Following its stellar performance during the recession of 2008-2009, Aeropostale (NYSE:ARO) has struggled to grow its revenues and retain customers. A lack of fashion apparel and a weak response to its product lines have weighed on the retailer’s growth. Going forward, Aeropostale will look to energize its business by undertaking three long term growth strategies – international expansion, increasing the scale of direct-to-consumer business and growth of its P.S. from Aeropostale brand.
Ratchet Up International Expansion
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Aeropostale’s stores are largely confined to the U.S., where the apparel industry is very competitive. Moreover due to the sluggish economic growth, U.S. buyers are looking for the best deals in terms of fashion and price. Since Aeropostale mainly offers basic styles for apparel, it has to rely on heavy discounts to attract customers, which negatively impacts the retailer’s sales. On the other hand, international markets where there is less competition and high demand for western brands could lead to further growth and better profitability for the company. Currently, Aeropostale’s international business is limited to 14 licensee stores in South-East Asia and Middle East, which account for a very small part of its overall revenues. 
The international growth needs to pick up. Aeropostale plans to add about 30 stores in Turkey over the next five years. Additionally, the retailer signed agreements with licensee partners last year to open stores in Columbia and Panama. Under such agreements, Aeropostale will give manufacturing and selling rights to a third party retailer and in turn will receive revenues in the form of fees paid by these partners. This channel will allow the retailer to create its brand awareness in a new market without investing too much. Aeropostale also partnered with FiftyOne in 2011 to start global shipping (100 countries currently), a step which is aimed at elevating its brand image in international markets. 
Let’s take a look at the revenue opportunity. Assuming that the retailer scales up its international expansion and opens 100-200 stores additional stores in international markets by the end of our forecast period, there can be an upside of roughly 10-15% to our price estimate. To estimate this upside, we take Gap Inc. (NYSE:GPS) as an example. Gap’s stores in international markets generate about 35% more revenue per store than they do in North America. Taking this as a proxy for Aeropostale, its international stores will have a potential of generating about $2.8 million/store in annual revenues (the value is $2.1 million per domestic store). This would imply $300-$600 million in additional revenues and with slightly better margins leads to an upside of 10-15% to our current price estimate.
Growing The Direct-To-Consumer Business
The apparel industry in the U.S. is largely being driven by direct-to-consumer channel. Major players such as Urban Outfitters (NASDAQ:URBN), American Eagle Outfitters (NYSE:AEO) and Gap are thriving on this trend. However, Aeropostale’s direct-to-consumer channel is still small and contributes less than 10% to the retailer’s revenues.  Although the revenue share of this channel is low, it has increased over the past few years.
Aeropostale provides a large variety of designs and sizes over the Internet, which might not be available in stores. Furthermore, Aeropostale has been focusing on m-commerce (mobile commerce) and f-commerce (e-commerce through Facebook) channels. Strategies such as launching a mobile app for Android users and upgrading its m-commerce with HTML5, which is considered a useful technology for mobile websites, have helped the retailer in growing its direct-to-consumer business.  As one sign of its growing online presence, Aeropostale has seen considerable growth in the number of fans on Facebook (NASDAQ:FB), which has grown from 5 million in 2011 to 8.5 million currently.  
These steps have helped the revenue share of Aeropostale’s direct-to-consumer business grow from 2.5% in 2007 to 8% in 2011. Additionally, revenues from this channel have grown by 35% annually over the past three years. 
We currently estimate direct-to-consumer business’ revenue share to reach 11% by the end of our forecast period. However, if Aeropostale expands this channel aggressively and its revenue share goes close to 20% by 2019 (similar to that for American Eagle Outfitters), there can be 10%-15% upside to our estimated stock price.
Growth Of P.S. From Aeropostale
Aeropostale’s namesake stores have struggled due to the response to its apparel, but at the same time, its P.S. from Aeropostale brand has performed well. The company launched the brand in 2009, offering casual clothing and accessories focusing on elementary school children in the age group of 4-12 years. Although P.S. from Aeropostale has a much smaller presence as compared to Aeropostale’s main brand, it has received good customer response.
Aeropostale operated only 71 P.S. from Aeropostale stores in the U.S. as of 2011, but it plans to expand them aggressively. For fiscal 2012, Aeropostale planned more stores for P.S. for Aeropostale (30) compared to its namesake brand (18).  The pace of expansion is evident from the fact that the retailer had opened 28 of these 3o stores stores by the end of Q3 fiscal 2012. 
The company does not report revenue figures separately for P.S. from Aeropostale. Assuming that the brand’s revenues are proportional to the number of stores it has, the revenue contribution turns out to be relatively small. Aeropostale operates 992 Aeropostale stores compared to about 100 P.S. from Aeropostale stores.  Hence, P.S. from Aeropostale still has a long way to go in order to make a significant contribution to Aeropostale’s stock. As far as short term plans are concerned, Aeropostale should increase fashion trends in its product offerings, to revive its growth.
Our price estimate for Aeropostale stands at $13, which is roughly in line with the market price.Notes: