) is a specialty retailer that sells casual apparel and accessories
targeted toward teens and young adults. Aeropostale's primary
Abercrombie & Fitch
) and Urban Outfitters (
). Aeropostale designs, markets and sells its own brand of
merchandise through its retail stores as well as through the
Internet and catalogs sales channel, which accounts for 16% of our
Internet & Catalog Carrying Sales Growth
Aeropostale reported mixed fourth quarter and full year results
last week. Though net sales for the fourth quarter increased by 5%
as compared to the same period last year, comparable store sales
for the period decreased by 3%. The increase in sales was largely
driven by increase in Internet & catalog orders sales, which
was up 21%.
For the full fiscal year 2011, the net sales increased 8% to
$2.4 billion with comparable store sales increasing 1% and internet
& catalog orders sales increasing 24%.
Increasing cotton prices towards the end of last year had an
impact on the company's profitability as full year operating margin
dropped by 110 basis points. The impact was more visible in the
fourth quarter, where a significant fall in merchandise margins
brought down the operating margin by nearly 300 basis points.
Raw Materials Inflation Taking its Bite
The increase in cost of key raw materials like cotton, fuel and
overseas labor had an impact on the whole supply chain as clothing
retailers were not able to offset cost increases. In addition,
consumer spending has been slow to pick up, and Morgan Stanley
estimates that apparel sales volumes could fall 2.2% this year if
prices rise 4%.
Last year, Aeropostale also lost market share as a result of
price cuts by some of its more up market rivals in the aftermath of
the recession. To offset this, the company resorted to deep
discounting that further impacted its merchandise margins. However,
with further increases in raw material costs expected this year,
the company is planning to increase prices on some of its products.
But, to increase its competitiveness, it plans to improve its
assortment as compared to last year, when some of its assortment
missed prevailing fashion trends.
Aeropostale's revenue per square foot has been increasing since
2005 and we expect this trend to continue. Specifically, the
company added significant market share and brand value during the
recent economic crisis, and we expect the company to build on this.
See the chart above for our estimates.
We estimate that the EBITDA margin for Aeropostale Stores
increased from around 10% in 2005 to 19% in 2009. In 2010, we
estimate ticked down slightly to just under 18% largely a
consequence of increasing raw material costs and increasing
competition limiting the ability of Aeropostale to increase prices,
especially as it relies on a promotional strategy. However, we
expect margins to recover slightly and stabilize around 19% by the
end of our forecast period.
However, there can be a downside to our forecasts, if there is
an extended period of increasing raw material prices and weak
consumer spending. These events would further intensify competition
among clothing retailers leading to more discounting to offload
If the EBITDA margin falls to 16% by the end of our forecast
period, it would mean a downside of around 10% to our current price
estimate for Aeropostale's stock.
See our estimates for Aeropostale