Aeropostale Goes Licensing Again, But It May Not Help

Aeropostale (NYSE:ARO) is struggling hard and does not have enough money to finance its revival strategies. That’s why it is looking to ink licensing deals to bring in incremental revenues without shelling out money. Earlier this month, the company signed a brand licensing deal with Himatsingka America for home textiles and, more recently, it entered a licensing agreement with Shuz 4 U International Ltd. to open Aeropostale stores in Ireland. In fact, the retailer has already opened its first licensed store in the country, launching an outlet at the Lift Valley Shopping Center in Dublin on October 22nd. ^[1]

With its domestic business facing the risk of insolvency, it makes sense for Aeropostale to expand internationally in order to diversify its risk geographically and generate additional revenues through expansion. It also makes sense for the company to expand through brand licensing deals, where the licensing partner takes care of the majority of costs and the brand receives a steady income. However, what’s surprising is that Aeropostale has decided to initiate its expansion in Europe through Ireland, a market that is neither huge, nor growing strongly. And even the retailer’s licensee partner is not the most established one. It seems that Aeropostale had a tough time finding a licensee partner in Europe due to its weak brand image. Hence, it appears to have settled for what it could get.

Our revised price estimate for Aeroposatle is at $2.22, implying a significant premium to the current market price.

See our complete analysis for Aeropostale

Aeropostale’s management believes that Shuz 4 U Ltd is an established licensee partner, which will help the company gain significant visibility. Shuz 4 U, a part of Shuz Group, has been in Ireland for five years and so far it has opened only 12 stores in the country. While the management team of the company had a combined experience of over 50 years in wholesale, distribution and retail, certain factors have prevented it from expanding steadily in the country. It can either be the lack of capital or the absence of strong brand licensee partners. Another factor can be the retail landscape of Ireland, which appears to be at a nascent stage. Either way, Aeropostale is unlikely to generate much revenues from the market given that it plans to open just 10 stores over the next five years.

While the market is not big, it would look even smaller to Aeropostale considering the competition. The fast fashion segment of the market is currently being dominated by Penneys, and the lower end segment has historically belonged to Dunnes Stores. While Dunnes has lately tried to redefine its place in the market, aiming to position itself as a mid-price range luxury brand, buyers are not acknowledging the change, which has resulted in its strong position deteriorating. ^[2] Something similar happened to Aeropostale when it tried to overhaul its product portfolio by introducing relatively expensive-fashion forward merchandise across the board, and failed terribly. Since consumer behavior appears somewhat similar in Ireland, Aeropostale may not be able to gain much traction in the market with its existing portfolio and strategies.

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1. Aeropostale Launches in Ireland, Aeropostale, Oct 21 2015 [↩]
2. Apparel and Footwear Specialist Retailers in Ireland, Euromonitor International, Apr 2015 [↩]