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Why Investors Should Avoid This Apparel Retailer

August 05, 2014 | About:
amal.singh70

amal.singh70

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The new fiscal year has been weak for Aeropostale (ARO). The apparel retailer declined after posting a greater than expected loss, and a horrifying outlook for the ongoing quarter depicts that investors must stay away from Aeropostale. Aeropostale is seen as the worst performer for the year so far in comparison to its peers American Eagle (AEO) and Abercrombie & Fitch (ANF). It seems like the trend will continue until and unless its turnaround strategies show results.

The problem

There’s a shift in buying preference for the teen apparel space, with new brands like H&M and Forever 21 gaining popularity over the established retailers. Aeropostale has suffered from this change. Its revenue in the first quarter dropped 12% year-over-year to $396 million and the net loss increased from $12.2 million in the last year to $77 million a quarter earlier. However, still the management has expressed confidence regarding a turnaround, but none of the investors seems to be interested in buying any of it, and the stock is trading at the lower end of its 52-week low.

A study has shown that this age group does not need malls to socialize and their apparel preference has shifted towards individuality and uniqueness. That’s why the sales of Aeropostale have taken a hit and the company is keen on adopting to the change. Aeropostale is making several relevant changes to its operations. These changes are believed to play critical role in its turnaround.

Will these work?

Aeropostale is witnessing strength in its sub-labels such as Bethany Mota. The company has plans to expand into additional sub-labels throughout the year for providing differentiation and uniqueness to customers.

Aeropostale is also focused on closing approximately 125 mall-based locations. As an alternative, it plans to now focus on the P.S. brand through other means.

A new brand campaign being launched by Aeropostale is believed to highlight it in an entirely new way. The go-to-market strategy of Aeropostale for back-to-school customers is expected to reposition the brand across all stores and digital channels. According to the management, this new campaign is expected to highlight the changes that Aeropostale has made to its brand, and finally attract new customers, mainly the teens.

Aeropostale is keen on managing its expenses efficiently. The savings for 2014 are expected to be around $5 million to $10 million, and the savings for 2015 are anticipated to be around $30 million to $35 million. Going forward, these savings are believed to help the company improve its bottom line performance.

Competition

The strategies of Aeropostale sound impressive, but still they haven't led to a solid turnaround yet. Contrastingly, American Eagle and Abercrombie are performing robustly. For instance, American Eagle is executing a buy online and ship-from-store pilot program, which has gained popularity. The company is also dedicated to bring down inventories and is focused on improving its pricing strategy by running selected promotions, improving product assortment, and eyeing on appropriate marketing events.

Additionally, American Eagle is refining its operations and is restructuring the business to remove redundancies in the sales channel. It has also highlighted its online site by including improved product displays and better navigation.

In the meantime, Abercrombie is adopting even better techniques by reducing the use of its logo in its merchandize to a large extent. Abercrombie is currently testing all of its product categories without using its logo to analyze the demand patterns accurately. Moreover, going forward Abercrombie has plans to sell its merchandize through online retailers while continuing to improve.

Conclusion

The shares of Aeropostale declined more than 60% as of now in 2014 and this fall is expected to continue. However, its peers are in a better position and are expected to keep pressurizing Aeropostale with their strategies.


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