Aeropostale’s Earnings Tumble Again, But Increasing Average Unit Retail Provides Hope

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ARO: Aeropostale logo
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Aeropostale

Aeropostale‘s (NYSE:ARO) shares dropped by more than 10% in after hours trading after the company reported a loss of $63.8 million in Q2, and projected wider-than-expected losses for the current quarter, which includes the critical back-to-school season. Low store traffic remains the biggest concern for the retailer and traffic trends haven’t changed much in the past couple of quarters, despite the launch of promising fashion collections. Earlier this month, Aeropostale reported that its comparable sales (including e-commerce) fell by 13% during the quarter and its revenues declined by a similar amount to $396 million, which was marginally ahead of the consensus estimated of $395 million. [1]

Interestingly, about a week back, Aeropostale revised its Q2 EPS outlook from a loss of $0.55-$0.61 to $0.42-$0.45, but it missed the lower end of its new guidance by a penny. Moreover, certain asset impairment costs and restructuring charges increased its Q2 loss to $0.81 per share. This compares to a loss of $0.43 per share or $33.7 million incurred in the same quarter last year. [2]

While Aeropostale’s overall Q2 performance was dismal, there were a few bright spots. The company’s average prices (average unit retail) increased by 6% during the quarter, due to good customer response to fashion collections such as Bethany Mota, Pretty Little Liars, and Live Love Dream. This indicates that although shoppers bought less at Aeropostale, they shopped at higher prices. Also, the retailer exhibited some progress on its cost cutting efforts as SG&A expenses fell 3% to $121 million. However, SG&A expenses relative to revenues increased by close to 300 basis points as comparable sales fell sharply. [3] Aeropostale’s new CEO, Julian R. Geiger, has been back at the company only for a few days, and hence he did not speak much during the earnings call. Yet, we will eagerly wait for updates on strategies he plans to employ for the company’s turnaround.

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Our price estimate for Aeroposatle is at $8.32, implying a premium of over 115% to the current market price. However, we are in the process of updating our model in light of the recent earnings release.

See our complete analysis for Aeropostale


Increasing Average Unit Retail Provides Some Hope

Due to its limited fashion variety, Aeropostale usually relies of deep discounts to attract customers, which weighs heavily on its average unit retail. Between 2010-2013, the retailer’s average unit retail declined at an average annual rate of more than 6%. However, the company has seen a turnaround in this metric in the first two quarters of 2014.

During its Q1 2014 earnings call, Aeropostale stated that its new fashion collections such as Bethany MotaLive Love DreamTokyo Darling, and 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. The 3% increase in this metric had a small offsetting impact on the retailer’s comparable sales decline in Q1. In Q2 2014, Aeropostale’s average unit retail increased by 6%, but it was overpowered by 14% decline in number of transactions and 5% decline in units per transaction.

While store traffic at Aeropostale continues to decline at an alarming rate, a turnaround in average prices should provide some respite. It is often said that Aeropostale needs to be more fashionable to ensure the revival of its growth, and the retailer is trying to do so, in fact. Its efforts to integrate more fashion collections in its portfolio are finally showing some promise. Aeropostale’s average prices are increasing, which should have a greater impact on its comparable sales growth once the traffic starts recovering.  Given the level of dislocation in the business, however, the new CEO faces a significant challenge.

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Notes:
  1. Aeropostale Forecasts Another Quarterly Loss, The Wall Street Journal, Aug 21 2014 []
  2. Aeropostale Reports Results For Second Quarter Of Fiscal 2014, Aeropostale, Aug 21 2014 []
  3. Aeropostale’s Q2 fiscal 2014 earnings transcript, Aug 21 2014 []