently slumped to a 21-month low, primarily due to an increase in cotton supply and a decline in Asia’s industrial output. ^[2] As a value based retailer, we expect Aeropostale to benefit more from the declining cotton prices because unlike its rival upmarket brand Abercrombie & Fitch, Aeropostale can’t easily pass the cost pressures to its customers, and hence is more susceptible to cotton price changes.

Additionally, Aeropostale should also gain from gradually improving U.S. macro-economic conditions, resulting in a decline in promotional scales in the U.S. teen apparel market. A lighter promotional scale for the Spring season should result in higher full-priced merchandise sales for Aeropostale, resulting in improved Average Unit Retail (AUR) and hence an improvement in margins.

Watching Updates on Aeropostale’s Long-Term Growth Strategy

In its 2012 spring presentation, Aeropostale’s president, Michael J. Cunningham, had announced the three long-term growth strategies for Aeropostale. These included international expansion, increasing the scale of direct business and growth in P.S. from Aeropostale stores. ^[3] We will closely watch for Aeropostale’s initiatives on its growth strategy during the quarter. 

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Aeropostale announces Q1 fiscal 12 results on May 17th, Source: Aeropostale’s IR [↩]
2. Cotton prices at 21-month low, Source: Bloomberg [↩]
3. Aeropostale’s 2012 Spring Presentation, Source: Aeropostale’s IR [↩]