Teen apparel retailer Aeropostale (NYSE:ARO) will release its Q1 fiscal 2013 earnings on May 23. Due to the unusually long winter in the U.S., we expect the retailer’s troubles to continue despite its efforts to improve sales. Aeropostale’s comparable store sales growth has been negative for the past two years due to a shift in sales mix to cheaper products (basic apparel), excessive promotional discounts and low store traffic.  While we expect this trend to continue, there will be some mitigating effect due to the growth in the retailer’s direct-to-consumer business.
Core Issues Likely To Weigh On Comparable Store Sales
- By How Much Have Aeropostale’s Revenue & EBITDA Changed In The Last Five Years?
- How Has Aeropostale’s Revenue Composition Changed In The Last Five Years?
- What’s Aeropostale’s Revenue & Expenses Breakdown?
- What Aeropostale’s Potential Suitors Would Have Access To?
- How Did Aeropostale’s Revenues And Losses Decline In 2015?
- What Happened To Aeropostale Last Year ?
After being one of the strongest performers during the recessionary period of 2008-2009, Aeropostale has struggled to sustain its growth. The retailer’s troubles began when customers started shifting to other brands that offered more fashion-based apparel products while Aeropostale largely remained focused on basic clothing.  Due to the lack of fashion component, the company relied heavily on promotional discounts to attract customers. This resulted in a comparable store sales decline of 8% and 2% in 2011 and 2012 respectively.  Although there have been some signs of improvement, the recovery has been painfully slow. Therefore, we expect these issues to continue to weigh on Aeropostale’s comparable store sales growth in this quarter as well.
Prolonged Cold Will Hinder Revival Efforts
To be on par with its competitors, Aeropostale is trying to increase the proportion of fashion focused products in its merchandise mix. It has signed a celebrity brand ambassador for effective marketing and is working on building a more flexible supply chain system for timely launch of its seasonal apparel products. (Read: Review Of Aeropostale’s Efforts To Improve Its Store Sales)  Aeropostale stated that it is looking to source the products from nearby location to reduce the lead times. While these efforts were guided in the right direction, their impact might not be visible in this quarter due to prolonged cold weather.
The recent winter season in the U.S. was unusually long. March 2013 was the coldest since 1996 and snowiest since 2002.  As a result, spring was delayed, which had a negative impact on the demand for spring clothing. For instance, demand for shorts during the fourth week of March fell by 12% compared to a year ago. 
The month of March in the last few years has been relatively warmer, with March 2012 as the hottest in the last 100 years. We believe that the retailers might have been expecting similar weather patterns, which may have encouraged them to invest more in spring inventory. However, the resulting surplus inventory could lead to increased number of markdowns, which can impact Aeropostale’s comparable store sales and margins.
However, Direct-To-Consumer Business Can Have A Small Offsetting Impact
Although Aeropostale launched its direct-to-consumer channel much later than some of its competitors such as Abercrombie & Fitch (NYSE:ANF) and American Eagle Outfitters (NYSE:AEO), this business has grown at a rapid pace over the past few years.
|Direct-To-Consumer Revenues ($Bil)||
The following factors have assisted this growth:
Aeropostale has a stable supply chain for its direct-to-consumer business. It utilizes the latest e-commerce technology for order management, product fulfillment and customer service. This has enabled the retailer to gradually reduce lead times and shipping & handling costs. Additionally, Aeropostale provides a large variety of designs and sizes over the Internet, which might be difficult to find in store. In September 2011, the retailer partnered with FifyOne to start international shipping. This move allowed customers from more than 90 countries to purchase directly from Aeropostale.com in their local currency. 
Along with this, Aeropostale has been focusing on m-commerce and f-commerce channels. It launched a mobile app for Android users and upgraded its m-commerce with HTML5, which is considered a useful technology for mobile websites.  The retailer recently added new features to its iPhone app such as a bar code scanner, outfit style guide & builder and a video section. Given the anticipated growth of mobile commerce in the U.S., these moves put Aeropostale in a favorable position. Leveraging the power of social networking, Aeropostale has launched a store on Facebook where customers can purchase products and provide feedback. 
Direct-to-consumer business accounts for about 25% of the retailer’s value, according to our estimates. The remaining 75% can be attributed to its physical stores, which haven’t been doing too well. Therefore, we believe that the growth in direct-to-consumer business may not be sufficient enough to offset the overall weakness in Aeropostale’s business.
Our price estimate for Aeropostale stands at $13, implying a discount of about 10% to the market price.Notes:
- Aeropostale’s SEC filings [↩] [↩]
- Aeropostale: Between a Rock and a Hard Place, Seeking Alpha, July 10 2011 [↩]
- Aeropostale’s Q4 fiscal 2012 earnings transcript, March 14 2013 [↩]
- Prolonged Winter Puts Retail Sales in Deep Freeze, CNBC, March 31 2013 [↩] [↩]
- Aeropostale Goes Global, FifyOne, Sept 21 2011 [↩]
- Aeropostale tries an Android app on for size, Internet Retailer, Aug 4 2011 [↩]
- M-Commerce sales via smartphones hit $8 billion in 2012, Internet Retailer, Jan 16 2013 [↩]