Aeropostale Earnings Preview: New CEO’s Strategies Will Be In Focus As Sales Continue To Stumble

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ARO: Aeropostale logo
ARO
Aeropostale

With buyers losing their interest in the brand altogether, Aeropostale (NYSE:ARO) has been unable to register positive comparable sales growth for almost three years now. Although the company has been trying hard to improve its product portfolio and bring back customers, its efforts have failed to yield the desired results. During the first quarter of fiscal 2014, while it was expected that the retailer’s troubles would ease out a little with the launch of the Bethany Mota and Pretty Little Liars collections, its downfall continued at an alarming rate. Aeropostale’s comparable sales declined by 13% during the quarter and it guided to a loss of $0.55-$0.61 per share for the second quarter, results of which are scheduled to be released on August 21.

However, the company recently revised its EPS forecast to a loss of $0.42-$0.45, and announced that its current CEO Thomas P. Johnson is being replaced by Julian R. Geiger, who had worked with the company during its tremendous growth phase. [1] It will be interesting to see what strategies Mr. Geiger formulates to bring Aeropostale’s growth back on track.

During a recent press release, the company stated that its comparable sales (including e-commerce sales) declined by 13% during the second quarter. Aeropostale could not drive sufficient store traffic on account of fierce competition from fast-fashion brands such as Zara, Forever 21 and H&M, and low brand loyalty. Moreover, the industry-wide foot traffic decline, due to the ongoing gradual shift to online retailing, further added to the retailer’s problems. During the quarter, Aeropostale’s revenues declined by 13% due to a significant fall in comparable sales, and closure of both under-performing mainline stores and mall-based P.S. from Aeropostale stores. [1]

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Our price estimate for Aeroposatle is at $8.32, implying a premium of over 115% to the current market price.

See our complete analysis for Aeropostale

Julian R. Geiger Replaces Thomas P. Johnson

A couple of days ago, Aeropostale announced that Julian R. Geiger has rejoined Aeropostale and he will be taking over Thomas P. Johnson’s role as the CEO of the company. During the phase when Aeropostale’s sales and profits were growing rapidly, Mr. Geiger was the leader of its strategic direction. He knows the company very well and believes that there is a big opportunity for its growth. Mr. Geiger specifically mentioned that Aeropostale’s transformation initiatives, financing deals and cost reduction plans can pave the way for its recovery. However, it is easier said than done. The company has been burning up cash faster than it is generating it, and is struggling to raise capital in the public market. Its efforts to be more fashionable haven’t shown any significant promise, due to which its future looks somewhat grim. During the earnings call, we will have a keen eye on what Mr. Geiger plans to do differently.

Low Brand Loyalty & Foot Traffic Decline Dragged Aeropostale’s Comparable Sales Down

With its affordable basic products, Aeropostale was one of the strongest apparel performers during the recession of 2008 to 2009. However, as the economy started recovering, the retailer failed to take advantage of rising consumer interest in fashionable apparel, due to its persistent focus on the logo business. This resulted in consistent comparable sales decline for the company that continues to date. Even though Aeropostale has launched certain fashion collections over the past, its continuing focus on basic products has overshadowed those changes. Moreover, the sluggish economic environment in the U.S. has weighed heavily on consumers’ discretionary spending, which has troubled the entire apparel industry. While certain fast-fashion brands have been able to grab a sizable share of the low consumer spending on apparel, struggling retailers such as Aeropostale and Abercrombie & Fitch (NYSE:ANF) have been at the receiving end of this trend.

The apparel industry struggle appears to be increasing as Urban Outfitters (NASDAQ:URBN) and Gap Inc (NYSE:GPS), who performed very well throughout last year, reported flat comparable sales growth in Q2. This can be attributed to the gradual customer shift to online shopping. Due to the increased proliferation of smartphones and tablets, and the convenience of online shopping, U.S. buyers have been making more purchases online. Subsequently, they are visiting fewer stores, which is a concern for a number of retailers including struggling Aeropostale. As per the data compiled by ShopperTrak, a firm that tracks store traffic in over 40,000 outlets across the U.S., store visits have fallen consistently by close to 5% year over year in all the months of the past two years, barring April 2014. [2] This is impacting sales at Aeropostale, which earns close to 90% of its revenues from store sales.

Store Closures Pull Revenues Down

Aeropostale stores are mainly located in shopping malls, where foot traffic has been weak over the past several quarters on account of weak consumer confidence. Moreover, shoppers have shunned the brand’s basic logo products in search of more fashionable merchandise offered by other retailers such as Gap Inc and Urban Outfitters. As a result, Aeropostale hasn’t been able to drive sufficient store traffic, which has led to heavy markdowns that impacted its store productivity. The company’s revenue per square foot has declined by close to 30% over the last three years and its EBITDA (earnings before interest tax depreciation and amortization) margins have crashed by almost 20 percentage points.

While Aeropostale is trying hard to increase the proportion of fashionable products in its portfolio with collections such as Pretty Little LiarsBethany Mota and Live Love Dream, it is also looking to cut its operating costs. The company has accelerated the closure of its under-performing namesake brand stores to improve its overall store productivity. At the start of fiscal 2013, the company had planned to close about 15-20 stores by the year-end, but it increased this figure to 30-40 half way through the year. In Q4, Aeropostale shut down 29 stores and it closed another 18 in the first quarter. Over the next several years, the retailer plans to close 175 stores in the U.S., which will bring the store count down to around 750. We believe that the retailer may have closed a certain number of Aeropostale and P.S. from Aeropostale stores in the second quarter of 2014.

Closing stores that do not generate significant traffic can have a slight positive impact on Aeropostale’s revenue per square feet as well as its operating margins. However, this strategy will put tremendous pressure on Aeropostale’s revenue growth as the retailer will have fewer stores operational at the end of Q2 fiscal 2014 as compared to the same quarter last year.

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Notes:
  1. Aeropostale Inc. Announces Julian R. Geiger to Rejoin Company as CEO, Aeropostale, Aug 18 2014 [] []
  2. Gap, L Brands Drive July Retail Sales, The Wall Street Journal, Aug 7 2014 []