Aeropostale Crashes Yet Again On Weaker-Than-Expected Results And Guidance

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ARO: Aeropostale logo
ARO
Aeropostale

There seems to be no end for Aeropostale‘s (NYSE:ARO) struggle. The company’s shares fell over  15% when it reported Q1 fiscal 2015 results well below  market expectations, which were already negative. It reported loss per share of $0.56, just below the consensus estimate of a loss of $0.55 a share. Net sales totaled at $318.6 million, trailing the market estimates of $326 million and reflecting a year over year decline of 20%. Comparable sales were down 11% on top of 13% decrease in the same quarter last year, and the remaining decline in net sales came from 19% decrease in weighed average square footage. [1] Aeropostale continues to struggle with its weak brand image, low store traffic and poor customer response, while trying to rightsize its store fleet and merchandise portfolio. Its revival efforts haven’t worked out very well so far and there have been barely any signs of improvement, let alone a notable recovery. In fact, average unit retail, which improved moderately last year implying a slight recovery in average prices, fell flat in the first quarter.

Our price estimate for Aeroposatle is at $6.18, implying a premium of close to 180% to the current market price. However, we are in the process of a significant revision in our price estimate.

See our complete analysis for Aeropostale


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Though Aeropostale feels that it is making some progress on its merchandise, its guidance for the second quarter that includes the start of the back-to-school season indicates otherwise. The retailer projects loss per share of $0.52-$0.60 for the quarter, which is again below the consensus estimate. A part of Aeropostale’s under-performance can be attributed to what’s troubling the entire apparel industry —   a consistent decline in foot traffic and fierce competition from Zara and Forever 21. Partially responsible is the retailer’s strategy of reshaping P.S. for Aeropostale, for which it has closed almost all the brand stores. However, the main problem remains Aeropostale’s basic logo merchandise portfolio, that has made it extremely difficult for the retailer to re-invent itself as a fashion retailer. Its fashion changes have been constantly undermined by its long-standing “cheap basic” brand image.

Although the retailer’s performance was disastrous, it can take a little heart from the fact that its gross margins improved slightly with better merchandise margins and a small decline in promotional activities. Gross Margins expanded to 19.2% from 18.5% last year. However, the improvement wasn’t too promising and much of it can be attributed to a slight rebound from last year’s drastically low levels. Aeropostale’s gross margins are below 20%, while several comparable apparel retailers have their EBITDA margins above this level. This fact is enough to gauge the weakness in the retailer’s business, which appears a long way from being profitable.

Aeropostale’s shares have reached an all time low, it is burning cash at a rapid pace and raising capital in public markets is a little far fetched now. It would make sense for the retailer to look for possibilities of a public-private transition, in order to work towards the revival of its business away from investors’ eyes. However, Aeropostale’s high operating lease and low cash generation capabilities make it a less attractive acquisition option despite the fact that its current market cap stands at just $174 million. Generating returns on such small investments might not be difficult for a private equity firm, should one acquire it, but no one has shown any such interest so far, which darkens the company’s future. There are some aspects of its business such as P.S. from Aeropostale and international expansion, where Aeropostale can push to improve its overall performance. However, they will require significant capital and time, and the retailer appears to have little of either. Investors are losing confidence in the company rapidly, which is indicative of the fact that Aeropostale may not sustain for long in the market if its revival efforts continue to fail.

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Notes:
  1. Aeropostale’s Q1 fiscal 2015 earnings transcript, May 21 2015 []