Aeropostale Earnings Preview: Struggle Will Continue; Average Unit Retail In Focus

Teen apparel retailer Aeropostale (NYSE:ARO) is scheduled to release its Q1 fiscal 2015 results on May 21st and, based on its first quarter guidance, it appears that the company will not report anything promising. After reporting better-than-expected profits for the fourth quarter of fiscal 2014, Aeropostale guided its first quarter loss per share at $0.53-$0.61, much worse than analysts’ estimates of $0.35 per share loss. ^[1] Despite its several efforts, the retailer still lacks the fashion depth that U.S. buyers favor in the merchandise of its competitors. Its product portfolio continues to feature basic logo merchandise, which no longer intrigues fashion conscious U.S. buyers. Worse still, the company’s efforts to break this mould through new launches have not been in line with customer preferences. Due to this, the retailer has consistently lost customers to other relatively better fashion brands such as Urban Outfitters (NASDAQ:URBN) and Gap (NYSE:GPS), and fast-fashion players such as Zara, Forever 21 and H&M. This trend visible in the fourth quarter of fiscal 2014 and may as well have continued in Q1.

Other factors that would have contributed to Aeropostale’s under-performance were the industry-wide decline in foot traffic, the company’s weak online business, significantly fewer number of P.S. from Aeropostale stores as compared to last year and continued mainline brand store consolidation.

Our price estimate for Aeroposatle is at $6.18, implying a premium of close to 150% to the current market price.

See our complete analysis for Aeropostale

Aeropostale isn’t the most preferred shopping destination as such, and the gradual shift from store to online shopping is making things worse for the company. Weighed down by prolonged winter weather, store traffic across brick-and-mortar retailers in February fell a sizable 12.5% as fewer buyers got out of their homes for shopping. ^[2] In March, overall apparel market growth remained at 2.5%, similar to what it was in February, which indicates that market conditions did not change much through the month. Hence, the year-over-year traffic change was most likely negative. ^[3] In April, however, Euclid reported that foot traffic increased 12% compared to the year ago period, which would have helped growth of retailers who earn a major share of their revenues through store sales. ^[4] However, overall sales growth of clothing and clothing accessories stores increased just 1.1%, implying that the rise in traffic around the Easter weekend was unable to overcome buyers’ reluctance to spend on discretionary products. Given that Aeropostale is among the weaker players in a struggling industry, it is highly unlikely that it was able to overcome the market weakness.

Given its duress, Aeropostale has been closing its stores aggressively, all the more so as U.S. buyers across the industry are increasingly switching to online shopping, which has led to a drastic decline in foot traffic. This trend has been more profound in shopping malls and, being a mall based retailer, Aeropostale has been among the most affected. In response, the company has closed a number of those stores that do not generate significant revenues.  Although thi move has helped it reduce expenses, it also has intensified the overall revenue decline. The retailer is even shifting its P.S. from Aeropostale store network from malls to off-malls locations, which is further contributing to the revenue decline. At the end of 2014, Aeropostale operated 834 mainline stores in the U.S., Canada and Puerto Rico, while it had 942 stores in the year ago period. Interestingly, its P.S. from Aeropostale store count came down to 26 from 151 in 2014. Hence, Aeropostale’s revenue decline for the first quarter quarter is expected to be much higher than its comparable sales decline, given that it had a significantly fewer number of stores in Q1 this year as compared to the year ago period. In fact, this was visible in Q4 fiscal 2014 as well. 

While Aeropostale’s performance has been below par for the most part, there were some signs of recovery last year, mainly in the form of recovering average unit prices. Between 2010 and 2013, the retailer’s average unit retail declined at an average annual rate of more than 6%. However, the company saw a turnaround in this metric in 2014. With better response to its fashion launches, Aeropostale saw its average unit retail go up 5% during the year, which was its first positive change in five years. The retailer’s collection’s such as Pretty Little Liars, Bethany Mota and Tokyo Darling finally saw some decent response, that allowed Aeropostale to usher a slightly higher proportion of full-priced sales for its fashion products. In order to be certain that the positive change in average unit retail was indeed an improvement in performance rather than just a slight rebound from extremely low levels (thanks to consecutive four years of decline), we will closely monitor this metric in the first quarter earnings call. If average unit retail sustains its recovery in the first quarter, it will indicate an imminent recovery. If this does not happen, the company’s revival hopes will dwindle rapidly.

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1. Aeropostale Reports Results For Fourth Quarter And Fiscal 2014, Aeropostale, Mar 12 2015 [↩]
2. Winter Weather Wrecks Havoc on Retail Stores, PR Newswire, Mar 5 2015 [↩]
3. Clothing and Clothing Accessories Stores, U.S. Census Bureau [↩]
4. Study: April sales fall despite traffic boost, Chain Store Age, May 8 2015 [↩]