Teen apparel retailer Aeropostale (NYSE:ARO) is set to release its Q3 fiscal 2012 earnings on November 28.  Investors and analysts will have a keen eye on how the comparable store sales turn up in this quarter. The retailer’s comparable store sales growth has been flat in the previous two quarters due to shift in sales mix and reduction in store traffic. 
Although Aeropostale’s fashion apparel has been successful in the past quarter, its main product segment, i.e. the core basic apparel has struggled.  This has been weighing on the retailer since the recession of 2008-2009 and we expect it to continue. Moreover, as the market remains highly promotional, the retailer’s margins will also be in focus. Although we believe that the rapid growth in the direct-to-consumer apparel industry will help Aeropostale, the positive impact on the retailer will not be significant.
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Comparable Store Sales and Margins In Focus
The comparable store sales in the previous two quarters have increased slightly. However, they were up against significantly weak Q1 and Q2 of fiscal 2011, when the comparable sales declined by 7% and 14% respectively.  Hence, the overall picture indicates that the retailer could be struggling due to its core basic apparel. Basic apparel is less risky for retailers but lacks the potential for higher growth from retailers that get the prevailing fashion trends correct. As Aeropostale’s key selling point is low pricing, this could be impacting its sales. With the shift in sales mix towards cheaper products and a decline in store traffic due to a lack of fashionable clothing, the comparable store sales growth could be under pressure.
Basic apparel were popular during the recession due to lower pricing. However, after the recession customers have become more conscious about the prevailing fashion trends, and shifted to more fashion forward apparel.  Although Aeropostale’s launch of fashion clothing such as new silhouettes, fabrics, details, fashion tops and printed denims has been successful, the major share of its sales still remains with its core basics.  The retailer is looking to increase the fashion appeal in its product assortments, but the consumers have been preferring other more fashionable brands such as Abercrombie & Fitch (NYSE:ANF). We believe that this will weigh on Aeropostale’s growth.
The teen apparel industry is highly promotional and the retailers are always under pricing pressure. Pricing becomes even more important in case of basic apparel. As Aeropostale is offering free coupons with heavy discounts, we believe that margins will be under pressure. 
Improving Online Apparel Industry Not Likely To Drive Aeropostale
The apparel industry is on a mend with players such Urban Outfitters (NASDAQ:URBN) and Gap reporting substantial growth via the direct-to-consumer business in their recent results (36% and 23% respectively).  Although Aeropostale is likely to benefit from this trend, the results will not add a significant value to the company. The direct-to-consumer business only contributes 8% to the retailer’s revenues and 15% to its value. (according to our estimates)
Our price estimate for Aeropostale stands at $13, implying a premium of about 5% to the market price.Notes: