Battle of Retail: Comparing Aeropostale vs. Abercombie on Key Metrics for the First Half

Aeropostale (NYSE:ARO) and Abercombie & Fitch (NYSE:ANF) are two of the best known brands in the U.S. teen apparel retail segment and have dealt with the turbulence regarding a slowing in spending, higher input prices and the fickle nature of teen fashion. We take a brief look at a few of the key metrics for the retail segment for these stocks like net sales, profit margins and inventory levels. We will touch upon where these companies stood a year back, what their current positioning is and what we can expect going ahead. Together with American Eagle Outfitters, these three form the so called triad of teen apparel retail.

Net Sales

In the below graph, Aeropostale’s revenues declined for the first six months of 2011 when compared to the same period in 2010. While in 2010 the value based retailer was touted as the fastest growing player among the three, at the moment the market is abuzz with the possibilities of a buyout. Aeropostale’s management is taking the blame for the ongoing mess as the company failed to make adequate adjustments from the dismal Q1 results. A lack of balance in the merchandise assortments for Q2 caused net sales to decline by 5%, with comp sales dropping by 14%. We expect to see continued disappointing sales in the near term.

Abercombie on the other hand has gained from Aeropostale’s missteps. Riding on the back of strong promotions and a solid product mix, Abercombie has been able to deliver sales growth in both the quarters. The situation looks good for the company ahead as it has performed reasonably well in the crucial back to school season.

Profit Margins

Profit margins are the most important factor to analyze in an apparel company, as the upside/downside of the stock is usually linked with the growth/decline in the margins. As evident from the chart, Aeropostale is a relatively more value-based retailer than Abercombie with Aeropostale’s merchandise carrying lower margins than that of Abercombie. While Aeropostale experienced a massive decline in margins from near 38%  in 2010 to 27% in 2011, Abercombie has managed to slightly increase its margins this year.

Rising production costs as well as an increase in promotion based expenses were the major reasons behind the steep decline in margins of Aeropostale. The reluctance of the company to pass on the cost increases to customers in fear of losing business has also played its part in making things worse for Aeropostale. Going forward, we expect the margins to improve as cotton prices return to normal.

Cotton is trading around $1.10 per pound, up from about $1 a year ago but down sharply from a peak of around $2.15 in March. The company may also benefit from an increase in internet sales which carries higher margins than the traditional retail business. ^[1] Similarly we anticipate an increase in margins of Abercombie as the company targets for $1 billion in internet sales.

Inventory Levels

In the current tough times when the overall apparel industry is struggling, inventory control has become a higher priority. While the inventory figure in and of itself is insignificant, a comparison with revenues provides the real picture. Inventory levels for Aeropostale during the first six months of 2010 stood at $82 million on $958 million in sales. This figure increased to $91 million on  $937 million in sales and depicts the inability of Aeropostale to manage its inventory effectively and also points to the lack of balance in the product mix resulting in the piling up of its stock.

Abercombie on the other hand has strived hard to make itself  leaner compared to 2010. The company reported a decline of $40 million in inventory during the first 6 months of 2011 followed by an increase in sales of $320 million during the same period.

Our Verdict: Abercombie & Fitch emerges out a clear winner from the above discussion as it leads in all the three fronts over Aeropostale. This has been reflected in the stock price which we think is justified. Unless Aeropostale’s management can come up with some concrete steps to right its strategy over the latter half of the year, we believe the retailer will continue to struggle.

See our full analysis for Abercrombie | Aeropostale

1. Aeropostale to provide international shipping, Source: Aeropostale IR, September 21st [↩]