Aeropostale‘s (NYSE:ARO) stock has fallen by more than 65% over the last year driven by its dismal financial performance and future uncertainties. The retailer’s over-reliance on basic products, its inability to attract sufficient store traffic, and the edgy retail environment in the U.S. all resulted in 15% comparable store sales decline in fiscal 2013. While the company is finding it hard to revive its growth, which is evident from its bleak Q1 fiscal 2014 guidance, there are a couple of positives that can help it recover gradually.
Aeropostale has come out with some new collections that can change its potential buyers’ perception. During the last quarter, the retailer launched new products inspired from TV series Pretty Little Liars and Internet personality Bethany Mota. Both of them have a tremendous teen following, which is an ideal demographic for the retailer. Also, the company’s young brand P.S. from Aeropostale has done very well so far, which is encouraging the retailer to ramp up its expansion. Although a near term turnaround may be unlikely, these aspects can have a certain positive impact on the retailer’s overall store traffic, and subsequently its growth.
Our price estimate for Aeroposatle is at $9.20, implying a premium of about 100% to the current market price.
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Better And Relevant Fashion Can Garner Significant Customer Attention
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 built a “cheap basic product” brand image of the company, which undermined its efforts of being more fashionable. However, we believe that Aeropostale’s new collections can do well since they are likely to attract a vast group of customers.
In December 2013, the retailer introduced an exclusive collection in partnership with Bethany Mota, an 18-year old established power player in the social media world. The collection featured a range of apparel, accessories and jewelry designed by Bethany reflecting her lifestyle. The company kept 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 launches. Bethany Mota has a huge teenage fan base (close to 6 million subscribers of her YouTube Channel) and we believe that they will show some affinity towards these products. According to some interviews conducted with customers exiting from Aeropostale stores, a change from basic logo products to a more fashion relevant range was a pleasant surprise. The retailer even stated in its recent earnings call that this collection exceeded expectations and delivered high margins and average prices.
A more important launch for the company was its first ever Pretty Little Liars collection in partnership with Warner Bros. The TV show Pretty Little Liars has been a sensation among teenage viewers, becoming the most tweeted show in television history. 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 strategically coincided the collection’s launch date with the season’s premier, to leverage viewers’ excitement to enhance sales. This collection hit all of Aeropostale’s stores as well as its online channel late in January. Early trends have indicated that Pretty Little Liars products are going for high average prices and drawing significant social media attention and twitter following.
During the fourth quarter of fiscal 2013, while Aeropostale’s core business comparable store sales were substantially down, these collections had an offsetting impact. Going forward, as the retailer continues to launch such appealing product lines, its fashion segment will become strong enough to have a material influence over its results.
P.S. From Aeropostale Shows Tremendous Promise
In 2009, Aeropostale launched a new retail concept called P.S. from Aeropostale, which offers casual clothing and accessories for kids in the age group of 4-12 years. While the retailer’s mainline business has struggled post-recession, this brand has performed very well. This can be attributed to the fact that competition in the pre-teen apparel market isn’t as intense as in the teen apparel market and consumer spending on clothing is relatively stable in the tween space. Although there are several established apparel retailers in the U.S., most of them focus on teenagers and young adults due to their preference for apparel shopping. This has made the pre-teen apparel market somewhat niche and safe to enter. Moreover, unlike the teen apparel space, where buyers often rely on their own income, kids are dependent on their parents for apparel shopping. In the current economic environment, employment scenario for adults (who earn higher) is much better than it is for teenagers, implying that adults have a higher budget for apparel and accessories.
Taking cue from these factors, Aeropostale has been expanding P.S. from Aeropostale aggressively. The company opened 29 brand stores in 2012 and accelerated the expansion rate in 2013 with the addition of 51 stores. As of fiscal 2013, the retailer had 151 P.S. from Aeropostale stores across 20 states in the U.S., leaving another 30 states untapped. Given the brand’s success and the huge market potential, it won’t be surprising if its geographical reach is extended in the near future. Aeropostale’s management has stated that its P.S from Aeropostale concept will ultimately grow to 500 stores and render $700 million in incremental revenues. This formulates a very interesting scenario where P.S. from Aeropostale’s physical presence will be at par with the company’s mainline business. This will make the brand strong enough to drive Aeropostale’s comparable store sales and margins, as well as bolster its cash flow.