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ARO AT A GLANCE

P/E ► 15.7 AVG EV/EBITDA ► 8.70 AVG ROA ► 27.3% VERY HIGH ROE ► 53.7% HIGH Debt to Equity ► 0.775 AVG Current Ratio ► 2.37 AVG Interest Coverage Ratio ► 7K VERY HIGH

 

 

 

 

 

 

Aeropostale (NYSE: ARO) sells its own brand of apparel and accessories to the highly targeted 14 to 17 year old demographic. The company sells its relatively mid- and lower-priced merchandise via its namesake Aeropostale stores, which are mostly mall-based. Aeropostale is one of the smaller firms in the youth apparel retail sub-market, generating $1.89 billion in net sales during fiscal 2008^[1]; its larger competitors Abercrombie & Fitch and American Eagle reported sales of $3.54 billion^[2] and $2.99 billion^[3] respectively.

Like many similar apparel companies, Aeropostale has moved towards expanding in Canada, where it currently operates 29 stores.^[4] Several early entrants to this market such as American Eagle Outfitters (AEO) and Abercrombie & Fitch Company (ANF) have generated much higher per store revenue compared to their respective American outlets, suggesting a potentially unsaturated opportunity in the country. In addition to the Canada trend, Aeropostale is one of few clothing retail companies that is actually benefitting from the American recession. Due to the fact consumers are spending less money, foot traffic has moved away from premium brands such as ANF to the more affordable Aeropostale, leading to a $300 million increase in sales from 2007 to 2008-a time period when many retailers saw a net decrease in sales. In addition, Aeropostale's increased attractiveness in light of the recession puts it in a good position to take advantage of two highly important times in the retail industry: the back-to-school season and the holiday season.

Business Overview

Aeropostale runs a value-based business model which sells its own brand of lower-priced apparel and accessories to teenagers. While companies such as Abercrombie & Fitch Company (ANF) try to preserve a "luxury" image in order to charge a premium for their goods, Aeropostale produces similar apparel at a lower price, attracting consumers who either cannot afford higher-priced brands or who want a similar style but also want to save money. Using this model, Aeropostale increased its store count from 671 in FY04 to 903 in FY08^[5] and grew net sales from $964 million to $1.9 billion during the same time span.^[6] This kind of consistent growth is typically difficult to achieve in fashion retail because of constantly changing trends and customer preferences.

Although its lower price points can be an advantage for Aeropostale, they also lead to lower gross margins. On Aeropostale's $1.89 billion of sales in 2008, the company's gross margin rate was 34.7% in 2008, considerably lower than its competitors' gross margins. Gross margin is obtained through subtracting cost of goods sold (production costs) from the company's total revenues. Since Aeropostale's prices are generally lower than those of competing chains, the amount of money it makes on each garment it sells is lower than a premium-priced brand would make. That leads to lower margins. However, the company has been able to manage its operating expenses to increase its operating margin from 11.9% in 2006 to 13.2% in 2008^[7], which puts them at about middle of the pack versus competitors.

The poor United States economy caused in large part by the 2007 Credit Crunch and the subprime lending crisis has led to an overall decrease in consumer spending. American consumers have begun to watch their purchases more carefully and spend money only on necessary items such as food and gas, leaving out more discretionary items such as apparel. This pullback in spending has resulted in a decrease in sales across all price points in the retail market. Aeropostale, however, is one of the few retailers to expand during the recession. It's lower price point makes it an attractive option for parents looking to cut down on how much they spend on clothes, and the products themselves prove popular to its core demographic of teenagers. Same-store sales in June 2009 increased 12% and the company raised its earnings forecast for the second quarter of fiscal 2009 to $0.48 to $0.50 cents per share.^[8]

Aeropostale has continued to buck the overall industry trend of decreasing sales in 2009. In June the company's same store sales rose by 12%, ahead of earlier estimates of 10.3%. the company has also increased its second-quarter earnings estimate.^[9] In addition, Aeropostale has opened its first international store outside North America in Dubai^[10] and started a new clothing line aimed at children ages 7-12, named "P.S. from Aeropostale." The first P.S. store opened in June.^[11]

Proportion of total sales by gender. Men's clothing as a portion of total sales increased while women's clothing decreased

Trends and Forces

Expanding into Canada: Scrambling for Market Share

Aeropostale entered the Canadian market in 2007, following in the footsteps of competitors Abercrombie & Fitch and American Eagle. At the end of 2008 there were 10 A&F stores^[13] and 86 AE stores^[14] in the country. Aeropostale had 29 stores in Canada by the end of 2008.^[4]

Aeropostale has not broken out sales figures for its Canadian stores, but if the competition is any indication, the overall opportunity for youth apparel in the country may be attractive. In FY08, American Eagle's 86 stores there generated $281 million in revenue in 2008^[15], selling more per store than their American counterparts (Canadian stores sell an average of $3 million a store, U.S. stores sell $2.6 million per store).^[15]

Recession working in Aeropostale's favor

The American economy was struck with a recession in 2008, leaving consumers across all income levels less inclined to spend as much money on clothing and accessories as they did in previous years. Although 2008 and 2009 have been hard years for most American retailers, Aeropostale is actually one of the few companies to increase its sales in 2008. It's lower price point in comparison to competitors such as Abercrombie & Fitch Company (ANF) make it attractive to consumers who are looking to cut down on their spending. Aeropostale's sales increased by almost $300 million from 2007 to 2008.^[7] Abercrombie & Fitch's sales, however, decreased by $200 million^[2] and American Eagle's sales decreased by almost $100 million.^[3] Aeropostale's value-based business model has proved a valuable asset during the recession.

Second Half Strength: Back-to-School and Holiday Shopping

• Back-to-School: Because the overwhelming majority of the customers of Aeropostale's brands age from 14 to 17 years old are high school students, Aeropostale traditionally experiences a significant boost in sales during the end of summer as students shop in preparation for school. The back-to-school shopping season also boosts sales for Aeropostale's competitors such as Abercrombie & Fitch and American Eagle Outfitters. Most of the back-to-school sales are included the third fiscal quarter, for which in 2008 Aeropostale experienced same store sales growth of 7%^[16] while its competitors (Abercrombie & Fitch and Aeropostale (ARO) and Pacific Sunwear of California (PSUN)) saw same store sales decrease by 14%^[17]and 2%respectively. This indicates that Aeropostale performed better than its competitors.

• Holiday Season: The retail industry typically sees a large boost in sales leading up to the holidays in November and December. Aeropostale is no different, as the company's fourth quarter 2008 sales increased by 17%.^[18] Abercrombie & Fitch, on the other hand, saw a 25% decrease in comparable store sales and a 2.80% decrease in profit.^[19] The sales boom usually brought about by the holiday season was dampened by the recession, and Abercrombie & Fitch's premium price level made consumers less inclined to purchase its goods.

Competition

Aeropostale fights for apparel and accessory spending with many other retailers in the highly competitive 14-25 year old fashion market. Aeropostale is one of the smaller members of its sector in terms of sales and it ranks fairly low in gross margin profitability (34.7% in FY 2008)^[7] due to its positioning as a mid- to lower-priced merchandiser. A "near luxury" company such as Abercrombie & Fitch generated a 66.7% gross margin rate in comparison.^[2]

Most of Aeropostale's major competitors operate multiple in-house sub-branded concept stores (such as the Hollister and abercrombie concepts by Abercrombie & Fitch and American Eagle Outfitter's aerie concept), while virtually all of Aeropostale's sales come from its one chain of Aeropostale stores. Aeropostale is attempting to catch up with its larger competitors by expanding its operations throughout the U.S. and Canada and by growing the P.S. from Aeropostale retail concept.

Aeropostale's major competitors include:

• Abercrombie & Fitch Company (ANF): Abercrombie & Fitch is the leader of the youth apparel retail market by nearly all measures. ANF is a larger company than ARO, with a greater store base and much higher net sales than ARO. Abercrombie & Fitch also operates four brands: Abercrombie & Fitch, Hollister, abercrombie, and RUEHL; all of which target different subsets of the 8-30 age range. While ARO's namesake stores compete with A&F and Hollister stores and ARO's new P.S. from Aeropostale concept competes directly with ANF's A&F, ARO has no match for post-college merchandise concept abercrombie (Abercrombie & Fitch plans to close the RUEHL retail concept by January 2010, meaning it will then cease to be an issue for ARO). Although ANF is one of ARO's most direct competitors, the two company's operate with different strategies: Abercrombie maintains a premium brand with high price points while Aeropostale focuses on providing its customers, primarily high school students, with trend-smart fashion at value prices.
• American Eagle Outfitters (AEO): American Eagle competes directly for the same customers (young men and women between the ages of 15 and 25)^[20] with Aeropostale's namesake stores; however, Aeropostale does not have a direct match for AE's new aerie and Martin + OSA sub brands. AEO is larger than Aeropostale in terms of total sales and profits, however its sales decreased from 2007 to 2008 whereas Aeropostale's sales increased by about $300 million. However, it is hard to directly compare the two retailers because of AE's higher price points and larger store base.

References

1. ↑ ^{1.0 1.1} ARO 2008 Annual Report pg. 17  
2. ↑ ^{2.0 2.1 2.2 2.3} ANF 2008 Annual Report pg. 23  
3. ↑ ^{3.0 3.1 3.2} AEO 2008 Annual Report pg. 17  
4. ↑ ^{4.0 4.1} ARO 2008 Annual Report pg. 3  
5. ↑ ARO 2008 Annual Report pg. 4  
6. ↑ ARO 2008 Annual Report pg. 17  
7. ↑ ^{7.0 7.1 7.2} ARO 2008 Annual Report pg. 19  
8. ↑ Aeropostale's same-store sales jump in June.
9. ↑ Teen retailers report weak June sales
10. ↑ "Aeropostale Expands Internationally"
11. ↑ "Aeropostale Delivers New Store for Trendy Tweens"
12. ↑ Aeropostale (ARO) Press Release, Fourth Quarter Earnings Release
13. ↑ ANF 2008 Annual Report pg. 4  
14. ↑ AEO 2008 Annual Report pg. 5  
15. ↑ ^{15.0 15.1} AEO 2008 Annual Report pg. 50  
16. ↑ Aeropostale, Inc. F3Q08 (Qtr End 11/1/08) Earnings Call Transcript.
17. ↑ Abercrombie & Fitch Co. Q3 2008 (Qtr End 11/01/08) Earnings Call Transcript.
18. ↑ Aeropostale Inc. Q4 2008 Earnings Call Transcript.
19. ↑ Abercrombie & Fitch Co. F4Q08 (Qtr End 01/31/09) Earnings Call Transcript.
20. ↑ AEO 2008 Annual Report pg. 2