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Bulls: Reasons To Buy

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Lower Prices Give Strong Positioning

Aeropostale boasts the lowest prices of the main players in the teen apparel market, which give the firm an advantage in the current economic slowdown as teen's already small disposable income shrinks as their parents cut back on spending.
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Children's Line

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Children's Line

Aeropostale will launch a new concept brand in 2009 designed for children. This new source of revenue could significantly help broaden Aeropostale's target market. The move follows the footsteps of Aeropostale's competitor, Abercrombie & Fitch, which operates a well-established children's brand, "abercrombie".
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Bears: Reasons To Sell

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Poor Timing for Launch of New Brand

As the credit markets in the U.S. are weak and outlook for the holiday shopping season is poor, Aeropostale will have a tough time launching its new brand in 2009.
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Late Entry into Canada

Aeropostale went international with the launch of 12 stores in Canada in 2007, but the company is far behind American Eagle which operates over 75 stores in Canada. This puts Aeropostale at a disadvantage in securing a place for its brand in the minds and wallets of Canadian consumers.
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Aeropostale (NYSE: ARO) sells its own brand of apparel and accessories to the highly targeted--and highly fickle--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, as well as the Jimmy'Z store concept launched in 2006 (i.e., surf and "California" fashion).[1]

Aeropostale is one of the smaller firms in the youth apparel retail sub-market, generating $1.59 billion in net sales during fiscal 2007[2]; its larger competitors Abercrombie & Fitch and American Eagle reported sales of $3.7 billion[3] and $3 billion[4], respectively. Aeropostale also generates lower margins than its competitors because its sells "value" products at lower price points compared to its higher priced competitors. From 2002 to 2006, Aeropostale grew its store base by about 20% per year, but this growth is slowing now as the company opened 86 locations on net for an 11% increase in the store base in 2007.[5]

Like many similar apparel companies, Aeropostale has moved towards expanding in Canada, where it opened 12 stores during 2007.[6]. 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 jumping on the multi-concept trend that has been growing at its competitors; not only has Aeropostale opened its new Jimmy'Z stores, but also will be launching a third concept in 2009 targeting a customer younger than the current 14-17 year old Aeropostale customer.

Contents

[edit] Business Overview

Aeropostale runs a value-based business model which sells its own brand of lower priced apparel and accessories to teenagers[7] who have little self-earned disposable income.

Using this model, Aeropostale doubled its store count from 367 in FY02 to 742 in FY06 and grew net sales from $550 million to $1.4 billion during the same time span.[8] The company also managed to increase its same store sales rate--a key retail metric--for ten consecutive years, a feat unmatched by its competition.[9] 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 $1.59 billion of sales in 2007, the company's gross margin rate was 34.8% in 2007[10] considerably lower than its competitors' gross margins. The company has been able to manage its operating expenses to increase its operating margin from 11.2% in 2005 to 12.7% in 2007[11], which puts them at about middle of the pack versus competitors.

Aeropostale expanded its store base to Canada in 2007 (12 stores) and developed a new store brand, Jimmy'Z Surf Co., in 2006 (14 stores). The latter moved Aeropostale towards higher-priced offerings by targeting 18-25 year olds (its core has been 14-17 year olds).

Aeropostale 5-Year Financial Figures[12]
Figure 2003 2004 2005 2006 2007
Revenue (millions) $734.8 $964.2 $1,204.3 $1,413.2 $1,590.8
Gross Margin 31.3% 33.2% 30.1% 32.2% 34.8%
Operating Margin 12.0% 14.1% 11.2% 11.9% 12.7%
Same store sales growth 6.6% 8.7% 3.5% 2.0% 3.3%
Store Total 459 561 671 742 828

[edit] Trends and Forces

[edit] 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 2007 there were 6 A&F stores[13] and 75 AE stores[14] in the country. Aeropostale opened 12 stores in Canada during 2007.[15]

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 FY06, American Eagle's 72 stores there generated over $230 million in revenue[16], selling more per store than their American counterparts. Abercombie's stores sold nearly three times as much merchandise per store compared to domestic outlets.

[edit] Multi-Concept Trend: Beyond Your First Name

Aeropostale has decided to join in on the multi-concept trend that has been growing at its competitors; Abercrombie & Fitch, which operates five different concepts (chains), and American Eagle, which currently operates three concepts with a fourth on the way in 2008, have both expanded beyond their core, namesake retail chains. Abercrombie's concept portfolio includes a store chain targeting children (abercrombie) and another designed for the post-college set (Ruehl). American Eagle has developed two chains beyond the AE brand, aerie and Martin + OSA, which are for teenage girls and the post-college segment, respectively. Aeropostale has also started branching out, with Jimmy'Z and a newly announced third concept which will be launched in 2009.

[edit] Growing the Jimmy'Z Concept

In fiscal 2006, Aeropostale launched a sub-branded retail chain called Jimmy'Z Surf Co. Jimmy'Z, like Aeropostale, is a mall based apparel and accessories retailer, but targets "trend-aware" 18 to 25 year olds with West Coast-themed fashion products.[17] The Jimmy'Z brand sells products at a significant price premium to Aeropostale's namesake stores.

Aeropostale initially launched the Jimmy'Z concept in 2006 with 14 mall-based stores[18], a number that wasn't increased during 2007[19] as the company fine-tuned details of the operation (merchandise mix, store format, supply chain, marketing, etc).

[edit] Third Concept: Children's Store

At the end of fiscal 2007, Aeropostale announced that it is developing a new concept that will be launched in 2009. Details on this new project are scarce but management said that the new concept will build on the company's "core competency" and target a "younger demographic than the Aeropostale customer (who is a 14-17 year old male or female)".[20] Thus it appears that Aeropostale will be launching a children's line in 2009, something that main competitor American Eagle Outfitters (AEO) will be doing in the second half of 2008.

[edit] Surf Fashion

Fashion tastes are notoriously fickle, especially in the young 14 to 17 year old demographic that Aeropostale targets. The company's push into the West Coast/California lifestyle (think surf and skate) could can be seen as a response to A&F's Hollister brand, which targets 14 to 18 year olds with West Coast, surf-themed apparel and accessories.[21] Abercrombie & Fitch has had a great success with the Hollister brand, which was responsible for 41% of A&F's $3.3 billion of sales in FY06.

[edit] 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, American Eagle Outfitters and Pacific Sunwear of California (PSUN). Most of the back-to-school sales are included the third fiscal quarter, for which this year Aeropostale experienced same store sales growth of 1.9%[22] while its competitors (Abercrombie & Fitch, Aeropostale (ARO) and Pacific Sunwear of California (PSUN)) saw same store sales growth of 1%,[23] 2%[24] and 5%[25] respectively. This indicates that Aeropostale performed in comparably with 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 sales have been more than twice as large as their first quarter sales in 2006.[26] A lackluster performance during the holiday season can lead to extensive promotional selling of leftover inventory which drags down Aeropostale's already low margins.

[edit] 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 (34.8% in FY 2007) due to its positioning as a mid- to lower-priced merchandiser. A "near luxury" company such as Abercrombie & Fitch generated a 67% gross margin rate in comparison.[27]

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 Jimmy'Z sub-brand in order to gain market share in the youth apparel market.

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 Jimmy'Z concept competes directly with ANF's Hollister, ARO has no match for A&F's kids apparel or post-college merchandise concepts: abercrombie and RUEHL. 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)[28] with Aeropostale's namesake and Jimmy'Z 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, and AEO has exhibited stronger growth recently than Aeropostale.[29] However, it is hard to directly compare the two retailers because of AE's higher price points and larger store base.
  • Pacific Sunwear of California (PSUN): Pacific Sunwear primarily serves several different customer segments through its three retail chains: PacSun, demo, and One Thousand Steps. However, the company recently declared it would be exiting the demo and One Thousand Steps chains so they are no longer relevant in competitive comparisons. PacSun stores are based mostly around trends in the alternative sports (surfing, snowboarding, skateboarding, etc.) lifestyle and offer third-party branded as well as private-label apparel, footwear and accessories to teenagers and young adults.[30] PacSun stores not only compete with Aeropostale's namesake stores, but are a direct competitor to Aeropostale's new Jimmy'Z concept in the surf-inspired merchandise market. Because Pacific Sunwear's operations depend largely upon third-party brands, footwear and different lifestyle-focused customer segments it is less comparable to ARO than Abercrombie & Fitch or American Eagle Outfitters (AEO) .
  • Urban Outfitters (URBN): Urban Outfitters is a relatively young retailer that operates three different branded store chains, Urban Outfitters (18 to 30 year olds), Anthropologie (30 to 45 year old women), and Free People (16 to 35 year old women).[31] Urban Outfitters is not as directly comparable to ARO due to its slight differentiation in targeted customer segments.
  • Gap (GPS): Gap is a much larger company than ARO in terms of sales, stores and customer segments targeted. Through variations on Gap (Gap Kids, babyGap, Gap Maternity) the retailer serves a wide range of customers; also, Banana Republic and Old Navy stores serve different socio-economic segments.[32] Because of the wider range of customers, Gap doesn't match up with ARO as closely as some other competitors, however there is some overlap. Particularly, Gap's Old Navy business competes with Aeropostale in that both stores try to offer contemporary fashion designed for teens at value prices.
Company Net Sales (mm) Gross Margin Operating Margin Sales Growth (Decline) from 2005 Same Store Sales Growth (Decline) Total Stores Sales per Store (thousands)
Aeropostale $1,590 34.8% 12.7% 12.6% 3.3% 828 $1,921
American Eagle Outfitters (AEO) $3,055 46.6% 19.6% 9.3% 1.0% 987 $3,095
Abercrombie & Fitch Company (ANF) $3,749 67.0% 19.7% 13.0% 2.0% 1,035 $3,623
Pacific Sunwear of California $1,454 28.0% (-2.5%) 0.8% 0.7% 1,097 $1,325
Urban Outfitters (URBN) $1,507 38.3% 14.9% 23.1% 11.0% 245 $6,153*
Gap (GPS) $15,763 36.1% 8.3% (1.0%) (4.0%) 3,167 $4,977
[33] [34] [35][36] [37] [38]

Note: *:Much of Urban Outfitters' revenue is generated through wholesale and internet orders so sales per store is not reflective of store-only sales.



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      [edit] References

      1. ↑ Aeropostale (ARO) Annual Report 2006
      2. ↑ Aeropostale (ARO) Press Release, Fourth Quarter Earnings Release
      3. ↑ Abercrombie & Fitch (ANF) Press Release, "Fourth Quarter Earnings Release"
      4. ↑ American Eagle Outfitters (AEO) Press Release Report, Fourth Quarter Earnings Release
      5. ↑ Aeropostale (ARO) Press Release, Fourth Quarter Earnings Release
      6. ↑ Aeropostale (ARO) Press Release, Fourth Quarter Earnings Release
      7. ↑ Aeropostale (ARO) Annual Report 2006
      8. ↑ Aeropostale (ARO) 10-K 2006, "Selected Financial Data"
      9. ↑ Aeropostale (ARO) Annual Report 2006
      10. ↑ Aeropostale (ARO) Press Release, Fourth Quarter Earnings Release
      11. ↑ Aeropostale (ARO) Press Release, Fourth Quarter Earnings Release
      12. ↑ Aeropostale (ARO) Press Release, Fourth Quarter Earnings Release
      13. ↑ Abercrombie & Fitch (ANF) Fourth Quarter Earnings Release
      14. ↑ American Eagle Outfitters (AEO) Fourth Quarter Earnings Release
      15. ↑ Aeropostale (ARO) Press Release, Fourth Quarter Earnings Release
      16. ↑ American Eagle Outfitters (AEO) Annual Report 2006
      17. ↑ Aeropostale (ARO) Annual Report 2006
      18. ↑ Aeropostale (ARO) Annual Report 2006
      19. ↑ Aeropostale (ARO) Press Release, Fourth Quarter Earnings Release
      20. ↑ Aeropostale (ARO) Press Release, Fourth Quarter Earnings Release
      21. ↑ Abercrombie & Fitch (ANF) Annual Report 2006
      22. ↑ Aeropostale (ARO) Third Quarter Earnings Release
      23. ↑ Abercrombie & Fitch (ANF) Third Quarter Earnings Release
      24. ↑ American Eagle Outfitters (AEO) Third Quarter Earnings Release
      25. ↑ Pacific Sunwear of California (PSUN) Third Quarter Earnings Release
      26. ↑ Aeropostale (ARO) Annual Report 2006, "Selected Quarterly Financial Data", p. 39
      27. ↑ Abercrombie & Fitch (ANF) Press Release, Fourth Quarter Earnings Release
      28. ↑ American Eagle Outfitters (AEO) 10-K 2006, "Business", p. 1
      29. ↑ American Eagle Outfitters (AEO) Annual Report 2006
      30. ↑ Pacific Sunwear of California (PSUN) Corporate Website
      31. ↑ Urban Outfitters (URBN) Corporate Website
      32. ↑ Gap (GPS) Annual Report 2006
      33. ↑ Pacific Sunwear of California (PSUN) Press Release, Fourth Quarter Earnings Release
      34. ↑ Abercrombie & Fitch (ANF) Press Release, Fourth Quarter Earnings Release
      35. ↑ Aeropostale (ARO) Press Release, Fourth Quarter Earnings Release
      36. ↑ American Eagle Outfitters (AEO) Press Release Report, Fourth Quarter Earnings Release
      37. ↑ Urban Outfitters (URBN) Press Release, Fourth Quarter Earnings Release
      38. ↑ Gap (GPS) Press Release, Fourth Quarter Earnings Release
      39. ↑ 39.0 39.1 39.2 Abercrombie & Fitch FY2007 10-K, 03/28/08, pg. 25, Item 6: Selected Financial Data
      40. ↑ Abercrombie & Fitch FY2007 10-K, 03/28/08, pg. 28, Item 7, Financial Summary
      41. ↑ Abercrombie & Fitch FY2007 10-K, 03/28/08, pg. 4
      42. ↑ 42.0 42.1 42.2 Aeropostale, FY2007 10-K, 04/01/08, Item 6: Selected Financial Data, pg. 17
      43. ↑ Aeropostale, FY2007 10-K, 04/01/08, Item 7: Key indicators, pg. 19
      44. ↑ 44.0 44.1 44.2 44.3 AEO FY2007 10-K, 04/02/08, Item 6: Selected Consolidated Financial Data, pg. 16
      45. ↑ 45.0 45.1 PSUN, 2006 10-K, Item 15, Pg F-4
      46. ↑ PSUN, 2006 10-K, Item 7, Pg 16
      47. ↑ PSUN, 2006 10-K, Item 15, Pg F-20
      48. ↑ 48.0 48.1 URBN, 2006 10-K, Item 15, Pg F-5
      49. ↑ URBN, 2006 10-K, Item 15, Pg F-8
      50. ↑ URBN, 2006 10-K, Item 7, Pg 25
      51. ↑ URBN, 2006 10-K, Item 7, Pg 20
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