Mall-based specialty retailer Aeropostale (AROPQ) is down in the dumps this year. The teen apparel specialist's stock has lost 45% of its value so far this year, worse than peers American Eagle (AEO -0.13%) and Abercrombie & Fitch (ANF -3.67%). However, the company is trying its best to get to back on the right track. Let's find out if it will succeed.
Gunning for a comeback
Aeropostale has entered into a deal with private equity firm Sycamore Partners, which will own 5% of the total outstanding shares of Aeropostale, infusing $150 million into the business. The company has no debt on the balance sheet while it has a cash position of $106 million. Aeropostale management said that they will be considering several investment options after this influx without going into the details.
But it shouldn't be forgotten that Aeropostale has a long road ahead of it before it can even think of a turnaround. In the last reported quarter, its revenue fell 16% to $670 million, while same-store sales took a big beating of 15%. Even the e-commerce segment wasn't able to rescue Aeropostale as its online comp sales remained flat year over year. The company is facing severe challenges in the business as its products are not clicking with its target customers, the teens. This led to a massive drop in its key financial metrics last quarter.
In the wake of such difficulties, Aeropostale is trying its best to make a comeback. The company has made significant changes in its design, merchandising, and product mix to address the changing needs of the teen retail segment. Under its vice president Emilia Fabricant, who has a track record in creating and executing merchandising and operational strategies, Aeropostale has taken aggressive measures such as improving product assortment, decreasing its dependence on logo-based products, and enhancing the brand equity.
For example, Aeropostale's deal with Sycamore also includes a sourcing agreement with MGF Sourcing -- a Sycamore affiliate. MGF will play a role in diversifying Aeropostale's apparel production, thereby strengthening its merchandizing. In addition, the company is studying teen shopping behavior closely now in order to make sure that it gets the right products into the market.
In addition, Aeropostale has been looking to close down unprofitable stores and instead focus on the profitable areas. Last quarter, it had closed 32 Aeropostale outlets after seeing lower traffic. These stores have been moved to places where the company is expecting a higher footfall. In addition, Aeropostale opened five Aeropostale and three P.S. for Aeropostale stores last quarter.
In 2014, the company plans to open seven Aeropostale stores, one P.S. for Aeropostale store, and remodel nearly 10 Aeropostale stores. Aeropostale is working with a consulting firm to implement reductions in overall stock-keeping unit count and optimize product flows so as to maintain a lean inventory and keep itself up to date with the latest trends.
Maintaining a lean inventory should help Aeropostale negate the effects of markdowns that come into play once the inventory gets old. So, Aeropostale will be able to improve its bottom line as a result since efficient inventory management helps eliminate unnecessary investments.
Aeropostale is also looking to establish an emotional connection with teen customers, which is why it affiliated itself with Pretty Little Liars – a TV show -- as a part of its marketing initiative. Aeropostale is also tapping social media through its Bethany Mota collection, as today's generation is motivated by a sense of discovery and creativity. Thus, Aeropostale is changing its product mix and is remodeling its product offerings to get better in the long run. The company is planning to double its investment in social media to improve its market share.
Are peers turning around?
Aeropostale is not the only company that's feeling the pain of the changing preference of teens. In fact, both American Eagle Outfitters and Abercrombie have struggled in recent times. But Aeropostale can take heart from the fact that the two of them have found some success in their turnaround moves.
Abercrombie, for example, is up 17% in 2014. Abercrombie is on the turnaround trail and is finding good traction in its online sales. In the last fiscal year, Abercrombie's online comps grew 13%, while 25% of its total sales in the fourth quarter came from the online channel. Going forward, Abercrombie has outlined a capital expenditure budget of $200 million for the current year, with most of the investments to be made in the direct-to-consumer (or online) channel. So, Abercrombie is going down the right path, and Aeropostale would do well to take a page out of its book.
Similarly, even American Eagle is seeing some positives. Its online comp sales in the previous fiscal were up 13%, while in-store comps were down just 6%, the least of the three. What's working in American Eagle's favor is the fact that it provides its complete collection in many fashion products online, as Fool writer Michael Carter recently wrote.
In addition, American Eagle is still profitable. The company has a net profit margin of 2.50% while Aeropostale's is a negative 7%.Also, analysts expect American Eagle's earnings to start growing again next year, which is the reason why the company carries a forward P/E of just 13 while its trailing P/E is 26.
Takeaway
Aeropostale is moving aggressively and is taking swift decisions to improve its operational and financial performance. It is moving stores from unprofitable areas to profitable ones and is also looking to improve its social media presence. So, investors shouldn't count out a turnaround at Aeropostale and they should keep a close eye on the company's progress.
