Teen apparel retailer Aeropostale is scheduled to report its Q4 fiscal 2014 results on March 12th and, based on its holiday results, we expect another very weak quarter for the company. Earlier this year, the retailer reported a 9% decline in its comparable store sales (including e-commerce) for the two month period of November and December 2014, on top of 15% decline witnessed in the same period of 2013. We see no reason why the company would have performed any better in January, given that market conditions did not change much through the November-January quarter. Moreover, Aeropostale still lacks the fashion depth that U.S. buyers favor in the merchandise of its competitors.
Aeropostale’s product portfolio continues to feature basic logo merchandise, which no longer intrigues fashion conscious U.S. buyers. Worse still, the company’s efforts to break this mould through new launches have not been in line with customer preferences. Due to this, the retailer has consistently lost customers to other relatively better fashion brands such as Urban Outfittersand Gap, and fast-fashion players such as Zara , Forever 21 and H&M . This trend continued in the holiday season of 2014 and most likely in January 2015 as well.
Our price estimate for Aeroposatle is at $6.38, implying a premium of less than 65% to the current market price.
See our complete analysis for Aeropostale
Though we expect there was weak revenue performance in the quarter, we must note that Aeropostale raised Q4 EPS guidance after its holiday results release on account of better-than-expected margins. The company said that it expects to report a loss per share of $0.25-$0.31 for the fourth quarter of fiscal 2014, as opposed to its previous guidance of $0.37-$0.44. While the retailer said that it achieved better margins in the holiday season than it originally expected, we are eager to find out how much of that came from a reduction in level of promotional activities. When Aeropostale started losing customers to other brands, it resorted to heavy discounting in order to maintain a consistent inventory turnover. However, fewer discounts during the holiday season would mean that the company was finally able to get some of its fashion calls right, which would result in full-price sales. Nevertheless, a small reduction in level of promotional activities for a few categories would provide only partial relief, as the company has a lot of other problems to address.
Given this duress, Aeropostale has been closing its stores aggressively, all the more so as U.S. buyers across the industry are increasingly switching to online shopping, which has led to a drastic decline in foot traffic. This trend has been more profound in shopping malls and, being a mall based retailer, Aeropostale has been among the worst affected. In response, the company has closed a number of its stores that do not generate significant revenues, which although has helped it reduce expenses, has intensified overall revenue decline. The retailer is even shifting its P.S. from Aeropostale store network from malls to off-malls locations, which is further contributing to the revenue decline. Currently, Aeropostale operates 834 mainline stores in the U.S., Canada and Puerto Rico, while it had 942 stores in the year ago period. Interestingly, itsP.S. from Aeropostale store count has come down to 26 from 151 over the last one year. Hence, Aeropostale’s revenue decline for the fourth quarter is expected to be much higher than its comparable sales decline. In fact, this was visible in the company’s holiday results, when it reported 9% fall in comparable sales and 11% decline in revenues.
With consistent comparable sales decline and significantly fewer number of stores, Aeropostale will continue to lose share in the U.S. apparel market. During the holiday season of 2013, the market stood at $41.5 billion and Aeropostale’s contribution was around $572 million or 1.38%. This year, while the market grew 4.5% to $43.4 billion, Aeropostale’s sales declined 11% to $508 million, or 1.17% of the market. This may have declined further in January.
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