) designs and markets casual apparel and accessories for young
adults and teens. The company competes with a variety of other
Abercrombie & Fitch
) and Urban Outfitters (
We have a $51.90 price estimate for Aeropostale's stock,
implying a hefty premium to the stock's market price. We estimate
that Aeropostale stores constitute around 79% of the stock's value,
with internet & catalog orders adding another 16%.
Cotton Price Down, Aeropostale Stock Up
Aeropostale may benefit from a drop in cotton prices. Cotton
futures prices have been under pressure and experts believe that
cotton prices could fall further by around 51%, to $1/pound, by the
end of the year. The declining price is largely attributable to
This trend is welcome news for apparel retailers, especially
Aeropostale, which is less of an up-market brand and is more
reliant on volume than prices to drive sales. Since Aeropostale
also resorts to a considerable amount of discounting, its margin
are more vulnerable to commodity costs than up-market brands like
Abercrombie & Fitch and American Eagle that enjoy price points
30-50% higher than Aeropostale.
Aeropostale was already planning to increase prices this year to
offset increasing raw material costs. Playing the price game is
probably something that Aeropostale should avoid, given that it
lost market share last year after up-market competitors Abercrombie
& Fitch and American Eagle lowered prices in the aftermath of
the financial crisis.
Aeropostale Store EBITDA Outlook
The EBITDA margin for Aeropostale stores increased from around
10% in 2005 to 19% in 2009, before dropping off slightly to about
18% in 2010. The decline in 2010 was driven by pricing pressure and
increasing commodity costs. Going forward, we anticipate a modest,
but steady recovery in EBITDA margins back towards the 19% level by
the end of our forecast period.
However, if cotton prices continue to fall, there could be
upside to our forecasts. To illustrate the potential impact of this
scenario, we estimate that an increase in Aeropostale store EBITDA
margin towards 20% by the end of our forecast period would imply a
5% upside to our $51.90 price estimate for Aeropostale's stock. You
can test this scenario, and others, by dragging the trend line in
the interactive chart above.
See our full analysis for Aeropostale