Weak Holidays Hurt Aeropostale’s Q4 Sales But Its Future Could Be Brighter

Aeropostale‘s (NYSE:ARO) struggle due to the shift in sales mix to cheaper products and lower store traffic continued in Q4 fiscal 2012. The weak holiday season in the U.S. didn’t help either and comparable store sales declined by 9% when measured against a weak Q4 fiscal 2011. However, Aeropostale can do better in the future with its focus on women’s merchandise, which is its main product category. Also, revamping the e-commerce business and marketing strategies might help.

See our complete analysis for Aeropostale

Reinforcing The Women’s Business, Which Has Been The Weakest

Women’s merchandise is Aeropostale’s main product category, contributing about 65% to its overall revenues. ^[1] This has also been the weakest performing category since 2011 due to poor customer response to its fashion-based products such as women’s knit tops. ^[2] In Q4 fiscal 2012, while revenues for the men’s business declined by 4%, they were down 10% for women’s business. ^[3] If Aeropostale wants to restore growth, it needs to revive its women’s business. It appears that the retailer is looking to do so.

The company made some changes to its management by hiring new talent as head of design and women’s merchandise. It is creating a specifically tailored head-to collection for different purposes such as casual, school and party. Moreover, adding emerging and prevailing fashion to these products will be a priority for the company. Aeropostale is also looking to balance the product mix of tops and bottoms to prevent inventory hangover concerns. ^[3] The management stated that there will be a noticeable difference in trims and finishing of its merchandise in the upcoming summer collection. Aeropostale is lowering the space allocated to basic products in its stores and is adding more fashion-focused products. These are some valuable steps taken by the company, but a lot will depend on the customer response to these changes.

Refurbishing The Direct-To-Consumer Channel, Which Has been The Strongest

The apparel industry in the U.S. is largely being driven by the direct-to-consumer business. Major players such as Urban Outfitters (NASDAQ:URBN) and American Eagle Outfitters (NYSE:AEO) are thriving on this trend. This is one area that has looked positive for Aeropostale over the last few years. During the period of 2010-2011, the retailer’s direct-to-consumer revenues increased at an average annual rate of 19% and further grew by a similar figure in 2012. ^[4] It makes sense for the retailer to continue investing in this channel to benefit from the growth.

Aeropostale provides a large variety of designs and sizes over the Internet, which might not be available in its stores. Furthermore, it has been focusing on m-commerce (mobile commerce) and f-commerce (e-commerce through Facebook). Strategies such as launching a mobile app for Android users in 2011 and upgrading its m-commerce with HTML5, which is considered a useful technology for mobile websites, have helped the retailer to grow its direct business. ^[5] Aeropostale has seen considerable growth in the number of fans on Facebook (NASDAQ:FB), which has increased from 5 million in 2011 to 8.7 million currently. ^{[6] [7]}

Last year, the retailer acquired GoJane.com, a popular women’s fashion footwear and apparel retailer. ^[8] GoJane added product Q&A to its website, which allows customers to make inquiries regarding the products. This boosted the website’s search traffic by 20% and order conversion rate by 250% (those who use this tool). ^[9] We believe that it will complement Aeropostale’s direct business growth. Although the direct-to-consumer revenue share has increased from 2.5% in 2007 to about 9% in 2012, it still has a long way to go before it can start making any material contribution. ^[1]

Marketing Strategies To Elevate Brand Image

Aeropostale plans to employ a 360 marketing strategy encompassing social media, physical stores and the digital channel. ^[3] Such a strategy has been successful for American Eagle Outfitters and should also help Aeropostale. However, for starters, it needs to get its product mix right. In 2012, Aeropostale signed actress Chloe Grace Moretz as its celebrity brand ambassador. According to the company, Chloe has become a fashion icon among today’s youth and will help refine Aeropostale’s brand image. ^[10] A similar strategy has yielded good results for women’s specialty retailer Ann (NYSE:ANN), when it partnered with Hollywood star Kate Hudson.

Our price estimate for Aeropostale stands at $13, implying a premium of about 5% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Aeropostale’s SEC filings [↩] [↩]
2. Aeropostale Q1 fiscal 2011 earnings transcript, May 19 2011 [↩]
3. Aeropostale Q4 fiscal 2012 earnings transcript, Mar 14 2013 [↩] [↩] [↩]
4. Aeropostale Reports Results For Fourth Quarter and Fiscal 2012, Aeropostale, March 14 2013 [↩]
5. Aeropostale tries an Android app on for size, Internet Retailer, Aug 4 2011 [↩]
6. Aeropostale Jumps Into The F-Commerce Game, Apparel, Aug 1 2011 [↩]
7. Aeropostale’s Facebook Page [↩]
8. Aeropostale Acquires Online Fashion Footwear and Apparel Retailer, GoJane.com, Aeropostale, Nov 13 2012 [↩]
9. GoJane.com boosts organic search traffic with social question and answer tool, Internet Retailer, Feb 21 2013 [↩]
10. Aeropostale Announces Actress Chloe Graze Moretz As Celebrity Brand Ambassador, Aeropostale, July 9 2012 [↩]