Aeropostale Worth $20 Despite Tough Retail Market

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Trefis
ARO: Aeropostale logo
ARO
Aeropostale

Teen specialty retailer Aeropostale (NYSE:ARO) showed an improvement in recent results, but the company’s struggles with negative sales comps and declining margins continue. [1] On a brighter note, the company gained by improving its product offering in women’s business, which reflected as an improvement in women’s business comp sales from a dismal negative 18% in Q2 to negative 11% in this quarter. The improvement in women’s product mix also improved the company’s gross margins compared to Q2. Aeropostale competes with other specialty retailers such as American Eagle Outfitters (NYSE:AEO), Abercrombie & Fitch (NYSE:ANF) and Gap Inc. (NYSE:GPS) in the teen apparel space.

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We have revised our price estimate of Aeropostale to $20.66, which is roughly 25% above current market price. The adjustments in our price estimate  primarily reflects change in company’s current net cash/debt position along with our improved outlook for margins in 2012.

Check our analysis for Aeropostale

Improvement in fashion and color of its women’s merchandise

A lack of balance in its merchandise was a major source of concern for Aeropostale during Q2. The company managed to return its color palette to the fun, bright and optimistic spirit for Q3. On the product basis while Aeropostale reduced its dependence on denims, strength in silhouettes was a major growth driver for the quarter.

However Aeropostale suffered from the lack of a broad range across its product mix. The trend continued through the holidays too with the company registering similar sales comps and margins during Black Friday weekend.

Margins continue to decline  as apparel market remains highly promotional

Although the margins improved over last quarter due to an improvement in product mix, the increased promotional activity in the apparel market weighed on margins. Additionally, high cotton prices also contributed to the decline.

On the other hand, Aeropostale’s direct sales increased by 19% during the quarter, which provided some tailwinds to the margins. Going forward, we expect the margins to improve further due to  Aeropostale’s recent launch in Singapore as well as the signing of a new licensing agreement to expand into Turkey.

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Notes:
  1. Aeropostale release Q3 earnings, Source: Aeropostale IR []