Aeropostale’s Earnings Were Marked By Lackluster Results, Weak Outlook And Recovery Efforts

Teen apparel retailer Aeropostale (NYSE:ARO) recorded another dismal quarter as its Q3 fiscal 2013 sales were weighed down by an edgy retail environment and heavy promotional activities. The retailer’s revenues, comparable stores sales, gross margins and net income were down substantially as compared to Q3 fiscal 2012. Also, it slashed its outlook for the fourth quarter as there were no signs of recovery and the retail environment remains uncertain. Still, the company appears to be in no mood to be acquired as it adopted a poison pill a few days back to prevent a possible takeover. ^[1] Instead, it is focusing on several initiatives to get its business back on track. Aeropostale is trying hard to improve its merchandise mix and customer interactions to boost store traffic, which has been on a decline since 2009.

However, while these efforts are inline with what the company needs to do, a near-term turnaround is highly unlikely. Aeropostale still earns a bulk of its revenues from basic products that no longer resonate well with its customers. Also, its more trendy products haven’t had any significant success due to their higher prices. To add to the retailer’s miseries, the overall U.S. apparel industry has been in a slump on account of low consumer confidence. Therefore, even as executive vice president Emilia Fabricant believes that the company is just a quarter away from the transformation of its fashion offerings, we do not expect Aeropostale’s customers to return any time soon. ^[2]

See our complete analysis for Aeropostale

Q3 Recap And Q4 Outlook

During Q3, teen customers continued to elude Aeropostale in search of more trendy products, which led to a decline of 14% and 15% in revenues and comparable store sales respectively. Response to core product categories such as graphics and fleece remained weak resulting in 10% decline in number of transactions. The management stated that these results were weaker-than-expected since it had to usher heavy markdowns to attain a clean inventory position for the holiday quarter. This factor also dragged Aeropostale’s gross margins down to 17.1% from 27.9% in the same quarter last year. The company reported a loss of $25.6 million or $0.33 per share, trailing the market’s expectations of $0.24 per share loss. ^[2]

Despite having witnessed improved sales results over the Black Friday weekend, Aeropostale slashed its outlook for the Holiday Quarter. It now expects a loss of around $0.24-$0.32 per share for Q4, while analysts have been modeling 8 cents per share loss. Apart from Aeropostale’s own problems, the prevailing industry weakness is responsible for this forecast. In line with what ShopperTrak predicted, holiday sales are seeing their weakest gains since 2009. Retail sales in November rose by a mere 2.3% and are expected to increase by just 2.4% for the entire holiday season. ^[3]

Aeropostale Is Working Hard For Its Product Development

The main reason behind Aeropostale’s problems has been poor customer response to its basic products such as tees, jeans and hoodies. Also, the retailer has not been too successful in integrating fashion content in its merchandise. However, it is trying hard to provide its customers with more options. Aeropostale has been focusing on developing its sub brands, launching new product categories and increasing its speed to market by reducing lead times and enhancing the sourcing system flexibility. ^[2]

Some of the retailer’s offerings such as women’s sweaters, woven pants and footwear along with men’s wovens, sweaters and short-sleeve knits performed relatively well through the quarter. Encouraged by these results, Aeropostale plans to further refine its product mix with expansion of its fashion offerings, which is a small category at the moment. The company’s sub-brand Live Love and Dream has seen some initial success driven by compelling customer response. The collection of active tops and pants as well as yoga, intimates and lounge wear was particularly strong. This brand has now evolved from concept to stores and the retailer plans to develop it further. It is also looking to nurture some new sub-brands to provide its customers with an array of products to choose from. Aeropostale’s focus on its merchandise improvement is evident from the fact that it has added significant amount of talent across its product development team over the past year. Also, it is working with a prominent New York branding firm to reposition its brand. ^[2]

It’s Looking To Strengthen Its Connection With Customers

As the U.S. economy started recovering after the recession of 2008-2009, Aeropostale started losing its customers to other fast fashion brands. This trend has continued til date as the retailer has been unable to rejuvenate its connection with the customers. Aeroposatle feels that appealing product offerings are not enough to drive store traffic, customers also want personal interactions along with the flexibility to access the brand. For this purpose, the company has invested heavily in social media to enhance the quality of customer engagement. The management stated that it has made significant progress on the social media front over the last quarter. Driven by positive customer response, Aeropostale’s engagement factor over Facebook (NASDAQ:FB) has increased substantially as compared to last year and Twitter (NYSE:TWTR) sentiment has gone positive within a quarter.

During Q3, the company partnered with the famous self-made social blogger, Bethany Mota to feature her in a new exclusive collection. Aeropostale released a few pieces of this collection over its twitter campaign and saw over 0.5 million people tweeting to unlock these looks within 5 weeks. The retailer is also entering in a similar partnerships with Warner Bros. for its Pretty Little Liars series. The first collection featuring different looks of the four main characters will hit the stores in early January. ^[2] These are a few examples of how the company is looking to revive its connection with its customers.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Aeropostale Adopts Limited Term Stockholder Rights Plan, Aeropostale, Nov 26 2013 [↩]
2. Aeropostale’s Q3 fiscal 2013 earnings transcript, Dec 4 2013 [↩] [↩] [↩] [↩] [↩]
3. U.S. Retail Holiday Sales Up 2.3%, Foot Traffic Declines, Bloomberg, Dec 1 2013 [↩]