Aeropostale (NYSE:ARO) offers its own brand apparel and accessories to kids and teenagers. The retailer operates mainly in North America and has only 14 licensee stores outside the region.  While Aeropostale outperformed its peers during the recessionary environment of 2008-2009 by offering basic apparel at lower prices, it has not been able to capture the quickly changing fashion trends post recession. This resulted in a decline in the retailer’s comparable store sales in 2011. Here we discuss the factors that can weigh on its future growth.
Significant Dependence On Vendors
- What Happened To Aeropostale Last Year ?
- Aeropostale Earnings: Scrutinizing Consolidation Strategy Following Another Dismal Quarter
- Aeropostale Earnings Preview: Expecting Another Crash
- Aeropostale Goes Licensing Again, But It May Not Help
- Aeropostale’s Licensing Deal Is A Smart Move, But It Comes With Challenges
- Aeropostale May Employ Reverse Stock Split To Prevent Delisting, But What Next?
Like most retailers, Aeropostale outsources its manufacturing operations to countries where labor costs are cheaper. The retailer is highly dependent on a small number of vendors for its inventory. About 87% of its inventory comes from five vendors.  A change in strategy of any of these vendors or a delay in supply can adversely affect the company. However, Aeropostale is less susceptible to foreign currency fluctuations as most of its vendors have offices in the U.S. and the payments are made in U.S. dollar. 
Lack of International Presence
Unlike competitor Abercrombie & Fitch (NYSE:ANF), Aeropostale’s operations are confined to North America. It operates only 14 stores in South East Asia and the Middle East.  While the teen apparel market is highly promotional in the U.S., the retailers are at liberty to exploit the lack of competition in international markets. This, along with slightly better economic conditions in the Middle East and Asia, allows them to operate a greater number of full-priced stores. This leads to better margins for the retailers and is one of the reasons why Aeropostale’s operating margins are lower than that of its competitors.
Moreover, Aeropostale lacks a presence in China and Japan, which have been lucrative markets for other apparel retailers. The company will have to come up with strong expansion plans for these regions before competition intensifies.
Weak Brand Recognition And Brand Acceptance
Aeropostale sustained its growth in the recessionary environment by offering basic apparel at lower prices. In January 2009, sales of apparel retailers such as Abercrombie & Fitch and American Eagle Outfitters (NYSE:AEO) slumped by 20% and 22%, respectively. Meanwhile, Aeropostale’s sales registered a 11% increase during the same period. 
However, as the economy recovered, Abercrombie & Fitch and American Eagle Outfitters started lowering their prices.  As these retailers’ brand recognition was better than Aeropostale’s in the U.S., the latter’s price advantage was not as effective as before. 
Customers started shifting towards popular brands and fashion wear, and Aeropostale lost out on capturing this trend. Aeropostale’s strategies to adapt to prevailing fashion trends also proved unsuccessful. For instance, the introduction of new fashion wear in women knit tops and junior’s tops met with a negative customer response. According to customer feedback, Aeropostale was missing trendy silhouettes, bright colors and fashion newness. This led to a reduction in comparable store sales, which continued until the last quarter. 
Moreover, in 2009, the retailer had to close down its under-performing Jimmy Z brand. 
These events indicate that Aeropostale has to develop a keen sense of the tastes of its target audiences and create ample awareness of its brands in order to fend off competition and fuel future growth.
Our price estimate for Aeropostale stands at $13, implying a premium of about 10% to the market price.Notes: