Aeropostale Earnings Preview: Expect The Struggle To Continue

Teen apparel retailer Aeropostale (NYSE:ARO), a retailer that has been struggling in the U.S. for the past couple of years, is scheduled to report its Q3 fiscal 2013 earnings on December 4th. We expect the retailer to report another weak quarter, as its underlying problems persist.  We suspect there was poor customer response to its present product offerings, which likely added to the impact of the prevailing weakness in the U.S. apparel industry. During the second quarter of fiscal 2013, Aeropostale’s comparable store sales declined by almost 15% due to heavy promotional activities and low store traffic. The third quarter will likely be weak as well.

Aeropostale’s basic product offerings continue to struggle and its fashion offerings have not been well received. We expect this factor to weigh on the retailer’s third quarter results. The U.S. apparel industry itself is going through a rough phase due to low consumer spending on apparel. We believe that this factor is strong enough to undermine initiatives Aeropostale has made to revive its business. Still, with a look towards the future, we will monitor the retailer’s store consolidation strategy, direct-to-consumer growth, and the performance of its P.S. from Aeropostale brand. Though these efforts are likely to have little noticeable impact on the upcoming results, progress on these fronts will be closely monitored by investors and analysts, as they provide some hope for the company’s long-term growth.

Lately some investment firms have started investing in Aeropostale and there have also been talks of a complete buyout. If the retailer continues to report dismal results in the third quarter, it might strengthen the chances of the company going private.

See our complete analysis for Aeropostale

Poor Customer Response To Product Offerings Will Continue

Prior to the second quarter, Aeropostale was struggling to hold onto its customers due to the lack of fashion content. As U.S. buyers have shown low brand loyalty, they have been readily shifting to brands that provide latest fashion products at affordable prices. This trend has fueled the success of some of the fast fashion brands such as Zara, H&M, Forever 21, Gap Inc (NYSE:GPS), Urban Outfitters (NASDAQ:URBN) etc. On the other hand, it has troubled retailers such as Aeroposatle, American Eagle Outfitters (NYSE:AEO) and Abercrombie & Fitch (NYSE:ANF).

However, to re-position its brand as more fashionable, Aeropostale took some determined steps in Q2 fiscal 2013. The company attempted a complete product overhaul, with a head-to-toe approach as it extended its fashion offerings and added certain new product categories such as footwear. ^[1] It started offering trendy products like lacy ruffled tunics, studded combat boots, floral anorak jackets etc., with hopes of attracting customers. Aeroposatle also launched some marketing campaigns to portray the brand as more fashionable, and reduced its lead times to increase the speed to market. ^[2]

Despite these efforts, customer response remained cold as these products did not complement Aeropostale’s brand perception. The brand is known to offer basic products such as t-shirts, jeans and hoodies at affordable prices. While the retailer’s idea was to integrate more fashion content in its offerings, it ended up making changes that were too drastic. ^[2] Moreover, the pricing of these products did not resonate well with the customers as they were relatively expensive. We do not expect the company to recover from this in a single quarter. Its basic products were already struggling and its fashion content failed to garner sufficient customer attention.

Industry Wide Weak Apparel Sales Will Add To The Retailer’s Miseries

Pressurized by slow job growth, increased taxes, higher healthcare costs and gasoline prices, U.S. buyers have scaled back their discretionary spending this year. Moreover, a percentage of consumers have started diverting their spending to cars and houses to take advantage of the low interest rates. Subsequently, they are holding back on other products such as apparel and accessories. As a result, consumer spending on apparel products has been sluggish so far in the year.

In response to this weakness, several U.S. retailers have ushered heavy promotions to win back customers and Aeroposatle is not an exception. Due to heavy markdowns, players such as American Eagle Outfitters and Abercrombie & Fitch have reported a decline of 5% and 14% respectively in their Q3 comparable store sales. Even the growth of some of the stronger performers such as Gap Inc and Urban Outfitters has slowed down. Therefore, we believe that this factor will add to Aeropostale’s existing problems, resulting in another weak quarter for the company.

These Factors Will Be In Focus

As the top-line growth is not looking good for Aeropostale, it is planning to reduce its operating expenses by closing down underperforming stores. At the start of fiscal 2013, the company had planned to close about 15-20 stores by the year end. Half way through the year, it increased this figure to 30-40. Although closing underperforming stores will weigh on Aeropostale’s revenue growth initially, it should have a positive impact on revenue per square feet and EBITDA margins over the longer run. This is essential for the retailer given that its revenue per square feet has been declining and its EBITDA margins are quite low as compared to its peers.

Aeropostale’s direct-to-consumer business has been growing at a healthy pace for some time now and its relatively new brand P.S. from Aeropostale has seen some success. We will keep an eye out for progress on these fronts as they are quite important for the company from long-term perspective. Over the longer-run, they will decide whether or not Aeropostale can generate good returns for its shareholders.

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

1. Aeropostale’s Q2 fiscal 2013 earnings transcript, Aug 22 2013 [↩]
2. Aeropostale Tries Makeover In Time For Back-To-School, Crain’s New York Business, Aug 11 2013 [↩] [↩]