Aeropostale Earnings Preview: Special Collections Can Offset The Impact Of Weak Holiday Season

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ARO: Aeropostale logo
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Aeropostale

It has been more than two years since teen apparel retailer Aeropostale (NYSE:ARO) saw positive comparable store sales growth. The company will report its January-quarter earnings on March 13th.  (Fiscal years end with January.)  Last year, the retailer registered a sales decline of 14%-15% in three consecutive quarters. Given the U.S. apparel retail market trend in the recently concluded holiday season, it might not be surprising if this decline trend continued in the fourth quarter as well. During the holiday season, U.S. foot-traffic fell substantially owing to adverse climate conditions and weak consumer spending on account of several macroeconomic factors.

Moreover, the retailer’s store consolidation strategy is creating headwinds as well. Half way through fiscal 2013, Aeropostale accelerated its under-performing store closures to reduce its operating expenses. However, Aeropostale launched two special collections (Bethany Mota and Pretty Little Liars) during the fourth quarter of fiscal 2013, that were expected to garner significant customer attention. This could have had an offsetting impact on the company’s revenue decline. We will get additional details regarding customer response to these collections in Aeropostale’s Q4 fiscal 2013 earnings call scheduled on March 13.

Our price estimate for Aeroposatle is at $10, implying a premium of about 35% to the market price.

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Weak Spending And Low Store Traffic Will Impact The Results

Due to the impact of increased taxes, slow job growth, changing spending patterns, higher healthcare costs and gasoline prices, U.S. buyers spent cautiously last year. This was clearly visible in the recent holiday season when the U.S. retail industry saw its weakest growth since 2009. Moreover, extreme weather conditions prevented buyers from shopping at stores. As a result, U.S. foot-traffic declined by 17.7% in December 2013 as compared to December 2012. [1] Overall, foot-traffic during the holiday season decreased by a very sharp 14.6%, which was significantly higher than ShopperTrak’s earlier prediction of 1.4% decline. [2] [3] While U.S. buyers spent freely on electronics, furniture and building materials, they were hesitant to spend on clothing. According to a Reuters poll conducted before the holiday season, about 27% of consumers were planning to lower their spending on apparel this holiday season. [4]

There are signs the weakness continued into the new year.  In January, retail sales fell by 0.4% from a month earlier as consumer confidence slipped and the U.S. witnessed record cold and heavy snowfall, that prevented store visits. [5] The Thompson Reuters/University of Michigan’s consumer sentiment index fell to 81.2 in January from 82.5 in the previous month. [6]

Store Closures Will Weigh On Revenue Growth

Aeropostale operates over 1,000 stores in the U.S. and Canada, and has been expanding steadily over the past few years. However, since the company is struggling to improve its sales, it is now looking to improve its profitability by closing under-performing stores. At the start of fiscal 2013, the company had planned to close about 15-20 stores by the year-end. Half way through the year, it increased this figure to 30-40. In Q4 alone, Aeropostale had plans to close 29 stores. Although this strategy can have a slight positive impact on the company’s operating margins and revenue per square feet, it will weigh heavily on its revenue growth.

Special Collections Could Boost Sales

Historically, Aeropostale has only focused on basic products such as t-shirts, jeans, hoodies, etc., which is one of the main reasons responsible for its troubles. This created a “cheap basic product” brand image for the company, which undermined its more recent efforts to sell more fashionable merchandise. However, we believe that Aeropostale’s new collections should help since they are likely to influence a vast group of customers with their celebrity association.

Back in December, the retailer introduced an exclusive collection in partnership with Bethany Mota, an 18-year old established power player in the social media world. [7] The collection features a range of apparel, accessories and jewelry designed by Bethany to reflect her own lifestyle. The company has established the starting price of this collection at $5 so that buyers do not find its products expensive, which was the case with Aeropostale’s previous fashion launch attempts. Bethany Mota has a huge teenage fan base (close to 5 million subscribers of her YouTube Channel) and we believe that they will show some affinity towards these products. [8] According to interviews conducted with customers exiting from Aeropostale stores, this change from basic logo products to more fashion-relevant products was a pleasant surprise to many.

Another important launch for the company is its first ever Pretty Little Liars collection in partnership with Warner Bros. [9] The TV show Pretty Little Liars has been a sensation among teenage viewers, becoming the most tweeted show in television history. [10] Over 2 million viewers watch its weekly episodes and more than 4 million viewers watched its Halloween special. The collection featuring outfits based of the personalities of the show’s stars is designed by Pretty Little Liars‘ costume designer Mandi Line herself. The collection’s prices are kept in $18-$72 range, which should resonate well with cost-conscious teenage buyers. The company has strategically kept the collection’s launch date same as the season’s premier so as to leverage the viewers’ excitement and enhance sales. This collection has hit all of Aeropostale’s stores as well as its online channel. However, we believe that its impact on the retailer’s Q4 results will be minimal since the launch came towards the end of the quarter.

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Notes:
  1. Retailing Today: December 2013, ShopperTrak, Jan 8 2014 []
  2. Retailers See Fourth Consecutive Quarter Annual Sales Increase During 2013 Holiday Season, ShopperTrak, Jan 8 2013 []
  3. ShopperTrak Expects Holiday Sales Will Increase In 2013, ShopperTrak, Sept 17 2013 []
  4. U.S. holiday sales expected to rise less than last year: ShopperTrak, Reuters, Sept 17 2013 []
  5. Growth Shows Signs of Slowdown, The Wall Street Journal, Feb 13 2014 []
  6. U.S. retailers’ sales chilled by weather, and low consumer confidence, Reuters, Feb 6 2014 []
  7. Aeropostale Launches Exclusive Collection With Bethany Mota, Aeropostale, Dec 6 2013 []
  8. Bethany Mota Fashion Beauty Fun, YouTube []
  9. Aeropostale Partners With Warner Bros To Launch First Ever Pretty Little Liars Series-Inspired Collection, In Collaboration With Costume Designer Mandi Line, Aeropostale, Jan 7 2014 []
  10. Twitter’s Biggest Show: Pretty Little Liars Breaks Another Social Media Record, People.com, Jan 14 2014 []