Aeropostale (NYSE:ARO) is a mall based specialty retailer offering casual apparel and accessories for men, women and children. The company operates mainly in North America through its stores and e-commerce channel. It has a limited presence in international markets including the Middle East, Asia and Europe through licensing agreements.
In this note, we look at a SWOT analysis for Aeropostale, which is a strategic method used to evaluate Strengths, Weaknesses, Opportunities and Threats associated with a business. After performing strongly during the recession of 2008-2009, the retailer has since struggled due to the shift in sales mix to cheaper products and lower store traffic. This warrants a closer look into the company’s intrinsic capabilities and available opportunities.
Good Presence In North America: Aeropostale operates around 1,100 stores across North America, comprising of 1,000 stores in the U.S. and 78 stores in Canada.  The company has more stores than some of its competitors such as American Eagle Outfitters (NYSE:AEO) and Abercrombie & Fitch (NYSE:ANF). Taking Gap’s (NYSE:GPS) 1,500 stores as a reference, we expect Aeropostale to continue expanding in the region. The company is in a good position to cater to its teenage customers who represent about 8% of the total U.S. population. 
Healthy Sales Compared To The Store Size: As a mall based retailer, Aeropostale’s stores are smaller in size as compared to Gap and American Eagle Outfitters. Despite the smaller size, these stores offer a large variety of apparel and accessories and generate higher revenue per square feet. While the figure for American Eagle and Gap is around $500 and $390 respectively, Aeropostale’s revenue per square feet is close to $550.
Sells Products At Heavy Discounts: One of the key selling points of Aeropostale is that it mainly offers basic merchandise at relatively lower prices and heavy discounts, thus going light on customers’ pocket. Such products become popular when the buyers are looking to cut back on their expenses. This is the reason why Aeropostale’s revenues increased by almost 40% during 2007-2009, when other apparel retailers were struggling due to the recessionary environment. 
Success Of P.S. from Aeropostale Brand: Through P.S. from Aeropostale, the retailer offers casual clothing and accessories for elementary school children in 4-12 age group. Although this is still a young brand, it has been gaining popularity in the U.S. Even as Aeropostale struggled during the last two years, P.S. from Aeropostale delivered encouraging results. Owing to the closure of American Eagle Outfitters’ 77kids brand, P.S. faces relatively lower competition, and caters to about 12% of the U.S. population.  Therefore, a good run from P.S. from Aeropostale is quite valuable for the company from long term perspective.
Immune To Foreign Currency Fluctuations: Although Aeropostale has outsourced its manufacturing activities to low cost destinations like other apparel retailers, most of its vendors maintain sourcing offices in the U.S.  The payments made to vendors and sourcing agents is done in the U.S. dollars, which protects the company against the negative impact of foreign currency fluctuations. 
Low-Proportion Of Fashion Focused Products: Aeropostale was one of the most successful retailers during the recession of 2008-2009, as it maintained cheaper prices by offering basic clothing rather than investing in fashion-focused products. With an improving economy and increasing disposable income, U.S. buyers started shifting to other fashionable brands such as American Eagle Outfitters and Abercrombie & Fitch.  Aeropostale has more or less stuck to its basic offerings and as a result, its comparable store sales have fallen in the last two years.  The company does offer some fashion-based apparel, but their proportion is quite low as compared to its core basics.
Women’s Merchandise Business Is Weakest: Women’s merchandise category, which contributes more than 60% to Aeropostale’s revenues, has been the weakest performer. Over the last two years, the comparable stores sales for women’s products have declined more than that for the men’s products.  This can be attributed to the fact that women tend to be more sensitive towards fashion than men. Women’s merchandise represents more than 50% of the total apparel sales in the U.S. 
Direct-To-Consumer Channel Is Small: Although the apparel industry in the U.S. is being driven by the growth in direct-to-consumer sales, the segment is still very small for Aeropostale. Launched in 2005, this business accounts for less than 9% of the company’s annual revenues. The percentage is low compared to that for some of its competitors such Abercrombie & Fitch (16%+).  Additionally, Aeropostale has lagged behind its peers in terms of direct channel’s growth during the last couple of years.
Limited International Presence: Aeropostale’s international presence is only limited to 26 licensee stores in the Middle East, Asia and Europe.  As a result, the company is almost fully dependent on the U.S. market and is missing out on substantial growth opportunities that international markets have to offer.
International Expansion: Aeropostale is nearing a saturation point in the U.S. and international markets remain wide open for the company. There are a number of lucrative markets where the retailer can enter. For instance, China is the second largest apparel market in the world with annual sales expected to cross $200 billion by 2014.  Another Asian country, Japan ($110 billion market), offers good potential for value-focused brands.   The Middle East region houses three of the five fastest growing apparel markets in the world.  The U.A.E’s annual per capita spending on apparel ($785 in 2010) is the highest among all the developing markets.  In Europe, Russians tend to spend about 3.1% of their income on apparel, which is noticeably more than China, Germany and the U.S.  We believe that Aeropostale can garner some success in these regions once it establishes a strong retail store base.
Growth in Direct-To-Consumer Business: Online apparel sales in the U.S. have surged due to growing Internet usage and increased usage of mobile devices. eMarketer forecasts the online apparel sales in the U.S. to increase to $90 billion by 2016, compared to $45 billion in 2012.  The industry growth along with Aeropostale’s efforts to ratchet up its direct channel provide a healthy growth opportunity. The retailer started its global shipping in 2011 and currently ships to about 100 countries. It is offering a greater variety of products over the Internet and is using latest technologies for mobile websites, revamping f-commerce and e-commerce channels, and leveraging the power of social media to gain popularity. Investments in mobile are justified as this channel is expected to account for 8% of the total online sales by 2016, up from 3% in 2012. 
Expansion Of P.S. From Aeropostale: This brand serves a larger demographic than Aeropostale’s namesake brand. P.S. from Aeropostale‘s presence is only limited to about 100 stores in 20 states in the U.S.  Thus, there exists a huge expansion potential for the brand. During fiscal 2012, the company opened about 29 P.S. from Aeropostale stores as compared to 18 Aeropostale stores. For fiscal 2013, it plans to open 60 P.S. from Aeropostale stores and only 14 namesake stores.  Over time, we expect this business to become a significant contributor to Aeropostale’s value.
Over Dependence On A Few Vendors: Aeropostale sources about 84% of its inventory from only five vendors.  A change in the strategy of any of these vendors or a delay in supply can adversely affect the company. It can result in inventory shortage or inventory hangover, and both these situations weigh on the comparable store sales growth. One such example is Abercrombie & Fitch, which faced these problems for a few quarters.  On the other hand, Urban Outfitters (NASDAQ:URBN) has about 4,100 vendors and does not buy more than 10% from any one of them.  We believe that Aeropostale should also follow a similar strategy to create a resilient supply chain and have strong negotiating power over its suppliers.
Delay In International Expansion: While retailers such as Gap, Abercrombie & Fitch and Guess (NYSE:GES) are aggressively expanding in international markets, Aeropostale still does not seem to have any strong plans on this front. If the competitors build upon their first mover advantage, Aeropostale might find it difficult to compete in these markets later. This will not only affect its brand building, but will also prevent full-price sales.
Our price estimate for Aeropostale stands at $15, implying a premium of about 5% to the market price.Notes:
- Aeropostale’s SEC filings [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- Age and Sex, United States Census Bureau [↩] [↩]
- Aeropostale: Between a Rock and a Hard Place, Seeking Alpha, Jul 10 2011 [↩]
- Apparel Retail in the United States, Market Research, Feb 27 2013 [↩]
- Abercrombie & Fitch’s SEC filings [↩] [↩]
- From Mao to Wao: Winning in China’s Booming Apparel Industry, McKinsey, Jan 2011 [↩]
- Overview of the retail apparel market, United Arrows [↩]
- Apparel In Japan, Euro Monitor, June 2012 [↩]
- UAE has highest apparel spending per capita in the world, Emirate 24 7, June 8 2011 [↩]
- UAE has highest fashion spending in developing world, Arabian Business, June 11 2011 [↩]
- Dress For Success: Cracking Russia’s Apparel Market, McKinsey, Nov 2011 [↩]
- Retail Ecommerce Set to Keep a Strong Pace Through 2017, eMarketer, Apr 24 2013 [↩]
- M-commerce sales via smartphones hits $8 billion in 2012, Internet Retailer, Jan 16 2013 [↩]
- Aeropostale’s Q4 fiscal 2012 earnings transcript, Mar 14 2013 [↩]
- Urban Outfitters’ SEC filings [↩]