Aeropostale Slumps Further With Dismal Results And Bleak Guidance

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ARO: Aeropostale logo
ARO
Aeropostale

Aeropostale‘s (NYSE:ARO) stock took another beating after the company reported abysmal Q1 fiscal 2014 results and slashed its guidance for the current quarter. Shares tumbled by more than 15% (after hours) as the retailer reported 13% fall in its comparable sales and guided a loss of $0.55-$0.61 per share for the second quarter, which was worse than analysts’ expectation of $0.50 per share loss. [1] Despite the company’s vigorous efforts to rejuvenate its brand image and add greater fashion content to its portfolio, store traffic remains low.

It appears that Aeropostale does not have many options left to regain its investors’ confidence and keep potential buyers interested. The retailer will have to be aggressive with its P.S. from Aeropostale expansion as it is the only aspect of Aeropostale’s business that provides some hope. However, the company is planning to shut down mall locations of its kids brand in the wake of weak mall traffic, and that will hinder the brand’s expansion plans. Therefore, P.S. from Aeropostale will not be able to pull the company out of its slump any time soon. While Aeropostale’s fashion collections are doing well, they haven’t had any notable impact on the company’s results. The retailer still relies on basic logo products for a bulk of its revenues, which is making its recovery arduous.

Our price estimate for Aeroposatle is at $9.20, implying a premium of over 100% to the current market price. However, we are in the process of updating our model in light of the recent earnings release.

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P.S. From Aeropostale Cannot Help In The Near Term

While Aeropostale’s mainline business has struggled post-recession, its kids brand, P.S. from Aeropostale, 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 higher focus on 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 its 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 has been almost certain that its geographical reach will be extended in the near future. However, Aeropostale is planning to shut 125 mall based P.S. stores this year due to weak mall traffic, which will reduce the brand’s presence considerably. Although the idea is to shift the brand from mall to 0ff-mall locations, the scaled-down presence increases the risk of customer shift to other brands. The company plans to grow the brand to over 500 stores eventually, but its current expansion plans suggest that it will not happen any time soon. Therefore, Aeropostale will have to rectify its core-business to recover in the foreseeable future.

Fashion Is Helping AUR (Average Unite Retail) But Not Store Traffic

During its earnings call, Aeropostale stated that its new fashion collections such as Bethany Mota, Live Love Dream, Tokyo Darling, Free State have been performing very well. Due to the strength of these product lines, the retailer’s average unit retail registered its first growth in the last seven quarters despite a highly promotional environment. [2] As pleasing as it may sound, significant fall in comparable sales despite increased value per transaction is a big worry for the retailer. It clearly indicates that store traffic at Aeropostale has been declining at an alarming rate, which sheds light on its deteriorating brand image. While improving its fashion content is exactly what Aeropostale needs to do to win back customers, it has to be very careful with its pricing strategy. Over the years, buyers have built a perception that Aeropostale is a “cheap basic product” brand and they have been reluctant to spend on the retailer’s expensive fashion products. The company needs to strike a balance between its product design and prices so that it can gradually mend its brand image and improve store traffic. However, it won’t be easy given that Aeropostale’s history with fashion launches hasn’t been the best.

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Notes:
  1. Aeropostale’s Loss Widens As Sales Continue To Slide, The Wall Street Journal, May 22 2014 []
  2. Aeropostale’s Q1 fiscal 2014 earnings transcript, May 22 2014 []