Aeropostale (NYSE:ARO) recently reported its Q3 fiscal 2012 earnings with a slight growth in the revenues and gross margins though comparable store sales fell slightly. This can be attributed to the tough pricing environment in its core basic apparel and competition from other retailers. These factors are likely to weigh on the retailer in the holiday season as well. Although these aspects might provide near term headwinds, the long-term does not look so bad.
Aeropostale saw good response to its fashion apparel in the women’s business.  Currently, the fashion apparel has a low proportion in the retailer’s overall product assortments. However, Aeropostale is looking to increase the penetration of its fashion apparel. Moreover, the retailer’s P.S. offering for kids has been performing well, and the store traffic has shown some signs of improvement. We believe that these factors will play a vital role in driving Aeropostale in the longer run. However, we expect the retailer to have a difficult holiday season as discussed in “Holiday Retail: Why Is Aeropostale Not Likely A Winner”.
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Fashion Apparel- Low Proportion But Improving Customer Response
Aeropostale’s main business is its core basic apparel where low pricing is a key selling point. After the recession of 2008-2009, shoppers have favored more fashion conscious brands and shifted to other retailers. This impacted Aeropostale and the retailer has had trouble recovering since then.
Aeropostale does offer a limited variety of fashion apparel, but its proportion is quite low as compared to its core basics. However, the retailer reported some improvement in its fashion apparel segment as women responded well to the fashion apparel such as fashion tops, wovens, colored and printed denims.  This is contrary to what happened in 2011, when the customer response was quite weak towards knit tops and juniors’ tops. Moreover, the retailer is planning to increase the penetration of its fashion apparel.  Although Aeropostale did not mention the figures, we believe that it is slowly heading in the right direction. Furthermore, Aeropostale’s men’s and accessories business also reported a strong quarter. 
P.S. for Aeropostale Performing Well
Aeropostale’s kids business has been performing well for quite some time now. Although its contribution is quite low to overall revenues, its growth is encouraging. Amid the retailer’s soft business, P.S. for Aeropostale has been able to sustain positive growth. In the third quarter of fiscal 2012, the retailer reported improvement in P.S. for Aeropostale’s comparable store sales. The retailer has around 100 P.S. for Aeropostale stores as opposed to more than 950 Aeropostale stores. The potential for growth exists, and we believe that P.S. for Aeropostale can be a bigger contributor in the long term.
Store Traffic Showing Signs Of Improvement
Contrary to what happened in the previous quarter, the store traffic at Aeropostale stores showed signs of improvement in this quarter. In the recently concluded quarter, the traffic increased by 2%, whereas it fell by 4% in the prior quarter.  Although it can also be attributed to a relatively weak third quarter last year, the increase is surely a good sign for the retailer. The comparable store sales fell by 1% due to a 5% decline in average unit retail, which can be attributed to shift in sales mix and the highly promotional environment.
Our price estimate for Aeropostale stands at $14, which is roughly inline with the market price.Notes: