Here’s Why We Believe Aeropostale’s Revenue Per Square Feet Can Recover

1.51
Trefis
ARO: Aeropostale logo
ARO
Aeropostale

Aeropostale‘s (NYSE:ARO) revenue per square feet (RPSF) increased from $553 in 2008 to about $628 in 2010 as the company gained share in the teen apparel market during the economic recession of 2008-2009, when customers became highly value oriented. However, the figure declined sharply in 2011 to $568 due to an imbalance of fashion and prints in Aeropostale’s merchandise. Moreover, customers started moving towards other trendy brands such as Gap (NYSE:GPS), Abercrombie & Fitch (NYSE:ANF) and Urban Outfitters (NASDAQ:URBN). As a result the company ushered heavy markdowns to compensate for low store traffic, which brought down the RPSF to $547 in 2012. Aeropostale continued its heavy discounting in 2013 amid an edgy retail environment that further dragged the figure down to $462 in 2013.

Aeropostale’s current RPSF is well below what it used to be a couple of years back, but we believe that it has bottomed out and will gradually improve going forward. We expect the figure to decline to $435 this year and marginally recover thereafter to reach $474 over the next five to six years.

The company has been very aggressive with discounting so far, but its average prices have started to improve. Although the increase isn’t strong enough to have a material impact, it indicates that Aeropostale’s fashion launches have been somewhat successful. If the company can plan and manage its future fashion launches properly, the proportion of full priced sales in its overall sales can improve. This can ultimately have a positive impact on the retailer’s RPSF. Also, Aeropostale’s strategy of shutting down stores that do not generate significant revenues can uplift its RPSF.

Relevant Articles
  1. Aeropostale Claims To Be Back After Filing For Chapter 11 Bankruptcy
  2. By How Much Have Aeropostale’s Revenue & EBITDA Changed In The Last Five Years?
  3. How Has Aeropostale’s Revenue Composition Changed In The Last Five Years?
  4. What’s Aeropostale’s Revenue & Expenses Breakdown?
  5. What Aeropostale’s Potential Suitors Would Have Access To?
  6. How Did Aeropostale’s Revenues And Losses Decline In 2015?

Our price estimate for Aeroposatle is at $7.75, implying a premium of over 105% to the current market price.

See our complete analysis for Aeropostale

Recovering Average Prices

Due to its limited fashion variety, Aeropostale usually relies on deep discounts to attract customers, which weighs heavily on its average unit retail. Between 2010 and 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 RPSF once the traffic starts recovering.

Lately, the retailer has managed to sell its fashion products at full prices or small discounts, which suggests that buyers are welcoming the newness in Aeropostale’s product offering. Hence, it is possible that more buyers will return to Aeropostale stores in the near future, which could complement its improving average unit retail. However, given the level of dislocation in the business, regaining buyer confidence will be a challenging task for the new CEO.

Store Consolidation

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 abandoned the brand’s basic logo products in search of more fashionable merchandise offered by other retailers such as Gap Inc and Urban Outfitters. Since the company hasn’t been able to drive sufficient store traffic, it is shutting down stores that do not generate significant revenues in order to improve productivity.

The company has accelerated the closure of its under-performing namesake brand stores to improve its overall store productivity. At the start of 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 alone, Aeropostale shut down 29 stores and it closed another 18 in the first quarter of 2014 and 14 in the second. Over the next several years, the retailer plans to close a total of 175 stores in the U.S., which will bring the store count down to around 750.

Closing stores that do not generate significant traffic can help Aeropostale improve its RPSF. Since these stores generate fewer revenues than other Aeropostale stores, but account for similar store space, their closure will help the company reduce its square footage at a faster rate than its revenue decline.

Upside/Downside

We currently estimate Aeropostale’s RPSF to decline to $435 in 2014 and then recover gradually to $474 over the next five-six years. However, if the company successfully turns around its brand image with appealing fashion launches, driving greater store traffic and operating with fewer markdowns, its RPSF can reach a level much higher than $474. If the figure increases to $500 instead, there can be about 10% upside to our price estimate. On the contrary, if Aeropostale fails to integrate better fashion in its portfolio and reduce its reliance on basic logo products, its recovery can stall. RPSF stabilizing at the current levels would result in more than 10% downside to our price estimate for Aeropostale.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid CapMore Trefis Research