After performing strongly during the recession of 2008-2009, Aeropostale (NYSE:ARO) has since struggled due to the shift in sales mix to cheaper products and lower store traffic. These factors weighed on its fiscal 2012 results and a weak holiday season in the U.S. didn’t help either. The retailer’s comparable store sales declined by 4% when measured against a weak fiscal 2011.
To revive its growth, Aeropostale is looking to improve its women’s merchandise mix (which has been the weakest performer) and boost the brand’s marketing. Although these steps appear to be in the right direction, their success will largely be determined by effective execution and customer response.
Revamped Marketing Strategies
Aeropostale plans to employ a 360 marketing strategy encompassing social media, physical stores and the digital channel.  Such a strategy has been successful for American Eagle Outfitters (NYSE:AEO), and we think that it may also help Aeropostale. However, for starters, the company needs to get its product mix right.
In 2012, Aeropostale signed actress Chloe Grace Moretz as its celebrity brand ambassador. According to the company, Chloe has become a fashion icon among today’s youth and will help refine Aeropostale’s brand image.  A similar strategy has yielded good results for women’s specialty retailer Ann (NYSE:ANN) when it partnered with acting star Kate Hudson. Although these strategies are no different from what most apparel retailers employ these days, effective execution could help Aeropostale to reach a broader spectrum of customers as a fun, fashion and affordable brand.
Improving Women’s Merchandise Mix
Women’s merchandise is Aeropostale’s main product category contributing about 64% to its overall revenues.  This has also been the weakest performing category since 2011, due to a poor customer response to its fashion-based products such as women’s knit tops.  In Q4 fiscal 2012, while revenues for the men’s business declined by 4%, they were down 10% for the women’s business.  If Aeropostale wants to restore growth, it needs to revive its women’s business and it appears that it is doing so.
The company made some changes to its management by hiring a new talent as the head of design and women’s merchandise. It is creating a specifically tailored head-to-toe collection for different purposes such as casual, school and party. Moreover, adding emerging and prevailing fashion to these products will be a priority for the company.
Aeropostale is also looking to balance the product mix of tops and bottoms to prevent inventory hangover concerns.  The management stated that there will be a noticeable difference in trims and finishing of its merchandise in the upcoming summer collection. Aeropostale is lowering the space allocated to basic products in its stores and is adding more fashion-focused products. In addition to this, the retailer acquired GoJane.com last year, a popular women’s fashion footwear and apparel retailer.  We believe that this will add a greater appeal and variety to Aeropostale’s women’s merchandise.
Will There Be An Impact?
In 2012, Aeropostale stores generated about $547 in revenue per square feet down from $568 in 2011. Going forward we expect the figure to gradually improve to $558 in next five-six years driven by the growth in P.S. from Aeropostale brand and international expansion. If the aforementioned strategies help the sales of Aeropostale’s existing stores and drive its revenue per square feet to $590, there can be 5%-10% upside to our price estimate.
Our price estimate for Aeropostale stands at $13, implying a premium of about 10% to the market price.Notes:
- Aeropostale Q4 fiscal 2012 earnings transcript, Mar 14 2013 [↩] [↩] [↩]
- Aeropostale Announces Actress Chloe Graze Moretz As Celebrity Brand Ambassador, Aeropostale, July 9 2012 [↩]
- Aeropostale’s SEC filings [↩]
- Aeropostale Q1 fiscal 2011 earnings transcript, May 19 2011 [↩]
- Aeropostale Acquires Online Fashion Footwear and Apparel Retailer, GoJane.com, Aeropostale, Nov 13 2012 [↩]