Teen apparel retailer, Aeropostale has lost close to 65% of its value over the past year owing to its dismal financial performance. With buyers losing their interest in the brand altogether, the retailer has been unable to register positive comparable sales growth for almost three years now. Although Aeropostale has been trying hard to improve its product portfolio and bring back customers, its efforts have failed to yield desired results. During the fourth quarter of fiscal 2013, while it was expected that the retailer’s troubles would ease out with the launch of Bethany Mota and Pretty Little Liars collection, its downfall continued at an alarming rate. Aeropostale’s comparable sales declined by 16% during the quarter and it clocked up $70 million in losses. Following the results, the company issued lackluster guidance for the recently concluded quarter, results of which are scheduled to be released on May 22.
The odds are high that it was a tough quarter. Fierce competition persists from fast-fashion brands such as Zara, Forever 21 and H&M. Extreme weather conditions and low brand loyalty continue to weigh on Aeropostale’s comparable sales, even as its strategy of downsizing its store fleet limits revenue growth. Although strong customer response to new collections might temper the retailer’s revenue decline, its impact is likely to be trifling since Aeropostale still earns a major share of its revenues from basic products.
Our price estimate for Aeroposatle is at $9.20, implying a premium of over 100% to the current market price.
See our complete analysis for Aeropostale
Comparable Sales Decline Will Continue
With its affordable basic products, Aeropostale was one of the strongest apparel performers during the recession of 2008 to 2009. However, as the economy started recovering, the retailer failed to take advantage of rising consumer interest in fashionable apparel, due to its persistent focus on the logo business. This resulted in consistent comparable sales decline for the company that continues to date. Even though Aeropostale has launched certain fashion collections over the past, its continuing focus on basic products has overshadowed those changes. Moreover, the sluggish economic environment in the U.S. has weighed heavily on consumers’ discretionary spending, which has troubled the entire apparel industry. While certain fast-fashion brands have been able to grab a sizable share of the low consumer spending on apparel, struggling retailers such as Aeropostale and Abercrombie & Fitch have been at the receiving end of this trend.
The competitive environment appears to be intensifying as Urban Outfitters, which performed very well throughout last year, has also started losing customers to low-cost fast-fashion brands. Since Aeropostale is already struggling to attract customers and cold weather in early February wasn’t conducive for apparel retailers, its results are unlikely to have improved. The retailer’s comparable sales decreased by substantial amounts in all the four quarters of fiscal 2013, and we expect that this metric to continued to decline in Q1 fiscal 2014 as well.
Store Closure Will Impact Revenues
Aeropostale stores are mainly located in shopping malls, where foot traffic has been weak over the past several quarters on account of weak consumer confidence. Moreover, shoppers have shunned the brand's basic logo products in search of more fashionable merchandise offered by other retailers such as Gap Inc and Urban Outfitters. As a result, Aeropostale hasn't been able to drive sufficient store traffic, which has led to heavy markdowns that impacted its store productivity. The company's revenue per square foot has declined by close to 30% over the last three years and its EBITDA (earnings before interest tax depreciation and amortization) margins have crashed by almost 20 percentage points.
While Aeropostale is trying hard to increase the proportion of fashionable products in its portfolio with collections such as Pretty Little Liars, Bethany Mota and Live Love Dream, it is also looking to cut its operating costs. The company has accelerated the closure of its under-performing namesake brand stores to improve its overall store productivity. At the start of fiscal 2013, the company had planned to close about 15-20 stores by the year-end, but it increased this figure to 30-40 half way through the year. In Q4 alone, Aeropostale shut down 29 stores. Over the next several years, the retailer plans to close 175 stores in the U.S., which will bring the store count down to around 750. We believe that some of these stores would have been closed in the first quarter of fiscal 2014.
Closing stores that do not generate significant traffic can have a slight positive impact on Aeropostale's revenue per square feet as well as its operating margins. However, this strategy will put tremendous pressure on Aeropostale’s revenue growth as the retailer will have fewer stores operational at the end of Q1 fiscal 2014 as compared to the same quarter last year. The teen apparel retailer operated 900 Aeropostale stores at the end of Q1 fiscal 2013 and 864 stores at the end of the last quarter of fiscal 2013. Assuming that the company closed 10-15 stores in the recently concluded quarter, it will report revenues from 50 fewer stores in Q1 results.
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