Is Chile Really A Lucrative Market For Aeropostale?

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ARO: Aeropostale logo
ARO
Aeropostale

Furthering its international expansion strategy, teen apparel retailer Aeropostale (NYSE:ARO) recently revealed plans to expand into Chile. The company has partnered with Sociedad Comercial Grupo Yes S.p.A., which will open licensed stores of Aeropostale and P.S. from Aeropostale in the country. Aeropostale’s first namesake store is scheduled to open later this year, and the company will initiate P.S. from Aeropostale’s expansion early next year. The retailer plans to open standalone stores in Chile, along with some department stores and multi-brand retail outlets. [1]

With its continued struggle in the U.S., Aeropostale has turned to international expansion to provide some respite. Last year, the retailer entered Mexico with its namesake brand and launched P.S. from Aeropostale in the region a couple of months back. Aeropostale is trying hard to identify international markets where its co-relation with American lifestyle and affordable prices can overshadow the lack of fashion depth in its product portfolio. The company’s new CEO Julian R Gieger believes that Chile represents an incredible opportunity for the brand’s expansion due to its stable economy and strong consumer appetite for American brands. However, Aeropostale’s future in the country looks somewhat unsecured given the competitive retail landscape.

Our price estimate for Aeroposatle is at $7.75, implying a premium of close to 170% to the current market price.

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Some Encouraging Prospects

Favorable Macro-Economic Scenario: Over the past few years, Chile has witnessed a surge in apparel sales as the macro-economic environment has improved steadily. Disposable income of Chileans has gone up driven by a consistent decline in unemployment rate. The jobless rate in Chile has dropped steadily since 2009 and stood at just 6% in 2013. As a result of increased consumer affordability, Chile’s GDP increased by an average of 6% between 2010-2012. Although the growth rate came down to 4% in 2013 and slowed further down towards mid-2014, prospects for value-for-money apparel retailers still look good. [2] In this context, Aeropostale can become a popular brand in the region given that it was the first choice shopping destination for several U.S. buyers during the economic downturn. It must be noted that in 2013, growth in apparel and footwear sales (+8%) in Chile comprehensively outpaced its GDP growth rate. [3] With the apparel industry performing much better than the overall economy, foreign retailers such as Aeropostale should be encouraged to enter the market.

Football & Running: Since football and running are two of the most popular sports in Chile, Aeropostale should look beyond its basic casual products and introduce a line of apparel and accessories relevant to these sports. With Chilean footballers including Alexis Sanchez and Arturo Vidal doing well in European leagues, people are imitating their outfits out of respect and pride. As a result, sales of performance apparel, tops, shorts, socks and footwear have gone up. Although Aeropostale doesn’t have performance apparel in its portfolio, it can tweak its basic t-shirts and hoodies with prints and designs closely associated with football. Even running is gaining significant popularity in the region. Each year, a number of brands organize marathons. Santiago alone hosts over 500 running events per year. [3] Such events provide a great opportunity for brands such as Aeropostale to increase their visibility.

But Competition is a Big Concern

Apart for its overreliance on basic logo products, Aeropostale’s downfall in the U.S. can be attributed to fierce competition from fast fashion brands such as Zara, Forever 21 and H&M. While the retailer might have hoped for lesser competition in its debut international ventures, its counterparts are not going to let that happen. Zara has been in Chile for almost a decade and Gap Inc (NYSE:GPS) entered the market in 2011. More recent arrivals are Forever 21 and H&M, who set up their operations in the country last year. Although Aeropostale might not struggle for growth in the initial expansion phase, it may end up repeating its U.S. story if it doesn’t infuse fashion in its product portfolio.

Specialty retailing is a relatively new concept in Chile, and most buyers are still accustomed to shopping for clothes at department stores and hypermarkets. Major retailers such as Falabella, Cencosud Retail, Ripley Corp and Wal-Mart (NYSE:WMT) Chile continue to gain share in the Chilean apparel market. It can be difficult for Aeropostale to compete with them given their deep understanding of Chilean consumer taste. Also, there are a couple of low-price focused retailers – Comercial Fashions Park and Tricot – who can give Aeropostale a run for its money. [3] Going forward, the apparel industry is likely to get more competitive with the expansion of domestic retailers in shopping malls and entry of foreign players. Hence, we believe that while the Chilean apparel market looks good for Aeropostale form the outside, intense competition somewhat steals its thunder.

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Notes:
  1. Aeropostale and P.S. from Aeropostale to Expand into Chile, Aeropostale, Oct 3 2013 []
  2. Chile’s Unemployment Rate Climbs 6.5% As Growth Slows, Bloomberg, Jul 31 2014 []
  3. Apparel and Footwear in Chile, Euromonitor, Jun 2014 [] [] []