In recent years, Aeropostale (NYSE:ARO) has struggled to keep up with the pace of the U.S. apparel industry. The retailer’s problems started in 2011, when its comparable store sales fell by 9% as the customers shifted towards more trendier brands.  Although Aeropostale continued to offer heavy discounts, the lack of popular fashion outweighed its low price advantage. In order to compete better in the current industry environment, an apparel retailer must ensure a popular brand image, responsiveness to changing fashion trends, strong direct-to-consumer channel along with competitive pricing. Aeropostale hasn’t done well on most of these fronts.
From a long-term perspective, Aeropostale needs to strengthen its direct-to-consumer channel and introduce better variety of fashion apparel within its product range. Additionally, it needs to expand to lucrative international markets such as China and Japan. Let’s discuss some of the strategies that the retailer has adopted to address its concerns.
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More Trendy Products Coming To Aeropostale’s Stores
Although Aeropostale mainly offers basic casuals, it also includes a limited variety of fashion apparel. These apparel products have performed well, but their proportion in the overall merchandise range still remains low. In its recent Q3 results statement, Aeropostale stated that it is slowly increasing the variety of fashion apparel within its products.  However, the company intends to take it slow with effective planning to ensure the success of this strategy. Once this is attained, the retailer will need to have strong control over its inventory in order to improve its response time of bringing new products to the market.
Aeropostale also expects to improve its most important business segment of women’s apparel line with the acquisition of online retailer GoJane.com that specializes in apparel and footwear for women.  The acquisition of GoJane.Com will help in improving fashion offerings and also assist its e-commerce business.
Brand Image And Popularity Needs To Improve
Aeropostale is perceived as a low priced basic apparel brand. Although this was a popular choice during the recessionary environment, demand for fashionable trends rose as the economy improved. Retailers such as American Eagle Outfitters (NYSE:AEO) and Abercrombie & Fitch (NYSE:ANF), which are more popular brands than Aeropostale, exploited this trend by offering a better variety of fashion apparel.  On the other hand, Aeropostale remained focused on its basics collection.
Meanwhile, in another publicity strategy, Aeropostale presented radio station Z100’s Jingle Ball 2012 at the beginning of December, featuring celebrities like Taylor Swift, Harry Styles, Liam Payne and Ne-Yo. Events like these helps the brand to be flashed in the media. The retailer needs to come up with more of such strategies as a reminder to customers of its brand.
Direct-To-Consumer Channel and International Presence Will Be Key Drivers
Although Aeropostale is on the right track in its quest for long term growth, the retailer will have to come up with strategies to improve its direct channel. The direct-to-consumer business is driving the apparel industry at the moment, and weakness here implies that Aeropostale is missing out on a substantial growth opportunity. While retailers such as Urban Outfitters (NASDAQ:URBN), Gap (NYSE:GPS) and American Eagle Outfitters registered direct-to-consumer revenue growth of 36%, 23% and 28% respectively in their latest quarter results, Aeropostale’s direct-to-consumer revenue rose by only 12%. 
According to our estimates, the direct-to-consumer segment constitutes only 15% of the company’s value.
Aeropostale also needs to increase its international footprint by targeting lucrative markets such as China, where initial stores of Abercrombie and Gap have performed well.  Aeropostale currently operates only 14 licensee stores in South-East Asia and Middle East and plans to add 30 stores in Turkey within the next five years.  There are still no plans for China which indicates that the company may lose out to its competitors in this region. China has huge potential for apparel retailers due to its huge population, booming middle class and increasing disposable income.
Our price estimate for Aeropostale stands at $14, which is roughly inline with the market price.Notes:
- Aeropostale’s SEC filings [↩] [↩]
- Aeropostale’s Q3 fiscal 2012 earnings transcript, Nov 28 2012 [↩]
- Aeropostale Acquires Online Fashion Footwear And Apparel Retailer ‘GoJane.Com, Aeropostale, Nov 13 2012 [↩]
- Aeropostale: Between a Rock and a Hard Place, Seeking Alpha, July 10 2011 [↩]
- Companies’ SEC filings [↩]
- Companies’ earnings transcripts [↩]