With Struggles In The U.S., Aeropostale Might Want To Focus On These International Markets

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Teen apparel retailer, Aeropostale (NYSE:ARO) has lost close to 65% of its value over the past year and is finding it really hard to recover. Despite its vigorous efforts, the retailer’s comparable sales and margins have declined substantially over the last couple of years. Since its strategies are not working out in the U.S., Aeropostale might want to look for opportunities beyond the domestic boundaries. We believe that investors or potential buyers will prefer that the retailer improve its market position in the U.S. before investing in new markets. However, it may not be a bad idea for Aeropostale to start expanding slowly and strategically in some key international markets that require minimal investments. Some of these markets include the United Arab Emirates, Turkey, the Philippines and Mexico.

Currently, Aeropostale operates only 96 international franchisee stores in 10 countries in the Middle East, Asia, Europe and Latin America. In comparison, it has more than 1,000 stores in North America. During 2012, the retailer signed three licensing agreements to open 25-30 stores in Columbia, Panama and the Philippines over the next five years. It also partnered with Distribuidora Liverpool, S.A. de C.V. to open several licensee stores in Mexico. In addition, the retailer came out with plans for retail store expansion in Mexico in July last year. [Read: Aeropostale’s Timing To Enter Mexico Was Not Ideal] We believe that Aeropostale’s competitive pricing can pave the way for its success in these markets and its international business can become sizable going forward.

Our price estimate for Aeroposatle is at $9.20, implying a premium of over 90% to the current market price.

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See our complete analysis for Aeropostale

The United Arab Emirates

The United Arab Emirates is the most important market in the Middle East as it has become a hub for foreign retailers. Despite a marginal slowdown in 2009 and 2010 due to global economic crises, the market registered solid volume growth in 2012 driven by an increase in number of tourists and entry of several international apparel brands. [1] A report by consulting group AT Kearney stated that U.A.E has the highest number of international retailers. This can be attributed to the local population’s high disposable income and fashion consciousness. The same report suggested that the region’s annual per capita spending on apparel sales ($785 in 2010) is the highest among all the developing markets. [2] Although the country’s total apparel market is still small ($5.8 billion), it has grown at a healthy compounded annual growth rate (CAGR) of 7.6% over the last four years. [3] The market is expected to sustain its growth going forward backed by soaring demand arising from improving tourism and rising disposable income levels. [1]

Aeropostale’s presence in the region is small (13 franchisee stores) and there is huge potential for retail as well as licensee store expansion. However, the company needs to plan its approach carefully as other U.S. retailers such as Abercrombie & Fitch (NYSE:ANF) and American Eagle Outfitters (NYSE:AEO) are also moving to the region. The market is already quite competitive with several retailers sparring over prices, resulting is slow unit price growth.

Turkey

The apparel industry in Turkey rebounded immediately after the global recession as consumer confidence improved. The market saw positive growth in all product categories, indicating an industry-wide recovery. Lately, due to spatial restructuring in large Turkish cities, a number of shopping centers have emerged. This has boosted the influence of urban lifestyle which is impacting the region’s apparel shopping trends. Buyers have started to prefer branded clothing available in large malls over non-branded products from local bazaars and independent retailers. In response, both local and international apparel retailers are aggressively expanding their footprints in shopping malls.

It must be noted that the Turkish apparel market is still dominated by local players as they are quickly adapting to changing shopping patterns. With their knowledge of local tastes, these companies have developed strong brands in an affordable price range. [4] However, this suggests that Aeropostale’s competitive pricing can be a strong advantage over other branded retailers as the region’s buyers are value conscious.  At the end of fiscal 2013, the retailer operated eight franchisee stores in the region.

The Philippines

Despite its small size, the Philippines apparel market offers good potential for value-focused retailers, due to its flourishing middle class, which is benefiting from rising disposable income on account of booming BPO (Business process outsourcing) industry and increasing remittances. The Philippines is one of the biggest BPO markets in the world, with over 640,000 (2011) employees working in various call centers. [5] In 2013, this industry generated $13.34 billion in revenues, which was an increase of almost 15% over the prior-year level. The country’s central bank expects the BPO industry to render $15.34 billion in 2014 with a sustained growth rate of 15%. By 2016, the industry is expected to touch $25 billion in revenues with close to 1.3 million employees, suggesting better lifestyle and higher demand for branded apparel in the future. [6]

Apart from the booming BPO industry, a substantial rise in remittances (money received from friends and relatives working abroad) is also stimulating consumer spending in the Philippines. Remittances account for close to 10% of the country’s GDP and have been rising rapidly over the past couple of years. The Philippines received $21.3 billion in cash remittances in 2012, which was 6.3 % higher than what it received in 2011. [7] In 2013, the figure further rose by 6.4% to $22.76 billion. Growing revenues from BPO and remittances resulted in better-than-expected economic growth of 7.2% in 2013 and a strong forecast of 6.5%-7.5% for 2014. [8] Therefore, we expect consumer spending to continue to improve in the coming years, which bodes well for the region’s apparel industry. Euromonitor expects the apparel market’s growth to pick up in the future driven by improving lifestyle and healthy economic growth. [9]

Within the apparel market, consumers have shown a preference for high fashion low-priced brands, which has allowed them to shop more frequently. They have been increasingly switching to online shopping, which is at a nascent stage currently, but is expected to become a key distribution channel in the future. [9] These aspects are likely to favor Aeropostale’s growth given that is a value focused brand. However, the company will face stiff competition from the market leader Suyen Corporation and its American partner American Eagle Outfitters.

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Notes:
  1. Apparel the United Arab Emirates, Euromonitor, Jul 2013 [] []
  2. UAE has highest apparel spending per capita in the world, Emirate 24 7, June 8 2011 []
  3. Apparel Retail in United Arab Emirates, Market Research, Feb 27 2013 []
  4. Apparel in Turkey, Euromonitor, Sep 2013 []
  5. BPO firms unfazed by Obama ‘job bill’, Business Mirror, Nov 8 2012 []
  6. BPOs made $13.34B in 2013 export services, Business Mirror, Jan 3 2014 []
  7. 2012 remittances hit record high, Philstar, Feb 15 2013 []
  8. Remittances up 6.4% to $22.76 B in ’13, Philstar, Feb 18 2014 []
  9. Apparel in the Philippines, Euromonitor, Jul 2013 [] []