Aeropostale Earnings Preview: Weak Back-To-School Season Could Hurt Results

by Trefis Team
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Trefis
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Aeropostale
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After a strong run during the recessionary period of 2008-2009, Aeropostale‘s (NYSE:ARO) comparable store sales have slid due to a lack of fashion focused products. This continued in the first quarter of fiscal 2013, as the prolonged cold and weak consumer spending added to the company’s troubles. As a result, comparable store sales fell by 14% and a near term recovery seemed looks unlikely.

Aeropostale recently provided a business update stating that it will report a decline of 6% and 15% in its revenues and comparable store sales, respectively, in the upcoming Q2 fiscal 2013 earnings release on August 22. [1] A poor response to the retailer’s revamped product mix and a disappointing start to the back-to-school season were the primary reasons. What’s worrying is that the retailer saw comparable store sales fall 15% despite including its online channel, which has done reasonably well so far.

See our complete analysis for Aeropostale

Aeropostale Tried A Product Overhaul For Its Back-To-School Season

After a weak holiday season and dismal first quarter, Aeropostale was eyeing the back-to-school season (second most important season for apparel retailers) to help its results. The company’s main strategy was to increase the proportion of fashion-focused products in order to attract teenage customers. It updated certain silhouettes, added authentic details and used soft & comfortable fabrics for its relatively strong product categories such as woven tops, bottoms and denims. [2] Aeropostale also launched new product categories such as active wear, lounge wear and a new line of intimates under its fragrance brand, Live Love Dream. [2] The retailer shifted its focus from its basic graphic tees and jeans to different and more trendy products such as lacy ruffled tunics, studded combat boots, floral anorak jackets etc. [3] Concurrently, Aeropostale was focusing on its supply chain to improve its speed to market and thus remain inline with changing trends. It has often been said that if the company wants to bring back its customers, it needs to be more fashionable. Although Aeropostale tried that, the results din’t turn out as planned.

Disappointing Start Of The Season For The Apparel Industry

Due to the prevailing economic weakness, the overall market is expected to remain weak during the entire back-to-school season, which runs from July to September. According to the National Retail Federation, average spending per family on apparel, shoes, supplies and electronics will decline by almost 8% during this season as compared to 2012. [4] This can be attributed to last year’s record back-to-school season spending and cautious consumer spending this year on the account of payroll tax increase. The season will be even more rough for teen retailers due to high unemployment rate among teenagers. [5] As U.S. employers slowed their hiring outside the farming sector, the unemployment rate in the teenage segment shot up to 23.7% in July. Moreover, entire apparel industry witnessed high markdowns during the same month as a number of retailers were looking to enter the third quarter with clean inventory position Hence, the start of the season was disappointing for a number of retailer’s including Aeropostale and American Eagle Outfitters (NYSE:AEO), which weighed on their results. Even prior to this season, apparel industry remained frail due to weak consumer spending and cooler spring season.

Customer Response Wasn’t Good Either

In addition to the weak season, Aeropostale’s fresh collection received poor customer response. The retailer made some big changes to its product styles and trends that didn’t resonate well with its customers. The fresh products failed to attract customers mainly due to their higher prices and sudden change in styles. [3] The strategy was a break away from Aeropostale’s usual brand image i.e. basic and sporty products at affordable prices. Although a product overhaul appears to be the right move, we feel that the changes were too drastic for Aeropostale’s customers liking. This, along with the prevailing low store traffic and high promotional activities dragged the comparable store sales down by 15% during the second quarter. [1]

Our price estimate for Aeropostale stands at $14.56, implying a premium of about 20% to the market price. We’ll update our valuation post earnings release.

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Notes:
  1. Aeropostale Provides Business Update, Aeropostale, Aug 8 2013 [] []
  2. Aeropostale’s Q1 fiscal 2013 earnings transcript, May 23 2013 [] []
  3. Aeropostale Tries Makeover In Time For Back-To-School, Crain’s New York Business, Aug 11 2013 [] []
  4. On heels of historically high back-to-school season, 2013 spending expectations decline, National Retail Federation, Jul 18 2013 []
  5. Teen Retailers Could Be In for Rough Back-To-School Season, The Wall Street Journal, Aug 6 2013 []
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