Aeropostale Finally Reports Profit, But Falls On Weak Guidance

Aeropostale (NYSE:ARO) reported operating profits for the first time in the last eight quarters, beating its own guidance as well as the consensus estimate. Excluding certain charges, the company reported net income of $0.4 million or $0.01 per share for the fourth quarter of fiscal 2014, while analysts were expecting a net loss of $0.03 per share. On the same reporting basis, Aeropostale posted operating profits of $3.7 million. However, despite the earnings beat, the retailer’s stock fell by over 15%, as it issued bleak earnings guidance for the first quarter of fiscal 2015. Aeropostale expects to report a loss per share of $0.53-$0.61, much worse than analysts’ estimates of $0.35 per share loss.

Moreover, the company was unable to meet the market expectations in terms of revenues, as its comparable sales including e-commerce fell 9% and net revenues fell 11% to $593.8 million, just below the consensus estimate of $595 million. Continued softness in demand weighed on Aeropostale’s comparable sales and its store network reshaping strategy made things worse. During the fourth quarter, Aeropostale opened no new stores and closed 77 namesake stores and 115 P.S. from Aeropostale outlets. ^[1]

Our price estimate for Aeroposatle is at $6.38, implying a premium of over 75% 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

Though in just a small amount, Aeropostale was able to report operating profits, which seemed far fetched just a while back. However, $9.9 million in store asset impairment charges, $0.5 million in intangible asset impairment related to GoJane trademark, and $3.5 million in other after-tax charges, turned the the retailer’s net income of $0.4 million to a net loss of $13.5 million. Nevertheless, Aeropostale’s bottomline performance excluding these one-time charges provides some hope for its sustainability. It suggest that once the retailer successfully revamps its product portfolio and rightsizes its store fleet, it can return to positive growth. Although the company appears to be leveraging the right facets of the business to get its growth back on track, it has had minimal success with its fashion launches so far and buyers continue to elude its basic logo merchandise.

To re-position itself in the league of retailers who offer a compelling range of fashion as well as logo merchandise, Aeropostale is looking to expand its contemporary fashion brands – Tokyo Darling and Brooklyn Calling. The retailer stated that these brands are being developed with a complete collection for the back-to-school season for guys and girls. Aeropostale believes that they will add a greater fashion depth to its portfolio, which was earlier missing from its stores. It also believes that these brands will appear very well in tandem with its Bethany Mota collection, which has been unable to create much buzz on its own.

Taking cue from its glory days, when Aeropostale’s success was centered on its ability to sell tops, it is once again looking to aggressively focus on knits and woven tops. During its most profitable years, the company was selling about five tops per bottom and it has come down to 3.5 in 2014. For 2015, the retailer wants this ratio to go up to 4:1, but it would need significant design innovation to achieve that given its weak brand image. Aeropostale mentioned in its earnings call that its long sleeve knit tops performed very well during the quarter, which is encouraging. ^[2]

Aeropostale’s progress on revamping its product portfolio has been painfully slow. At present, it neither has a portfolio to attract buyers, nor results to please its investors. However, a few years down the line, Aeropostale may see notable success, given that it is working hard on developing existing and upcoming brands into core fashion and fashion basic powerhouses. Also, after a few years, the retailer will have its P.S. from Aeropostale’s stores in lucrative locations, which will lay a solid foundation for the brand’s future growth.

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1. Aeropostale Reports Results For Fourth Quarter And Fiscal 2014, Aeropostale, Mar 12 2015 [↩]
2. Aeropostale’s Q4 fiscal 2014 earnings transcript, Mar 12 2015 [↩]