Aeropostale’s Timing To Enter Mexico Was Not Ideal

Teen apparel retailer Aeropostale (NYSE:ARO) has limited room for growth in the U.S. due to its wide presence and existing problems. The retailer operates close to 1,000 stores in the U.S., which have been performing poorly for some time now due to less popular products and disinterested shoppers. Aeropostale’s comparable store sales have declined by 9% and 4% in 2011 and 2012, respectively, driven by low store traffic and excessive discounts. Fiscal 2013 has been worse for the company as its comparable sales have slipped by 14%, 15% and 15%, respectively, during the first three quarters. The fourth quarter is not likely to be any different as the retail industry has been slow in the ongoing holiday season.

With its U.S. business under tremendous pressure, Aeropostale has started moving to international markets. In July this year, the company came out with plans for retail store expansion in Mexico. ^[1] Although the region provides good potential for value-focused apparel retailers, Aeropostale has not chosen the best time to enter the market. The Mexican economy has slowed down lately due to weak consumer sentiment. Given its weak brand image and the uncertain economic environment, Aeropostale is less than well-positioned for this entry.

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The Market Potential Is Good

With rising disposable income and a clear interest in fashion, Mexico’s consumers have become an attractive market for affordable brands. About 78% of the region’s population resides in urban areas and about 46% Mexicans are below 25 years of age. ^{[2] [3]} This implies that a major portion of Mexico’s population is young, follows good lifestyle trends and is aware of changing fashion. This bodes well for the apparel industry’s long-term growth outlook. Currently the region’s apparel market size stands at around $5.7 billion, and is expected to grow at a GAGR (compounded annual growth rate) of 3.4% for the next few years. ^[4]

Historically, apparel products have been available in Mexico through a number of channels, such as grocery chains and direct retailers. However, lately, specialty retailers have become much more popular and have emerged as the most important distribution channel in the market. These retailers are increasing their market share by expanding in major shopping centers across the country. This has resulted from Mexican buyers laying a greater emphasis on the shopping experience, which is often better in a specialty store as compared to a department store. Although these factors are encouraging for Aeropostale, its growth in Mexico might not be easy. Lately, a number of multinational brands such as H&M, Gap Inc. (NYSE:GPS), American Eagle Outfitters, Guess (NYSE:GES) and Forever 21 have ventured in the region, resulting in increased competition. ^[5]

But, The Timing Could be Better

Although the Mexican retail market has seen robust growth over the past few years, it has struggled in 2013. ^{[6] [7]} This is attributable to weak consumer confidence and a slowdown in the overall economy. Mexico’s economy shrank by 0.74% in the second quarter due to lower government spending, weak demand for exports and lower consumption. This marked the first decline in the country’s economy in the last four years. ^[8] Although the economic scenario gradually improved in the latter part of the year, Mexico’s GDP is expected to expand by only 1.3% this year, while it grew by 3.9% in 2012. ^[9]

Mexico’s strong ties with the U.S. economy seem to be preventing it from enjoying the strong economic growth of its emerging market peers, such as Brazil. Due to weakness in the economy, the largest retailer in the region Walmex, (Wal-Mart Mexico), witnessed sales declines in consecutive months of July and August. Moreover, comparable store sales for other Mexican retailers also fell by 2.3% in July. ^[10] The decline in Wal-Mart’s (NYSE:WMT) sales clearly indicates that Mexican buyers are spending less even on less expensive daily needs.Clearly, the retail environment at present is less conducive to Aeropostale’s planned entry, whicholy adds tothe challenges it faces. This can only stengthen the had of those who wish to take the company private.

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

1. Aeropostale To Expand In Mexico, Aeropostale, Jul 1 2013 [↩]
2. Urban population (% of total), The World Bank [↩]
3. Mexico Age Structure, Index Mundi [↩]
4. Mexico-Apparel Retail, Market Line, Feb 5 2013 [↩]
5. Apparel in Mexico, Euromonitor International, Apr 2013 [↩]
6. Mexico Retail Sales YOY, Trading Economics [↩]
7. Mexican Retail Sales Unexpectedly Fall ror Second Month in a Row, Bloomberg, May 22 2013 [↩]
8. Mexico cuts outlook as economy shrinks in first since ’09, Reuters, Aug 20 2013 [↩]
9. Mexican Retailers Report Rebound In November Sales, The Wall Street Journal, Dec 16 2013 [↩]
10. Diluted Mexico tax reform gives retailers relief but no panacea, Reuters, Sept 11 2013 [↩]