The recently concluded four day long Thanksgiving weekend showed signs of a strong holiday season this year. This season is very important for most retailers as they can generate about 30% of their annual sales and 50% of their profits during the last two months of the year.  In this analysis we will take a look at Aeropostale‘s (NYSE:ARO) expected performance this holiday season.
Along with Aeropostale we also look at American Eagle Outfitters (NYSE:AEO) and Abercrombie & Fitch (NYSE:ANF). Although their success is also influenced by macroeconomic trends, it is unlikely that all of them will perform well at the same time. The success of an apparel retailer usually stems from a shift in customers from one retailer to another.  This shift can be driven by a number of factors such as a lack of fashion apparel and an absence of promotional activities. Here are the two reasons why we believe that the holiday season will be weaker for Aeropostale in comparison to its peers.
Low Proportion Of Direct-To-Consumer Business
The direct-to-consumer business has been the most valuable driver for most of the apparel retailers in the recent months. Holiday spending is being driven increasingly by retailers’ e-commerce businesses. The National Retail Federation predicts the overall sales in the holiday season to increase by 4.1% with a 17% increase in online sales.  The online sales are expected to account for 10% of the U.S. retail spending during the holiday season, while in 2007 the figure was 7.4% of the total retail spending.  Moreover, online sales increased by 26% to reach $1 billion on Black Friday compared to last year.  This implies that the e-commerce channel will be one the most important aspects for the retailers.
According to our estimates, American Eagle Outfitters’ (27%) and Abercrombie & Fitch’s (33%) direct-to-consumer businesses are quite valuable for these stocks. Whereas, this business segment is not a significant contributor to Aeropostale’s stock at 15%. While the first two retailers have reported substantial increases in direct-to-consumer revenues in their previous quarterly results, Aeropostale’s growth has been relatively slow. This will act as a headwind for Aeropostale in achieving strong holiday season results.
Aeropostale’s main strength is its core basic apparel that do not have significant fashion trends associated with them. These apparel have lower pricing and were quite popular during the recessionary environment. Post-recession, consumers have shifted to more fashion conscious brands such as Abercrombie & Fitch and American Eagle Outfitters. While Abercrombie & Fitch and American Eagle Outfitters have been responsive to the changing fashion trends, Aeropostale has struggled on this front due to a lack of fashion appeal. We expect this to weigh on Aeropostale in the holiday season as well.
Although Aeropostale provides heavy discounts, traffic at its stores is likely to be less than other apparel retailers in our view. Young shoppers looking for fashion apparel might consider Abercrombie & American Eagle Outfitters, and the ones looking for basic apparel will also have to compete with bigger retail channels like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). Looking at the overall picture, Aeropostale’s low pricing and promotions might not be enough to hold onto the store traffic amid fierce competitive environment.
Our price estimate for Aeropostale stands at $13, implying a premium of about 5% to the market price.Notes:
- Update 3- Retail Stock Slip, holiday sales boost seen fleeting, Reuters, Nov 26 2012 [↩] [↩]
- Aeropostale’s share tumble on market share worries, NBC News, Nov 26 2012 [↩]
- Record Online Holiday Sales Seen As Mobile Drives Growth, Bloomberg, Nov 27 2012 [↩]
- Black Friday sales online top $1 billion for first time: comScore, Reuters, Nov 25 2012 [↩]