Mexican Expansion Will Give P.S. From Aeropostale A Much-Needed Push

U.S. apparel retailer Aeropostale (NYSE:ARO) recently announced the debut of its P.S. from Aeropostale brand in Mexico. The company opened its first kids brand store in Mexico City this July in partnership with Distribuidora Liverpool, S.A. de C.V., which also operates Aeropostale’s mainline stores in the country. For the brand’s further expansion in the market, Aeropostale plans to open P.S. from Aeropostale store-in-store locations in Liverpool department stores, along with its standalone outlets. Aeropostale’s namesake brand has seen tremendous growth in Mexico over the last year, which has encouraged the retailer to introduce its kids brand as well. Overall, Aeropostale plans to open more than 100 P.S. from Aeropostale stores in Mexico over the next few years. ^[1]

P.S. from Aeropostale’s Mexican expansion plans have brought a glimmer of hope for investors who were worried after the company decided to shut 125 P.S. from Aeropostale mall-based locations in the U.S. within a year. While the idea behind this strategy was to gradually relocate the brand to locations with better foot traffic, opening the same number of stores in a short span of time will be a strenuous task. If Aeropostale does not open an adequate number of P.S. from Aeropostale stores in the near term,  it runs the risk of losing customers to other brands. In this context, the brand’s Mexican expansion can complement its domestic store growth.

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What Makes P.S. from Aeropostale so Important?

In 2009, Aeropostale launched P.S. from Aeropostale, which offers casual clothing and accessories for kids in the 4-12 age group. 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 a cue from these factors, Aeropostale has been expanding P.S. from Aeropostale aggressively and it plans to eventually grow this concept to 500 stores across the country.

Brand Relocation Could Drive Customers Away

As of 2013, P.S. from Aeropostale had 151 stores in 20 states in the U.S., leaving another 30 states untapped. While it made sense to continue the brand’s aggressive expansion given the huge available market, Aeropostale surprised many when it decided to shut 125 mall based locations of P.S. from Aeropostale in a  year. The retailer’s stores are mainly located in shopping malls, where foot traffic has been weak over the past several quarters on account of weak consumer confidence. Interestingly, P.S. from Aeropostale stores have been operating well in shopping malls despite lower traffic. Realizing that there is an opportunity to further improve performance, Aeropostale recently decided to shift its P.S. from Aeropostale stores from malls to off-mall locations. Although the brand’s expansion at other locations will continue in line with this strategy, the closure of 125 stores will leave P.S. from Aeropostale with an unsubstantial retail presence in the near future. This can drive P.S. from Aeropostale’s loyal customers to other similar brands, which is exactly the opposite of what Aeropostale is trying to attain right now.

Mexican Expansion Can Provide Some Support

By expanding in Mexico, not only can P.S. from Aeropostale get its much-needed near term store growth, but it can also help Aeropostale strengthen its global footprint. The Mexican apparel market has been very good to the retailer so far, with its rising disposable income, clear interest in fashion and high proportion of young shoppers. Over the last year, Aeropostale’s namesake brand has found tremendous acceptance in Mexico, which has resulted in strong growth. Aeropostale’s local partner Liverpool has immense experience of operating large Mexican department stores, and also Aeropostale itself. With its market expertise, Liverpool will be able to launch P.S. from Aeropostale at the most lucrative locations in Mexico, which is likely to complement the brand’s growth in the U.S.

Aeropostale plans to eventually grow its P.S. from Aeropostale concept to 500 stores, but its recent decision to close 125 mall locations indicates that this won’t happen anytime soon. Meanwhile, Aeropostale must sustain an adequate number of P.S. from Aeropostale stores so that its brand image does not fade away. More than 100 stores in Mexico over the next few years along with continued expansion in the U.S. can help the company accomplish this. Aeropostale opened about 50 P.S. from Aeropostale stores in the U.S. last year and it might look to add a similar number this year as well.

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1. P.S. From Aeropostale Launches In Mexico, Aeropostale, Aug 1 2014 [↩]