Aeropostale’s Revised Q4 Guidance Isn’t Promising As Its Old Story Continues

Teen apparel retailer, Aeropostale (NYSE:ARO), reported its holiday sales results earlier this month, and raised its Q4 guidance slightly on account of better-than-expected margins. The company now expects to report a loss per share of $0.25-$0.31 for the fourth quarter of fiscal 2014, as opposed to its previous guidance of $0.37-$0.44. Aeropostale stated in a recent press release that the retailer achieved better margins during the holiday season than it originally expected and managed its inventory properly. The company believes that it will end the fourth quarter with a clean inventory position, that should have a slight negative impact on markdowns going forward. ^[1]

While Aeropostale’s bottomline performance during the holiday season was slightly better than expected, it continues to report significant decline in revenues. The company’s revenues for the two month period of November and December 2014 declined 11% to $508 million. Its comparable store sales including e-commerce fell 9%, on top of 15% decline witnessed during the same period last year. Reporting revenue declines in double digits is something that Aeropostale has persistently done over the past several quarters.

Our price estimate for Aeroposatle is at $6.38, implying a premium of less than 115% to the current market price.

See our complete analysis for Aeropostale

Aeropostale’s results continue to struggle due to buyers’ lost interest in the brand, which was very popular during the recessionary environment for its affordable clothing. However, post-recession, it should have focused on gradually bolstering its portfolio with fashion items rather than persisting with basic logo merchandise. Aeropostale kept losing buyers who were prepared to spend more on clothing other than logo t-shirts jeans and hoodies, to players who had a better product variety.

Over time, U.S. buyers developed a perception that the brand is just about cheap basic products and as a result, its fashion launches weren’t well received. Aeropostale had a great opportunity to sustain its growth momentum post-recession by assessing the demand effectively, but it may have failed to comprehend the fact that discretionary consumer spending would eventually recover and buyers would want better products. This is the reason why fashion-forward players such as Zara and Forever 21 have thrived over the past-couple of years. Aeropostale’s own launches centered on fashion-forward products have been overshadowed by its long standing brand image.

Over the past one year, the retailer has lost significant share in the U.S. apparel and accessories market to fast-fashion players. During the holiday season of 2013, the market stood at $41.5 billion and Aeropostale’s contribution was around $572 million or 1.38%. This year, while the market has grown 4.5% to $43.4 billion, Aeropostale’s sales have declined 11% to $508 million. Considering these figures, the company’s market share comes out to be 1.17%, 21 basis points below its last year’s levels. ^[2] Aeropostale still needs to do a lot to return to positive growth, let alone gain share in the market.

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1. Aeropostale Provides Holiday Sales Results And Updates Fourth Quarter Outlook, Aeropostale, Jan 8 2015 [↩]
2. Clothing and Clothing Accessories Stores, The United States Census Bureau [↩]