Positive Outlook for Aeropostale Despite Recent Sales Slowdown

Aeropostale (NYSE:ARO) is a specialty retailer that sells casual apparel and accessories targeted to youths.  Aeropostale’s primary competitors include American Eagle (NYSE:AEO), Abercrombie & Fitch (NYSE:ANF), Gap (NYSE:GPS) and Urban Outfitters (NYSE:URBN).

Aeropostale designs, markets and sells its own brand of merchandise through its retail stores as well as over the internet. We estimate that the Aeropostale stores constitute around 78% of our $54.78 price estimate for Aeropostale’s stock, which stands well ahead of current market price.

We previously discussed the possibility that economic recovery could prompt near-term slowdown in Aeropostale’s revenue growth (See: Aeropostale’s Sales Could Slump as Economy Recovers).

We hypothesized that US economic recovery could provoke potential customers to trade up to more premium teen brands like Abercrombie & Fitch and American Eagle, both of which performed very well prior to the economic slowdown. On average, Aeropostale’s price points are around 30% lower than American Eagle and 50% lower than Abercrombie & Fitch.

Aeropostale’s Monthly YOY Revenue Growth Slowing

Our projections might already be taking hold. Comparable store sales for Aeropostale were flat for 3Q FY10, vs. a 10% increase during 3Q FY09. Year-to-date through Q3 FY10, comparable store sales were up only 3% year-over-year, vs. an increase of 11% for the same period last year. Although the strength observed during 2009 creates tough comps for 2010, the magnitude of the slowdown in growth creates cause for concern.

Further, Aeropostale is not showing many signs of improvement entering the holiday season. For November 2010, comparable store sales were down 1% as comapred to an increase of 7% in the year ago period. ^[1]

Despite Aeropostale’s recent struggles, some of its major competitors are reporting strong sales growth.

Abercrombie & Fitch – Comparable Store Sales +22% YOY in November

Comparable store sales were notably higher for both A&F and Hollister brand stores vs. November 2009. The two brands saw comparable stores up 23% year-over-year (YOY) and up 22% YOY, respectively. Year-to-date, company-wide comparable store sales are up 7% YOY (up 22% YOY in November). ^[2]

Gap – Comparable Store Sales +4% YOY in November

Comparable store sales for Gap in North America were up 5% YOY in November 2010, while company-wide comparable store sales increased 4%. This growth continued a trend from October, which saw comparable store sales for Gap in North America up 5% YOY. ^{[3] [4]}

Aeropostale Revenue per Square Foot

Revenue per square foot (RPSF) for Aeropostale stores increased from about $550 in 2007 to $620 in 2009, an annual growth rate of 7%. During this period RPSF for Aeropostale’s competitor Abercrombie & Fitch fell from $480 to $370 while Gap stores remained flat around $400.  The increase for Aeropostale can largely be attributed to a shift in consumer preferences towards value-priced brands during the economic downturn, which suited Aeropostale’s promotional marketing strategy and lower price points.

Going forward, we anticipate that RPSF for Aeropostale stores will continue its upward climb, reaching $700 by the end of our forecast period. We believe the company made significant gains in market share (and brand value) during the economic crisis, and could leverage its marketing strategy to life comparable store sales and grab additional market share.

However, the recent trends in comparable store sales for Aeropostale vs. its competitors indicate that there could be reason for downside to our forecasts. To highlight the sensitivity of Aeropostale’s stock value to RPSF, we estimate that flat RPSF in the years ahead would generate 8% downside to our price estimate. Notably, this would still leave our number ahead of market value as we remain bullish on the company’s outlook.

See our full company breakdown and estimates for key drivers to Aeropostale’s stock value in the display below.

See our full analysis of Aeropostale here

1. Aeropostale Reports 3rd Quarter 2010 and November Sales Results [↩]
2. Abercrombie & Fitch Reports November Sales Results [↩]
3. Gap Inc. Reports November Sales Results [↩]
4. Gap Inc. Reports October Sales Results [↩]