The first quarter of fiscal 2013 put a severe dent in Aeropostale‘s (NYSE:ARO) recovery efforts as the retailer’s comparable store sales declined by 14% due to the prolonged cold and heavy promotional deals.  Winter this year was unusually long, which impacted the demand of spring clothing for a number of retailers, including Aeropostale. As a result, the number of transactions at Aeropostale’s stores fell by 10% this quarter. Additionally, the retailer ushered in heavy promotions to clear off its holiday inventory leading to 9% decline in average prices.  However, a positive development for Aeropostale was the relatively low inventory carryover to the second quarter.  This should help the company perform better in the back-to-school season.
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Apart from expanding internationally, Aeropostale is focusing on the growth of P.S. from Aeropostale brand and e-commerce business to revive its growth. Although the company made some progress on these fronts during the quarter, we don’t see them driving a near term turnaround. The weak performance of Aeropostale’s namesake stores in North America, which account for majority of its revenues, still remains the key issue for the company. See our complete analysis for Aeropostale
Can Focus On Back-To-School Help Next Quarter’s Results?
After a weak holiday season and dismal first quarter, Aeropostale has its eyes set on the back-to-school season as it looks to target its primary customers – teenagers. The company has been constantly working on increasing the proportion of fashion based apparel in its merchandise range. Aeropostale stated that despite the weak results some products such as woven tops, bottoms and denims featuring prevailing trends, generated positive comparable store sales growth.  We expect the retailer to leverage this positive outcome as it updates silhouettes, authentic details, and soft & comfortable fabrics for the back-to-school season. It is also introducing new product categories such active and lounge wear and a new line of intimates under its fragrance brand, Live Love Dream. 
In addition to revamping its product offerings, Aeropostale is also focusing on its marketing campaigns. The retailer is introducing a visual collateral which reflect’s the teens’ dynamic, fun and multifaceted lifestyle.  In order to engage its customers, Aeropostale launched a summer marketing campaign, “Summer Road Trips”, inviting customers to share photos and win prizes worth $1,500.  Though open only for a limited period, the contest can help Aeropostale connect with its customers, and likely effect the back-to-school season for the retailer. 
Although Aeropostale has seen positive customer response to its new fashion offerings in the previous quarters, the proportion of fashion based apparel in its overall merchandise still remains low. Therefore, we believe that the impact of the retailer’s focus on the back-to-school season may get diluted and any near term turnaround is unlikely.
Growth In E-Commerce & P.S. from Aeropostale – These Businesses Are Still Small
Despite the overall weakness in the business, Aeropostale’s direct-to-consumer revenues surged by 13% during Q1 fiscal 2013. A stable supply chain, the use of the latest e-commerce technology, international shipping, the acquisition of GoJane.com and mobile commerce are contributing to this growth. This channel is Aeropostale’s strength at the moment, but it is still far off from being a material contributor. The table below shows how this business has trended historically. Although the growth still remains healthy, it has slowed down significantly.
|Direct-To-Consumer Revenues ($Bil)||0.04||0.08||0.13||0.16||0.18||0.22|
P.S. from Aeropostale’s performance has been much better than that of Aeropostale’s mainline brand. Through this brand, the retailer offers casual apparel and accessories for school children in the age group of 4-12 years. Inspired by the brand’s performance and small presence in the U.S., the company has aggressively expanded it. During the first quarter, while Aeropostale opened only one namesake store, it opened about 24 P.S. stores, and entered eight new states and Puerto Rico.  The company now operates 124 such stores in comparison to 982 Aeropostale stores in North America. However, P.S. from Aeropostale’s growth hasn’t been high enough to offset the weakness in Aeropostale’s overall business.
International Expansion Will Show Impact In The Long Run
Aeropostale has continued its expansion in the Middle East, which has three of the five fastest growing apparel markets in the developing world. The annual per capita spending on apparel in markets such as the U.A.E. is the highest among all the developing markets.  Apart from the Middle East, Aeropostale has plans to enter Mexico, the Philippines, Columbia and Panama. With rising disposable income and fashion consciousness, Mexico has become a good market for affordable brands.  The Philippines also provides good potential for value based brands due to booming business processing outsourcing industry and rising remittances.  As Aeropostale is a value focused brand, we expect it to do well in these regions. However, it will take a while before we see any significant financial impact from the company’s international expansion.
Our price estimate for Aeropostale stands at $14, which is slightly below the market price.Notes:
- Aeropostale’s SEC filings [↩]
- Aeropostale’s Q1 fiscal 2013 earnings transcript, May 23 2013 [↩] [↩] [↩] [↩] [↩] [↩]
- Aeropostale Summer Road Trip [↩]
- Aeropostale “Summer Road Trip” Instagram contest, Aeropostale’s Facebook Page [↩]
- UAE has highest fashion spending in developing world, Arabian Business, June 11 2011 [↩]
- Apparel in Mexico, euromonitor, Apr 2013 [↩]
- Apparel in the Philippines, euromonitor, June 2012 [↩]